Article 13 of the Constitution provides, “The state should not make laws, which are inconsistent with or in derogation of the fundamental rights”. If so, should any law passed by Parliament be treated as constitutionally valid, even if it does not follow the basic principles as laid down in the Constitution? Each section of the Income Tax Act, 1961, and allied rules speak about compliance required of taxpayers. In the event of any contravention of tax provisions, the taxpayer has to pay interest, penalty or face prosecution.
Each section of the act defines the duty and accountability of the taxpayer. However, there is not a single provision under the Income Tax Act, which holds a tax officer accountable for misuse of tax provisions or passing unfair orders against a taxpayer. The income tax law nowhere provides any penal provisions against the tax officer for passing unfair or legally untenable orders or orders passed on the basis of manipulation of facts. There is always room for misuse of various tax provisions in the law as its subjective nature makes it easy for tax officers to twist facts as they desire. In such cases, the only remedy available to the taxpayer is to go in appeal and wait for years to get justice. Until the time he gets a fair order from the appellate authority, he is subjected to interest, penalties and recovery proceedings. A tax officer can even attach a taxpayer’s bank accounts for recoveries, irrespective of whether the legitimacy of the demand.
In Global Energy Ltd. vs Central Electricity Regulatory Commission, the Supreme Court observed that, “The law sometimes can be written in such subjective manner that it affects the efficiency and transparent functioning of the government. If the statute provides for pointless discretion to agency, it is in essence demolishing the accountability strand within the administrative process, as the agency is not under obligation from an objective norm, which can enforce accountability in the decision-making process. All law making, be it in the context of delegated legislation or primary legislation, have to conform to the fundamental tenets of transparency and openness on the one hand and responsiveness and accountability on the other. These are fundamental tenets flowing from due process requirement under Article 21, equal protection clause embodied in Article 14, and fundamental freedoms ingrained in Article 19. A modern deliberative democracy cannot function without these attributes.”
The constitutive understanding of the aforementioned guarantees under the fundamental rights chapter in the Constitution has to reflect in the functioning of all three wings of the state — executive, legislature and judiciary. When one talks about state action, the devil lies in the detail. The approach to the writing of laws, rules, notifications etc, has to showcase the concerns expressed in the Constitution. The image of law, which flows from this framework, is its neutrality and objectivity: The ability of law to situate the sphere of general decision-making outside the discretionary power of those wielding government power. Law has to provide a basic level of “legal security” by assuring that the law is knowable, dependable and shielded from excessive manipulation. In the context of rule making, delegated legislation should establish the structural conditions within which those processes can function effectively.
However, these conditions are not satisfied in the implementation of tax laws. Officials in the income tax department have enormous discretionary powers that in essence frees the tax department from any obligation to follow objective norms. The result is there is no accountability in the decision-making of the department. Moreover, it is also subject to excessive manipulation. If income tax law does not follow the basic principles laid down by the Constitution why should it not be treated as unconstitutional?
Nani Palkhiwala, in one of his budget speeches, said, “Don’t call me an expert in income tax laws. Indian income tax laws are drafted in much of subjective manner that no one can be expert in that.” That was 30 years ago. Nothing much has changed since. The subjective nature of the income tax laws allow for their misuse. The finance minister in his budget speech mentioned that there are about 3 lakh cases pending with the first appellate authority with disputed tax liability of Rs 5.50 lakh crore. Among them could be very many cases which involve honest taxpayers who are victims of wrong or illegal orders passed by tax officers.
This year’s budget had a proposal to address taxation issues. Among the proposed amendments were: No penalty in respect of income tax cases with disputed tax liability up to 10 lakh and exceeding that will be subject to minimum 25 per cent penalty under the disputes resolution scheme; a new dispute resolution scheme, which will reduce litigation and the cost of litigation; no discretion to tax officer for imposing penalty of 100 to 300 per cent of the tax sought to be evaded, instead a penalty of 50 per cent in cases of income underreporting and 200 per cent in cases of misreporting of facts; rationalising disallowances under section 14A of expenses incurred to earn exempt income; limitation of one year to dispose of a taxpayer’s petition seeking waiver of interest and penalty.
If tax laws are made more objective and provisions are introduced to fix the accountability of tax officers, there is likely to be a great reduction in litigation. Harassment of honest taxpayers too would stop to a great extent.