Wp/4202/1999 Of R. Damodar Reddy v. The Commissioner Of Income-Tax

*THE HON’BLE SRI JUSTICE L.NARASIMHA REDDYAND *THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM+W.P.No.4202 of 1999 % Dated 08.07.2014 R.Damodar Reddy. ….Petitioner $ The Commissioner of Income Tax and another. ….Respondents ! Counsel for the petitioner : Sri A.V.Krishna Kowndinya ^ Counsel for respondents : Sri J.V.Prasad < GIST: > HEAD NOTE: ? Cases referred: 1. (1843-60) All ER Rep 21: 2. Maxwell 12[th] Edition by P.St.J. Langam page 228 3. [1964] 2 Q.B 74. [1962] 2 Q.B 5304. [1962] 2 Q.B 530 5. Bennion on Statutory Interpretation 5[th] Edition page 986 THE HON’BLE SRI JUSTICE L.NARASIMHA REDDYAND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAMW.P.No.4202 of 1999 JUDGMENT: (Per LNR,J) This writ petition involves the interpretation of some provisions of Karvivad Samadhan Scheme, 1998 (for short ‘theScheme’). The petitioner is an individual assessee. Heundertakes works of construction mainly for the Indian Railways. He submitted his income tax returns for the year 1996-97,showing the income of Rs.2,31,490/-. The Income Tax Officerpassed an order dated 02.02.1998 observing that the taxableincome of the petitioner is Rs.7,70,200/-, by adding certain items.In an appeal preferred before the Commissioner (Appeals), thetaxable income was marginally reduced to Rs.7,43,650/-. Notsatisfied with the relief granted therein, the petitioner approachedthe Income Tax Appellate Tribunal, Hyderabad (for short ‘theTribunal’) by filing a further appeal. The Scheme came into operation when the appeal waspending before the Tribunal. Therefore, the petitioner submittedan application in the prescribed form, claiming benefitthereunder. It was mentioned that the disputed arrears vis-à-visthe petitioner comprised of tax of Rs.1,05,977/-, interest ofRs.53,593/- and penalty of Rs.4,50,000/-. He offered to pay 30%of the disputed tax, in terms of the Scheme. The competentauthority i.e., 1[st] respondent however passed a proforma order,dated 02.02.1999, requiring the petitioner to pay a sum ofRs.3,04,483/-. The difference mainly arose on account of thelevy of 35% amount on the component of interest and penalty. The petitioner challenges the order, dated 02.02.1999. Hecontends that though an application was filed in the prescribedform, and the stipulated amount was paid, the 1[st] respondentpassed the impugned order, contrary to the provisions of theScheme. The 1[st] respondent filed a counter affidavit opposing thewrit petition. According to him, the petitioner is under obligationto pay the amount at 50% of the arrears of taxm, under Clause(a)(iv) of Section 88 of the Finance Act, 1998 (for short ‘the Act’). It was also stated that when doubt arose in this behalf, clarification was sought from the Central Board of Direct Taxes(CBDT), and through letter, dated 03.09.1988, clarification wasgiven; and the impugned order was passed in accordance withthe same. Sri A.V.Krihna Kowndinya, learned senior counselappearing for the petitioner submits that the scheme maintains aclear distinction between the cases, in which, the amount duefrom an asessee comprises of (a) arrears of (i) tax; (ii) interest;and (iii) penalty, on the one hand, and (b) the amount due,comprising of arrears of (i) tax; and (ii) penalty, on other hand. He submits that the first category of cases is covered by Clause(a)(iii) of Section 88 of the Act, where the amount payable is 30%of “disputed income”, whereas in the second category of cases,covered by clause (a)(iv) of the Section, the amount becomespayable at 50% of tax arrears, as defined under Clause (m) ofSection 87 of the Act. He submits that the case of the petitionerfell within the ambit of Clause (a)(iii) of Section 88 of the Act, butthe 1[st] respondent made a demand by treating the case asfalling under Clause (a)(iv) of Section 88 of the Act. Sri J.V.Prasad, learned Standing Counsel for the IncomeTax Department, on the other hand, submits that the impugnedorder was passed strictly in accordance with the provisions of theAct and the Scheme. He contends that the mere fact that thereexisted some arrears of tax would not relieve the petitioner fromthe obligation to pay the amount on all three components. Hefurther submits that the penalty levied against the petitioner was,in relation to a matter, totally unconnected with the assessmentand the clarification issued by the CBDT dealt with such cases. The Parliament introduced the Scheme by substitutingChapter IV through the Act. The objective appears to be toreduce the pendency of litigation in the field of taxation. TheScheme covers not only the cases under the Income Tax Act butalso the cases under other taxation enactments. The variousexpressions that become relevant in operation of the Scheme are defined under Section 87 of the Act. One expression, whichbecomes relevant in the context of the present case is ‘taxarrear’. It is defined under clause (m) as under: (m) “tax arrear’ means,- (i) in relation to direct tax enactment, the amount oftax, penalty or interest determined on or before the 31[st]day of March, 1998 under that enactment in respect of anassessment year as modified in consequence of givingeffect to an appellate order but remaining unpaid on thedate of declaration;tax, penalty or interest determined on or before the 31[st]day of March, 1998 under that enactment in respect of anassessment year as modified in consequence of givingeffect to an appellate order but remaining unpaid on thedate of declaration; (Clause (ii) is omitted since it relates to the indirect tax enactments.) The salient features of the Act is that irrespective of thenature or merits of the claim, an assessee is given the option topay the stipulated percentage of the disputed amount, to give aquietus to the litigation. One of the conditions is that theproceedings in relation to the dispute must be pending before anauthority under the Act, or the Court. There is no controversy inthis case as to the applicability of the Scheme, since the appealpreferred by the petitioner was very much pending before theTribunal. The Scheme maintains a distinction between theassessees, who are individuals, on the one hand, and theassessees, that are companies, firms etc. on the other hand. Forthe individual assessees, the amount payable is 30% of thedisputed income and for the corporate assessees, it is 35%. The entire controversy in this case turns around thequestion as to whether it fits into Clause (a)(iii), or Clause (a)(iv)of Section 88 of the Act. The provisions read: (iii)in the case where tax arrear includes income-tax,interest payable or penalty levied, at the rate of thirty-five percent of the disputed income for the personsreferred to in clause (i) or thirty per cent of the disputedincome for the persons referred to in clause (ii).interest payable or penalty levied, at the rate of thirty-five percent of the disputed income for the personsreferred to in clause (i) or thirty per cent of the disputedincome for the persons referred to in clause (ii). (iv)in the case where tax arrear comprises only interestpayable or penalty levied, at the rate of fifty percent ofthe tax arrear.payable or penalty levied, at the rate of fifty percent ofthe tax arrear. A close perusal of Clause (a)(iii) makes it clear that itapplies to cases, where the tax arrears include threecomponents viz., income tax, interest and penalty, whereasClause (a)(iv) applies, where the components are only two viz.,interest and penalty. The qualitative difference is that in thecases falling under Clause (a)(iii), 30% (the assessee in thiscase being an individual) of ‘disputed income’, whereas in thecases falling under Clause (a)(iv), the amount which is requiredto be paid is 50% of ‘tax arrear’. Not only the percentage of theamount payable but also the substratum on which thepercentage is to be calculated varies. A close perusal of Clause (a)(iii) makes it clear that itapplies to cases, where the tax arrears include threecomponents viz., income tax, interest and penalty, whereasClause (a)(iv) applies, where the components are only two viz.,interest and penalty. The qualitative difference is that in thecases falling under Clause (a)(iii), 30% (the assessee in thiscase being an individual) of ‘disputed income’, whereas in thecases falling under Clause (a)(iv), the amount which is requiredto be paid is 50% of ‘tax arrear’. Not only the percentage of theamount payable but also the substratum on which thepercentage is to be calculated varies. In his declaration, as prescribed under the Scheme, inclause (f), the petitioner has shown the following components: (i) Tax - Rs.1,05,977/- (ii) Interest - Rs.53,593/- (iii) Penalty - Rs.4,50,000/- Stating that the income referable to tax is Rs.2,64,943/- thepetitioner deposited 30% thereof being Rs.79,483/-. The 1[st]respondent however took the view that the petitioner is liable topay 50% of all the three components aggregating toRs.3,04,483/-. He appears to have been guided by theclarification issued by the CBDT. The relevant clarification,which was extracted in the counter affidavit, reads: Q.No.7. The scheme offers full waiver of interest andpenalty where the tax arrear includes such interest orpenalty along with tax. What kind of interest and penaltywould be open for such waiver? Ans. All interest and penalties that are directlyrelated to assessed income or arrears of taxes will be openfor full waiver, if the taxes are outstanding on the specifieddates, e.g., interest u/s.234A, 234B, 234C, 139(B), 215, 216,217, 158BFA, 220(2) or penalties u/s. 271(1)(c), 221,158BFA, 273 etc. But where the interest or penalty is notdirectly related to assessed income/arrears of tax, waiver ofonly 50% thereof is available, eg., interest u/s. 201(1A)penalties u/s. 271(1)(b), 271A, 271B, 271BB, 271C, 271D,271E, 271F, 272A, 272AA, 272BB etc. We are of the view that the approach of the 1[st] respondentis not correct. Once the case falls under Clause (a)(iii) ofSection 88 of the Act, the amount is payable at 30% of the‘disputed income’. The word ‘disputed income’ is defined underclause (e) of Section 87 of the Act as under: (e) “disputed income”, in relation to an assessmentyear means the whole or so much of the totalincome as is relatable to the disputed tax. To determine this, one has to fall back upon the disputedtax, which, in the instant case is Rs.1,05,977/-. If this figure ismultiplied by 100/40, the figure representing the disputed incomewould emerge, being Rs.2,64,940/-. An analysis of Clauses (a)(iii) and (a)(iv) of Section 88 of the Act would present some extraordinary features. A person,who is in arrears of tax, is exposed to higher obligation, whereasthe one, who is in arrears of tax, interest and penalty, is relievedof a substantial obligation. That, however was the intention ofthe Parliament and the Courts or for that matter, the respondentscannot look into the reasons. The clarification issued by the Board, in a way adds somemore dimensions and angles to the Scheme. Basically, theBoard can neither expand nor restrict the scope of the Act, butcan only issue instructions and clarifications, for effectiveimplementation. Instances, though rare, are not lacking, in which agrammatical reading of a provision of law would lead to certainabnormal, if not absurd situations, that may not have beencontemplated or foreseen by the concerned legislatures. Whenever Courts face situations of that nature, a device knownas “exceptional construction” is resorted to, so that the provisionis read in such a way, as not to lead any absurdity. Way back in 1857, the House of Lords in Grey v. Pearson[[1]], held, “The ordinary grammatical sense of the words is to be The clarification issued by the Board, in a way adds somemore dimensions and angles to the Scheme. Basically, theBoard can neither expand nor restrict the scope of the Act, butcan only issue instructions and clarifications, for effectiveimplementation. Instances, though rare, are not lacking, in which agrammatical reading of a provision of law would lead to certainabnormal, if not absurd situations, that may not have beencontemplated or foreseen by the concerned legislatures. Whenever Courts face situations of that nature, a device knownas “exceptional construction” is resorted to, so that the provisionis read in such a way, as not to lead any absurdity. Way back in 1857, the House of Lords in Grey v. Pearson[[1]], held, “The ordinary grammatical sense of the words is to be adhered to, unless that would lead to an absurdity or somerepugnance or inconsistency with the rest of the instrument, inwhich case the grammatical and ordinary sense of the wordsmay be modified, so as to avoid such absurdity andinconsistency, but no further.” Maxwell in his treatise on ‘The Interpretation of ’[[2]]Statutesobserved, “Where the language of a statute, in its ordinary meaningand grammatical construction, leads to a manifest contradictionof the apparent purpose of the enactment, or to someinconvenience or absurdity which can hardly have beenintended, a construction may be put upon it which modifies themeaning of the words and even the structure of the sentence. This may be done by departing from the rules of grammar, bygiving an unusual meaning to particular words, or by rejectingthem altogether, on the ground that the legislature could notpossibly have intended what its words signify, and that themodifications made are mere corrections of careless languageand really give the true meaning. Where the main object andintention of a statute are clear, it must not be reduced to anullity by the draftsman’s unskilfulness or ignorance of the law,except in a case of necessity, or the absolute intractability ofthe language used”. He referred to the relevant precedents in this behalf. Two illustrations in the form of precedence would make the principle involved clear. In Adler v. George[[3]],the relevant lawprohibited any person to be within the vicinity of a particularplace, and violation thereof provided for punishment. A personentered the premises and when sought to be prosecuted, hepleaded that the liability to be punished would arise, if only hewas found within the vicinity, and not when he entered thesame. The contention was repelled and the person waspunished. This, notwithstanding the fact that the provisions of acriminal law must be construed strictly and no act or omissioncan be treated as crime, unless ordained by the competent legislature. Acceptance of the contention of the accused thereinwould have resulted to absurd situations. In R. v Baker[[4]], Section 23(2) of the Firearms Act, 1937 fell for consideration. It provided for punishment of imprisonmentof 7 years, if a person is arrested on suspicion of havingcommitted schedule offence, i.e. possessing a firearm, whereasthe punishment for a person found to be in possession of firearmis, imprisonment for 2 years. The Court took the view that theliteral interpretation of the provision would lead to absurdities andremoved the same. Bennion in his Treatise on Statutory Interpretation[[5]]has this to say, “Common senseThis section of the Code deals with anaspect of the principle that Parliament is taken to expect itsActs to be applied with common sense. According to LordSimon of Glaisdale: In R. v Baker[[4]], Section 23(2) of the Firearms Act, 1937 fell for consideration. It provided for punishment of imprisonmentof 7 years, if a person is arrested on suspicion of havingcommitted schedule offence, i.e. possessing a firearm, whereasthe punishment for a person found to be in possession of firearmis, imprisonment for 2 years. The Court took the view that theliteral interpretation of the provision would lead to absurdities andremoved the same. Bennion in his Treatise on Statutory Interpretation[[5]]has this to say, “Common senseThis section of the Code deals with anaspect of the principle that Parliament is taken to expect itsActs to be applied with common sense. According to LordSimon of Glaisdale: “…a court would only be justified in departing from theplain words of a statute were it satisfied that: (1) there is clearand gross balance of anomaly; (2) Parliament, the legislativepromoters and the draftsman could not have envisaged suchanomaly and could not have been prepared to accept it in theinterests of a supervening legislative objective; (3) the anomalycan be obviated without detriment to such legislative objective;(4) the language of the statute is susceptible of the modificationrequired to obviate the anomaly.” Item (4) of this list is abscure, since it is precisely because thelanguage is not susceptible of the meaning sought that it maybe necessary to apply a strained construction to obviate theanomaly. Avoiding anomalyEvery legal system must seek to avoidunjustified differences and inconsistencies in the way it dealswith similar matters. As Lord Devlin said, ‘no system of lawcan be workable if it has not got logic at the root of it’. Thelogic here referred to is not formal or syllogistic logic. It wasthis formal logic that Lord Halsbury had in mind when he saidthat ‘every lawyer must acknowledge that the law is not alwayslogical’. The American Holmes J is remembered for sayingthat ‘The life of the law has not been logic: it has beenexperience’. While in formal logic the conclusion must inexorably follow from applying the minor premiss (the facts) to the majorpremiss (the legal rule), in ‘informal’ logic it is the majorpremiss itself that is suspect.” On application of these principles to the facts of the case, it becomes clear that the view expressed by the authorities underthe Act, vis-à-vis the claim of the petitioner that benefit under theScheme cannot be sustained in law. We, therefore, allow the writ petition and set aside the impugned order. Since the petitioner has already paid theamount in accordance with Clause (a)(iii) of Section 88 of theAct, it is declared that he is not in arrears of any tax nor he isunder obligation to pay any further amount, with reference to theassessment year 1996-97. It is left open to the 1[st] respondent topass consequential orders, if any. The miscellaneous petition filed in this writ petition shall also stand disposed of. There shall be no order as to costs. ____________________ L.NARASIMHA REDDY, J ______________________ CHALLA KODANDA RAM, J Date: 08.07.2014 Note: L.R.Copy to be marked. JSU THE HON’BLE SRI JUSTICE L.NARASIMHA REDDYAND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM W.P.No.4202 of 1999 JSU Date: 08.07.2014 [1](1843-60) All ER Rep 21:(1843-60) All ER Rep 21: [2]Maxwell 12[th] Edition by P.St.J. Langam page 228Maxwell 12[th] Edition by P.St.J. Langam page 228 [3][1964] 2 Q.B 7[1964] 2 Q.B 7 [4][1962] 2 Q.B 530[1962] 2 Q.B 530 [5]Bennion on Statutory Interpretation 5[th] Edition page 986Bennion on Statutory Interpretation 5[th] Edition page 986