RavPratapSingh

The Monsoon of Tax ‘Reform’ 

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It’s raining tax ‘reform’. Income Tax Bill, 2025 (‘IT Bill, 2025’) will soon replace the six decades old Income Tax Act, 1961. Goods and Services Tax (‘GST’) will ostensibly be simplified by Diwali of 2025. And we will have a two-tier GST consisting of 5% and 12%, with a ‘special’ tax rate of 40% applicable to select goods and services. Income Tax Return forms are being simplified, money limits for filing appeals across all tax domains are being enhanced to reduce tax litigation. Cumulatively, the changes – we are informed – are part of the larger goal of ushering in ‘Next-Generation Reforms’. There is a lot of activity, but something seems amiss.

Substantive tax reform is amiss. 

IT Bill, 2025: Simple Language, Uncertain Policy 

The use of simple, comprehensible, and coherent legal language is a goal worth spending thousands of hours. But such an exercise proves to be shallow and limited if the underlying policy is unclear and operating at cross purposes. Is faceless assessment scheme now the default manner of assessment or some aspects of human interaction are to be retained permanently? Do CSR activities deserve an unqualified tax-free status? What is the appropriate manner to levy tax on trusts? If the questions seem too narrow and pointed, what about the broader ones. Do we decisively move to the new tax regime and shed the old tax regime? Do we provide revenue targets to officers, but ensure that they don’t adopt absurd positions? Can we ensure that the Revenue Department does not adopt a position that is contrary to plain language of the statute? Do we repose faith in taxpayers and make policies from that starting point or is the default position otherwise? Should every tax treaty now be necessarily notified or was it just a convenient argument adopted by the Income Tax Department to deny benefits to a handful of taxpayers? I can go on, but you get the gist. 

If core income tax policies are in a state of flux, the language to express that policy can only provide limited clarity. Ironically, most clarity emerges in only in provisions which endow powers to the Income Tax Department. This includes powers of search and seizure, powers of arrest, and now that the dust has settled a bit: powers to reopen assessments. Otherwise, use of phrases such ‘tax year’ for ‘assessment year/previous year’ or use of ‘irrespective’ instead of ‘notwithstanding’ is a choice in favor of alternate words, not necessarily clarity. The IT Bill, 2025 may be more readable compared to its predecessor. The unending provisos and explanations may have been removed, redundant provisions to some extent been deleted, and use of legalese comparatively lesser. But improved readability should not be confused with clarity.    

GST: Multiple Tax Rates are not THE Enemy

Multiple tax rates in GST only take the heat because they are an obvious and low hanging target on which we like to hang all the flaws of GST. But the truth is that the Union and States cannot express their GST governance in clear and unambiguous terms. Why are purchaser’s dependent on suppliers to file their returns to claim Input Tax Credit? Why is provisional attachment of taxpayer properties so commonplace that courts must intervene repeatedly, and caution about the draconian nature of the power of provisional attachment? What policy is guiding levy of GST on health and life insurance? Why was online gaming target of ludicrous GST claims despite the law being obviously silent on come crucial issues? Why cannot the Revenue Department not digest any loss in courts? Any major loss in courts for the Revenue Department immediately triggers an amendment to nullify the decision. If possible, a through retrospective amendment. You want examples of these amendments? I’ve enlisted some here. 

The upward trajectory of GST collections hides the many flaws of GST governance. Instead of undertaking long, painful substantive reform, and building on the many gains of GST, we have chosen to focus on tinkering with GST rates. It is an easy sell on the political front. Come Diwali, it is easy to sell reduction of GST rates on cars and claim brownie points. But does that solve the broader issues caused by multiple tax rates in GST. The classification disputes – though source of occasional amusement – are unlikely to see end of the day until GST magically adopts a single-rate structure. Is revenue neutral rate now completely irrelevant to determine GST tax rates? If GST Compensation Cess is phased out, will the new policy be of no more cesses on GST? Because if the Union and States are simply going to levy ad hoc cesses on narrowed down tax slabs to compensate for revenue loss, we may as well stick with the current tax rates. And, while we at it, can someone tell me: why do gold and precious stones that they deserve a tax rate of their own?    

Tax Administration IS Tax Policy

There is a credible viewpoint in tax law scholarship: tax administration IS tax policy. You can understand this pithy quote in any number of ways. First, that tax administration can elevate or bury the most prudent tax policy. Delay in processing bona fide tax refunds can defeat a well-intentioned policy of reducing tax burdens of certain taxpayers. Cancelling GST registrations for sham reasons can defeat the policy of providing registrations within three working days of filing an application of registration. The above viewpoint can also be understood to mean that tax administration is an integral part of tax policy. Or if not integral, tax policy is certainly not distanced from tax administration. And that any tax reform or change in tax policy that does not bring a simultaneous change in tax administration is a flawed, if not a doomed tax reform. 

We cannot expect a rewrite of a law or a change in the tax rates to simply reduce unnecessary litigation, improve compliance, or otherwise improve tax governance. We need accompanying changes in attitudes of tax officers which in turn may require a broader systemic change in the administration of our Revenue Departments. Forsaking pedantic interpretation of law, aspiring for tax coherence, letting go of smaller tax demands in the short run for long term gains of simplicity and coherence can be some of the changes. But, as I write and advocate for these changes, I’m already convinced that they will take a long time to be realized. If at all.   

Conclusion – Buzzwords Abound  

The landscape of tax law and policy is increasingly being populated by buzzwords of no consequence. ‘One Nation, One Tax’ was a slogan that hid the reality that some indirect taxes will survive the implementation of GST. Now the ‘Diwali gift’ of GST tax rates restructuring is being thrown around as if sane tax policy is a largesse of the state and not a basic expectation of taxpayers. Income tax law has a ‘new look’ while it retains its old soul. And, while one cannot grouse political priorities because buzzwords sell, it is vital to understand the substance or the lack of it that hides behinds these quasi-marketing slogans. India’s tax landscape needs reform – deep, wide, and substantive. Anything else is activity, not meaningful change.    

Shelf Drilling Judgment: A Case of Interpretive Disagreements

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The Supreme Court in a split judgment left unresolved the long standing issue of interplay between Section 144C-Section 153 of the Income Tax Act, 1961 (‘IT Act, 1961’). The absence of a clear resolution while not ideal, provides an insight into different interpretive attitudes towards procedural issues in tax. In this article, I make a few broad points on the interpretive approaches both the judges adopted when faced with a question that did not have a clear answer, but at the same time, a question seems to have acquired more complexity than  warranted. 

Issue 

The panoramic question was: whether timelines for ‘specific assessments’ in Section 144C of the Income Tax Act, 1961 (‘IT Act, 1961’) are independent of or subsumed in the general timelines for assessments provided in Section 153 of the IT Act, 1961? 

Section 144C provides the procedure and timelines for a specific kind of assessments which typically involve foreign companies. If the assessing officer makes any change in the assessment which is prejudicial to the assessee, then Section 144C prescribes a procedure which includes forwarding a draft assessment order to the assessee. If the assessee has any objections after receiving the draft assessment order, it may approach the Dispute Resolution Panel (‘DRP’). Section 144C, in turn, empowers DRP to issue binding directions to the assessing officer. And the latter has to complete the assessment as per the said directions. Section 153, in comparison, is a general provision which prescribes timelines for completion of assessments and reassessments. The assessing officer ordinarily has 12 months, after the end of a financial year, to complete any assessment.  

Opinions that do not ‘Converse’ 

In the impugned case, both judges framed the issue identically but answered it in diametrically opposite fashion. The divergent conclusions were a result of the different interpretive approaches adopted by both judges and their differing opinions as to what each of them considered relevant factors to adjudicate the case. The jarring part is that there seems to be no single point of consensus between the two judges. At the same time, while Justice Nagarathna does mention some points of disagreement with Justice SC Sharma’s opinion, the latter does not even mention or even superficially engage with her opinion. And consequently, Justice SC Sharma fails to tell us as to why he disagrees with Justice Nagarathna. It is left for us to arrive at our deductions and conclusions. I indulge in a preliminary attempt at this exercise and identify how both judges approached the issue and interpreted the relevant provisions and their respective reasonings.          

Modes Of Interpretation 

It is trite that tax statutes need to be interpreted strictly. Justice Nagarathna in her opinion went into significant detail about the appropriate interpretive approach in tax law disputes and cited various judicial precedents to lend support to her view of the necessity of strict interpretation. One offshoot of the doctrine of strict interpretation is that if the provision(s) is clear, plain, and unambiguous and inviting only one meaning, the courts are bound to give effect to that meaning irrespective of the consequences. It is this interpretive approach that guided her opinion that the issue of interplay between Section 144C-Section 153 was simply of statutory interpretation. She added that courts should not opine about the adequacy of the timelines available to the assessing officer or to the assessee as it would undermine the cardinal principles of tax law interpretation. So, if a strict interpretation of the provisions meant that an assessing officer would have limited time to complete assessments, so be it. It is for the Parliament to look into the adequacy of time available to the officers and assessees, not courts.      

Justice SC Sharma had no qualms – superficial or otherwise – about the need to follow strict interpretation. His approach was of a ‘balancing act’, literally. He clearly says that the Court must be alive to the ‘fine balance’ that needs to be maintained between tax officers having sufficient time to scrutinise income tax returns to prevent tax evasion and the right of assessees to not have their returns scrutinised after a certain amount of time. And in doing so, he stresses on the need for harmonious interpretation, the need to make various provisions of the IT Act, 1961 work. As is wont, a balancing act tends to lead to a half-baked solution. And Justice SC Sharma’s conclusion is one such solution where he concludes that the timelines prescribed in Section 153 are not completely irrelevant to Section 144C. The assessing officer is bound to complete the draft assessment order within the timelines mentioned in Section 153, and not the final assessment order. So he binds the assessing officer to complete half a job within the timeline prescribed by Section 153, but not the complete job. As per him, the final assessment order can be passed even after the limit set of Section 153. This is certainly not a strict interpretation of tax law provisions, but a judge’s subjective view of what is a ‘reasonable time’ for an assessing officer to complete an assessment.  

Relevance of Administrative Inconvenience 

Justice SC Sharma’s opinion is littered with his concern for tax officers of this country and their inability to complete assessments in a short time if the time period under Section 144C is interpreted to be subsumed in the time period provided in Section 153. He stated that in such a scenario, the tax officer will have to work ‘backwards’ and allow for a period of nine months to the DRP. As per Section 144C, if an assessee objects to the draft assessment order and refers it to a DRP, the latter has nine months to issue directions to the officer for completion of assessment and its directions are binding on the assessing officer. So, the assessing officer has to complete the draft assessment order by anticipating that objections may be raised before DRP, else the final assessment may not be completed within the timeline prescribed in Section 153. Justice Sharma was of the opinion that the Parliament ‘could not have conceived’ such a procedure to be followed by an assessing officer. The root cause of his concern was that the time window to complete the final assessment would be ‘negligible’ since ordinarily an assessment is to be completed within 12 months from end of the financial year in which the remand order is received from the tribunal. And this narrow time window, in his view, would ‘result in a complete catastrophe for recovering lost tax.’

Justice Nagarathana, however, dismissed the concern of unworkability of timelines. She said that failure of the assessing officer to meet the statutory timeline cannot be the basis of assuming any absurdity. The Revenue argued that if an assessing officer has to work backwards, the timelines may not be met, leading to an absurdity. I do agree with Justice Nagarathana that if for a specific set of assesses the assessing officers have to work backwards to respect the timelines, it does not make the provisions unworkable or absurd. How is working backwards to accommodate statutory prescribed timelines an absurd position? An assessing officer has to essentially accommodate nine months of time accorded to DRP in Section 144C and issue a draft assessment order accounting for that time. The actual absurdity is in the Revenue’s argument that an assessing officer accounting for the time that DRP may consume is a ground for extending statutory prescribed timelines. 

Also, Justice Nagarathana made it clear that merely because the assessee may opt for raising objections against the draft assessment order and approach the DRP cannot be a factor for increasing the timeline. The assessee cannot be prejudiced for exercising a right prescribed in the statute. Justice SC Sharma’s opinion though suggests that the exact opposite and implies that the assessee exercising the right to file objections and approach DRP is a good reason to extend timelines. And in implying so, he adopts a tenuous position. 

Impact of Non Obstante Clause(s) 

Our tax statutes contain non-obstante clauses galore, but their import and impact is understood differently based on the context. In the impugned case, Justice Nagarathana noted that the context and legislative intent of a non-obstante clause is vital to understand its import. Applying the above dictum, she held that the non-obstante clause in Section 144C(1) was only regarding the special procedure prescribed in the provision and not for the timelines enlisted in Section 153. She elaborated that Section 144C is only applicable to ‘eligible assessees’ and the provision mandates the assessing officer to forward a draft assessment order, while in all other cases a final assessment order is issued directly. Since Section 144C prescribes a special procedure for the eligible assessees, it overrides only those provisions of the IT Act, 1961 which prescribe a different procedure. Section 144C does not override all the provisions of the IT Act, 1961.  

Based on the above reasoning, Justice Nagarathana concluded that  the effect of non-obstante clause of Section 144C(1) is not to override Section 153. But why? This is because as per Justice Nagarathana, the latter was not contrary to the former. She added that if Section 144C is construed to extend the limitation period prescribed under Section 153, it would lead to an ‘absurd result’ as the scope and ambit of two provisions is distinct. She was clear that Section 153 prescribes timelines for assessments and reassessments while Section 144C prescribes procedure for a specific set of eligible assessees. In other words, Section 153 controls the timelines for all assessments while Section 144C controls procedure for specific assessments that may encompass only a limited set of assessees. Thus, both provisions had different scope and were not at odds with each other.  

One can also understand the above interpretive dilemma as an occasion where a judge faced with the relation between a general and specific provision, held that the former should serve the object and aims of the latter. Section 153 is certainly a general provision, and the timelines prescribed in it must be respected by a narrower and more specific provision such as Section 144C. Latter cannot operate at odds with the former and defeat the larger objective of completing assessments within prescribed time periods.  

Justice SC Sharma’s emphasis was on the non-obstante clauses in Section 144C(4) and Section 144C(13) which specifically override Section 153. Both these sub-sections mention the assessing officer’s obligation to pass a final assessment order. Both these sub-sections obligate an assessing officer to pass a final assessment order within one month (approximately) of receiving the assessee’s acceptance and DRP’s directions respectively. Justice Sharma somehow reads into the non-obstante clauses in these two sub-sections the idea that their effect was to only extend the timeline for passing a final assessment order and not the draft assessment order. He concluded that an assessing officer will have to complete the draft assessment order within the limitations stated in Section 153. 

Justice Sharma insisted that the non-obstante clauses must be construed to ‘not defeat’ the working of the IT Act, 1961 and ensure a harmonious construction of both the provisions. However, the real reason was his belief that if timelines of cases in Section 144C were subsumed in Section 153, it would be ‘practically impossible’ to complete the assessments. As discussed above, Justice Nagarathana was clear – and rightly so – that such a belief should have no role in interpretation of tax statutes. Also, Justice Sharma added that the assessing officer only acts in an executing capacity once the draft assessment order is passed, since the no new fresh issues can be raised thereafter. The implication being that the draft assessment order issued under Section 144C is effectively a final assessment order. This is convoluted phrasing and also an inaccurate understanding of assessment orders.      

Use of ‘Internal’ and ‘External’ Aids for Interpretation 

In the context of this discussion, let me say that an internal aid for interpretation can be understood be other provisions of the IT Act, 1961. While an external aid can include the Parliamentary discussions, committee reports, etc. Both the judges referred to external aids in the impugned case and tried to understand the rationale of impugned provisions, especially Section 144C, by citing memorandums and explanatory notes of the relevant finance acts. Justice Nagarathna cited them in significant detail and one can see that her conclusion was influenced by these external aids. The Finance Minister, when introducing the amendment via which Section 144C was inserted in the IT Act, 1961 had mentioned the need to improve climate for tax disputes, expedite the dispute resolution process, and provide an alternate dispute resolution process. Since the assessees that would benefit from Section 144C would primarily be foreign companies, the aim was to signal a more receptive tax environment for foreign investment. If expediting dispute resolution process was one of the aims of Section 144C, one could argue it was a reasonable deduction that timelines of Section 144C were subsumed in timelines of Section 153. Holding otherwise would delay the process instead of expediting it. And Justice Nagarathna was partially influenced by the purpose of introducing Section 144C before arriving at her conclusion.      

Justice SC Sharma’s reliance on external aid was comparatively much more limited. He cited the relevant extracts that explained the need for Section 144C, but his focus was more on the need to harmoniously interpret Section 144C and Section 153. He tried to reason that his conclusions were aimed at making sure the IT Act, 1961 remained workable and absurdities were avoided. He primarily relied on internal aids, i.e., other provisions of the IT Act, 1961 to defend his conclusions that he said were aimed to ensure harmony amongst the various statutory provisions.    

While We Await Another Judicial Opinion  

Until a three-judge bench weighs in with their opinion, the interplay of Section 144C-Section 153 obviously remains without a clear answer. On balance, the reasoning adopted by Justice Nagarathna is more aligned to classical principles of tax law interpretation. But, the Indian Supreme Court has an uneven record in tax law matters and predicting what may happen next is as good as rolling the dice. In recent times, the Supreme Court’s uneven history on tax matters includes but is not limited to providing remedy to the Revenue Department without them even making a request for it. Or adopting gymnast worthy legal fictions and altering the concept of time to ostensibly balance the rights of the Revenue and the assessees. Thus, there is no predicting the outcome of this dispute, though I can go out on a limb and say that the relevant provision(s) maybe amended, and retrospectively so, if the Income Tax Department does not agree with the final verdict. Such amendments are certainly not unheard of!     

Competition Law and the IBC: An Alternate Perspective on the Supreme Court’s Balancing Act

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Introduction

Recently, the Supreme Court (‘Court’) in Independent Sugar Corporation Ltd v Girish Sriram Juneja & Ors resolved an interpretive uncertainty involving the interface of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) with the Competition Act, 2002. The narrow question before the Court was whether the approval of a resolution plan by the Competition Commission of India (‘CCI’) must mandatorily precede the approval of the Committee of Creditors (‘CoC’) under the proviso to Section 31(4), IBC. The proviso states that:

 Provided that where the resolution plan contains a provision for combination as referred to in section 5 of the Competition Act, 2002 (12 of 2003), the resolution applicant shall obtain the approval of the Competition Commission of India under that Act prior to the approval of such resolution plan by the committee of creditors.

The majority opinion, relying on a plain and literal interpretation, held that prior approval by the CCI was mandatory and not directory. The interpretive disagreement did not arise due to any ambiguity in the provision per se, but due to anxiety about delays in the resolution process. It was argued that mandating the prior approval of the CCI for all resolution applicants, instead of only the successful resolution applicant, would delay the completion of the resolution process under the IBC, and time is of the essence in a resolution process to protect and maximise the value of the corporate debtor’s assets. The issue – before, and even after the Court’s judgment – has been largely looked at from the prism of efficacy of the resolution process under the IBC and the need to respect timelines. Even the resolution professional in the impugned case seems to have interpreted the requirement of prior approval as directory to preserve time.  

I suggest that there are alternative ways to examine the issue. First, the prior approval of the CCI ensures respect for the commercial wisdom of the CoC as it prevents an ex-post alteration of the latter’s decision. The above sequence will help preserve the design of the IBC, which entrusts the CoC with the final say on commercial decisions in the resolution process. Second, I propose that insistence on prior approval of the CCI should be viewed as an eligibility requirement for resolution applicants instead of a procedural hurdle. The requirement of the prior approval of the CCI may dissuade insincere resolution applicants, and prevent submission of resolution plans that may crumble at the implementation stage. Cumulatively, both arguments cohere with the framework of the IBC and provide us a better understanding of its aims and procedures.  

Respect For Commercial Wisdom Of The CoC 

In most cases where petitioners have challenged the CoC’s approval of a resolution plan, courts have invoked the supremacy of the commercial wisdom of the CoC. The policy design of the IBC confers powers on the CoC to take commercial decisions, and courts can only intervene in limited and specific instances. The narrow window for judicial interference with decisions of the CoC has been rightly justified by courts by invoking limited grounds for appeal under the IBC. Courts have, thus, termed decisions of the CoC as being of paramount importance. How does the CoC’s supremacy translate into, and become relevant, in the context of the interface of the IBC and the Competition Act, 2002?

The Court in the impugned case relied on the commercial wisdom of the CoC to observe that the lack of prior approval will dilute the aforesaid design of the IBC. For example, if the CoC approves a resolution plan before it receives approval by the CCI, it would leave open the possibility of the latter suggesting modifications to the resolution plan. Permitting ex-post changes by the CCI would also strike at the finality of the CoC’s decision, and, more pertinently, alter the CoC’s position as the final arbiter of corporate debtors’ destiny. The Court underlined the paramount importance of the commercial wisdom of the CoC and reasoned that it can only be exercised assiduously if the CCI’s approval precedes the CoC’s approval. Otherwise, the CoC would be forced to exercise its commercial wisdom without complete information.   

Providing the CoC with the final say on commercial aspects of the resolution plan has remained a core idea since the initial stages of discussion on the IBC. The Bankruptcy Law Reforms Committee (‘BLRC’) had noted that one of the flaws of the pre-IBC regime was to have entrusted business and financial decisions to judicial forums. The BLRC opined that it was not ideal to let adjudicatory bodies take commercial decisions as they may not possess the relevant expertise. To overcome the flaws of the pre-IBC regime, the IBC was designed to empower only the CoC to take business decisions, as it comprises of financial creditors who may bear the loss in the resolution process. The bifurcation of roles was clear, the legislature and courts were to control and supervise the resolution process, however, all business decisions were the remit of the CoC, though it would arrive at the decision after consultation and negotiations with the corporate debtor. In a similar vein, the Court in Swiss Ribbons v Union of India noted that the financial creditors, comprising mainly of banks and financial institutions, are from the beginning involved in assessing the viability of the corporate debtor, and are best positioned to take decisions on restructuring the loan and reorganisation of the corporate debtor’s business when there is financial stress.         

The resolution applicant also suggested that the CCI’s approval could be sought by the successful applicant after the CoC’s approval but before the NCLT’s approval. First, the suggestion contravenes the plain language of the proviso. Second, the suggestion, if accepted, would still leave open the window of the CCI suggesting amendments to the CoC-approved resolution plan and strike at the IBC’s aim to give the CoC the final say on commercial aspects of the resolution plan.

In fact, the CoC approving a resolution plan which has not received the CCI’s approval would also be in contravention of other provisions of the IBC. The Court specifically mentioned that a resolution plan which contains a provision for combination is incapable of being enforced if it has not secured prior approval of the CCI. Such a plan cannot be approved by the Court as it would violate Sections 30(2)(e), 30(3), and 34(4)(a) of the IBC on grounds of being in contravention of the laws in force. Apart from the above provisions, it may be worth mentioning Section 30(4), which obligates the CoC to approve a resolution plan after considering its feasibility and viability. Clearly, evaluation of the feasibility and viability of a resolution plan must precede the CoC’s approval. The CoC should not be put in a position where it approves a resolution plan and only subsequently considers its feasibility and viability based on the CCI’s opinion, as that would disregard the IBC’s mandate.   

 Proviso To Section 31(4) As An ‘Eligibility Requirement’

 I suggest that the proviso to Section 31(4) should be viewed as an eligibility requirement for the resolution applicant. My suggestion is predicated on an analogy with Section 29A(c). Briefly put, Section 29A(c) declares that a person is ineligible to submit a resolution plan if such person or any other person acting jointly, or in concert with, it has an account classified as a non-performing asset for one year. The proviso removes the ineligibility if the person makes payment of all overdue amounts before the submission of the resolution plan. One of the resolution applicants in Arcelor Mittal India Pvt Ltd v Satish Kumar Gupta & Ors had argued that insistence on the prior payment of overdue amounts would reduce the pool of resolution applicants as their plan may not be eventually approved by the CoC, and that the proviso should be interpreted in a ‘commercially sensible’ manner wherein overdue amounts should be allowed to be paid as part of the resolution plan and not before the submission of the resolution plan.

Justice S.V.M Bhatti, in his dissenting opinion in the impugned case, has attempted to interpret proviso to Section 31(4) in a similar fashion. He has observed that insistence on prior approval by the CCI would limit the number of eligible resolution applicants. Further, he noted that the requirement of prior approval by the CCI raises a question of prudence since the resolution applicant would seek approval of its plan, which may eventually not be acceptable to the CoC.    

 In Arcelor Mittal, the Court dismissed the above line of arguments and held that the plain language of the proviso to Section 29A(c) makes it clear that the ineligibility is removed if overdue payments are made before the submission of the resolution plan. Making the overdue payments may be worth the while of the applicant as the dues may be insignificant compared to the possibility of gaining control of the corporate debtor. The Court added that it would not disregard the plain language of the proviso to avoid hardship to the resolution applicant. The above reasoning squarely applies to the proviso to Section 31(4) and is more persuasive than the dissenting opinion in the impugned case.  

 In fact, one could further engage with the argument about the proviso limiting the number of eligible resolution applicants by stating that the mandate of prior approval of the CCI may act as a filtering mechanism and attract only sincere applicants with concrete resolution plans. The receipt of the CCI approval may diminish the possibility of the resolution plan crumbling at the implementation stage due to the inability or disinclination of the resolution applicants to comply with the subsequent conditions that the CCI may impose. Knowledge of the CCI’s stance prior to the approval of the resolution plan will help in setting realistic timelines and conditions for the successful resolution applicant. 

 Section 31(4) permits the successful resolution applicant to obtain the necessary approvals required under any law for the time being in force, within one year from the date of approval by the adjudicating authority.  The proviso to Section 31(4) carves out one exception and states that if the resolution plan contains a provision for combination, the resolution applicant shall obtain the approval of the CCI prior to the approval of such resolution plan by the CoC. The language of the proviso is clear, unambiguous, and the legislative intent is unmistakable. As the Court noted in its majority opinion, courts must respect the ordinary and plain meaning of the language instead of wandering into the realm of speculation. An exception has been made in the proviso wherein resolution applicants need the prior approval of the CCI. To interpret ‘prior’ to mean ‘after’ would amount to the judicial reconstruction of a statutory provision. There is also no room to interpret the requirement of prior approval as being directory and not mandatory. Analogous to the proviso to Section 29A(c), obtaining the prior approval of the CCI may be ‘worth the while’ of the resolution applicants and this would be a  minor hardship compared to the possibility of controlling the corporate debtor.  

 Prior approval by the CCI should be viewed as an eligibility requirement for resolution applicants instead of a procedural burden. Typically, resolution professionals prescribe requirements of net worth, expertise, etc. for resolution applicants. If compliance with such conditions is not viewed as a hurdle, why view a regulatory approval only through the lens of time, as a procedural hurdle? Instead, it is better viewed as a safeguard to prevent future legal hurdles, smoothen the implementation of approved resolution plan, and to preserve the IBC’s design.  

Understanding The Anxiety About Delay

The Court, in the impugned case, has cited statistics to blunt the argument on delay. The statistics about the speed of decision-making by the CCI reveal that delays may not be significant. The Court cited the Annual General Report of the CCI for 2022-23, as per which, the average time taken by the CCI to dispose of combination applications was 21 days, and there was no recorded instance of the CCI taking more than 120 days to approve a combination application. The track record of the CCI partly convinced the Court that arguments about delays were exaggerated.

While there is merit in arguing that the insistence on prior approval by the CCI may delay the resolution process, it is important to add two caveats: first, even in cases not requiring the approval of the CCI, timelines of the IBC are not frequently respected for various reasons. This is not to suggest that additional delays would do no harm, but that delays are par for the course even when the CCI’s approval is not required. So, it is not accurate to ascribe the possible delay only to the requirement of the CCI’s prior approval. Second, prior approval by the CCI will be needed in relatively few instances, and thus there is good reason to adopt a relaxed view of timelines in such cases to avoid competition law issues after the CoC has approved the resolution plan. The additional time consumed in seeking the CCI’s approval will be for a valid reason, i.e., to address the interface of the IBC with competition law. The IBC cannot be implemented in a sealed bubble. where no extraneous factor  ever influences the speed and progress of the resolution process.  

Conclusion

I have tried to establish that once we take a step back from the time-centric arguments, we can cast a different lens on the issue of the interface of competition law and the IBC.  We can understand that the decision-making of the CoC, and other procedural requirements also need to be respected to maintain the integrity of the resolution process. Time, despite being vital, cannot solely dictate the entire resolution process. When the resolution process implicates other areas of law, such as competition law, adopting a relatively relaxed approach to the time limits of the IBC may ensure smooth approval and implementation of the resolution plan. In fact, the prior approval of the CCI aligns with the key design of the IBC, which strives to reserve final decisions on the resolution process to the CoC, subject to minimal judicial supervision. If the CCI unpacks and modifies the CoC-approved resolution plans ex-post, it will in fact, undermine the sanctity of the resolution process.

[This post was first published at NLSIR Online in May 2025.]

Service Charge, its Similarity with Tax, and a ‘Double Whammy’ for Consumers: Some Thoughts

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Introduction 

The Delhi High Court (‘High Court’) recently ruled that levy of mandatory service charge by restaurants violates customer rights. The High Court’s reasoning, anchored in consumer protection laws, termed a mandatory service charge as deceptive and misleading for consumers. The High Court also made a few casual references to tax laws. For example, the High Court took umbrage at the nomenclature of ‘service charge’ and its potential to confuse customers with a tax levied by the Government. There is merit to the High Court’s observation, but service charge and tax have a deeper connection that is only superficially referred to in the judgment. In this article, I try to scratch the surface a bit deeper.  

I elaborate on two potential misgivings about service charge that the High Court’s judgment may entrench: 

First, the High Court noted that addition of service charge below the cost of food followed by levy of GST in the bill, created a ‘double whammy’ for the customers. I argue that restaurants by adding service charge before calculating GST were adhering to the mandate under CGST Act, 2017. In complying with GST laws, restaurants seem to have tripped over the Consumer Protection Act, 2019. Unless there is a change in any of the two laws, restaurants are now faced with the challenge of squaring a circle.  

Second, the High Court’s view that service charge can be confused for a tax prompted it to recommend that a change in nomenclature may be worth exploring. The High Court recommended that the Central Consumer Protection Authority (‘CCPA’) can permit restaurants to levy ‘tip’, ‘gratuity’, or ‘fund’ on a voluntary basis. The nomenclature issue was two-fold: first, service charge per being mistaken for a tax by customers; second, use of abbreviations by restaurants – such as ‘charge’, ‘VSC’, ‘SER’ – which further misled the customers if the levy was a mandatory levy by the State or restaurants. I query whether ‘confusion’ is the touchstone to determine if a levy by private entity should be disallowed or is its perceived mandatory nature?  

GST on Food Cost + Service Charge 

The High Court noted in its judgment that: 

Moreover, when the bills of establishments are generated, it is noticed that the service charge is added right below the total amount of the cost of the food, followed by GST and taxes. For any consumer who does not examine the bill thoroughly, the impression given is that the service charge is a component of tax; (para 122)

The High Court’s above observation hints at two things: 

one, the restaurants are trying to inflate the cost of food bill by calculating GST on the cumulative of food bill and service charge;  

second, the mention of service charge just before GST creates a confusion that the former is a tax. 

Let me examine the first implication in this section.  

Section 15(2)(c), CGST Act, 2017 states that the value of supply of goods or services or both shall include:

incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services; (emphasis added)

Thus, if a restaurant was adding service charge to the food bill before computing GST, it was adhering to the mandate of GST law and not trying to ‘inflate’ the bill on its own accord. Once a restaurant decides to levy any additional charge including packing charges, etc., then as per Section 15(2)(c) it needs to be added to the total cost in a bill before computing GST. Adding all the ancillary costs ensures that the base value for calculating GST is as high as possible. Enhancing underlying value of the supply is a statutory policy aimed to enhance revenue collections, and leaves business entities such as restaurants no option to exclude charges such as service charge from the cost. One could question the statutory policy, but I doubt restaurants at fault for adding service charge to the food cost before computing GST.   

In adding the service charge to food cost, as per the mandate of CGST Act, 2017, restaurants though seem to have tripped over the consumer protection law. How to ensure compliance with both? The High Court has offered a suggestion that service charge could be renamed to something that cannot be confused with a tax, though its payment should remain voluntary.    

Service Charge Can be Confused With Tax 

The High Court, as noted above, was concerned about mention of service charge just above GST in the restaurant bill and its potential to confuse customers former with a tax. The High Court also noted that:     

In some cases, service charge is being confused with service tax or a mandatory tax imposed by the government. In fact, for the consumers, the collection of service charge is proving to be a double whammy i.e., they are forced to pay service tax and GST on the service charge as well. This position cannot be ignored by the Court. (para 123)

Latter part of the High Court’s judgment, of course, is a bit inaccurate. Service tax has been subsumed by GST since July 2017. Also, payment of GST on service charge is not a ‘double whammy’ as the High Court observes. It is, as noted above, payment of GST as per statutory mandate. It is simply, a ‘whammy’ as inclusion of service charge in value of supply though prejudices the taxpayer, is not qualitatively dissimilar from inclusion of any charges that suppliers compulsorily collect from their recipients.  

The first part of the observation points out that service charge can be confused with a tax by consumers who may think they have no option but to pay it, may be misled into paying a private compulsory levy. The misleading part is on two counts, as per the High Court. 

First, the mention of service charge just above GST. This can be corrected by tinkering billing software and doesn’t seem like a substantive issue that it beyond correction. One could perhaps mandate restaurants to specifically mention in the bill itself that service charge is discretionary and not a levy by the State.    

Second, is the phrase ‘service charge’ itself, which gives consumers the impression that it is a tax. But will a service charge by any other name taste just as bitter? Perhaps. 

Even if the CCPA permits restaurants to rename service charge to let us say a ‘tip’, it would have to be on a voluntary basis. Technically, as per CCPA guidelines, service charge was discretionary even before the Delhi High Court’s judgment. And if CCPA permits levy of ‘tip’, we would enter similar issues of restaurants arguing that the ‘tips’ are voluntary and customers can request it to be waived off while customers claiming that the voluntary nature is only a ruse. Restaurants effectively collect ‘tip’ as if it’s a mandatory charge. Equally, GST will have to levied on food cost and ‘tip’, if paid. Thus, the ‘double whammy’ may persist. 

Can consumers confuse a ‘tip’ with a ‘tax’? Well, ideally, they should not confuse a service charge with a tax either. Not after July 2017, since the terms service charge and GST are not eerily similar. However, one should not take the view of a tax professional but deploy the standard of an average reasonable consumer. It is difficult to predict with mathematical certitude, but a ‘tip’ or ‘gratuity’ seems like a relatively less confusing option. If CCPA can mandate that no restaurants cannot use abbreviations or alternate names which can lead to confusion as in the case of service charge. There should be one voluntary levy and its name uniform across all restaurants.  

Finally, I’m prompted to ask a question: do we mistake any other levy by private entity as a tax? Is there any comparable example? 

There have been instances of conmen masquerading as tax officers, and fooling people into paying money, but I cannot think of a comparable levy where an average person has been confused that the money is not being collected by the State, but a private entity. Perhaps some people were confused if the maintenance fee paid to their resident associations was a State levy, but the confusion doesn’t seem as widespread as for service charge. The confusion seems a rather peculiar and unique problem to service charge. And one that may require an innovative solution. Though, equally possibly, restaurants may eschew the path of levying or collecting any ‘tip’ and may simply raise prices of food to compensate. Wait and watch, I guess.  

Fraudulent Sale is Supply Under GST: Three Errors of the Advance Ruling

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A recent advance ruling by Gujarat AAR is a frustrating read. AAR held that sale by a seller constitutes as supply under GST laws even if the seller was defrauded and did not receive any consideration for such goods. In this article, I argue that there are three obvious errors in the advance ruling, which encompass flaw in applicant’s arguments and AAR’s approach. The three errors are: 

First, the applicant’s framing of question. 

Second, AAR’s reasoning and identification of relevant provision. 

Third, applicant’s argument on why a fraudulent sale should not constitute a supply. 

The facts involved a peculiar and may I daresay a novel question that should have led to an interesting analysis of the relevant legal provisions and hopefully a defensible answer. Instead, what we receive via the advance ruling is a superficial analysis and a facile answer. 

The basic facts in application were: the applicant supplied submersible pumps for two months and generated several invoices for the said sales only to discover that it had been defrauded. The applicant did not receive any consideration for the supply of goods as the order documents were forged by a fraudulent purchaser by using the name of a reputable purchaser. Applicant approached AAR seeking an answer whether GST can be levied on the above transaction.  

First Error 

The question before AAR should have been whether such a fraudulent sale of goods constitutes a supply under GST laws, even in the absence of a consideration? Instead, applicant framed the question as:      

Whether the goods supplied by us [becoming victim of fraud without receiving consideration] could be considered as supply of goods under the provisions of section 21 under the IGST Act? 

Grammatical errors in the question aside, the legal question would be why did the applicant invoke Section 21, IGST Act, 2017? The impugned provision states that import of services made on or after the appointed day shall be liable to tax regardless, whether the transactions for import of such services had been initiated before the appointed day. However, the applicant’s transaction in question was an inter-State supply and nothing to do with import of services. Clearly, the applicant approached AAR with a question that referred to the wrong provision. And AAR also noted the applicant’s reference to the above provision and observed: 

How this will be applicable to supply of goods made by the applicant to the recipient in the State of Assam is not understood. We find that the question, at best is vaguely framed. (para 9)

The applicant’s query could not have been answered by referring to the wrong provision and thus another approach was necessary. 

Second Error 

In adopting the alternate approach, the AAR made an error by referring to Section 12, CGST Act, 2017 which states the time of supply of goods. Time of supply goods is a concept under GST which helps us determine at what point in time did the supply in question took place. To delineate and cohere various situations, the provision lays down certain rules including deeming fictions. AAR referred to Section 12 and noted that time of supply of goods is either the date of issue of invoice by the supplier or date on which the supplier receives payment with respect to the supply, whichever is earlier. Applying the above rules to the facts, AAR noted that the supplier had issued invoices in June 2023 and July 2023, thus the point of taxation in respect of supply of goods will be the date of issue of invoice. AAR thereby concluded that the applicant had supplied goods under relevant provisions of GST laws. 

The error in the above analysis by AAR is that it did not consider if supply had been made. Time of supply as the phrase indicates is only relevant for a supply. The more relevant question for AAR was if a supply had been made and not the time of supply. Latter was contingent on the former. AAR, instead, assumed that the supply had been made and relied on time of supply and invoices to state that a supply had been made. 

Third Error 

This leads us to the third error: applicant’s argument that no supply had taken place. The applicant relied on Sales of Goods Act, 1930 to argue that a valid sale had not taken place since all the essential ingredients of a sale were not satisfied in absence of a consideration. AAR declined to accept applicant’s above argument and referred to Section 7, CGST Act, 2017 which defines supply. However, instead of analysing if the ingredients of supply were satisfied in the impugned case, AAR took a short route and simply noted that ‘it is not disputed that a supply has been done by the applicant’. (para 14) AAR concluded that while a fraud may vitiate the contract of sale, the applicant has not explained how a fraudulent sale moves outside the ambit of supply. 

The error here is actually two-fold: first, the applicant invoking Sales of Goods Act, 1930 instead of categorically stating that the ingredients of supply are not satisfied in the impugned case; second, AAR only reproducing the definition of supply in its ruling rather than examining if a supply can take place under Section 7, CGST Act, 2017 even if the purchaser pays no consideration. To be fair though, AAR would not undertake the latter exercise if the applicant doesn’t argue for it. And it seems the four people representing the applicant before AAR didn’t make the argument and instead surprisingly relied on Sales of Goods Act, 1930 to argue that a sale had not taken place.      

Conclusion 

The first instinct is to club Gujarat AAR’s impugned ruling with the wide swathe of sub-par advance rulings under GST. While AAR is not completely faultless in this ruling and did commit its own error, the applicant approached AAR with a wrongly framed question and made some misjudged arguments. There is only so much that AAR can do when the applicant adopts such a flawed approach. AAR to some extent did salvage the situation. But just about. Irrespective, I doubt we have heard the last word on this issue. 

Legislative Intent or Error: Puzzle of Indian Tax Policy

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Introductory Questions 

Let me start with a question: how does one discover legislative intent in a provision of tax statute? Through a plain reading of the provision or through a subsequent statement by the State’s legal counsel stating its intent? Positivist thinking would point us to the former, and rightly so. A statement, even a sworn statement in a court shouldn’t override what is contained in the statute. Deference to the legislature cannot extend to a point where despite what the statute contains, court interprets the provision based on legislature’s statement explaining its intent. 

The question in your mind may be: why am I asking this question? Well, for those who follow tax developments, you may already know. For others, I’m asking the question in the context of Safari Retreats case and the latest amendment to CGST Act, 2017 via the Finance Act, 2025. 

One key question that the Supreme Court had to answer in Safari Retreats case was: Did the legislature intentionally use the conjunction ‘or’ instead of ‘and’? Or did the legislature commit a mistake? A simple question that acquires tremendous urgency if a taxpayer needs the answer to assess its tax liability which in this was a few crores. 

During the hearing, the State’s counsel argued that use of the conjunction ‘or’ was a legislative error and further pressed that ‘or’ should be read as ‘and’. What should have been the ideal response of the Supreme Court? One view – subscribed by the State – is that Supreme Court should have declared ‘or’ means ‘and’ and interpreted the provision accordingly even if it meant throwing all grammar and interpretive rules out of the court complex. Or was there more justification in the Supreme Court responding the way it did: legislative intent can only be revealed by the legislative text and not by the State counsel’s statement about the text. And in doing so, restrict the amount of deference that courts accord to the legislature in tax laws.   

And equally importantly, how should we respond? Resign to yet another retrospective amendment to a tax statute and raise our hands in exasperation while letting out a huge sigh. Or do we try to understand this entire episode like a puzzle and use it as an example of how Indian State approaches tax policy. I prefer to do the latter, and hence this article.  

‘Or’ Means ‘And’

I’ve commented on the case in detail here and here. In this article, I intend to provide a limited overview of the controversy with an aim to highlight Indian State’s tax policy choices. 

In 2019, the Orissa High Court allowed taxpayer to claim Input Tax Credit (‘ITC’) on construction of a shopping mall. In 2024-25, one of State’s arguments before the Supreme Court was that use of ‘or’ instead of ‘and’ was a legislative error. The reason for the argument, from a revenue perspective, was straightforward: it would ostensibly allow the State to block the taxpayer’s ITC claim. But the State was aware of the ‘legislative error’ since 2019, why not correct the error via a legislative amendment and bury the issue instead of making elaborate arguments before the Supreme Court? Commenting on the same the Supreme Court in its judgment observed the following: 

The writ petition in which the impugned decision was rendered is a six-year-old writ petition. If it was a drafting mistake, as suggested by learned ASG, the legislature could have stepped in to correct it. However, that was not done. In such circumstances, it must be inferred that the legislature has intentionally used the expression “plant or machinery” in clause (d) as distinguished from the expression “plant and machinery”, which has been used in several places. (emphasis added) (para 43)

As is evident, the Supreme Court rejected the State’s claim of an error. If use of ‘or’ was indeed an error, there was ample time for the State to step in and rectify it. And its failure to do so, in my books, counts as lack of bona fide. For the Supreme Court it was sufficient to dismiss the entire argument and proceed solely on the basis of what was written in the statute.  

What did the State achieve by not amending the law and correcting what it claimed was a ‘legislative error’? For one, if the Supreme Court had actually ruled that ‘or’ should be read as ‘and’, it would have armed the State with a decision that could have been conveniently used by it to block ITC in the future as well. 

Second, if the Supreme Court refused to interpret ‘or’ to mean ‘and’, the State could have claimed that the decision did not reflect ‘legislative intent’. Both things did happen. The latter is no longer a surprise. Each time the State loses a major tax case, its response is that the judicial decision does not reflect legislative intent. And subsequently, it leads to an amendment of the provision in question. And even more often, the amendment is given retrospective effect.   

Legislative Intent – Legislative Error 

The Supreme Court in its above cited paragraph makes it sufficiently apparent that legislative intent must be reflected through the statute itself. If the State claims that a legislative error crept into the statute, it should have rectified it in the intervening 6 years it had to act on it. 

Legislative intent thus cannot be superimposed on a statute by the State on discovering its error or mistake. That would upset the balance of power in State’s favor and would violate a cardinal rule of tax law interpretation, i.e., strict interpretation of tax statutes is necessary to determine the taxpayer’s liability. 

But does that mean that legislative error can never be acknowledged by courts? Apparently so.

One, there is no telling if an error is truly an error. In Safari Retreats case, the petitioners pointed out that:

In the model GST law, which the GST Council Secretariat circulated in November 2016 for inviting suggestions and comments, the expression “plant and machinery” was used both in clauses (c) and (d) of Section 17(5). However, while enacting the law, the legislature has advisedly used the expression “plant and machinery” in clause (c) and “plant or machinery” in clause (d) of Section 17(5). Therefore, the intention of the legislature cannot be brushed aside by contending that the use of the word “or” in Section 17(5)(d) is a mistake of the legislature. (para 9)

In such circumstances, who is to know if the legislature intentionally replaced ‘and’ with ‘or’ when finalising the text of the bill or an error crept in while editing the Model law. Presumably only the State can reveal the mystery through detailed document history and accompanying notes on the provisions. But do we want to go down that rabbit hole. Forget us, I doubt the State would like that like that level of transparency in law making. 

Second, it would defeat a core tenet of not just tax law but also law in general. Tax liability is as per the law that exists and not what the law was intended to be. A taxpayer has no way of knowing what the legislature ‘intended’ to enact except by interpreting the provisions as they exist. And if one argues that the legislative debates, and other pre-legislative reports would provide a clue, it is a heavy burden to impose on the taxpayer. Then not only must the taxpayer know the law but also whether the law contains an error or not. Hardly just or fair. And one would argue such a stance is also devoid of common sense.

Puzzle of Indian Tax Policy

Hidden in the steps of Safari Retreats case and its aftermath is the puzzle of Indian tax policy decisions. 

One, why wait for the Supreme Court’s decision and then amend the provision retrospectively? Because beyond the immediate urgency of losing or wining a case, was a question of policy. Do we allow taxpayers to claim ITC on construction of shopping malls when they further rent it for business? While a timely amendment of ‘or’ to ‘and’ may not have answered the question with certainty, it would have provided a clear signal of proactive policy making including correcting errors. Instead, the post-decision amendment reveals a policy of amending laws as per convenience.   

Two, where were the States? Since the entire dispute centred around CGST Act, 2017 we expect response from the Union, but GST is a federal levy. Why didn’t any State openly and persuasively argue for an amendment and perhaps end a long winding litigation? It was only after the Supreme Court’s judgment, that States were visible. But just about. States were on board for the GST Council’s recommendation for amendment. Or at least no State objected to the amendment. So, my impression is that either ALL States were either clueless about the litigation or all of them unanimously approve retrospective amendments to GST laws instead of proactive amendments to thwart resource consuming litigation. Maybe, this is the kind of uniformity that was aimed through GST. 

Third, why file a review after deciding to introduce the amendment? Again, it seems the Court’s stamp of approval or its views on the amendment will prevent sprouting of similar issues from the provision. In this case, though the litigation may not end because even the amendment may not prove enough as courts will still need to interpret the phrase ‘plant and machinery’. But a review seems like a circuitous way of making tax policy when there can be direct and straightforward ways. Only we prefer to be clever by half and like to prevent transparency on fundamental tax policy issues. Else, the State may be held to its word and that is not something it will enjoy. 

Way Forward 

The promise of no retrospective amendments to GST laws was buried long ago. And now it is dead. We can only hope for a more sane approach to tax disputes and a saner reaction to court decisions that are not in the State’s favor. Else, the familiar cycle of dispute, decision, amendment will continue till perpetuity until one fine day we feel the need to ‘simplify’ GST by removing all the Provisos and Explanations which were added via numerous reactive amendments.    

When A Princess Worried About Tax on Alimony

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All things in life have a tax angle, including alimony payments. In this article I elaborate on tax treatment of alimony payments under the Income Tax Act, 1961 (‘IT Act, 1961’). Upfront, these are the three takeaways from this article: 

first, a lump sum payment of alimony amount is not taxable in the hands of recipient, since it is a capital receipt.

second, the monthly payment of alimony amount is taxable in the hands of recipient, since it is an income from a particular source. 

third, the payer receives no tax deductions for alimony payments, even if the payments are made under a decree of court. 

The law on all three above aspects was laid down by the Bombay High Court in Princess Maheshwari of Pratapgarh v Commissioner of Income Tax. This case is the focus of my article below. 

Decree of Nullity Sprouts Tax Questions  

(i) Decree of Nullity of Marriage 

In September 1963, Princess Maheshwari Devi of Pratapgarh obtained a decree of nullity of her marriage with Maharaja of Kotah. The Bombay City Civil Court (‘civil court’) pronounced the decree of nullity under Section 25, Hindu Marriage Act, 1955. As part of the proceedings, the Princess had claimed monthly alimony and a gross sum as permanent alimony from the Maharaja. The Civil Court ordered the Maharaja to pay the Princess an amount of Rs 25,000 as permanent lump sum alimony and a sum of Rs 750 per month as monthly alimony. The Maharaja was obligated to pay the latter until her remarriage, if and when, it took place.    

(ii) Two Tax Questions 

I will spare you details of assessment years and focus on the broader issue: the Princess claimed tax exemption on the lump sum alimony amount as well as the monthly alimony amounts. Her claims were rejected by the Income Tax Office and Appellate Tribunal, and against the said decisions she appealed to the Bombay High Court.

The High Court had to answer two questions: 

First, whether the monthly alimony of Rs 750 was income in hands of the Princess and liable to tax? 

Second, whether the lump sum alimony of Rs 25,000 was income in hands of the Princess and liable to tax? 

The framing of questions is crucial, from an income tax viewpoint. A receipt of money is only taxable if it constitutes ‘income’ as defined under the Income Tax Act, 1961 (‘IT Act, 1961’). Else the receipt falls outside the ambit of IT Act, 1961 though given the current and expansive definition of income, rarely if ever is a receipt of money not subjected to income tax. 

Monthly Alimony is Taxable in Hands of Princess  

The Bombay High Court answered the first question in favor of the Income Tax Department and held that the monthly alimony payment to the Princess constituted her income and was taxable in her hands. The arguments from both sides were as follows.  

(i) Arguments 

The advocate for the Princess rested her case for tax exemption of the monthly alimony on various grounds. Some of them were: 

First, alimony is merely an extension of husband’s obligation to maintain his wife and Section 25, Hindu Marriage Act merely enlarges that obligation. The advocate was implying that the husband is obligated to maintain his wife, whether they continue to remain married or not.  

Second, the alimony payment to the Princess did not emerge from a definite or particular source and in fact, the payment would cease on her remarriage. 

Third, monthly alimony is a personal payment from her ex-husband and not a consideration for any services performed – past or future. 

The counsel for the State though argued that the decree of Civil Court had created a legal right in favor of the Princess. The right to receive a monthly alimony amount had a definite source, i.e., the decree of court, and should be taxed as income in hands of the Princess.   

(ii) High Court Applies the Law

The Bombay High Court scanned through the previous cases to state judicial understanding o the term ‘income’. For example, one notable case, the Privy Council had observed that income is something that is ‘coming in’ with some sort of regularity from a definite source. The High Court after scanning various other precedents, succinctly stated the judicial definition of income as: 

a periodical return for labour/skill that a person receives with some regularity, and from a definite source. But an income excludes a ‘windfall’ gain. 

The above definition would squarely cover a monthly alimony payment. The only point then in the Princess’s favor was her claim that the monthly alimony was not a result of application of any labour or skill on her part. But the High Court rejected this point and held that even voluntary payments can constitute income in hands of recipient if they come with regularity from a definite source. The High Court though further pointed out that the monthly alimony was paid to the Princess because of the civil court decree which was obtained by her by expending effort and labour. And the civil court decree is the source of her right to claim monthly alimony as minus the decree she would have no right to alimony. The High Court concluded: 

Although it is true that it could never be said that the assessee entered into the marriage with any view to get alimony, on the other hand, it cannot be deneid that the assessee consciously obtained the decree and obtaining the decree did involve some effort on the part of the assessee. The monthly alimony being a regular and periodical return from a definite source, being the decree, must be held to be “income” within the meaning of the said term in the said Act.

The monthly alimony amount was something the Princess would receive regularly because of the decree, because of her efforts to obtain to same from the civil court and thus it would constitute her income under IT Act, 1961 and be subjected to income tax. 

Lump Sum Amount Received as Alimony: Exempt from Tax  

As regards the taxability of lump sum amount of Rs 25,000 received as alimony, the Bombay High Court decided that it amounted to a capital receipt and was not taxable as income in the hands of the Princess. The High Court observed: 

It is not as if the payment of Rs. 25,000 can be looked upon as a commutation of any future monthly or annual payments because there was no pre-existing right in the assessee to obtain any monthly payment at all. Nor is there anything in the decree to indicate that Rs. 25,000 were paid in commutation of any right to any periodic payment. In these circumstances, in our view, the receipt of that amount must be looked upon as a capital receipt.

Capital receipt, in income tax law, is only taxable if there is an express charging provision in income tax law to that effect. Else, not. Only revenue receipt is charged to income tax by default. Thus, the above distinction of revenue and capital receipts was in favor of the Princess. Also, because the High Court took the view that the lump sum payment did not ‘commute’ any monthly or periodical payments that the Princess would have received since she had no pre-existing right to receive the monthly alimony payment. To be clear, the lump sum alimony amount could be taxable if it ‘commutes a part of the future alimony’. However, the High Court said there was nothing in the civil court decree that indicated that the lump sum amount commuted her monthly payments. At the same time, the High Court did acknowledge that ‘beyond doubt that had the amount of Rs. 25,000 not been awarded in a lump sum under the decree to the assessee, a larger monthly sum would have been awarded to her on account of alimony.’ Thus, leaving a window ajar to tax lumpsum alimony amounts in future cases.     

No Tax Deductions for Alimony Payments

The unfairness of IT Act, 1961 is that it does not allow deduction for alimony payments. Typically, husbands pay alimonies to their ex-wives. Presuming that the alimony payment is from a portion of husband’s already taxed income, such payment should ideally qualify for a deduction. It can be viewed as an expense. If not the entire amount, a deduction with an upper cap can be provided. And for monthly alimony payments anyways the wife is liable to pay income tax, so providing the husband income tax deduction on such payments may not be too harmful from a revenue perspective. Currently, the husband pays income tax on his income, pays a portion of such income as monthly alimony to his ex-wife, and the ex-wife is liable to income tax for the monthly alimony as it constitutes her income. A bountiful for the revenue, unless the spouses are smart and rich enough to agree only to a one-time alimony amount, circumventing the uneven tax consequences of IT Act, 1961.   

In fact, the Bombay High Court described the above position of law as ‘unfortunate’. It heeded the legislature to pay attention to this aspect and noted: 

It is clearly desirable that a suitable amendment should be considered to see that in cases where the payments of alimony are made by a husband from his income and are such that they cannot be claimed as deductions from the income of the husband, in the assessment of his income, they should not be taxed in the hands of the wife. That, however, is not for the courts but for the Legislature to consider.

The Bombay High Court made the above observations in 1982. Since the IT Act, 1961 has been amended several times to include various capital receipts within the realm of taxability. But not lump sum alimony payments categorized as capital receipts have not been made taxable. Neither have deductions on alimony payments been included. Our lawmakers seem busy ‘simplifying’ the income tax law, rather than introducing substantive and meaningful policy changes that acknowledge new social realities. 

Conclusion 

Neither the Income Tax Act, 1961 and unfortunately nor does the Income Tax Bill, 2025 provide a clear answer about taxability of alimony payments. Tax lawyers typically advice their clients based on above discussed judgment of the Bombay High Court. Any legislative clarity on this front seems a bit distant for now.    

Regardless, I would like to conclude with a normative question: 

Who SHOULD pay the tax on alimony payments? 

Depending on your gender biases, views on divorce, necessity of alimony payments, your perception of divorce settlements as fair or otherwise, your answers would vary. Typically, women receive alimony payments from their ex-husbands. And people who have strong and inflexible opinions that women use family laws as ‘get rich quick’ route are likely to argue that women should foot the tax bill on both kinds of alimony payments: made via lump sum amounts and/or on monthly basis. 

A tax law view would be to ask who benefits from the alimony payment? And who bears the burden? The latter should receive a deduction on the payment and the former should shoulder the tax liability. Irrespective of gender. I’m willing to go a step further and suggest that even if the alimony payment is not made because of a court order, but voluntarily as part of a valid contract, the above principles should apply. Taxability of alimony payments should not depend on whether court ordered it, or parties themselves agreed to it. IT Act, 1961 provides deductions to all kinds of voluntary contributions including to political parties, it is imperative that same principles apply to personal relationships if it ends with mutual consent – actual or perceived. We should stop hiding behind the argument that alimony payment is a personal obligation and thus does not qualify for deduction. Unless one entertains the far-fetched belief that providing such a deduction may further catalyze divorces.         

Finally, and just as a matter of abundant caution I would like to add that transfer of various assets – jewelry, house, etc. – between two spouses can and do happen when they are still legally married and sometimes after the marriage has legally ended. The transfers of such assets attract different tax liabilities and warrant a separate discussion.  

Tax Privacy: To Begin a Conversation … 

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Income tax law is based on disclosing information to the State. Personal financial information. Bank account statements, investments, salary receipts, rent paid or received, medical expenses, money transferred to spouse, expenses of children, insurance premiums, political donations, charitable contributions to name a few. Each piece of information is necessary to ascertain the exact tax liability of a taxpayer. And it is statutory duty of a taxpayer to make accurate and timely disclosures.  

If income tax administration is based on State compulsorily seeking detailed financial information from taxpayers, is it even possible to expect tax privacy? Yes. In fact, one could argue it is necessary to demand tax privacy. But what would tax privacy look like? What safeguards can be reasonably demanded and expected? There are no concrete answers and if I may dare suggest, no tentative answers either. Because the conversation around tax privacy in India has not even begun. 

To Begin a Conversation … 

Conduct an unscientific and random survey: ask your colleagues and friends if they are comfortable sharing their income tax returns with everyone? The dominant response will be no. Tax privacy in India starts and ends with a strong disagreement to make income tax returns public. Tax privacy in India hasn’t progressed beyond the notion of income tax returns. And even in this example, privacy exists in a rudimentary shape. The disinclination to share one’s income tax return with public at large isn’t entirely rooted in privacy, but a desire to avoid unnecessary scrutiny by social media and other ‘experts’, who may find numerous inconsistencies or point at insufficient income disclosures. And there lies the risk of reassessment notices, a trigger with which the Income Tax Department isn’t unfamiliar. And if you are even mildly popular, your income tax returns will be the fodder of endless gossip. Though you may not be object if your advance tax payments are conveniently disclosed to underline your success. 

The broad expectation of an Indian taxpayer seems to be that the State can access all relevant financial information, but the details contained in income tax returns should not be disclosed to the public at large without previous consent of the taxpayer, if at all. But we seem to have accepted or at least resigned to the fact that there is no concrete limit on the State’s power to secure personal financial information. How else will the State assess your income tax liability is the retort? 

An accurate response is that the State does not need unfettered access to your personal financial information to ascertain your income tax liability. State needs access to your ‘relevant’ personal financial information. Ordinarily, a taxpayer makes self-assessment – with help of a tax lawyer or an accountant – and discloses the relevant financial information. The State may, at times, demand additional information on the ground of ‘insufficient disclosure’ or to verify certain expenses. And it is at the juncture of disclosure and additional disclosure where privacy needs to be a shield for taxpayer, but it is conspicuous by its absence. The concept of tax privacy as a legal concept isn’t sufficiently articulated in India, especially to mediate the exchange of information and additional information between the State and taxpayers.          

Disclosing Financial Information 

Privacy is in the context of tax law, especially income tax law requires specific articulation. If I disclose to the State that I received a gift of immovable property from my parents, it is to ensure that an appropriate amount of tax is paid on the gift received. Hiding the transaction may allow me to escape the tax liability, in the short term or even forever, but it would be contravention of income tax law. But what if the State secures access to the transaction between me and my parents? If I did not disclose it voluntarily, maybe I boasted about acquiring a new immovable property on social media, and the State monitoring my virtual activity suddenly swung into action.

One pertinent question here is: can the State monitor my virtual activities in the hope of finding my ‘hidden’ sources of income or does it need prior permission before monitoring my activities? Privacy centric answer would lean in favor of the latter. The answer would suggest that the State needs to have a priori justification to monitor a taxpayer’s online activity. And such surveillance can only take place for a limited time and for specific activities. For example, tracking phone calls or movement without listening to the content of phone conversations. Our income tax laws are designed to grant the State power to intrude into taxpayer’s lives and the threshold to intrude into taxpayer’s life isn’t high. 

For example, let me look at some provisions that have lately generated some concern. Currently, search and seizure operations are permitted under Sec 132, IT Act, 1961 if some designated officers such as the Principal Commissioner, Chief Commissioner or Principal Chief Commissioner have ‘reason to believe’ that certain documents, articles, gold, etc. that are relevant to proceedings under the IT Act, 1961 have not produced by the taxpayer. The search and seizure operations empower officers to enter any building, vessel, aircraft, etc. and search persons, seize book, articles, etc. Section 132(9B) also empowers the officers to provisionally attach property of the taxpayer. These are extensive powers that are at times used to browbeat political opponents or journalists that the State doesn’t particularly like. Does the Income Tax Bill, 2025 go a step forward and provide additional powers to the State? Yes. 

Clause 247, Income Tax Bill, 2025 largely mirrors Section 132, IT Act, 1961, except the latter also provides the officers powers to override access codes to virtual digital space and any computer system where the codes are not available. It is the digital equivalent of powers to break lock to enter a locked building where the keys to the lock are unavailable. The threshold under Income Tax Bill, 2025 remains the same as under the IT Act, 1961. The authorized officer must have a ‘reason to believe’ that some document or information contained in an electronic media is not being disclosed by the taxpayer in relation to an income or property. 

Reason to believe is the subjective opinion of the officer in question and as per courts, should be based on credible material. But there must be proximate relation between the material on which opinion is formed and the final opinion. However, the courts have repeatedly stated that it is a subjective standard, and they cannot substitute the officer’s view with their view. The threshold of ‘reason to believe’ thus doesn’t provide ample safeguards against intrusion of privacy by tax officers: physical and virtual.   

The broad scope of search and seizure powers under the IT Act, 1961 and now Income Tax Bill, 2025 are rightly criticized for being overbroad. But the pushback is never rooted in protection of privacy. Or if it is, privacy is only in unarticulated subtext. Once officers are authorized to conduct a search and seizure operation under Section 132, they have the power to break locks, almirahs, seize documents, and search persons thereby impinging on business freedoms, bodily autonomy, and basic right to be ‘left alone’. While the State can justify that taxation is a sovereign right and search and seizure powers are ancillary to tax administration. But the articulation of privacy rights is missing in this argument and counter argument. To what extent can the State intrude into a person’s life to secure tax collection? When can the State violate physical autonomy of a taxpayer? On what grounds? We don’t know. Not yet.    

Disclosing Additional Information 

Privacy in the context of income tax law further suffers due to powers of the State to demand additional information under certain circumstances. Search and seizure operation is ideally conducted if the officer believes that the taxpayer has not voluntarily disclosed the information demanded by the State. But sometimes the additional information that is demanded from the taxpayer may put privacy in jeopardy. The additional information is usually sought when the income tax return of a taxpayer is selected for scrutiny or audit. In such cases, the officers demand additional information. For example, if I claim that I paid an ‘X’ amount as medical expenses for myself, then the State can question the validity of the claim. Or the amount. Disclosing additional information may risk disclosing my private medical information to the State. While the State may claim that not disclosing the entirety of medical expenses and the exact disease may jeopardize taxpayer’s claim for medical expenses and tax deduction. Where should we draw the line? Not sure, but the question is worth asking for now. 

Carrying the Conversation Forward  

There are three distinct strands of tax privacy that I wish to articulate in this preliminary article on tax privacy. I hope to delve deeper into each of these strands in the future, but the summation on each of these aspects of tax privacy is as follows. 

To begin with, if a taxpayer consents to sharing personal financial information with the State, then it is not unreasonable to expect tax privacy. To begin with, State should only seek relevant information that is proximate to the purpose of ascertaining tax liability. It is unreasonable to assume that the State has a carte blanche to demand any financial information. 

Equally, it is a valid expectation that the State shall only use the said information for purpose of computing and assessing tax liability. The ‘purpose limitation’ test as data protection law informs us. Privacy in this context is breached if the State uses the information for a purpose other than tax.  

Finally, I wish to underline the once the State has secured certain information, keeping the information secure is also State obligation. However, this is only one aspect of privacy, and in fact, more an element of confidentiality and less of privacy. And yet we tend to focus unduly on the State not disclosing our income tax returns to the public, instead of questioning scope of its power to demand and collect information in the first place. 

Powers of Arrest under CGST Act, 2017 and Customs Act, 1962: Constitutionality and their Scope

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The Supreme Court in a recent judgment upheld the constitutionality of arrest-related provisions contained in Customs Act, 1962 and CGST Act, 2017. The Court also elaborated on the scope of arrest powers under CGST Act, 2017 and safeguards applicable to an arrestee. The judgment reiterates some well-established principles and clarifies the law on a few uncertain issues. In this article, I examine the judgment in 3 parts: first, the import of Om Prakash judgment and Court’s opinion on arrest powers under Customs Act ,1962; second, the issue of constitutionality of arrest-related provisions contained in CGST Act, 2017, and third, the scope and contours of arrest-related powers under GST laws along with a comment on Justice Bela Trivedi’s concurring opinion and its possible implication. 

Part I: Om Prakash Judgment and Customs Act, 1962 

Om Prakash Judgment 

In Om Prakash judgment, the Supreme Court heard two matters relating to Customs Act, 1962 and Central Excise Act, 1944. The issue in both matters was that all offences under both the statutes are non-cognizable, but are they bailable? The Court held that while the offences were non-cognizable, they were bailable. The Court referred to relevant provisions of the CrPC, 1973 and statutes in question to support its conclusion. For example, the Court referred to Section 9A, Central Excise Act, 1944 and held that the legislative intent is recovery of dues and not punish individuals who contravene the statutory provisions. And the scheme of CrPC also suggests that even non-cognizable offences are bailable, unless specifically provided. 

The Supreme Court in Om Prakash judgment also clarified that even though customs and excise officers had been conferred with powers of arrest, their powers were not beyond that of a police officer. And for non-cognizable offences, the officers under both statutes had to seek warrant from the Magistrate under Sec 41, CrPC, 1973.  

Amendments to Customs Act, 1962 

Section 104, Customs Act, 1962 was amended in 2012, 2013, and 2019 to modify and to some extent circumvent the application of Om Prakash judgment. Supreme Court’s insistence on tax officers seeking Magistrate’s permission before making an arrest was sought both – acknowledged and modified via amendments to the Customs Act, 1962. To begin with, Customs Act, 1962 bifurcated offences into two clear categories: cognizable and non-cognizable and the amended provisions clearly specified which offences were bailable or non-bailable. These amendments which were the subject of challenge in the impugned case. 

The Supreme Court rejected the challenge and held that petitioner’s reliance on Om Prakash judgment was incorrect. But were the pre-conditions for arrest in Customs Act, 1962 sufficient to safeguard liberty? Were there sufficient safeguards against arbitrary arrest to protect the constitutional guaranteed liberties? 

The Supreme Court clarified that the safeguards contained in Sections 41-A, 41-D, 50A, and 55A of CrPC shall be applicable to arrests made by customs officers under the Customs Act, 1962. The arrestee would have to informed about grounds of arrest, the arresting officer should be clearly identifiable through a badge being some of the protections available to an arrestee. Court added that mandating that said safeguards of CrPC shall apply to arrests by customs officers ‘do not in any way fall foul of or repudiate the provisions of the Customs Act. They complement the provisions of the Customs Act and in a way ensure better regulation, ensuring due compliance with the statutory conditions of making an arrest.’ (para 29) 

The Supreme Court further added that safeguards provided in Customs Act, 1962 were in itself also adequate to protect life and liberty of the persons who could be arrested under the statute. The Supreme Court noted that the threshold of ‘reason to believe’ was higher than the ‘mere suspicion’ threshold provided under Section 41, CrPC. And that the categorisation of offences under the Customs Act, 1962 wherein clear monetary thresholds were prescribed for non-cognizable and non-bailable offences enjoined the arresting officers to specifically state that the statutory thresholds for arrest have been satisfied. 

Finally, the Supreme Court read into Section 104, Customs Act, 1962 the requirement of informing the accused of grounds of arrest as it was in consonance with the mandate of Article 22 of the Constitution. The Supreme Court exhorted the officers to follow the mandate and guidelines laid down in Arvind Kejriwal casewhere it had specified parameters of a legal arrest in the context of Sec 19, PMLA, 2002. 

While dismissing the challenge to constitutionality of arrest-related provisions of Customs Act, 1962 the Supreme Court cautioned and underlined the need to prevent frustration of statutory and constitutional rights of the arrestee. 

Overall, the Supreme Court was of the view that pre-conditions for arrest specified in Customs Act, 1962 were not constitutional and safeguarded the liberties of an arrestee while obligating the custom officers to clearly specify that the conditions for arrest were satisfied. The Court also clarified that various safeguards prescribed in CrPC, 1973 were available to an arrestee during arrests made under Customs Act, 1962.  

Part II: Constitutionality of Arrest-Related Provisions in CGST Act, 2017

Article 246A Has a Broad Scope 

The constitutionality of arrest-related provisions contained in CGST Act, 2017 was previously upheld by the Delhi High Court in Dhruv Krishan Maggu case, as I mentioned elsewhere. The Supreme Court in impugned case also upheld the constitutionality of provisions.  The arguments against constitutionality of arrest-related provisions in CGST Act, 2017 were similar in the impugned case as they were before the Delhi High Court. The petitioner’s challenge was two-fold: first, Parliament can enact arrest related provisions only for subject matters contained in List I; second, powers relating to arrest, summon, etc. are not incidental to power to levy GST and thus arrest-related provisions cannot be enacted under Article 246A of the Constitution.

The Supreme Court’s rejection of petitioner’s argument on constitutionality was in the following words: 

The Parliament, under Article 246-A of the Constitution, has the power to make laws regarding GST and, as a necessary corollary, enact provisions against tax evasion. Article 246-A of the Constitution is a comprehensive provision and the doctrine of pith and substance applies. The impugned provisions lay down the power to summon and arrest, powers necessary for the effective levy and collection of GST. (para 75) 

Supreme Court relied on the doctrine of liberal interpretation of legislative entries, wherein courts have noted that the entries need to be interpreted liberally to include legislative powers on matters that are incidental and ancillary to the subject contained in legislative entry. Relying on above, the Supreme Court concluded that: 

Thus, a penalty or prosecution mechanism for the levy and collection of GST, and for checking its evasion, is a permissible exercise of legislative power. The GST Acts, in pith and substance, pertain to Article 246-A of the Constitution and the powers to summon, arrest and prosecute are ancillary and incidental to the power to levy and collect goods and services tax. In view of the aforesaid, the vires challenge to Sections 69 and 70 of the GST Acts must fail and is accordingly rejected. (para 75) 

The Supreme Court has correctly interpreted Article 246A in the impugned case. The Court liberally interpreted the scope of Article 246A in a previous case as well. The Court’s observations in the impugned case align with its previous interpretation wherein the Court has been clear that Article 246A needs to be interpreted liberally – akin to legislative entries – and include in its sweep legislative powers not merely to levy GST but ancillary powers relating to administration and ensuring compliance with GST laws. 

The nature of Article 246A is such that it needs to be interpreted akin to a legislative entry since there is no specific GST-related legislative entry in the Constitution. The power to enact GST laws and bifurcation of powers in relation to GST are both contained in Article 246A itself investing the provision with the unique character of a legislative entry as well as source of legislative power in relation to GST. 

Part III: Scope and Contours of Arrest Powers under CGST Act, 2017

Reason to Believe and Judicial Review  

The Supreme Court referred to the relevant provisions of GST laws to note that there is clear distinction between cognizable and non-cognizable offences under the GST laws. And bailable and non-bailable offences have also been bifurcated indicating the legislature’s cognizance of Om Prakash’s judgment. Further, the nature of offence is linked to the quantum of tax evaded. While the threshold to trigger arrest under CGST Act, 2017 is the Commissioner’s ‘reason to believe’ that an offence has been committed. In this respect, the Court emphasized that the Commissioner should refer to the material forming the basis of his finding regarding commission of the offence. And that an arrest cannot be made to investigate if an offence has been committed. The Supreme Court also pronounced a general caution about the need to exercise arrest powers judiciously. 

Another riddle of arrest that the Supreme Court tried to resolve was: whether a taxpayer can be arrested prior to completion of assessment? An assessment order quantifies the tax evasion or input tax credit wrongly availed. And since under CGST Act, 2017 the classification of whether an offence is cognizable or otherwise is typically dependent on the quantum of tax evaded, this is a crucial question. And there is merit in stating that the assessment order should precede an arrest since only then can the nature of offence by truly established. In MakeMyTrip case – decided under Finance Act, 1994, the Delhi High Court had mentioned that an arrest without an assessment order is akin to putting the horse before a cart. And in my view, in the absence of an assessment order, the Revenue’s allegation about the quantum of tax evaded is merely that: an allegation. And there is a tendency to inflate the amount of tax evaded in the absence of an assessment order. And an inflated amount tends to discourage courts from granting bail immediately and can even change the nature of an offence.  

However, the Supreme Court in the impugned case noted that it cannot lay down a ‘general and broad proposition’ that arrest powers cannot be exercised before issuance of assessment orders. (para 59) There may be cases, the Supreme Court noted where the Commissioner can state with a certain degree of certainty that an offence has been committed and in such cases arrest can be effectuated without completion of an assessment order. 

Here again, the Supreme Court stated that the CBIC’s guidelines on arrest will act as a safeguard alongwith its previous observations on arrest by custom officers, which will also apply to arrest under GST laws.      

The issue is that CBIC issued the guidelines on arrest in 2022, and yet the Supreme Court noted that there have been instances of officers forcing tax payments and arresting taxpayers. And though the arrests led to recovery of revenue, the element of coercion in tax payments cannot be overlooked. If the coercive element during arrest was present even despite the guidelines, then perhaps an even stronger pushback is needed against arbitrary and excessive use of arrest powers. While the Supreme Court has done well in stating that various safeguards will apply to arrests such as those enlisted in various provisions of CrPC and requirements of warrants from Magistrates in non-cognizable offences, even the numerous safeguards, at times, don’t seem enough to protect taxpayers.   

Justice Bela M. Trivedi’s Concurring Opinion  

Justice Bela M. Trivedi’s concurring opinion prima facie dilutes safeguards provided to taxpayers. The Revenue is likely to use her words to argue against any judicial interference and deny bail to accused. Justice Trivedi clearly noted that when legality of arrests under legislations such as GST are challenged, the courts must be extremely loath in exercising their power of judicial review. The courts must confine themselves to examine if the constitutional and statutory safeguards were met and not examine the adequacy of material on which the Commissioner formed a ‘reason to believe’ nor examine accuracy of facts. 

Justice Trivedi was emphatic that adequacy of material will not be subject to judicial review since an arrest may ordinarily happen at initial stages of an investigation. The phrase ‘reason to believe’, she observed, implies that the Commissioner has formed a prima facie opinion that the offence has been committed. Sufficiency or adequacy of material leading to formation of such belief will not be subject to judicial review at nascent stage of inquiry. The reason, as per Justice Trivedi was that ‘casual and frequent’ interference by courts could embolden the accused and frustrate the objects of special legislations such as GST laws. Limited judicial review powers for powers exercised on ‘reason to believe’ is a recurring theme in the jurisprudence on this standard. Reason to believe is a standard prescribed under IT Act, 1961 as well and courts have clear about not scrutinizing the material which forms the basis of the officer’s belief. 

However, some of Justice Trivedi’s observations seem at odds with the lead opinion which requires written statements about Commissioner’s belief, reference to material on basis of which the Commissioner forms the ‘reason to believe’ that lead to arrest. The majority opinion is also clear about power of judicial review in case of payment of tax under threat of arrest, power of courts to provide bail even if no FIR is filed, among other safeguards. Though in the leading opinion there is no clear opinion about scope of judicial review at preliminary or later stages of investigation.  

One possible manner to reconcile Justice Trivedi’s concurring opinion with the lead opinion is that her observations about narrow judicial review are only for preliminary stages of investigation. And that courts can exercise wider powers of judicial review at later stages of investigation. And that her view is only limited to ensuring that once the statutory safeguards have been met, courts should not stand in the way of officers to complete their inquiries and investigations else aims of the special laws such as GST may not be met. But her views are likely to be interpreted in multiple manners and the Revenue will certainly prefer her stance in matters relating to bail, not just at the initial stage of investigation but during the entire investigative process.   

Conclusion 

In the impugned case, the Supreme Court has advanced the jurisprudence on arrests under tax laws to some extent. But the observations are not in the context of any facts but in a case involving constitutional challenge. Thus, numerous safeguards that the Court has noted will apply to arrests made by customs officers or under GST Acts will be tested in future. Courts will have to ascertain if the arrests were made after fulfilment of the various safeguards, whether taxes were paid under threats of arrests, and other likely abuse of powers. The crucial test will be how and if to grant bail including anticipatory bail in matters where FIR is not registered. 

Finally, ‘reason to believe’ is admittedly a subjective standard. It is the opinion of an officer based on the material that comes to their notice. And courts while may examine the material, cannot replace their own subjective view with that of the officer. The test in such cases is if a reasonable person will arrive at the same conclusion based on the material as arrived at by the Commissioner. Thus, ‘reason to believe’ as a standard per se, limits scope of judicial review and confers immense discretion to the Commissioner to exercise powers of arrest. The jurisprudence on this issue – both under the IT Act, 1961 and GST laws – is evidently uneven due to the subjective nature of standard. And courts have not been able to form a clear and unambiguous stance on the scope of judicial review with respect to the ‘reason to believe’ standard. And this unevenness and relatively weak protection afforded to taxpayers is likely to continue in the future as well despite the Supreme Court’s lofty observations in the impugned case.             

            

Long Wait for GSTATs: July 2017 … and Counting. 

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GSTATs have been envisaged as the first appellate forum under GST laws. And yet, 7.5 years since implementation of GST, not a single GSTAT is functioning. Reason? Many. Some are easy to identify, others are tough to understand. Nonetheless, here is a small story of the ill-fated GSTATs since the implementation of GST laws in July 2017. 

Provision is Declared Unconstitutional 

CGST Act, 2017, as originally enacted, provided that the no. of technical members in GSTATs would exceed the no. of judicial members. Both the Union and States wanted to ensure their representation on GSTATs via technical members which led to each GSTAT accommodating at least 2 technical members, i.e., technical member (Centre) and technical member (State). But CGST Act, 2017 provided for only one judicial member on the Bench of GSTAT. The Madras High Court ruled that the strength of technical members in tribunals cannot exceed that of judicial members, as per the law laid down by the Supreme Court. The relevant provision – Section 109(9) as originally enacted – was struck down as unconstitutional. There was a simultaneous challenge on the ground of Article 14 wherein the petitioners argued that under CGST Act, 2017 advocates were not eligible to become members of GSTATs and it violated their fundamental right to equality. The High Court refused to accept this plea and requested the Union to reconsider the ineligibility of advocates. Making advocates ineligible to become members of GSTAT is rather strange since a similar disqualification does not exist for ITATs under the IT Act, 1961.     

No Appeal Against the Decision  

The Union didn’t appeal against the Madras High Court’s decision. Surprising, since the Union likes to defend all its decisions including its interpretation of tax statutes until the last possible forum. Or perhaps in this instance the Union decided it was prudent to agree with the High Court’s decision. Or it wanted to use the High Court’s decision as a shield to defend the delay in operationalizing GSTATs. Irrespective, the Union’s decision to not file an appeal against the High Court’s decision meant it had to explore options to operationalize the GSTATs. During 2019-2021, the GST Council did discuss the options and feasibility of GSTATs in various States and the required no. of Benches, but the discussions didn’t prove to be immediately fruitful. One possible option of breaking the logjam was by amending the respective provision of CGST Act, 2017. 

Provisions are Amended 

The Finance Act, 2023 amended the provisions relating to composition of GSTATs. Below are the relevant provisions before amendment and post-amendment respectively: 

Pre-Amendment

Section 109(3):

The National Bench of the Appellate Tribunal shall be situated at New Delhi which shall be presided over by the President and shall consist of one Technical Member (Centre) and one Technical Member (State). 

Section 109(9): 

Each State Bench and Area Benches of the Appellate Tribunal shall consist of a Judicial Member, one Technical Member (Centre) and one Technical Member (State) and the State Government may designate the seniormost Judicial Member in a State as the State President. 

Post-Amendment 

Section 109(3): 

The Government shall, by notification, constitute a Principal Bench of the Appellate Tribunal at New Delhi which shall consist of the President, a Judicial Member, a Technical Member (Centre) and a Technical Member (State). 

Section 109(4): 

On request of the State, the Government may, by notification, constitute such number of State Benches at such places and with such jurisdiction, as may be recommended by the Council, which shall consist of two Judicial Members, a Technical Member (Centre) and a Technical Member (State). 

In summary, the amendments via the Finance Act, 2023 have ensured that the no. of judicial members are equal to technical members, if not more. This is because the President of GSTAT is usually the senior most judicial member. The balance of judicial and technical members needed to be met on two fronts: ensuring balance of representation between the Union and States inter-se needs and the balance between judicial and technical side to avoid executive domination. Now that the initial hurdle to constitute GSTATs was officially removed via Finance Act, 2023, one would have expected speedy and decisive steps towards constitution of GSTATs. But that wasn’t the case.  

Benches, Chairperson, Website … and Other Puny Steps 

Since the provisions relating to GSTATs have been amended, the Union has taken multiple – but tiny – steps towards operationalizing the GSTATs. With each step, the tax community has raised its hopes for quick operationalization of GSTATs. But each step seems a step too far. 

In May 2024, the Minister of Finance administered oath to the first President of GSTAT, New Delhi. Since GSTATs are not yet operational and do not hear cases, I’m not sure what the President of GSTAT does to earn his salary.  

In July 2024, in another step forward, the Ministry of Finance notified various Benches of GSTATs, with the Principal Bench in New Delhi. 

Recently, the tax community was rejoicing at GSTATs having a dedicated website. It is hard for me to understand the joy of having a functional website for an institution that itself isn’t functional. And the purpose of having a website is difficult to comprehend due to a recent report in January 2025, mentioning that GSTATs will take another 6 months to begin their functioning. When the formalities for appointing personnel have not completed, IT infrastructure is yet uncertain, and real estate for GSTATs has not been finalized, even 6 months seem like an ambitious target. Especially due to the track record of the Union and States on this aspect of GST.  

Constitutional Courts are Impatient  

Since GSTATs, ideally the first appellate forum for GST-related disputes, are not functioning, the burden has shifted to constitutional courts. High Courts and the Supreme Court end up hearing matters that typically should not have received attention beyond GSTATs. Supreme Court has recognized the effect of not having GSTATs and has recently raised the following query in one of its orders:

We would like to first know at the earliest why the Goods and Services Tax Appellate Tribunal has not been made functional till this date.  

The Union is supposed to reply to the above query in three weeks, but do not expect any fireworks and new revelations. 

Supreme Court’s question was prompted after it noted that the petitioner had the remedy to file an appeal under CGST Act, 2017 but had to approach the High Court via writ petition due to GSTATs not functioning. Many such cases that did not deserve or should not have been heard by High Courts and Supreme Court are currently in limbo because these constitutional courts do not have the advantage of GSTATs judgments and fact finding.   

Previously, the Allahabad High Court also tried to make the Union act quickly. But, despite the High Court’s eagerness to constitute GSTATs in the State of UP, there wasn’t much headway. 

Additionally, GSTATs are necessary to ensure harmony in interpretation and coherence in jurisprudence which has, for a long time, been at the mercy of AARs and AAARs. Both are intended to be interpretive bodies, not dispute resolution bodies but their several sub-par interpretations have caused tremendous confusion on various matters.

To conclude, I cannot say for sure when GSTATs will start functioning, but it is imperative that they do. And they function efficiently. A reform such as GST cannot be truly called a bold or a transformative reform until the accompanying rule of law infrastructure is operational. And GSTATs are a vital cog of that infrastructure. Until then, GST has certainly transformed the landscape of indirect tax in India. But, the promise of fair and speedy resolution of disputes remains a distant and unfulfilled promise.  

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