It’s time to solve India’s huge tax litigation problem : 12-03-2019

In early February, the Central Board of Direct Taxes (CBDT) set up a task force on litigation management to examine, among other things, ‘whether the ITAT (Income Tax Appellate Tribunal) has passed perverse or irregular orders, or where submissions of the department representative (counsel for the I-T department) have not been recorded by the ITAT’.

It proposes to take further action based on the findings, after taking up the matter with the law ministry. A little over 90,000 cases were pending at the ITAT level, with corresponding contentious I-T demands aggregating to Rs 2.01 lakh crore, as of March 31, 2017. It is no secret that the I-T department is the largest tax litigant. This fact, with a low success rate, doesn’t paint a pretty picture. Appeals filed by the I-T department constituted 85% of the appeals as of March 31, 2017, with its success rate being less than 30%. For the doubting Thomases, these statistics are drawn from the Economic Survey 2018.

Under the traditional litigation process, the first level of appeal is with the commissioner (appeals). Then, in hierarchical order, with ITAT, which is also the final fact-finding authority. If the case involves a question of law, appeals can be filed with the high courts, and a further appeal lies with the Supreme Court.

Litigation management has rightly been the focus of the Central Board of Direct Taxes (CBDT) for the last few years. But some steps are puzzling. For instance, its action plan for fiscal 2018-19 sought to offer performance credits to the commissioner (appeals) for ‘quality’ appellate orders passed by them. Such orders include cases where the appellate commissioner enhances the order of the I-T officer — in other words, the quantum of tax demand is increased — or where he strengthens the order of the I-T officer — in other words, the quantum of tax demand is increased — or where he strengthens the order of the I-T officer.

It also includes instances where he levies a penalty on the additions confirmed by him to a taxpayer’s income. Understandably, this step has raised questions among taxpayers and in professional circles. According to this report, at the commissioner (appeals) level, the tax amount caught up in 3.22 lakh pending cases was Rs 6.38 lakh crore, as of March 31, 2018.

While CBDT may have its own reasons for the scope outlined for its committee, as well as the grant of performance credits, it also needs to introspect and plan to nip litigation in the bud. Often, arbitrary or irrational demands are raised by assessing officers, because they must meet unrealistic targets on which hinges their performance appraisal. This results in the taxpayer invariably filing an appeal.

To curb this tendency, a few years ago, a‘high-pitched scrutiny assessment committee’ was set up. Aggrieved taxpayers could approach this committee. The idea was to deter high-handedness by punitive measures such as transfers. Action has been taken in a few cases, the general perception being that the initiative has been a non-starter. Adequate resources need to be committed and adequate publicity given to this endeavour.

A significant increase in the monetary threshold of the tax effect on matters below which an appeal can’t be filed by the I-T department announced in July 2018 (e.g., from Rs 10 lakh to Rs 20 lakh in case of appeals with ITAT) has eased the backlog. CBDT expects that the increase in monetary thresholds announced in July 2018 will lead up to 34% cases being withdrawn at the ITAT level, 48% at the high court level, and 54% at the Supreme Court level.

An earlier CBDT report, issued in 2016, on litigation management had called for periodical weeding out of pending appeals, that have been rendered infructuous due to subsequent change in law or court rulings. Further, at present, there is no adverse consequence if an appeal is filed without merit. On the other hand, a single slip in not filing an appeal could impact the assessing officer’s performance assessment.

Assessing officers should be encouraged to file quality appeals, only if merited, which, in turn, would improve the rate of success. Penalty under Section 271(1)(c), for concealment of income, is routinely initiated by the assessing officers. Yet, only about 6% penalty orders are reportedly sustained by the ITAT. Judicious imposition of this penalty, with approval of higher authorities, could be introduced. CBDT could also strengthen its exercise of issuing clarifications on contentious issues.

India’s advance pricing mechanism has helped curb litigation in the arena of transfer pricing, even as the advance ruling mechanism faced administrative challenges. Alternate routes, such as private rulings given by high-ranking I-T officials, or an alternative dispute mechanism using third-party mediation, could be introduced. This would ensure that matters, especially complex ones relating to general anti-avoidance rule (Gaar), don’t reach the litigation stage.

Source : Financial Express

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