India: Mandatory Pre-Deposits In Appellate Proceedings: An Honest Tax Payer's Conundrum

Last Updated: 22 September 2015
Article by Ayush Mehrotra

One of the key amendments introduced by the finance minister in his maiden budget presented last year was the introduction of mandatory pre-deposit for appeals in customs, excise and service tax matters. The intent for introducing this amendment was to expedite the disposal of regular appeals by freeing the appellate authorities from hearing stay applications.

While the intent behind the amendment was laudable, its implementation seems to have resulted in aggravated harassment of assessees. The erstwhile provisions of customs, excise and service tax laws provided discretionary powers to the appellate authorities to dispense with the pre-deposit in cases where the pre-deposit would face significant financial hardship due to the same. The removal of this discretion has caused severe financial disruption and unnecessary burden on bonafide assessees, especially those at the wrong end of a frivolous and non-reasoned order.

It appears that the finance ministry completely ignored the sharp rise in instances of judicial indiscipline which has resulted from the constantly increasing litigative attitude of the revenue authorities. Further, the widely available statistics show that huge demands based on absurd interpretations have forced assessees to approach the high courts for writ relief instead of filing statutory appeal as provided under the extant regime.

According to any metric, the appellate bodies in the indirect tax field comprising of customs, central excise and service tax are increasingly disregarding the cardinal common law rule of stare decisis, i.e., rule of precedent and, even more importantly, the fundamental principles of natural justice. Two decades ago, the Supreme Court in Union of India v Kamlakshi Finance Corporation Ltd1 held that judicial discipline requires the department authorities to follow the precedents set by higher appellate authorities. In fact, the Gujarat High Court recently instructed2 the Central Board of Excise and Customs to issue a detailed circular directing the adjudication authorities to abide by the judicial discipline. Disregarding the rule of precedent not only amounts to disobedience to directions of the higher courts, but also leads to multiplicity of proceedings. A common fallout of these practices is the remand of disputes back to the original authorities for re- adjudication, eventually resulting in even more prolonged litigations.

Similarly, the continued disregard of principles of natural justice by departmental authorities in adjudication matters is another issue which plagues the present tax administration. In this regard, it would be further relevant to note that the Supreme Court has unequivocally stated that every action of the Government needs to be reasoned and free from arbitrariness.3 Despite the unambiguous position in this respect, it can be seen that assessees face difficulties in obtaining an effective hearing, in addition to suffering from the unreasoned and unsubstantiated orders from the lower authorities. This is despite the fact that Supreme Court in ample cases has categorically held that adjudication and appellate functions discharged by departmental authorities are quasi-judicial functions in nature and are thus bound to abide by the doctrine of natural justice and rule of law.

In the above backdrop, imposing a condition of mandatory pre-deposit for filing an appeal before the Customs Excise and Service Tax Appellate Tribunal has affected bonafide assessees prejudicially. Despite having a strong case on merits and severe financial hardships, they are required to deposit the prescribed percentage of amount of duty and penalty adjudged against them for getting their grievances heard. Thereafter, even if the case is decided in their favour, they are faced with another uphill task of getting the refund of the pre-deposit. In fact, in some of the cases, the assessees who are facing severe financial hardships are forced to approach the writ court seeking relief against the departmental action because affording the entry fee to seek appellate remedy prescribed under law was beyond their means.

This situation is in stark contrast to the reform-centric policy of the new Government. While addressing a gathering of FICCI members during his campaign, Shri Narendra Modi stated that "the tax terrorism prevailing in the country is dangerous. One can't run the government by thinking that everyone is a thief...". 4 Even during the short span for which the present Government has been in power, it has consistently advocated for providing a conducive business environment to entrepreneurs, free of uncertainty and fear of harassment from governmental authorities. This intent was also reiterated by the finance minister while presenting the 2015-16 Union Budget, wherein he stated that the Government has acted to improve the tax regime in India to make it non-adversarial.

Though the intent of the present Government and the actions taken at the macro level to rejuvenate investor confidence have been appreciated by the business community, the ignorance of micro issues is diluting the expected outcome of the reform measures. The intent of the leadership is clearly not percolating to the various levels of the government hierarchy, who still seem to believe that assessees are tax evaders.

Therefore, the reforms intended by the Government should be initiated by ensuring the efficiency at the lowest level in both tax administration as well as adjudication matters, since it is at this level that the highest interaction between the Government and businesses takes place. While dealing with the issue of tax terrorism and reducing investor confidence, it is extremely important that we present a certain and stable tax regime to our businessmen and investors.

One way of achieving this is to ensure a simple and unambiguous regime or the issuance of timely and binding clarifications in cases of any ambiguities. Efforts should be made to guarantee that departmental circulars and precedents of the higher courts are given due respect while determining any matter. This would not only enhance the certainty regarding our tax laws but would also help in reducing the litigation.

Further, the issue of deficiencies in infrastructure and large number of vacancies in the relevant departments also needs to be immediately addressed to ensure that officials employed with the revenue department also have an enabling work environment and are not overburdened. It would be worthwhile to mention that one of the key reasons for introducing such an amendment was to reduce the work load on the appellate benches by removing the stay petitions completely. However, as per the author's belief, the need for improvement on deficiencies and resource crunch cannot be tackled by making the approach difficult.

It is believed that the above measures would not only improve the collection of taxes but would also improve the confidence of the trade and industry in the revenue department. Further, in view of the reasonable, just and fair approach of our judicial authorities, it would be preferred if their discretion in determining the right case for granting the stay and waiver from pre-deposit is continued so that the right to appeal is actually available to all assessees.


1. 1991 (55) ELT 433 (SC).

2. In the case of E I Dupont India Pvt Ltd v Union of India, 2013-TIOL-1172-HC-AHM-CX.

3. Refer Kamana Dayaram Shetty v The Airports Authority of India, (1979) 3 SCR 1014.

4. Aarti Krishnan, All you wanted to know about: Tax Terrorism, dated 13 October 2014.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

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