CRIMINAL LAW

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Problems of New Facts and Evidence in Income Tax References
— A Plea for Review of Keshav Mills Case
by Sunil Gupta*

Cite as : (2002) 1 SCC (Jour) 3

The changes under the Finance Act, 1998

The age-old advisory jurisdiction of reference to the High Court, first, under Section 66 of the Income Tax Act, 1922, and, thereafter, under Section 256 of the Income Tax Act, 1961 (hereinafter "the Act") for eliciting the High Court's opinion on "any question of law" arising out of an order of the Income Tax Appellate Tribunal stood abrogated and revoked by the Finance (2) Act, 1998 with effect from 1-10-1998. From that day, instead of reference, a new appellate jurisdiction was conferred on the High Court by the insertion of Section 260-A in the Act for an appeal from the Tribunal's order involving a "substantial question of law". This appeal is similar to the second appeal which lies to the High Court in civil cases under Section 100 of the Code of Civil Procedure (CPC).

In fact, the newly-inserted Section 260-A itself provides that provisions of CPC relating to appeals to the High Court shall also apply to income tax appeals filed under that provision(Section 260-A). Thus, the problem relating to the production of any new facts and evidence before the High Court stands somewhat resolved under the new appellate regime inaugurated with effect from 1-10-1998. With effect from that date, in keeping with Order 41 Rule 27 CPC, it has been open to a party to adduce additional evidence in the appeal before the High Court if

(a) the Tribunal has refused to admit evidence which ought to have been admitted, or

(b) the party establishes that notwithstanding the exercise of due diligence, such evidence was not within his knowledge or could not, after the exercise of due diligence, be produced by him at the time when the order appealed against was passed,

(c) the High Court requires any document to be produced or any witness to be examined to enable it to pronounce judgment, or for any other substantial cause.

However, as is well known, under the previous regime of reference to the High Court under Section 256, the facility of new or additional facts and evidence even in the most compelling circumstances of hardship was not available. That problem will even now continue to be faced by parties in a large number of references pending in the High Court in respect of orders of the Tribunal passed before 1-10-1998. In these pending references, at least, one more generation of lawyers is bound to be visited by the nagging problem of new facts and evidence which have for long been a matter of discussion in various Supreme Court and High Court judgments and income tax treatises.

The judgment of Allahabad High Court dated 14-10-1999 in some pending references, led by ITR No. 475 of 1977 Shervani Charitable Trust v. CIT, has proved that the issue of new facts and/or evidence being permitted in a reference is still not archaic or outdated and needs to be addressed urgently in right earnest.

The tragic case of Shervani Charitable Trust

The Shervani Charitable Trust was a registered Trust created by the settlers under a trust deed dated 13-4-1956. In certain assessment years, the Income Tax Department raised a dispute questioning the charitable nature of clause 2(B) of the trust deed and denied the benefit of exemption to the Trust under Section 11 and the benefit of deduction to its donors under Section 80-G of the Act.

In assessment years in the aforementioned pending references before the High Court viz. the Trust's Assessment Year 1971-72 and one donor's Assessment Years 1967-68 and 1968-69 and another donor's Assessment Year 1972-73, also the Department raised the same dispute. During the years 1974, 1975, and 1976, the departmental authorities up to the Tribunal passed orders in the Trust's Assessment Year 1971-72 holding that the object in clause 2(B) was not charitable. In 1977, the Tribunal made a reference to the High Court for its opinion, inter alia, on the question whether the object in clause 2(B) was charitable and also sent a Statement of Case to the High Court under Section 256(1) of the IT Act. The reference remained pending.

In 1979, the settlers instituted a suit before the civil court and on 11-2-1980 the civil court decreed the suit for rectification of the trust deed by an amendment of clause 2(B) with retrospective effect, that is to say, w.e.f., 13-4-1956, on the ground that a mistake as to their true charitable intention had occurred in the wording of clause 2(B) of the trust deed. The object in clause 2(B) now became clearly charitable.

Meanwhile, various cases of the Trust involving Assessment Years 1967-68 to 1970-71 and 1972-73 to 1976-77 had been submitted for decision to the Settlement Commission (set up under the Act in 1975). On 20-9-1982, the Settlement Commission gave its decision holding that the civil court decree was binding on the Department and the trust deed shall have to be read in its rectified form from the very inception of the Trust, i.e., with retrospective effect from 13-4-1956. The Trust stood entitled to income tax exemption.

However, unfortunately, so far as the Trust's Assessment Year 1971-72 is concerned, the same had been pending in reference before the High Court and, therefore, under the law could not be submitted to the Settlement Commission.

In 1983 the Income Tax Department filed a special leave petition (SLP) before the Supreme Court challenging the order of the Settlement Commission in the Trust's cases. Civil appeals in respect of the two donors involving some of their Assessment Years, including Assessment Year 1971-72, had already been pending in the Supreme Court from before. On 16-8-1996 the Supreme Court by a common order dismissed the Department's SLP and confirmed the Settlement Commission's order specifically holding the Trust to be a charitable trust even for the pre-decree (pre-1980) assessment years and correspondingly also allowed the donors' appeals automatically because they pertained to donations made to the very same Trust.

Soon thereafter, in 1996 the Trust filed an application before the High Court in its pending reference of 1977 for Assessment Year 1971-72 bringing on record the subsequent favourable developments as to the retrospective rectification of the trust deed under the civil court's decree (1980), the Settlement Commission's decision (1982), the Supreme Court's order (1996) etc. The Trust prayed that the questions of law may be answered in its favour by the High Court also for the left out year, Assessment Year 1971-72, or the case be sent back to the Tribunal for decision afresh or a supplementary Statement of Case on the new facts be called for from the Tribunal for a proper and complete adjudication. Similar applications were also filed by the donors in their own pending references.

On 14-10-1999 the High Court delivered the aforementioned judgment in all the references rejecting the prayers made by the Trust and the donors in their applications of 1996 and declining to take the subsequent developments or orders into consideration. It held, relying on the completely outdated Statement of Case on facts, that the object in clause 2(B) of the trust deed (unamended) was not charitable and, hence, neither the Trust nor the donors were entitled to any benefit.

Accordingly, even though in respect of several pre-decree or pre-1980 assessment years, the Settlement Commission as well as the Supreme Court had held the object in clause 2(B) to be charitable, the decision of the High Court for Assessment Year 1971-72 alone went to the contrary. Ironically, even in respect of Assessment Year 1971-72, the Supreme Court had confirmed the charitable nature of clause 2(B) in the donors' appeals before it.

In brief, the stark reality which stands out now is that although the Trust has been accepted to be "charitable" for income tax benefits up to the Settlement Commission and the Supreme Court for the years, Assessment Years 1967-68 to 1970-71 as well as Assessment Years 1972-73 to 1976-77, for the intervening year, Assessment Year 1971-72, the impugned order of the High Court has resulted in denial of the very benefits to the Trust. This is a patently incongruous position in law causing grave injustice to the assessee on account of a mere technicality in the structure of the law.

The High Court's reasons

The High Court's reasoning to reject the applications of the Trust and the donors to consider the subsequent developments was founded on the traditional view taken by the courts over the years that the High Court in a reference under Section 256 is not authorised to take cognizance of any new facts or evidence over and above the Statement of Case on facts sent to it for opinion by the Tribunal. Relying on the judgment in Keshav Mills Co. Ltd. v. CIT 1, CIT v. Premji Bhimji2, CIT v. L. Lachhman Dass Nayar3 and Yogiraj Charity Trust v. CIT4 the High Court refused to take cognizance in the reference proceedings before it under Section 256 of even such crucially relevant and significant subsequent events as had obtained in the case of the Shervani Charitable Trust.

A review of the ratio of Keshav Mills case (1965) required

The case of the Trust shows that Keshav Mills1 is a rather harsh and unrealistic decision which deserves to be reviewed at the earliest. A plea for reconsideration of the dicta in Keshav Mills1 etc. has been made even in the highly respected treatise The Law and Practice of Income Tax by N.A. Palkhivala, 8th Edn., at pp. 1552-54 as follows:

"Need to reconsider decisions on court's jurisdiction in income tax references—

It is submitted with respect that some judgments of the Supreme Court dealing with the Court's jurisdiction in income tax references have unduly restricted the scope of the Court's powers and functions.

*    Advocate, Supreme Court of India Return to Text

1. (1965) 56 ITR 365 (SC) Return to Text
2. (1967) 66 ITR 441 (SC) Return to Text
3. (1960) 38 ITR 528 (Punj) Return to Text
4. (1984) 149 ITR 7 (Del) Return to Text
5. (1967) 66 ITR 622 (SC) Return to Text
6. (1968) 68 ITR 200 (SC) Return to Text
7. (1970) 2 SCC 834 Return to Text
8. (1974) 3 SCC 205 : 1973 SCC (Tax) 499 Return to Text
9. (1978) 4 SCC 358 : 1979 SCC (Tax) 22 Return to Text