New Delhi: The Supreme Court on Thursday struck down a 2005 law setting up a National Tax Tribunal (NTT), which proposed to reduce the pile-up of tax demands locked up in litigation in high courts that currently amounts to over 4 trillion.

Chief justice R.M. Lodha and justices J.S. Khehar, J. Chelameswar and A.K. Sikri quashed sections 5, 6, 7, 8 and 13 of the law, rendering it ineffective for all practical purposes. Justice R.F. Nariman, agreeing with the majority view, held the law unconstitutional on two grounds—separation of powers between the judiciary and the executive, and judicial superintendence.

The government will now have to look at new ways to reduce pending litigation both on direct and indirect taxes. More than 4 trillion of tax demand is locked up in pendency and litigation in tribunals and courts, official estimates show.

Thursday’s ruling could affect all similar tribunals set up to decide substantial questions of law, including the National Company Law Appellate Tribunal, which is also facing legal challenge.

The NTT was seen as an alternative to high courts where the tax department or the assessee, unhappy with the decision of the appellate tribunal, could file an appeal. The decision of the NTT could only be challenged in the Supreme Court. The idea was to move tax cases away from the high courts, already burdened with other cases, and speed up decision-making.

It would have also ensured that different interpretations of law are not made by high courts, which would have to be ultimately settled by the Supreme Court. Under the NTT law, there were provisions which ensured that any different interpretation of the law would be referred to a special bench of the tribunal, which would take a final decision.

“Since the aforesaid provisions (sections 5, 6, 7, 8 and 13), constitute the edifice of the NTT Act, and without these provisions the remaining provisions are rendered ineffective and inconsequential, the entire enactment is declared unconstitutional," Khehar said for the majority of the apex court’s constitutional bench.

The ruling also states that NTT Act takes away the power of judicial review of the high courts under articles 226 and 227, as it provides an appeal directly to the Supreme Court against an NTT order.

A substantial question of law, according to precedent, is one which is of general public importance, or significantly and directly affects the rights of the parties involved. Article 323B of the Constitution, which talks about the creation of tribunals by the executive, had also been challenged by the petitioners as being violative of the concept of separation of powers between the executive and the judiciary.

The NTT Act allowed the executive “extensive control" with regard to appointments of members and procedure of the tribunal.

The petitions, filed by Madras Bar Association and others, had challenged a quasi-judicial body deciding substantial questions of law in appeal.

Declaring NTT unconstitutional will lead to widespread confusion amongst the legal and tax community, said Sunil Jain, a partner at J. Sagar Associates, a law firm.

“Even though the NTT is yet to become operational, it is widely expected to be a solution for reducing large scale pendency of tax cases at various high courts across India," he said. “The judgement may deliver a critical blow to NTT and create uncertainty about various other tribunals which are dealing with substantial questions of law and doing a satisfactory job by unclogging the high court systems for other important litigations."

“A well thought out strategy will be required to deal with the expectations from the judicial system in relation to disputes of technical nature," Jain said.

The judgement will have repercussions on speedier disposal of appeals before high courts, K.R. Sekar, a partner at Deloitte Haskins and Sells Llp, said in a note.

“One of the major challenges faced by taxpayers is the time involved in litigation process starting from tribunal to Supreme Court," he said, adding that the government will have to find a way of ensuring the speedier disposal of appeals.

The committee constituted by the Central Board of Direct Taxes and government need to ensure that an alternative dispute resolution process is legislated to increase the confidence of tax payers, Sekar said.

Remya Nair contributed to this story.

Close