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Azadi Bachao Andolan v. Union Of India..
Factual and Procedural Background
This petition was filed in public interest alleging that actions and inactions by the Income-tax authorities caused significant loss to the public exchequer. In early 1994, the Income-tax Department received information that many multinational companies operating in India were not fully declaring salaries and perks paid to expatriate employees, particularly portions paid outside India. Under the Income-tax Act, 1961, the entire salary of such employees is taxable in India if the employee stays for more than 183 days in a financial year. Notices were issued to some foreign companies, leading to some voluntary tax payments, but many companies did not comply.
The Central Board of Direct Taxes issued Circular No. 685 in June 1994 to address non-deduction of tax at source and encouraged voluntary compliance by waiving penalties if tax and interest were paid by July 31, 1994. Despite this, only a few expatriate employees paid taxes. In 1997, a Voluntary Disclosure of Income Scheme was launched to allow declaration of concealed income without penalty, with mixed compliance from companies. Surveys were conducted in 1998-1999, but penalties were often not levied, and proceedings dropped, allegedly under pressure from the Japanese Chamber of Commerce and Industry and based on directives from high-level officials including a letter from the Commissioner of Income-tax, Delhi VI.
The Income-tax authorities denied allegations of illegal pressure and stated that penalties were levied where appropriate and waived only after considering reasonable cause in each case. The petition challenges the distinction made by the authorities in levying or waiving penalties, contending it was based on directives without proper application of mind.
Upon review, the petition relates to 93 cases. Penalties have been levied in 46 cases, not levied or proceedings dropped in 41 cases, and 5 cases are pending. Reasons for non-levy include voluntary payment of tax and interest, cooperation with the department, bona fide belief of non-liability, and guidance from the Japanese Chamber of Commerce seeking waiver if taxes were voluntarily paid.
Legal Issues Presented
- Whether the Income-tax authorities acted without application of mind and under unauthorized pressure in deciding not to levy penalties on non-declaration of expatriate employees’ salaries paid abroad.
- Whether the criteria for waiver of penalties under Sections 273A and 273B of the Income-tax Act were properly applied by the authorities.
- Whether the non-levy of penalties and dropping of proceedings was justified on the basis of reasonable cause.
- Whether action should be taken against individual expatriate employees who failed to pay tax on salaries received abroad.
Arguments of the Parties
Petitioner’s Arguments
- The Income-tax authorities failed to apply their mind and acted under directives from higher officials and external pressure, particularly from the Japanese Chamber of Commerce.
- The reasons given for non-levy of penalties were not reasonable and did not justify waiving penalties.
- Penalties were waived without proper consideration, resulting in loss to the public exchequer.
Income-tax Authorities’ Arguments
- Denial of any illegal pressure or unauthorized interference in decision-making.
- Each case was considered on its merits, and penalties were levied where warranted.
- Non-levy of penalty occurred only where voluntary and bona fide compliance was made by the assessee, and reasonable cause was found to exist.
- Practical difficulties exist in taking action against individual expatriate employees who have left India after project completion.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Re. A. Solicitor (1945) KB 368 | Definition and scope of "reasonable cause" in law | The court relied on this precedent to explain that reasonable cause is a rational ground that would constrain a person of average intelligence and ordinary prudence, and that it cannot be precisely defined but must be judged in context. |
Court's Reasoning and Analysis
The court observed that the petition concerned 93 cases, with penalties levied in 46 cases and not levied or proceedings dropped in 41 cases, with 5 pending. The court examined the reasons for non-levy of penalties, which generally included voluntary revision of tax deduction statements with payment of tax and interest, cooperation with the department, bona fide belief of non-liability, and influence of the Japanese Chamber of Commerce seeking waivers upon voluntary compliance.
The court noted the legal framework under Sections 273A and 273B of the Income-tax Act, highlighting that the criteria for waiver under Section 273A involve voluntary and good faith disclosure prior to detection, which cannot be illogically applied to cases governed by Section 273B. The court emphasized the limited scope for interference in such matters unless the decision is perverse or based on irrelevant or no material.
Applying the principle of reasonable cause, as explained in Re. A. Solicitor, the court found that the authorities’ decisions to waive penalties or drop proceedings were not unreasonable. The court held that reasonable cause depends on facts and circumstances and that the authorities’ satisfaction that reasonable cause existed was not to be lightly disturbed.
Regarding non-action against individual expatriate employees, the court acknowledged practical difficulties, including the fact that most employees had left India after project completion. However, the court recommended that authorities take appropriate action against those still in India according to law.
Holding and Implications
The court’s final decision was to dismiss the petition, effectively upholding the decisions of the Income-tax authorities.
DISPOSED OF
The direct effect of this decision is that the non-levy of penalties and dropping of proceedings by the Income-tax authorities in the specified cases is affirmed. The court did not set any new precedent but reiterated the limited scope of judicial interference in such administrative decisions where reasonable cause is found. The court also emphasized the practical difficulties in pursuing individual expatriate employees but encouraged appropriate action against those still within jurisdiction.
Arijit Pasayat, C.J— Alleging that certain actions/inactions on the part of the Income-tax authorities have caused huge loss to the public exchequer, this petition stated to be in public interest has been filed.
2. In a nutshell, the allegations are that in early 1994 Income-tax Department received reliable information to the effect that many multi-national companies operating in India are not fully declaring salaries/perks paid to their expatriate employees posted in India and in particular portion of the salaries paid to them outside India. Under the Income-tax Act, 1961 (in short the Act) the entire salaries received by such expatriate employees posted in India are liable to be declared irrespective of the fact whether it was paid in India or abroad and has to be taxed in India. The only condition requisite for such declaration was that stay of such employee in India for the relevant financial year exceeds 183 days in aggregate. Income-tax authorities issued notices to some foreign companies seeking information regarding salaries of expatriate employees which were paid to them outside India. On getting such notice, some of the companies deposited tax and some companies disclosed that they had earlier not declared salary paid abroad and thereafter declared that amount and deposited taxes on it. However, most of the multi-national companies did not do so. Circular No. 685 was also issued by the Central Board of Direct Taxes (in short the Board) on 17/20th June, 1994 highlighting such non-deduction of tax at source on salaries and allowances paid. However, in order to encourage immediate compliance, the Board decided that procedure under Section 221 and 271-C for levy of penalties and proceedings under Section 276B need not be resorted to in case an employer voluntarily comes forward and pays whole of the tax due under Section 192 along with interest liabilities under Section 201(1A) on or before 31-7-1994. Despite this circular, few foreign companies’ expatriate employees came forward and paid taxes. In 1997, Voluntary Disclosure of Income Scheme, also described as Amnesty Scheme, was launched giving chance to those who had not complied with requirements of law. An opportunity was given to pay tax by declaring concealed/undeclared income under the said Scheme and avoid penalty and prosecution. Some of the companies disclosed taxes that had been evaded on salaries paid abroad to their expatriate employees under the Scheme and paid taxes; while some of the companies did this partially, and some others who had been evading payment of such taxes did not even avail of this scheme. Survey was conducted on premises of various companies in 1998-1999. It is alleged that despite all these actions by giving premium to defaulters, penalties which were leviable have not been levied; on the other hand, by resorting to Section 273B of the Act orders have been passed not to levy penalties. A list of 95 cases has been annexed to show that in these cases requisite action has not been taken. It has also been stated that action against individual employees has not been taken though available to be taken. It has been urged that such action on the part of the income tax authorities has resulted in huge loss to public exchequer and has been done under pressure from Japanese Chamber of Commerce and Industry (in short the Chamber of Commerce). Further, the penalties have not been levied/proceedings have been dropped on the basis of a letter written by the Commissioner of Income-tax, Delhi VI indicating that penalties were not to be levied in non-survey cases. It is asserted that the letter was written pursuant to an agreement arrived at in a meeting held in the chambers of Chairman of the Board. In other words, it has been urged that there was no application of mind and only account of unauthorized interference by the Board and other high placed officials, penalties have not been levied/proceedings have been dropped.
3. In the counter-affidavit filed by the Income-tax authorities, allegations of illegal pressure have been denied. It is, on the other hand, stated that action was bona fide and in many cases penalty has been levied and in those cases where voluntary and bona fide action was taken by the assessee to deposit the tax and interest, it was decided not to levy penalties. Each case was considered on merits and after being satisfied that reasonable cause existed for non-compliance penalty has not been levied/proceedings have been dropped.
4. Learned counsel for the petitioner submitted that fine distinction made by the Income-tax authorities is not available to be drawn. The whole exercise was done, on the basis of directive issued by the higher authorities and there has been no application of mind. Reason which weighed with the authorities cannot be said to be reasonable so as to warrant non-levy of penalty. Learned counsel for the Revenue on the other hand submitted that each case has been examined on its merits and after recording satisfaction that reasonable cause existed penalty has not been levied.
5. From the materials on record we find that that the petition relates to 93 cases and not 95 cases as stated. Two names have been duplicated. It is further seen that in 46 cases penalty has been levied. In 41 cases either penalty has not been levied, or proceedings have been dropped. In 5 cases matter is still pending consideration. So far as the case where penalty has been levied, the petitioner cannot have any grievance. So far as the non-levy is concerned, we have perused the reasons indicated by the authorities for such non-levy. In essence the following reasons in each case seem to have weighed with the authorities for non-levy:
(i) Case where the deductor has voluntarily revised its TDS statements and paid taxes and iterest thereon.
(ii) The deductor has co-operated with the department in the proceedings.
(iii) The deductor was under a bona fide belief that it was not liable to deduct tax at source on the payments in question.
(iv) The deductor was guided by the Japanese Chamber of Commerce & Industry who held meetings with Chief Commissioner of Income-tax seeking waiver of penalty and prosecution if they come forward voluntarily and pay the taxes thereon.
6. At this juncture it is necessary to take note of Section 273A and 273B. Section 273A dealt with power to reduce levy of penalty etc by the Commissioner, in a case which relates to penalty under Section 271(1)(c) of the Act. Waiver can be done only if the following conditions are satisfied, i.e assessee has:—
a) Prior to detection of concealment of particulars of income or of inaccurate particulars furnished in respect of such income.
b) Voluntarily and in good faith made full and true disclosure of such particulars.
c) Co-operated in any enquiry relating to assessment of income.
A case of non-deduction of tax at source cannot prima facie be placed at a high pedestal than concealment of income or furnishing inaccurate particulars. The situation is rather reverse. Therefore, application of the ingredients/criteria applicable to Section 273A to a case governed by Section 273B cannot be held without logic or justification. The matter may be looked from another angle. In an hypothetical case, penalty under Section 271-C is levied, and the matter is carried to Tribunal in appeal. Tribunal applies the parameters applicable to Section 273A and cancels the penalty levied holding that reasonable cause existed. In that event a case for reference under Section 256(1) or (2) of the Act would not arise. What would constitute reasonable cause cannot be laid down with precision. It would depend upon factual background and scope for interference in a reference application or much less in a writ petition is extremely limited and unless the conclusions are perverse based on conjectures or surmises and/or have been arrived at without consideration of relevant material and/or taking into account irrelevant material, there is no scope for interference. Reasonable cause, as applied to human action is that which would constrain a person of average intelligence and ordinary prudence. The expression reasonable” is not susceptible of a clear and precise definition, for an attempt to give a specific meaning to the word “reasonable” is trying to court what is not number and measure what is not space. It can be described as rational according to the dictates of reason and is not excessive or immoderate. The word “reasonable” has in law the prima facie meaning of reasonable with regard to those circumstances of which the actor, called on to act reasonably, knows or ought to know” (See Re. A. Solicitor (1945) KB 368). Reasonable cause can be reasonably said to be a cause which prevents a man of average intelligence and ordinary prudence, acting under normal circumstances, without negligence or inaction or want of bona fides.
Above being the position, action of the authorities in not levying the penalty/dropping proceedings cannot be said to be unreasonable. Considering the limited jurisdiction as well as limited scope for interference in a writ petition, we do not find any justification to interfere with orders holding that penalty was not leviable/dropping the proceedings.
7. So far as non action against individual employees is concerned, certain practical difficulties have been highlighted by the authorities. It is stated that tax and interest required to be paid by grossing up relevant amount has been calculated, and collection has been made. Except a negligible number, others have left the country on completion of projects, and it would be practically impossible to lay hands on those employees for further action relating to penalty etc. While this practical aspect cannot be lost sight of, nonetheless it would be desirable and appropriate for income tax authorities to take action against those who are still available in India in accordance with law. What particular action would be appropriate is for the concerned income tax authorities to decide. Writ petition is accordingly disposed of.
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