Direct Tax Vivad Se Vishwas Act, 2020; Striking Down The Answer To Question No 71 Of Circular 21/2020

The Supreme Court was dealing with a Special Leave Petition by the Union of India and the Tax Department on a decision which was rendered by the Bombay High Court in Writ Petition No. 5956 of 2021 wherein the Bombay High Court set aside the Answer to Question No. 71 (of the FAQs) of Circular No. 21 of 2020 as being untenable, unsustainable and unacceptable inasmuch it created an arbitrary and unreasonable classification which was ultra-vires and was digressing or deviating from the object or purpose of the DTVSVAct.

Question No. 71 (of the FAQs) of Circular No. 21 of 2020

Circular No. 21 of 2020 was issued on 4^th December 2020 by the Department of Revenue (Central Board of Direct Taxes) to provide clarifications on the DTVSV Act on aspects that were resulting in confusion amongst the assessees.

The DTVSV Act inter alia allows the assessees to seek redressal and thereafter a settlement in relation to their disputed tax claims against which appeals may be pending before an appellate forum or the time period for filing an appeal has not elapsed, as on 31^st day of January 2020.^[1] The said aspect is also clarified by Question No. 1 (FAQ) in relation to the Act on the Income Tax online portal, wherein for the question 'Which appeals are covered under the Vivas se Vishwas?", the following answer is provided:

​Appeals pending before the appellate forum [Commissioner (Appeals), Income Tax Appellate Tribunal (1TAT), High Court or Supreme Court], and writ petitions pending before High Court (HC) or Supreme Court (SC) or special leave petitions (SLPs) pending before SC as on the 31st day of January, 2020 (specified date) are covered. Cases where the order has been passed but the time limit for filing appeal under the Income-tax Act, 1961 (the Act) against the order has not expired as on the specified date are also covered. Similarly, cases where objections filed by the assessee against draft order are pending with Dispute Resolution Panel (DRP) or where DRP has given the directions but the Assessing Officer (AO) has not yet passed the final order on or before the specified date are also covered. Cases where revision application under Section 264 of the Act is pending before the Principal Commissioner or Commissioner are covered as well. Further, where a declarant has initiated any proceeding or given any notice for arbitration, conciliation or mediation as referred to in section 4 of the Bill is also covered.​

However, a frequent query that came up before the Tax Department was in relation to the settlement of appeals against intimation received by the assessees under Section 143(1) of the Income Tax Act. The question and the answer was formulated in the following manner by the Tax Department in Circular No. 21 of 2020:

Q. No. 71. Vivad se Vishwas forms do not contain a specific option to settle appeal filed against intimation U/S 143(1) of the Act. Accordingly, please clarify how to settIe such appeal, which is pending as on 31^st Jan 2020 (or time to file appeal has not expired on 31^st Jan, 2020).

Answer: Appeal filed against intimation u/s 143(1) of the Act is eligible under Vivad se Vishwas if adjustment has been made under sub-clauses (iii) to (vi) of clause (a) of section 143(1) of the Act

Accordingly, the Circular made a classification stipulating that only such appeals under Section 143(1) of the Income Tax Act where adjustments had been made under Sections 143(1)(a)(iii) and 143(1)(a)(iv) were eligible for settlement under the Act.

Ruling of the Bombay High Court

The assessee in the present case was a charitable trust which received an intimation under Section 143(1) of the IT Act in 2012 for its return of income for assessment year 2010-2011. Pursuant to the intimation, the total outstanding tax and interest was computed at INR 31,83,240 by the Tax Department. Aggrieved by the aforementioned intimation, the assessee filed its first appeal with the CIT (Appeals) against the said intimation. However, the appeal was filed after a huge delay of 58 months, i.e., on 13.11.2018, and accordingly the said appeal of the assessee was dismissed on grounds of delay.

The assessee thereafter applied for resolution of the disputed tax under the DTVSV Act. The CIT, however, rejected the application of the assessee citing the Circular, categorically relying on Question No. 71 (of the FAQs) of Circular and stipulating that since no adjustment had been made in present appeal under Sections 143(1)(a)(iii) and 143(1)(a)(iv), the application of the assessee was not eligible under the scheme of the Act.

Aggrieved by the above decision of the CIT, the assessee preferred a writ petition under Article 226 of the Constitution of India, 1950 before the Bombay High Court, being Writ Petition (L) No. 5956 of 2021.

The High Court allowed the above writ and set aside Question No. 71 of the Circular on the following primary reasons:

1. The Act did not provide for any classification in appeals with reference to the orders passed by the authorities, including the CIT under different provisions.
2. The excluded categories under the DTVSV Act were stipulated under Section 9 of the Act and orders before the CIT, not having adjustments under Sections 143(1)(a)(iii) and 143(1)(a)(iv), have not been mentioned therein.
3. The classification created by Question No. 71 of the Circular was without any rationale or plausible basis or material and was accordingly arbitrary, unreasonable and discriminatory. Such classification, as per the High Court, would be in breach of Article 14 of the Constitution of India, 1950 and would not be based on intelligible differentia having nexus to the object of the Act.

Accordingly, the Bombay High Court concluded by stipulating:

The answer to question no.71 purporting to exclude appeals against the orders under section 143(1)(a)(i) or (ii) is unsustainable and unacceptable. In the circumstances, emerging exclusion from the answer to question No. 71 of the circular No. 21 of 2020 dated 04.12.2020 is untenable and deserves to be set aside. We, therefore, set aside Answer to Question No. 71 of Circular No. 21 of 17 of 18.

Decision of the Supreme Court

Aggrieved by the aforementioned ruling of the High Court, Union of India along with the Tax Department preferred an appeal by way of a Special Leave Petition under Article 136 of the Constitution of India, 1950.

The Supreme Court, however, vide its Order dated 22.06.2021, completely agreed with the reasoning of the Bombay High Court and found that there was "no justification to exclude additions made in exercise of power under sub-clause (ii) to clause (a) to Section 143(1) of the Income Tax Act, 1961 from the benefit under the Direct Tax Vivad se Vishwas Act, 2020. The latter Act makes no such distinction".Clearly therefore, the Supreme Court agreed with the High Court that the classification created through Question No. 71 of the Circular was without any basis and unreasonable and accordingly adjustments besides those made under Sections 143(a)(iii) and 143(a)(iv) would also be eligible for reference under the Act. The Supreme Court, accordingly, upheld the setting aside of the Circular by the Bombay High Court.

However, a note of caution seems to have been added by the Supreme Court on aspect of delay in filing the appeal before the CIT by the assessee. Pursuant to Section 249(2) of the IT Act, appeals against intimation under Section 143 of the IT Act can be made before the CIT within a period of 30 days from the i) the date of service of notice or demand relating to the assessment of penalty in cases of assessment or penalty, or ii) the date on which intimation of the order sought to be appealed against is served to the assessee. The appeal of the assessee before the CIT was not filed within the aforementioned timeframe and was only preferred after a substantial delay of 58 months.

On the argument relating to the same by the Additional Solicitor General before the Supreme Court, the Supreme Court noted that the said argument was not raised before the High Court and hence it could not adjudicate on the same. However, the Supreme Court left the said contention 'open'.

The Additional Solicitor General has raised an additional argument that the first appeal under sub-clause (ii) to Clause (a) to Section 143(1) was filed belatedly in November, 2018 and was dismissed on 31.01.2020, and only thereafter the respondent-assessee had preferred an application under the aforesaid Act. We are not examining the second argument as this was not raised by the Revenue before the High Court and is not a ground taken to reject the application under the aforesaid Act. The said contention/plea is not examined and is left open.

Therefore, had the aspect of delay been raised before the High Court, the benefit of DTVSV Act would not have been available to the assessee. Clearly the ruling of the Supreme Court is a clear indication that the assessee cannot have it both ways, i.e., delay the appeal under the IT Act and thereafter prefer a settlement before the DTVSV Act as well. The assesses would therefore have to keep the aspect of delay in mind while considering their options under the DTVSV Act.

The author is an Advocate in the Supreme Court of India and Views are personal .