High Court sets aside ITAT order for lack of proper reasoning in tax appeal case

Get the full picture - access the original judgement of the court order here

Case Name

Board of Secondary Education vs Principal Commissioner of Income Tax, (High Court of Madhya Pradesh)

ITA No.10/2021

Date: 17th November 2021

Key Takeaways

• Judicial orders must contain proper reasoning: Courts and tribunals must explain their decisions clearly - they can’t just jump to conclusions without explaining why
• "Non-speaking" orders are invalid: When an appellate authority doesn’t give adequate reasons, their order becomes legally defective
• Natural justice requires transparency: Proper reasoning is essential for fairness and allows parties to understand why they won or lost
• ITAT has wide powers but must exercise them properly: Since the ITAT can decide both questions of law and fact, it has a greater responsibility to explain its decisions

Issue

The central legal question was: “Whether the impugned order dated 06.11.2020 passed by the Income Tax Appellate Tribunal, Indore Bench in ITA No.164/Ind/2018 in unlawful for being non-speaking in as much as not containing enough reasons to disclose the mind of the appellate authority to save it from being sacrificed at the alter of principle of natural justice?”

Facts

1. The Board of Secondary Education had a tax dispute for Assessment Year 2014-15
2. They had paid Income Tax of Rs.2,16,50,650/- on deemed income under section 11(3) for A.Y. 2013-14
3. They wanted this payment to be allowed as a deduction for the current year (A.Y. 2014-15)
4. The Commissioner of Income Tax (Appeals) rejected their claim, creating a tax demand of Rs.84,72,830/-
5. The Board appealed to the ITAT, but the ITAT dismissed their appeal on 06.11.2020
6. The Board then approached the High Court, arguing that the ITAT’s order didn’t contain proper reasons

Arguments

Board of Secondary Education (Appellant) argued:

• The ITAT’s order was “non-speaking” - it didn’t contain sufficient reasons to explain why their appeal was dismissed

Revenue Department (Respondent) argued:

• The ITAT’s order contained sufficient reasons, particularly in paragraph 7 of the order
• The tribunal’s mind was adequately reflected in the order, so it couldn’t be called non-speaking

Key Legal Precedents

The court relied heavily on Kranti Associates Private Limited and another Vs. Masood Ahmed Khan and others, (2010) 9 SCC 496, which established comprehensive principles about the requirement to give reasons in judicial decisions.

Key principles from this precedent include:

• Quasi-judicial authorities must record reasons for their conclusions
• Recording reasons serves the principle that “justice must not only be done, it must also appear to be done”
• Reasons operate as a restraint on arbitrary exercise of power
• Reasons have become an indispensable component of decision-making
• “Reason is the soul of justice”

The court also referenced sections 253 to 255 of the Income Tax Act, which give the ITAT jurisdiction to decide questions of both law and fact.

Judgement

The High Court ruled in favor of the Board of Secondary Education. Here’s what the court decided:

Court’s Reasoning:

• The ITAT’s order was indeed “non-speaking” because it failed to provide adequate reasons
• While the ITAT claimed to have given “thoughtful consideration” to the CIT(A)'s findings, it then jumped to conclusions without explaining why the appeal was being dismissed
• The only reason given was that “the present case is not a case of change of accounting system,” which was too cryptic and insufficient
• The court emphasized that “Reasons are the bridge between the facts, circumstances on one side and the conclusion on the other, in absence of which, a judicial order becomes a lifeless piece of paper”

Orders Made:

1. The ITAT’s order dated 06.11.2020 was set aside
2. The ITAT was directed to decide the case afresh by passing a “speaking order” (one with proper reasons)
3. If the tribunal’s composition had changed, parties should be given a fresh hearing
4. The High Court clarified it had not commented on the merits of the underlying tax claim

FAQs

Q1: What does “non-speaking order” mean?

A: It means a judicial order that doesn’t contain adequate reasons or explanations for the decision reached. It’s like getting a verdict without understanding why the judge decided that way.

Q2: Why are reasons so important in judicial decisions?

A: Reasons ensure transparency, prevent arbitrary decisions, help parties understand why they won or lost, and enable effective appeals to higher courts. As the court said, “reason is the soul of justice”.

Q3: Does this mean the Board of Secondary Education won their tax case?

A: Not exactly. The High Court only decided that the ITAT must redo its decision with proper reasoning. The actual tax dispute still needs to be decided by the ITAT on merits.

Q4: What happens next?

A: The ITAT will have to hear the case again and pass a fresh order with detailed reasoning explaining why they’re allowing or dismissing the appeal.

Q5: Can other taxpayers use this judgment?

A: Yes, this reinforces the principle that all tax tribunals must give proper reasons for their decisions. It strengthens taxpayers’ rights to get reasoned orders from tax authorities.

1. The present Income Tax Appeal is preferred u/S.260-A of the Income Tax Act, 1961 assailing the order dated 06.11.2020 passed in ITA No.164/Ind/2018 by the Income Tax Appellate Tribunal, Indore Bench, dismissing the appeal of assessee, who had raised the following grounds:-

“1. On the facts and in the circumstances of the case, the ld. Commissioner of Income Tax (Appeals-II), Bhopal was not justified in holding that the

payment of Income Tax of Rs.2,16,50,650/- paid on deemed income u/s 11(3) for A.Y. 2013-14 should not be allowed as a deduction or application of the

income of the current year (ASSESSMENT YEAR 2014-15) & is hence also wrong in upholding the following:

a) Tax demand of Rs.84,72,830/-

b) Interest payable u/s 234A, 234B & 234C.”

2. Learned counsel for the appellant raises singular ground

that the impugned order of Income Tax Appellate Tribunal, Indore

Bench is non speaking.

3. Learned counsel for the revenue on the other hand contends

that the impugned order contains sufficient reasons to sustain the

same. It is submitted by counsel for the revenue that the reasons are

contained in para 7 of the impugned order. It is further submitted that

the mind of the Income Tax Appellate Tribunal is reflected therein,

and therefore, the order cannot be termed to be non-speaking.

4. Accordingly, this Court after hearing learned counsel for the

rival parties frames the following substantial question of law:-

“Whether the impugned order dated 06.11.2020

passed by the Income Tax Appellate Tribunal, Indore

Bench in ITA No.164/Ind/2018 in unlawful for being non-

speaking in as much as not containing enough reasons to

disclose the mind of the appellate authority to save it

from being sacrificed at the alter of principle of natural

justice?”

5. Considering the nature of substantial question framed

above, this appeal does not require any detailed hearing and can be

disposed of at this stage itself.

6. Learned counsel for the rival parties have no objection in

regard to appeal being disposed of at this stage.

7. A bare perusal of the impugned order reveals that in para 1,

grounds of the appeal raised by the assessee are mentioned followed

by para 2, wherein various stages through which the case travelled

have been mentioned including the foundational facts. Para 3

contains the grievance of appellant in short. In para 4, contentions of

the assessee in his appeal are detailed. Para 6 gives an impression

that the same contains findings but in actuality the said para merely

reproduces the order impugned before the ITAT passed by the

CIT(A). Lastly comes para 7, which has some semblance of

disclosure of mind of the ITAT; but a bare perusal of the same

reveals that the ITAT has stated that they have given thoughtful

consideration to the findings of CIT(A), and thereafter without

recording reasons as to why the appeal is being dismissed, the ITAT

jumped to the conclusion that there is no infirmity in the order

impugned before it. The only short and cryptic reason assigned is

that the present case is not a case of change of accounting system,

which is not sufficient to disclose the mind of the ITAT while

deciding the appeal.

8. Reasons are the bridge between the facts, circumstances on

one side and the conclusion on the other, in absence of which, a

judicial order becomes a lifeless piece of paper.

9. The Apex Court in Kranti Associates Private Limited and

another Vs. Masood Ahmed Khan and others, (2010) 9 SCC 496

has held thus:-

47. Summarizing the above discussion, this Court holds:

(a). In India the judicial trend has always been to record

reasons, even in administrative decisions, if such

decisions affect anyone prejudicially.

(b). A quasi-judicial authority must record reasons in

support of its conclusions.

(c). Insistence on recording of reasons is meant to serve

the wider principle of justice that justice must not only be

done it must also appear to be done as well.

(d). Recording of reasons also operates as a valid

restraint on any possible arbitrary exercise of judicial

and quasi-judicial or even administrative power.

(e). Reasons reassure that discretion has been exercised

by the decision maker on relevant grounds and by

disregarding extraneous considerations.

(f). Reasons have virtually become as indispensable a

component of a decision making process as observing

principles of natural justice by judicial, quasi-judicial

and even by administrative bodies.

(g). Reasons facilitate the process of judicial review by

superior Courts.

(h). The ongoing judicial trend in all countries committed

to rule of law and constitutional governance is in favour

of reasoned decisions based on relevant facts. This is

virtually the life blood of judicial decision making

justifying the principle that reason is the soul of justice.

(i). Judicial or even quasi-judicial opinions these days

can be as different as the judges and authorities who

deliver them. All these decisions serve one common

purpose which is to demonstrate by reason that the

relevant factors have been objectively considered. This is

important for sustaining the litigants' faith in the justice

delivery system.

(j). Insistence on reason is a requirement for both judicial

accountability and transparency.

(k). If a Judge or a quasi-judicial authority is not candid

enough about his/her decision making process then it is

impossible to know whether the person deciding is faithful to the doctrine of precedent or to principles of incrementalism.

(l). Reasons in support of decisions must be cogent, clear

and succinct. A pretence of reasons or `rubber-stamp

reasons' is not to be equated with a valid decision making

process.

(m). It cannot be doubted that transparency is the sine

qua non of restraint on abuse of judicial powers.

Transparency in decision making not only makes the

judges and decision makers less prone to errors but also

makes them subject to broader scrutiny. (See David

Shapiro in Defence of Judicial Candor (1987) 100

Harward Law Review 731-737).

(n). Since the requirement to record reasons emanates

from the broad doctrine of fairness in decision making,

the said requirement is now virtually a component of

human rights and was considered part of Strasbourg

Jurisprudence. See Ruiz Torija Vs. Spain, (1994) 19

EHRR 553, at 562 para 29 and Anya vs. University of

Oxford, 2001 EWCA Civ 405, wherein the Court referred

to Article 6 of European Convention of Human Rights

which requires, "adequate and intelligent reasons must be given for

judicial decisions".

(o). In all common law jurisdictions judgments play a

vital role in setting up precedents for the future.

Therefore, for development of law, requirement of giving

reasons for the decision is of the essence and is virtually

a part of "due process".

10. Testing the impugned order on the anvil of law laid down

by the Apex Court and the principles of natural justice, this Court has

no hesitation to hold that the impugned order passed by the Income

Tax Appellate Tribunal, Indore Bench in ITA No.164/Ind/2018 is

non-speaking.

11. Before parting, it would be appropriate to mention that

though the jurisdiction of ITAT u/S.253 to 255 is not only to decide

the questions of law but also of fact and therefore, the scope of

interference is much larger than the scope before a revisional

authority. Thus, the least that is expected of an appellate judicial

authority vested with such wide powers is to record reasons so that

it’s mind is disclosed thereby informing the aggrieved person the

exact reasons behind the conclusion and thus in the process

facilitating availing of remedy before the higher forum.

12. In the conspectus of above discussion, the present appeal

on the aforesaid short substantial question of law is allowed.

(i) The impugned order dated 06.11.2020 passed by the

Income Tax Appellate Tribunal, Indore Bench in ITA

No.164/Ind/2018 is set aside.

(ii) The Income Tax Appellate Authority, Indore Bench is

expected to decide ITA No.164/Ind/2018 pertaining to the

assessment year 2014-2015 by passing a fresh speaking order.

13. It is made clear that in case the composition of the

Appellate Tribunal has since changed, then prior to passing speaking

order, the rival parties ought to be given a hearing in accordance with

the Income Tax Act.

14. It is also made clear that we have not commented upon

merits of the claim before the Tribunal.

(Sheel Nagu) (Purushaindra Kumar Kaurav)

Judge Judge