2024 (3) TMI 1483 - HC - Income Tax

Subordinate revenue authorities must follow binding appellate decisions and cannot ignore orders unless suspended by a competent authority

M/s. OM Siddhakala Associates Versus Deputy Commissioner of Income Tax, CPC

HC held that subordinate revenue authorities are bound to follow ITAT decisions and cannot refuse compliance merely because the order is unacceptable to ... Rejection of application filed u/s 264 - ITAT judgements relied upon by the assessee have not been accepted by the Department while passing order - HELD THAT:- The Apex Court in Union of India and Others v. Kamlakshi Finance Corporation Ltd. [1991 (9) TMI 72 - SUPREME COURT] has held that in disposing the quasijudicial issues before them, the Revenue Officers are bound by the decisions of Appellate Authorities. The order of Appellate Collector is binding on the Assistant Collectors working within his jurisdiction etc. The Apex Court in paragraph no. 6 has criticized the conduct of Revenue Authorities. Respondent No. 3 should have realized that the order of ITAT Pune was binding upon him and the principles of judicial discipline required that orders of the highest Appellate Authorities should be followed unreservedly by the subordinate Authorities. The mere fact that the order is not acceptable to the department, in itself an objectionable phrase, can furnish no ground for not following it, unless its operation has been suspended by the Competent Court. If this healthy rule is not followed, the result would only be undue harassment to Assessees and chaos in administration of tax laws. We hereby quash and set aside the order impugned in the petition and remand the matter to Respondent No. 3 for de-novo consideration. ISSUES PRESENTED AND CONSIDERED 1. Whether a subordinate revenue authority is bound to follow an order of the Income Tax Appellate Tribunal (ITAT) when considering an application under Section 264 of the Income Tax Act, 1961, absent suspension by a competent court. 2. Whether the denial of an application under Section 264 on the ground that statutory amendments (tolerance limits) operate prospectively, despite an ITAT order to the contrary, is permissible when the department has not obtained a stay of the ITAT order. 3. Whether failure by a subordinate revenue authority to follow binding appellate orders amounts to impermissible administrative conduct warranting quashing and remand for fresh consideration with specified procedural safeguards (personal hearing, reasoned order, timelines). ISSUE-WISE DETAILED ANALYSIS Issue 1: Binding Character of ITAT Orders on Subordinate Revenue Authorities Legal framework: Revenue officers exercising quasi-judicial functions must act in accordance with the hierarchy of appellate decisions; orders of higher appellate authorities bind subordinate authorities unless their operation has been lawfully suspended. Precedent Treatment: The Court relied on and applied the principle articulated by the Supreme Court that the orders of appellate authorities (Collector (Appeals), Tribunal) are binding on subordinate revenue officers and must be followed unreservedly as a matter of judicial discipline. Interpretation and reasoning: The Court emphasized that correctness or acceptability of an appellate order to the department is not a justification for subordinate officers to disregard it. Bypassing binding appellate orders undermines legal certainty, causes harassment to taxpayers, and produces administrative chaos. The Court found that Respondent No. 3 should have recognized the ITAT order as binding when adjudicating the Section 264 application. Ratio vs. Obiter: Ratio-subordinate revenue authorities are bound to follow ITAT orders unless those orders are stayed by a competent court. Obiter-comments stressing administrative consequences (harassment, chaos) reinforce the necessity of adherence but are supplementary. Conclusion: The Court held that the subordinate authority erred in failing to follow the ITAT order and reiterated the binding effect of appellate orders in the revenue hierarchy. Issue 2: Legitimacy of Rejecting Section 264 Application on Prospectivity Grounds Despite ITAT Ruling Legal framework: Interpretation of statutory amendments' temporal operation (prospective vs. retrospective) is a legal question; where an appellate authority (ITAT) has determined an issue, subordinate authorities must normally apply that determination unless a higher court has stayed its operation. Precedent Treatment: The Court treated the ITAT decision as binding on the subordinate authority for the purpose of adjudicating the Section 264 application and relied upon Supreme Court authority condemning subordinate disregard of appellate orders. Interpretation and reasoning: The impugned order rejected the application on merit by stating the tolerance limits introduced by Finance Acts were explicitly prospective from specified dates, and observed absence of High Court/Supreme Court pronouncements to the contrary. The Court held that such reasoning could not justify ignoring an existing ITAT order favorable to the assessee, particularly where the department had not obtained suspension of that ITAT order. The departmental objection that ITAT judgments were 'not accepted by the Department' was insufficient to decline to follow the ITAT. Ratio vs. Obiter: Ratio-prospective language in statutory amendments does not permit subordinate officers to disregard binding appellate decisions holding otherwise, absent suspension. Obiter-observations that departmental non-acceptance of ITAT precedents is 'of no help' are contextualized as improper grounds for refusal. Conclusion: The Court concluded that rejection of the Section 264 application on the stated prospectivity ground was impermissible in the face of a binding ITAT order; the subordinate authority must give effect to the appellate determination unless lawfully stayed. Issue 3: Remedy - Quashing, Remand for De-novo Consideration, and Procedural Directions Legal framework: Judicial review of quasi-judicial orders allows quashing where subordinate authorities fail to follow binding appellate orders or where adjudication is procedurally flawed; courts may remit for fresh consideration, prescribing procedural safeguards to ensure compliance with law and natural justice. Precedent Treatment: The Court invoked the principle that failure to follow appellate orders warrants corrective relief and invoked supervisory powers to secure adherence to appellate rulings and to protect against harassment of taxpayers. Interpretation and reasoning: Given the subordinate authority's disregard of the ITAT order and its reliance on departmental non-acceptance and prospectivity language, the Court found the impugned order unsustainable. To secure an outcome consonant with the ITAT's position and to ensure fair process, the Court ordered a de-novo reconsideration with explicit procedural steps: issuance of notice of personal hearing at least five working days in advance; opportunity for written submissions within three working days after the hearing; requirement that the subsequent order be reasoned and address all submissions; and a timeline for disposal (on or before a specified date). Ratio vs. Obiter: Ratio-the appropriate remedial step for such disregard is quashing and remand for fresh, reasoned consideration in conformity with appellate precedent and principles of natural justice. Obiter-detailed procedural timeframes and hearing notice periods are directions tailored to the facts of this matter but illustrative of supervisory remedies available to the Court. Conclusion: The Court quashed the impugned order and remanded the matter for fresh consideration in line with the ITAT's law, directing specific procedural safeguards (personal hearing with advance notice, opportunity for written submissions, issuance of a reasoned order) and prescribing a deadline for final disposal. Cross-References and Interconnected Points 1. Issue 1 and Issue 2 are interlinked: the binding effect of ITAT orders (Issue 1) directly governs the permissibility of rejecting a Section 264 application based on statutory prospectivity (Issue 2). 2. Issue 3 flows from Issues 1 and 2: remedial quashing and remand are predicated on the subordinate authority's failure to apply the binding appellate decision and to afford proper adjudicatory process. Final Disposition The impugned order was quashed and set aside; the matter remanded for de-novo consideration by the subordinate authority, which must follow the ITAT's law, provide the petitioner with a personal hearing (notice at least five working days prior), permit written submissions within three working days thereafter, pass a reasoned order addressing all submissions, and complete the exercise by the date directed by the Court. No order as to costs.