Tax Thoughts

AAR Functioning Stalled

Mr. Arvind Datar (Senior Advocate)
Apr 24, 2017

The Income-tax Act, 1961 provides for an Authority for Advance Rulings (AAR) under Chapter-XIX-B, which is to provide the facility of ascertaining the income-tax liability of a non-resident well in advance and thereby avoid long drawn and expensive litigation. The AAR has  been quite effective and was looked up to with confidence and hope.

In the recent past, the functioning of the AAR has been sought to be stymied by a completely erroneous interpretation of certain amendments made by the Finance Act, 2017.

The AAR, after the retirement of Justice Sirpurkar, in August 2016, functioned as a two-member panel.  After the retirement of one more member, it had  only one functional member.  The Central Government cannot be faulted with not appointing a Chairman because, reportedly, no Supreme Court judge was willing to head the panel. This necessitated an amendment that was made by the Finance Act,  2017  whereby a High Court judge can now be the Chairman of AAR.

In a PIL, the Patna High Court had directed  that till a new Chairman  was appointed, all the pending cases before the AAR should  be dealt with by the Judicial Member, at the Principal Bench and who was to carry out the functions of the AAR  as its in-charge Chairman. This was to ensure  that  the  functioning  of  the AAR  did not  come to a grinding halt. Significantly, the Union of India did not prefer any appeal  to  the Supreme Court order against  this order and the logical consequence was that the AAR  had to function in the manner set out by the Patna High Court.

With the appointment of one more member, the AAR began to function once again but suddenly  an objection has been taken that the AAR should not function in view of the approval of  the appointment of  Justice  K. K. Trivedi, a  retired  judge of the M.P. High Court as Vice-Chairman of the AAR Bench at the National Capital Region [NCR].  

The objection by the Department was based on the insertion of sub-sections (6A) and (6B) in section 245-O  which  read as follows:-

(6A)   In the event of occurrence of any vacancy in the office of the Chairman by reason of his death, resignation or otherwise, the senior-most Vice-Chairman shall act as the Chairman until the date on which a new Chairman, appointed in accordance with the provisions of this Act to fill such vacancy, enters upon his office.

(6B)   In case the Chairman is unable to discharge his functions owing to absence, illness or any other cause, the senior-most Vice-Chairman shall discharge the functions of the Chairman until the date on which the Chairman resumes his duties.

It is submitted  that the objection of the Department is totally baseless. Actually, no Vice-Chairman has been appointed and, at  present,  only the Appointments Committee of the Cabinet (ACC) has approved the name of Justice K. K. Trivedi, as the Vice-Chairman in a newly created bench at NCR.  Now, section 245-O(8) states that the AAR  will  be located in the National Capital Territory of Delhi,[1]  and also at other places as may be notified.  Under  this sub-section,  an  additional bench was  created at Mumbai and NCR as early as 2015 but the Mumbai bench never functioned. The net result is that there is no Chairman or Vice-Chairman manning the AAR today. The appointment of Justice K. K. Trivedi has to be formally made. Thus, there is only one bench which continues to function at Delhi. Sub-section (6A) only states that the senior-most Vice-Chairman  can act as the Chairman until a new Chairman is appointed. This means that if there are two Vice-Chair-persons, the senior most of them will act as Chairman. If there is only one Vice-Chairman, he will automatically act as a Chairman till the new Chairman is appointed.  Sub-section (6B) provides that  the senior most Vice-Chairman can discharge the functions of  a Chairman.   Section 245-O(7) states that a  bench will consist of the Chairman or Vice-Chairman and one Revenue Member and one Law Member.  It is not clear as to whether there should be a three-member bench which is always headed by the Chairman or Vice-Chairman  because  two member benches have functioned in the past  without any difficulty.  Thus, there can be no objection to the functioning of a two-member bench of the AAR.    Indeed, the Patna High Court had directed that even the  single judicial member could continue as the AAR.  Consequently, there could be no objection if the present two member bench continued to discharge the duties cast upon the AAR.  It is indeed unfortunate that untenable objections have been raised resulting in paralyzing the functioning of the AAR which will only add  to the considerable backlog.

Apart from the above unfortunate objection, the regrettable attitude of the Income-tax department is to object almost every application  on the ground that it is prima facie designed for an avoidance of income tax even in cases which  are squarely covered by the decision of the Supreme Court or the AAR itself.   Every application is objected  to resulting in enormous amount of delay.  The statistics are alarming: at present  there are 437 applications pending  before the AAR and some are as old as 2009,  whereas  the legislature has  proposed disposal within a  six months time frame.

Ironically, in  budget after budget, Finance Ministers repeatedly announce that  the Budget will be tax friendly and that income-tax proceedings  are not adversarial. The  reality  is  exactly the contrary.  The objection to  every application  only  results in enormous waste  of  precious  time. It  is also advisable  to  eliminate  the two-stage process  of admission and disposal before  the AAR.  

It  will be in the interest of all concerned  if  the  AAR,  even as a two-member bench,   starts  functioning  again.


[1] I am informed  that  the National Capital Region  includes  part  of  NOIDA, Ghaziabad etc.  and  is  technically larger than the  National Capital Territory of  Delhi.

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