A three-judge bench of the Supreme Court in Commissioner of Customs v M/s Canon India Pvt. Ltd.[1] (hereinafter referred to as ‘the 2024 judgement’), has in unanimity and consensus, resuscitated the stillborn show-cause notices. The 2024 judgement has adjudicated whether the officers of DRI are ‘proper officers’ for the purpose of issuing show-cause notice under Section 28 of the Customs Act, 1962 (for short the 1962 Act) and whether Explanation 2 is a caveat on Section 28(11) of the 1962 Act? Acting as sentinel on the qui vive, the Apex Court has reversed the loss of revenue to the state, prevented pilferage of revenue, reiterated the law on review and introduced advanced purposive interpretation in tax laws.
The 2024 judgement emanated from the review of M/s Canon India Pvt. Ltd. v Commissioner of Customs,[2] (hereinafter referred to as ‘the 2021 judgement’) appeal filed by UOI against the judgement of Delhi High Court in the Mangali Impex v Union of India[3] which was pending before the Supreme Court and the petitions challenging the constitutional validity of Section 97 of the Finance Act, 2022. The maintainability of the review petition was anchored in the fact that the relevant law was ignored and an inapplicable law formed the foundation for the judgment, hence it provided a ground for review under Rule 1, Part IV Order XLVII of the Supreme Court Rules, 2013.
The 2021 Judgement
The 2021 judgement held that the officers of the Directorate of Revenue Intelligence (hereinafter referred to as ‘DRI’) are not proper officers for the purposes of issuing show-cause notices under Section 28 of the 1962 Act as:
1. The summoning u/s Section 28(4) of the 1962 Act is administrative review of an act and can be done by the same officer, his successor, or any officer granted the assessment duty under Section 17 of the 1962 Act.
2. The definite article “the” used before “proper officer” in Section 28 of the 1962 Act, limits the exercise of powers by a specific proper officer and not any proper officer.
3. Officers of DRI were notified under Section 2(34) of the 1962 Act instead of Section 6.
The 2021 judgment was reversed in the 2024 judgment on the basis that:
1. The 1962 Act has no statutory link between Sections 17 and 28. The nature of review under Section 28 differs from assessment and re-assessment under Section 17, and the amended Section 17 allows officers to choose to be functus officio, shifting the dynamics of assessment.
2. The definite article “the” in Section 28 of the 1962 Act, refers to a “proper officer” notified under Section 5 of the 1962 Act. Further, article “the” in Section 28 of the 1962 Act has no apparent relation with the proper officer referred to under Section 17 of the 1962 Act.
3. Section 6 of the 1962 Act replaces Section 8 of the 1878 Sea Customs Act, empowering officers like Police, ITBP, and BSF to exercise customs powers in areas without a Customs House. Further, after being designated officers of customs under Section 4(1) of the 1962 Act, DRI officers do not need to be bestowed functions under Section 6.
Mangali Impex
In Mangali Impex v Union of India (supra), the High Court of Delhi held Section 28(11) of the 1962 Act unconstitutional as:
1. There was an apparent conflict between Explanation 2 and Section 28(11) of the 1962 Act rendering the Validation Act inapplicable to show cause notices issued prior to 08.04.2011 i.e., the date on which the new Section 28 of the 1962 Act came into force.
2. Section 28(11), conferred powers of the proper officer upon multiple sets of customs officers without any territorial or pecuniary jurisdictional limit, resulting in utter chaos and confusion.
Mangali Impex v Union of India was overruled by the 2024 judgement, as:
1. Adopting purposive interpretation, the position dealt with by the insertion of section 28 (11) of the 1962 Act is distinct from Explanation 2. Explanation 2 clarifies that they will proceed in terms of the unamended provision whereas Section 28(11) of the 1962 Act is about the competence of the officer.
2. The officers having been entrusted and assigned the functions as noted above, are deemed to have been possessing the authority, whether in terms of section 28 of the 1962 Act unamended or amended and substituted as above.
Analysis
Article 265 of the Constitution of India provides that any compulsory exaction of money by the Government amounts to imposition of tax which is not permissible except by or under the authority of a statutory provision. The 2024 judgement interprets whether the recovery of the duty not levied or not paid or short-levied or short-paid is permissible under the authority of law i.e. The 1962 Act. The rule that a taxing statute is to be construed literally/ strictly was enunciated in a classic passage by the Hon’ble Supreme Court of India in A.V. Fernandez v. State of Kerala, as follows: “In construing fiscal statutes and in determining the liability of a subject to tax one must have regard to the strict letter of the law. If the revenue satisfies the court that the case falls strictly within the provisions of the law, the subject can be taxed. If, on the other hand, the case is not covered within the four corners of the provisions of the taxing statute, no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the Legislature and by considering what was the substance of the matter.”[4]
The foundation stone of the 2024 judgement has been set in the interpretation of Notification No. 44/2011 dated 06.07.2011 issued under Section 2(34) of the 1962 Act, which stands on the shoulders of Notification no. 19/99- Cus (N.T.) dated 26.04.90 and Circular No. 4/99 Cus dated 15.02.1999. The notification notified officers of DRI of different ranking as Commissioners of Customs, Deputy Commissioners of Customs or Assistant Commissioners of Customs and entrusted them with the functions of Sections 17 and 28 of the 1962 Act. If we may adopt a mathematical imagery the proper officer in relation to any functions to be performed under this Act would be:
Proper officer u/s 2(34) of 1962 Act = Officer of Customs + assigned/ bestowed with functions.
As per 2024 judgement before the Finance Act 2022, Section 4 of the 1962 Act, empowers the Board to appoint officers of customs, Section 5 of the 1962 Act enunciates that an officer of customs may exercise the powers and discharge the duties conferred or imposed under this act on any officer of customs and Section 6 empowers the board to entrust any central or State Government officer with the functions of board or any officer of customs under this act. The question of law that resurfaced was that before the Finance Act 2022 which section empowered the Board or the Principal Commissioner of Customs or Commissioner of Customs to assign any functions to be performed under this Act. The 2024 judgement made a tryst with the definition clause and held that the definition clause empowered the Board to bestow upon any officer of Customs any functions to be performed under this act thereby rectifying the lacuna enunciated in M/s Canon India Pvt. Ltd. v Commissioner of Customs.
It is a settled principle of law that the scope of the definition clause is cribbed, cabined and confined to conducing interpretation. The sub silentio empowering of the executive to issue notification under the definition clause is legislative, hence overarching. Supreme Court in catena of decisions has ruled that the intention of the legislation is to be gathered from the language used and it is not the function of the court of law to give words a strained and unnatural meaning to cover loopholes through which the evasive taxpayer may find escape or to tax transaction which legislature intended to but did not. The unnatural power granted by the court to the words of Section 2(34) of the 1962 Act by means of purposive interpretation has toppled the established principle of interpretations for tax laws.
Various lethal radiations are going to emanate from this vice amongst which the most lethal is the opening of floodgate of litigation. This change in laws of interpretation has overruled 100-200 years of case law and has provided the government with the opportunity to muffle every taxpayer through litigation under the aegis of purposive interpretation. Government and bureaucrats have the tendency to perceive themselves as transient and the same leads to multiple appeals and this review is quintessence of the same. Our judicial system is clogged with cases and the biggest litigant is the State and this would lead to retrospective Amendments resuscitating all stillborn cases. Furthermore, the essential element of Article 265 of the Constitution i.e. tax should be levied or collected only by the authority of law has been left otiose as with this judgement now any person can collect tax and the officer would be retrospectively entrusted with the powers to collect tax post such collection/ recovery.
The second pillar of the 2024 judgement is the exclusion of Explanation 2 caveat on Section 28(11) of the 1962 Act under the aegis of purposive interpretation. On a cursory look, it can be deciphered that the non-obstante clause contained in Section 28(11) of the 1962 Act is limited to “…judgment, decree or order of any court of law, tribunal or other authority…” and does not oust the application of other provisions of the 1962 Act including Explanation 2. The Supreme Court subjected the explanation to a narrow, pedantic or lexicographic approach and overruled Mangali Impex. Supreme Court has deemed that notwithstanding anything in this act, all persons appointed as officers of Customs under sub-section (1) of section 4 of the 1962 Act will be proper officers for the purposes of Sections 17 and 28 of the 1962 Act. It is a settled proposition of law that the Statement of Objects and Reasons of the Act are to be used for interpretation only when there exists ambiguity and I for one, am unable to trace ambiguity or confusion in Section 28 of the 1962 Act. Moreover in CIT v. Vatika Township (P) Ltd., it has been held that if the provision of a taxing statute is ambiguous and vague and is susceptible to two interpretations, the interpretation which favours the subjects, as against the Revenue, has to be preferred.[5] Applying this principle explanation must be presumed as a rider on the retrospective application of Section 28(11) of the 1962 Act. The 2024 judgement has ignored the existence of potholes that have already been recognized and repaired by the legislature vide Finance Act 2022. This purposive interpretation amounts to putting the cart before the horse since now every taxpayer is obliged to interpret present and future laws per the presumed purpose of the Act which the judiciary itself interpreted after about two decades of litigation. It will not be far-fetched to state that the same is anathema to the democratic system as it amounts to rule by law and not rule of law.
The third limb of the 2024 judgement was the retrospective amendments carried out in the 1962 Act, vide the Finance Act, 2022. The findings in respect of the vires of the Finance Act 2022 were confined to the contentions raised in the 2021 judgement but when analysed whether it was clarificatory or took away existing rights the same would be graded as curate’s egg. For the sake of brevity, the discussion on the retrospective or prospective application is redundant for this judgement since it has been held that the Board can bestow functions under Section 2(34) of the 1962 Act and the retrospective Amendment to Section 28(11) of the 1962 Act was constitutional and not bound by Explanation 2, thereby the Finance Act 2022 is superfluous.
To put it pithily, although the 2024 judgement alleges that the 2021 judgment was not cognisant of the notifications, but since all the notifications were under Section 2(34) of the 1962 Act, the same cannot be adequate for the purposes of Section 17 and 28 of the 1962 Act, therefore the 2021 judgement is not per incuriam. Additionally, not just officers of DRI, even the officers of Customs were not proper officers since there was no provision to bestow them the functions. Furthermore, Mangala impex applied the literal rule of interpretation and the 2024 judgement applied purposive interpretation, both being at stark ends of the prism, the taxpayers continue to languish in a constant state of confusion.
[1] 2024 SCC Online SC 3188.
[2] AIR 2021 SUPREME COURT 1699
[3] (2016) SCC ONLINE Del 2597.
[4] AIR 1957 SC 657
[5] (2015) 1 SCC 1
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