Court dismisses writ petition challenging tax assessment, directs company to pursue statutory appeal

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Case Name

M/s. Greenstar Fertilizers Limited vs Additional/Joint/Deputy/Asst Commissioner of Income Tax/Income Tax Officer, National Faceless Assessment Centre, Delhi and Anr. (High Court of Madras)

W.P.No.23219 of 2021 and WMP.No.24518 of 2021

Date: 1st November 2021

Key Takeaways

• Alternate remedy rule applies strictly in tax matters: Courts will not entertain writ petitions when statutory appeals are available, especially in fiscal law cases
• Merit-based disputes belong in appeals: Issues involving factual determinations and business transactions should be resolved through proper appellate channels
• FEMA compliance issues don’t create excess jurisdiction: Tax authorities can consider FEMA violations when making income tax assessments without exceeding their jurisdiction
• Natural justice requires reasonable opportunity: As long as taxpayers get a chance to respond to notices, procedural fairness is maintained

Issue

Can a taxpayer directly challenge an income tax assessment order through a writ petition when statutory appeal remedies are available, particularly when the disputes involve factual determinations about business transactions and FEMA compliance?

Facts

Greenstar Fertilizers received an assessment order dated September 28, 2021, for assessment year 2018-19 under Section 143(3) read with Section 144B of the Income Tax Act.

The timeline was quite tight:

• September 15, 2021: Notice under Section 144B issued
• September 17, 2021: Company replied
• Show Cause Notice with Draft Assessment Order issued
• September 26, 2021: Company submitted objections
• September 28, 2021: Final assessment order passed

The tax department made two significant additions totaling ₹108.93 crores. The first involved transactions with Xangbo Trading (India) Pvt. Ltd., which the department didn’t accept as legitimate Inter Corporate Deposits. The second concerned high seas sales payments in Indian currency that were treated as external commercial borrowing.

Arguments

Petitioner’s Arguments (Greenstar Fertilizers):

1. Incorrect characterization: The ICDs with Xangbo were wrongly treated as not being genuine ICDs, and high seas sales payments in INR were incorrectly classified as external commercial borrowing
2. Excess of jurisdiction: The assessment order violated FEMA without proper notice to the counterparty
3. Natural justice violation: The process from notice to final order violated principles of natural justice

Respondent’s Arguments (Income Tax Department):

1. Merit-based issues: Both ICD and high seas sales disputes are factual matters that don’t warrant writ jurisdiction interference
2. No jurisdictional excess: The assessment was based on available materials and didn’t impose FEMA penalties, only income tax consequences
3. No natural justice breach: The company responded to notices and didn’t complain about inadequate time

Key Legal Precedents

The court relied heavily on the “alternate remedy rule” and cited several landmark cases:

1. Assistant Collector of Central Excise, Chandan Nagar, West Bengal Vs Dunlop India Ltd and others reported in (1985) 1 SCC 260 - This established that Article 226 shouldn’t short-circuit statutory procedures, especially in revenue matters
2. United Bank of India Vs Satyawati Tondon and others reported in (2010) 8 SCC 110 - Reinforced that alternate remedy rule applies with greater rigor in matters involving recovery of taxes and public money
3. Authorized Officer, State Bank of Travancore Vs Mathew K.C. reported in (2018) 3 SCC 85 - Emphasized that High Courts must insist on exhausting statutory remedies before entertaining writ petitions
4. The Assistant Commissioner of State Tax Appellant(s) and Others Vs M/s Commercial Steel Limited (decided on 03.09.2021) - This recent Supreme Court decision outlined four exceptional circumstances where writ jurisdiction can be exercised despite alternate remedies: (i) breach of fundamental rights; (ii) violation of natural justice principles; (iii) excess of jurisdiction; or (iv) challenge to statute’s validity

Judgement

The court dismissed the writ petition, and here’s their reasoning:

On Merit Issues: The court found that both the ICD and high seas sales disputes were clearly factual matters. The assessment order’s findings about Xangbo being non-resident owned and controlled (97.99% shareholding by a Cayman Island entity) and the characterization of transactions were merit-based determinations suitable for appellate review.

On Excess of Jurisdiction: The court rejected this argument, explaining that the tax authorities didn’t impose FEMA penalties but only levied income tax within their statutory powers. The assessment order considered FEMA compliance as a factor but didn’t exceed jurisdictional boundaries.

On Natural Justice: Since the company responded to all notices and didn’t complain about inadequate time, the court found no procedural violation.

Final Order: The court directed Greenstar Fertilizers to pursue their statutory appeal under Section 246A of the Income Tax Act, noting that the appellate authority would consider the case on its own merits without being influenced by any observations in this order.

FAQs

Q1: Why couldn’t the company directly challenge the assessment in High Court?

A: The court applied the “alternate remedy rule” which requires taxpayers to first exhaust statutory appeal processes before approaching High Courts, especially in tax matters where this rule applies with “utmost rigor”.

Q2: What about the tight timeline between notice and assessment?

A: The court noted that the company didn’t complain about inadequate time and actually responded to all notices. The timeline (notice on Sept 15, reply on Sept 17, objections on Sept 26, order on Sept 28) was deemed acceptable since the company participated fully.

Q3: Can tax authorities consider FEMA violations in income tax assessments?

A: Yes, as long as they don’t impose FEMA-specific penalties. The court clarified that considering FEMA compliance for income tax purposes doesn’t constitute excess of jurisdiction.

Q4: What happens to the ₹108.93 crore addition now?

A: Greenstar Fertilizers must file a statutory appeal under Section 246A of the Income Tax Act within 30 days. The appellate authority will examine the merits fresh, and the company may seek exclusion of time spent in this writ petition under Section 14 of the Limitation Act, 1963.

Q5: Is there any pre-deposit requirement for the appeal?

A: While Section 246A doesn’t have a mandatory pre-deposit, the company argued that seeking a stay of the demand requires depositing 20% of the assessed amount. The court didn’t resolve this controversy but noted that limitation and any deposit conditions would apply to the statutory appeal.

Captioned main writ petition has been filed assailing an assessment order dated 28.09.2021 made under Section 143(3) read with 144B of 'the Income-tax Act, 1961 (43 of 1961)' [hereinafter 'IT' Act for the sake of brevity, convenience and clarity] pertaining to assessment year 2018-19 qua writ petitioner.

2. Mr. Vijayaraghavan of M/s. Subbaraya Aiyar Padmanabhan & Ramamani [Law firm], who was before this virtual Court on behalf of writ petitioner, in his campaign against the impugned order made submissions a broad summation of which is as follows:

1) Two additions namely 'Inter Corporate Deposits' ['ICDs'] qua an entity, which goes by the name Xangbo Trading (India) Pvt. Ltd., [hereinafter 'Xangbo' for the sake of brevity] has been erroneously treated to be not an ICD and a payment made regarding high seas sales in 'Indian Currency' ['INR' for the sake of convenience] has been treated as external commercial borrowing both of which are incorrect;

2) The above is clearly excess of jurisdiction as the impugned order proceeds on the basis that there is aviolation of 'Foreign Exchange Management Act, 1999' ('FEMA') without even issuing notice to the counter

party;

3) There is a violation of 'Natural Justice Principle' (NJP) and the trajectory of the notice under Section 142(1) of IT Act and draft assessment order culminating in the impugned order will bring to light NJP violation;

3. Ms. Hema Murali krishnan, learned Senior standing counsel accepted notice on behalf of both the respondents.

4. Owing to the nature of the matter, with the consent of learned counsel on both sides, main writ petition is taken up.

5. Learned Revenue counsel on instructions made submissions, a summation of which is as follows:

a) Point turning on ICD and payment in INR qua high seas sales turn on merit and therefore do not warrant interference in writ jurisdiction;

b) There is no excess of jurisdiction issue as the assessment order proceeds on the basis of available materials;

c) It cannot be gainsaid that there is NJP violation as the writ petitioner has not complained about the time frame within which responses were sought and on the contrary, writ petitioner has responded to the notices.

6. This Court now proceeds to consider the submissions one after the other, discuss the same and give its dispositive reasoning for arriving at a conclusion.

7. First point turning on ICD and high seas sales are clearly

matters on merit. The reason is, impugned order i.e., assessment order

did not accept the plea of writ petitioner that Xangbo did not provide

profit and loss account, it would be evident from the receipt of so called

interest which has been pegged at a huge sum of 108.93 crores (added)

and the impugned order proceeds on the basis that the transaction of writ

petitioner with Xangbo is not in confirmity with the norms of FEMA.

This is clearly a matter on merits. Regarding the argument posited on

payment qua high seas sales being made in INR being treated as external

commercial borrowing, indirect foreign investment and FDI in 100%

wholesale sector loans extended in INR has been held to be not a

business approved and not in the confirmity with FEMA norms. The

arguments that the norms of FEMA have not been set out with specificity

or required approval details have not been set out with specificity in the

impugned order are all clearly arguments in the nature of an appeal qua

impugned order i.e., not arguments compelling interference in writ

jurisdiction. To be noted, impugned order i.e., assessment order

proceeds on the basis that Xangbo is non resident owned, non resident

controlled with opaque ownership (97.99% share holding being

subscribed by a Cayman Island Controlled entity, which has been

allowed 'Foreign Direct Investment' (FDI) in 100% wholesale sector).

All these turn heavily on facts and therefore, this is also another reason to say that these are clearly matters for legal drill in the nature of an appeal and does not warrant interference in writ jurisdiction.

8. This takes this Court to the next point that turns on FEMA

norms. The norms of FEMA not being set out with specificity or a

conclusion being arrived at qua alleged FEMA violation without issuing

notice to the counter party, cannot be construed as excess jurisdiction.

The reason is, impugned order does not mulct the writ petitioner with

consequences of alleged FEMA violations (under FEMA) in the

impugned order. All that the impugned order does is, it levies income

tax and consequences within the Statutory perimeter of IT Act. If there is

an error in holding that FEMA norms have not been followed or that the

business is not approved under FEMA, these are matters which can be

corrected in an appeal. All this turns heavily on facts and on merits of

the matter. Excess jurisdiction as an illustration is a case/situation where

an Authority exercises jurisdiction which is not vested in it. In this case,

if the respondents have levied any fine or have mulcted the writ

petitioner with any of the consequences for FEMA violation under

FEMA that may well qualify as a case of excess jurisdiction. The

consequences under FEMA do not form subject matter of impugned

order. If there is no violation of FEMA, it is well open to the writ

petitioner to canvass the same in a statutory appeal. Therefore, this is not

a case of excess jurisdiction. This Court is unable to accept the argument

that this is a case of excess jurisdiction.

9. This takes us to the last point namely NJP violation. A careful

perusal of chronology reveals that notice under Section 144B of IT Act

has been issued on 15.09.2021 and writ petitioner has replied on

17.09.2021. Thereafter, a 'Show Cause Notice' ('SCN') under section

144B has been issued and this SCN contains Draft Assessment Order.

Thereafter, writ petitioner has sent its objections on 26.09.2021 and

ultimately, impugned order has been made on 28.09.2021. As rightly

contended by learned Revenue counsel, in this case, writ petitioner has

not raised the point that the time granted is not reasonable, adequate or

ample. On the contrary, writ petitioner has responded to the notice and

the same has culminated in the impugned order. Therefore, it is made

clear that this Court has not expressed any opinion or view on the merits

of the matter and as to whether time granted is reasonable, ample or

adequate as that does not fall for consideration in the case on hand.

Suffice to say that the writ petitioner has responded and the impugned

order has been made.

10. This takes this order to the alternate remedy rule i,e,

availability of alternate remedy which was projected by learned Revenue

counsel. Learned Revenue counsel submitted that statutory appeal is

available to the writ petitioner against the impugned order and that

statutory appeal is under Section 246A of IT Act. Learned Revenue

counsel also pointed out that there is no pre deposit condition qua 246A

of IT Act, but this was disputed by learned counsel for writ petitioner by

saying that there may not be a pre deposit condition, but if one seeks a

stay of impugned order, deposit of 20% of the demand is made

imperative for grant of stay in the light of circulars that are operating

now. This Court does not propose to go into this controversy as to

whether the circular would act as pre deposit condition as this Court has

come to the conclusion that this is not a fit case for interference in writ

jurisdiction and the writ petitioner has to be relegated to the alternate

remedy of statutory appeal. Once the writ petitioner chooses to avail the

alternate remedy under Section 246A of IT Act, it follows as an

inevitable sequitur that limitation and pre deposit conditions if any, will

operate.

11. On alternate remedy rule, this Court is clear in its mind that

alternate remedy rule is not an absolute rule and it is only a discretionary

rule. Alternate remedy rule is self imposed restraint qua writ jurisdiction.

However, in a long line of case laws i.e., catena of case laws starting

from Dunlop India case, Hon'ble Supreme Court has repeatedly held that

when it comes to fiscal law statutes, alternate remedy rule has to be

applied with utmost rigour. The long line of authorities will include

Dunlop India case [Assistant Collector of Central Excise, Chandan

Nagar, West Bengal Vs. Dunlop India Ltd. and others reported in

(1985) 1 SCC 260], Satyawati Tandon case [United Bank of India Vs.

Satyawati Tondon and others reported in (2010) 8 SCC 110] and

K.C.Mathew case [Authorized Officer, State Bank of Travancore Vs.

Mathew K.C. reported in (2018) 3 SCC 85]. To be noted, this is not an

exhaustive list of case laws for the principle that alternate remedy rule

qua fiscal law will be applied with utmost rigor is attracted, but it is only an illustration. In Dunlop India case, relevant paragraph is paragraph 3 and the same reads as follows:

'3... Article 226 is not meant to short-circuit or

circumvent statutory procedures. It is only where statutory

remedies are entirely ill-suited to meet the demands of

extraordinary situations, as for instance where the very vires

of the statute is in question or where private or public wrongs

are so inextricably mixed up and the prevention of public

injury and the vindication of public justice require it that

recourse may be had to Article 226 of the Constitution. But

then the Court must have good and sufficient reason to

bypass the alternative remedy provided by statute. Surely

matters involving the revenue where statutory remedies are

available are not such matters. We can also take judicial

notice of the fact that the vast majority of the petitions under

Article 226 of the Constitution are filed solely for the purpose

of obtaining interim orders and thereafter prolong the

proceedings by one device or the other. The practice certainly

needs to be strongly discouraged.'

(Underlining made by this Court

to supply emphasis and highlight)

12. In K.C.Mathew case, relevant paragraph is paragraph 10 and

the same reads as follows:

'10. In Satyawati Tondon the High Court had

restrained further proceedings under Section 13(4) of the Act.

Upon a detailed consideration of the statutory scheme under

the SARFAESI Act, the availability of remedy to the aggrieved

under Section 17 before the Tribunal and the appellate remedy

under Section 18 before the Appellate Tribunal, the object and

purpose of the legislation, it was observed that a writ petition

ought not to be entertained in view of the alternate statutory

remedy available holding: (SCC pp.123 & 128, Paras 43 & 55)

“43. Unfortunately, the High Court overlooked the

settled law that the High Court will ordinarily not entertain a

petition under Article 226 of the Constitution if an effective

remedy is available to the aggrieved person and that this Rule

applies with greater rigour in matters involving recovery of

taxes, cess, fees, other types of public money and the dues of

banks and other financial institutions. In our view, while

dealing with the petitions involving challenge to the action

taken for recovery of the public dues, etc., the High Court

must keep in mind that the legislations enacted by Parliament

and State Legislatures for recovery of such dues are a code

unto themselves inasmuch as they not only contain

comprehensive procedure for recovery of the dues but also

envisage constitution of quasi-judicial bodies for redressal of

the grievance of any aggrieved person. Therefore, in all such

cases, the High Court must insist that before availing remedy

under Article 226 of the Constitution, a person must exhaust

the remedies available under the relevant statute.

55.It is a matter of serious concern that despite

repeated pronouncement of this Court, the High Courts

continue to ignore the availability of statutory remedies under

the DRT Act and the SARFAESI Act and exercise jurisdiction

under Article 226 for passing orders which have serious

adverse impact on the right of banks and other financial

institutions to recover their dues. We hope and trust that in

future the High Courts will exercise their discretion in such

matters with greater caution, care and circumspection.'

(underlining made by this Court to supply

emphasis and highlight)

13. To be noted, in K.C.Mathew's case more particularly,

paragraph 10, which has been extracted and reproduced supra, Satyawati

Tondon principle has been captured. Therefore, this Court does not

burden this order by extracting relevant paragraphs from Satyawati

Tondon case law.

14. Be that as it may, very recently i.e., on 03.09.2021 a three

member Hon'ble Bench of Hon'ble Supreme Court speaking through

Hon'ble Dr.Dhananjaya Y Chandrachud in Commercial Steel case law

[The Assistant Commissioner of State Tax Appellant(s) and Others

Vs.M/s Commercial Steel Limited] held that though interference qua

writ jurisdiction on the teeth of alternate remedy will be only under

exceptional circumstances. Relevant paragraphs in Commercial Steel

case law are Paragraphs 11 and 12 and the same read as follows:

'11 The respondent had a statutory remedy under

section 107. Instead of availing of the remedy, the respondent

instituted a petition under Article 226. The existence of an

alternate remedy is not an absolute bar to the maintainability

of a writ petition under Article 226 of the Constitution. But a

writ petition can be entertained in exceptional circumstances

where there is: (i) a breach of fundamental rights; (ii) a

violation of the principles of natural justice; (iii) an excess of

jurisdiction; or (iv) a challenge to the vires of the statute or

delegated legislation.

12 In the present case, none of the above exceptions

was established. There was, in fact, no violation of the

principles of natural justice since a notice was served on the

person in charge of the conveyance. In this backdrop, it was

CA 5121/2021 7 not appropriate for the High Court to

entertain a writ petition. The assessment of facts would have

to be carried out by the appellate authority. As a matter of

fact, the High Court has while doing this exercise proceeded

on the basis of surmises. However, since we are inclined to

relegate the respondent to the pursuit of the alternate

statutory remedy under Section 107, this Court makes no

observation on the merits of the case of the respondent.'

15. From the narrative thus far, this Court is clear in its mind that

none of the exceptional circumstances, which have been culled out by

Hon'ble Supreme Court are attracted in the case on hand. To be noted,

excess jurisdiction point urged has been negatived by this Court and the

same has been delineated supra elsewhere in this order.

16. In the light of the discussion and dispositive reasoning set out

supra, this Court has no difficulty in coming to the conclusion that this is

a fit case to relegate the writ petitioner to file statutory appeal under

Section 246A of IT Act. In other words, there is no ground warranting

interference in writ jurisdiction qua impugned order. Though obvious, it

is made clear that if the writ petitioner chooses to take the alternate

remedy route and file a statutory appeal under Section 246A of IT Act,

Appellate Authority shall consider the appeal on its own merits and in

accordance with law de hors any observation made in this order.

Observations in this order which may have the trappings of some

expression touching upon merits is for the limited purpose of disposal of

captioned writ petition and therefore, if writ petitioner chooses to avail

alternate remedy, statutory appeal shall be dealt with by Appellate

Authority untrammelled by any observation made in this order. Though

obvious, it is also made clear that alternate remedy if availed by the writ

petitioner will be subject to pre deposit [either direct or indirect as

contended] and limitation.

17. This Court is informed that the time limit for preferring the

statutory appeal is 30 days. If the writ petitioner chooses to seek

exclusion of the time spent in this Court qua captioned writ petition for

computing this 30 days (by resorting under Section 14 of The Limitation

Act, 1963), the same can be considered by Appellate Authority on its

own merits and in accordance with law. This order will neither impede

nor serve as an impetus in such a legal drill.

18. The sequitur is, writ petitioner's campaign against the

impugned order fails and the writ petition is dismissed. Consequently,

captioned WMP is also dismissed. There shall be no order as to costs.

01.11.2021

Index: Yes/ No

Speaking/Non-speaking Order