The Law Commission of India, in its 128th Report (1988) examines the “cost of litigation” and suggested ways to compensate the wronged party so that cost of litigation does not become an impediment in the road to justice. This paper examines the cost of litigation in taxation matters, with special emphasis to taxation laws, reasons for frivolous litigation in these matters, its deleterious effect on the business environment of the country. The author will also suggest some ways to reduce litigation, to compensate the wronged party and in general improve the business environment of the country by bringing some measure of justice in the nation’s tax justice system.

Tax disputes are certain. In any assessment system such disputes will exist. However, such disputes bring uncertainty in the taxation matters, particularly Indirect taxation system where the person liable to pay tax does not bear the burden of tax, they merely collect the taxes from some other person and pays to the government, and they do it like BEGAR. When the system of dispute resolution fails or become oppressive, it spoils the business environment of the country and affects the growth of GDP adversely.

Tax dispute in Custom, Central Excise & Service Tax starts with issuance of Show Cause Notice. Unfortunately the Show Cause Notice is decided by departmental officers themselves, invariably the case is decided against the assessee. The first appellate authority is Commissioner (Appeals), who is equally biased and the matter invariably reaches to the Tribunal. One of a reputed author has spoken about adjudication,

“The whole adjudication process in Central Excise, Service Tax and Custom is a farce. ….Chances of getting justice at the level of Commissioner (Appeals) is 25%. …. Provision of pre deposit of duty in case of appeal to Commissioner (Appeals) has become a multi crore business . Assessees are loosing faith in adjudication process. ……. This encourages the assessee to use “short cuts” methods and off course revenue officers knows cost benefit analysis of the situation.”

A careful analysis of the situation results in following conclusions:

1. Departmental adjudication is a farce.

2. It fecilitates corruption.

3. It results in subversion of rule of law and loss of faith in judicial process.

Why are we continuing with such departmental adjudication? I don’t know.

There is a celebrated Nagarkar Case. In this case, a Commissioner in adjudication allegedly levied lesser penalty on the assessee and hence disciplinary proceeding started him. I am just asking from the revenue authorities as to in how many cases disciplinary proceeding has been initiated against departmental officers for issuing vexous Show cause notices which does not stand the scrutiny of law, of passing illegal orders against assessee which fell in appellate proceeding. None. Thus the revenue administration expects its officers to pass order in its favour. When such expectation is there in the revenue administration itself, there is no surprise that such departmental adjudication is subverting the rule of law by deteriorating the faith of assessee in departmental adjudication.

After such departmental adjudication, which takes approximately decade, when the assessee stand is found correct, he does not get any cost of litigation. In 1999, Section 254 (2)(2B) was added in the Income Tax Act, 1961 empowering the Tribunal to award cost. No such provision has been enacted in Custom, Central Excise & Service Tax laws. Even at the time of filing appeal to Appellate Tribunal, the government is not required to pay any fee, unlike the assessee.

Thus revenue administration has a vested interest in issuing frivolous notices, doing biased adjudication & filing frivolous appeals. It saves the departmental officers from nagarkar type disciplinary proceeding. However it results in piling of cases in Appellate tribunals and hamper their work of doing justice. It is not that no officer does justice in adjudication. There are a few officers who think justice should be done in adjudication. They do justice sometimes, but then the orders are reviewd and appeal is filed by the department. The result is same, piling of cases in tribunal, who is the first authority doing justice in taxation matters.

Where is the remedy? Do we need one or more specifically does the government needs one? I think government needs a remedy. It will improve business environment in the country leading to greater growth (and higher revenue). It will make India a better investment destination. It will reduce corruption. It will make the tax system more efficient.

Say, a commissionerate has to issue a Show Cause Notice. Issuing vexous notices also consumes equal amount of time in investigation, drafting, adjudication, appeal and burden the tax officers equally. At the end it is quashed and the government does not get anything out of it. If such vexous notices are not issued, revenue officers can concentrate on real tax evadors and will be able to plug the leakage of revenue in a better manner. When lesser adjudication will be required to be done, adjudicating officers can give sufficient opportunity to the assessee resulting in better adjudication. When better adjudication is done, lesser appeal will be filed resulting into better hearing of appeals and appreciation of contentious legal issues. Tax evadors will not be able to benefit from overburdened investigators, adjudicators and appellate authorities. On the other hand, honest assessees can concentrate on their work rather than defending vexous notices, leading to more production and better revenue.

Cost of litigation:

As a matter of general principle, cost of litigation shall be borne by the wrong party. If government has issued a vexous notices, or adjudicator has passed a biased order or frivolous appeal has been filed; the cost of litigation should be borne by the government. On the other hand if the assessee is contesting the notice in a frivolous manner, cost of litigation should be borne by the assessee. If there is a clear cut provisions for bearing of such cost, it will result in reduction in frivolous litigation, both by the government and assessee, and tax disputes shall be settled quickly and efficiently.

There is a provision of cost in Income Tax appellate tribunal, however such provisions are discretionary at the discretion of the tribunal. Such discretionary provisions results in non imposition of cost and does not act as a deterrent to frivolous litigation. Further, calculation of cost wastes precious time of the judicial authorities. It should be legislated in a manner of a fixed cost, with discretion to the tribunal to enhance/reduce it in appropriate cases.

In taxation matters value of duty demanded, penalty imposed etc. is always known and fixed. The cost of litigation may be calculated as percentage of disputed duty/penalty. Further the cost may be revised upward as the matter goes up. So, there can be 0.5% duty demanded at the level of original authority, 0.75% of duty/penalty at the level of Commissioner (Appeals), 1% at the level of CESTAT and may be going up to 2% at the level of Supreme Court. Alternatively it can be assessed as court fee payable on the like value of a civil suit, increasing in the same manner with each appellate stage.

A litigant (be it government or assessee) must know that if he is wrong, he has to bear the cost of litigation. Off course tribunal/courts shall have power to enhance/reduce cost in appropriate cases. Such a system will reduce abuse of legal process and results in a more just society. Further with such cost system, a common man shall be able to take recourse to judicial settlement of disputes without worrying about cost of litigation in just circumstances.

Am I asking justice from law, when philosophers say, “law is an engine of oppression”?

Written by:- Advocate Rajesh Kumar. The author can be contacted on The author can be contacted on [email protected] , Web:

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  1. Jimmy Shah says:

    Dear Sir,

    I congratulate you for taking up this revolutionary issue. Entire industry should hold hands and raise this issue.

    Moreover I would also suggest some short of penalty upto the personal level in all the government departments, sothat the officer taking wrong decision should also realise the pain that an individual undergo.

    All the best.

    Jimmy Shah

  2. sarvesh kumar says:

    Good to receive informtive mails from your side… I would like to suggest you that due to scarecity of time if you could add-on a summery of the decisions or conclusions, at the end of the discusion, then it would save our time and your services would be more beneficial for us.

    Thanks and regards

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September 2021