An essential facet of justice is time, which is true for not just the judicial system but any form of quasi-judicial proceeding and grievance redressal system. Timely initiation of proceedings and disposal is a matter of public policy. It is the legislature's job to provide statutes with a clearly defined framework for initiating and ceasing proceedings. But what happens when the law is silent on the aspect of initiation?
The absence of clarity on such a relevant topic places taxpayers at a disadvantage when we consider the provision of section 275 under the Income Tax Act 1961 (“Act”). At first glance, the provision seems quite clear in placing a bar on limitation for imposing penalties. But when we examine the section more closely, specifically 275(1)(c), a question does arise. Clause (1)(c) of section 275 is a residuary provision that gets triggered specifically in cases that do not fall under clauses (a) and (b) of the same provision which are applicable when the penalty is sought to be imposed as a fallout of action taken in another proceeding. Some instances where clause (1)(c) would possibly get triggered would be, failure to deduct and collect TDS, failure to get accounts audited, failure to furnish a statement of financial transaction, and certain other cases that do not fall under clause (a) and (b) of section 275(1) of the Act.
In terms of clause (1)(c), the time limit for concluding penalty proceedings would be the end of the financial year in which they are initiated or six months from the end of the month in which the action is initiated whichever is later. Naturally, this gives rise to the question of when should this period of limitation commence.
In the absence of clarity regarding the initiation of penalty proceedings, the apparent conclusion would be to rely on the jurisprudence developed around the concept of “Reasonable time”. This concept is well established around the globe and yet there is no exhaustive definition that can encompass all its interpretations and applications. When we consider the concept of reasonable time in relation to clause (1)(c) of the above-mentioned section, penalty proceedings should be initiated within such time that does not burden the taxpayer with maintaining their relevant documentary evidence for an uncertain period of time.
The Delhi High Court used this concept to tame the unfettered power of the Revenue Authorities in the case of Bharti Airtel Ltd. vs. UOI. The argument of administrative convenience, as cited by the Revenue Authorities to issue a show-cause notice after 4 years, was not held to be justified. The High Court observed that allowing such an action would burden the taxpayer with the oppressive responsibility of maintaining their books for an uncertain period of time.
The above-mentioned case dealt with an inordinate delay of proceedings under section 201 of the Act, but the crux of the matter is similar in the sense that in essence, it considers the absence of legislative clarity of time limits for initiating proceedings. In the case of JCIT vs. Clix Capital Services, the penalty proceedings under section 271C of the Act were initiated 9 years after the completion of the assessment and naturally, the taxpayer objected to the Revenue authorities’ action to initiate penalty proceedings. The Revenue authorities argued that since the above-mentioned section does not specify the time of commencement, it should be taken as the date from when the show cause notice is issued under section 274 of the Act. The Delhi High Court took note of this lacunae and rightfully concluded that this would present the Revenue authorities with the limitless authority to issue the show cause notice on the date of their choosing as they did in this case after 9 years. Agreeing with the taxpayer’s submission, Delhi HC quashed the show cause notice that was issued after an inexcusable delay.
A similar position was adopted by the Delhi HC in the case of CIT vs. Hindustan Coca-Cola Beverages, where the penalty proceedings were initiated 11 years after the assessment was concluded. The Revenue authorities utilized the legislative gap in the provision to initiate the penalty proceeding under section 271C of the Act in their own sweet time yet again. By construing the implication of the word “initiated” as used in the section, the Court, in this case, opined that the penalty needs to be initiated within a “reasonable time”.
Without legislative clarity, the judiciary has interpreted the statute based on legal principles that have evolved to prevent the Revenue authorities from gaining an undue advantage. Despite judicial guidance, establishing clarity by making suitable changes in the language of the law would be a more reliable fix.
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