A Retrograde Change To The Income Tax Appeal Process
Why does a Commissioner of Income Tax (Appeals) need to be incentivised to perform a statutory function?
In an unprecedented move, the Central Board of Direct Taxes, in pursuance to its Central Action Plan 2018-19, has announced a scheme to incentivise the Commissioner of Income Tax (Appeals) for accelerating disposals of appeals before the First Appellate Forum. The First Appellate Forum has been clogged with a rising number of appeals (totaling over 3,20,000 cases) and the quantum involved as of March 31, 2018, comprises over 55 percent of estimated collections for FY19.
Net-net, the official figures released by the Ministry of Finance suggest that the tax demand in appeals before CIT(A), as on April 1, 2018, is Rs 6.38 lakh crore (excluding Rs 87,000 crore in demands stayed by tribunal/courts), a whopping share of the annual direct tax collection. India collected over Rs 10 lakh crore in direct taxes for FY18 and collections are expected to rise by 15 percent in the current year.
As part of Vision 2020 litigation management approach, the Central Action Plan is targeted to achieve a laudable objective to reduce litigation, enhance the credibility of administration for ensuring a robust and fair system of taxation, thrust stiff time-bound disposal targets and instill a sense of accountability.
Firstly, the Action Plan has missed on two critical issues, recognition of which will help articulate a clearer vision.
- An analysis as to why litigation is high in India in general, and the reasons for ‘high pitched’ assessments, in particular;
- Statutory powers, constraints, and reasons for CIT(A) which has lost its relevance as the first appellate forum.
It’s a known fact that the government continues to be the largest litigant. This has been identified by successive Law Commissions, the 2018 Economic Survey and repetitive strictures by High Courts and the Supreme Court, in judgments that favour taxpayers.
The Action Plan refuses to acknowledge the facts, leave alone reasons for high pitched assessment, the clogged machinery of the department and refusal to evaluate merits of each case for the government, before embarking on the path of litigation.
In the absence of an analysis as to ‘why and where’ we are, we shall never figure out ‘how’ to deal with the challenge.
Although the Action Plan has useful suggestions on disposal of cases before tribunals and courts, my focus is on litigation management before the CIT(A). In the past four years, we have at least two respectful committees/commission reports, whose findings deserve a serious review. First is the 2014 Tax Administrative Reform Commission for which a separate secretariat and staff was mandated to look into the entire gamut of reforms. In the four volumes of TARC report, selective parts of which have been implemented in piecemeal fashion, the First Report deals with a review of administrative practices causing a rise in tax disputes. More importantly, it deals with strategies to avoid disputes and if disputes arise, to seek suitable measures to resolve them before they go to courts. The second such report is the Rani Singh Nair Committee Report (2015) on high pitched/profile litigation which recommended the Revenue Department to evaluate each case on merits before appealing against orders of tribunals and High Courts. In fact, the government did implement that in some cases.
Let’s come to the Action Plan which talks about the CIT(A)’s scope for speeding disposal of appeals. The disturbing part is the concept of passing a ‘quality’ order by a CIT(A) which will entitle them to an additional credit of two units per order.
Such credits sound as criteria for promotion, that has to be reported and evaluation for which will be done by the Chief Commissioner.
Quality orders have been referred to include orders to enhance the assessment, strengthen the assessment order of the assessing officer, levy penalties on such orders. It is intriguing that such a concept has been introduced despite a statutory framework that mandates the CIT(A) to confirm, reduce, enhance and annul an assessment.
Why should a CIT(A) consider levy of penalties when, under the law, such proceedings are independent of assessment proceedings? A levy of penalty is justified only in situations of ‘wilful default to evade tax’. This can eventually be determined by a quasi-judicial forum and the judiciary, not by the first appellate forum. The criteria for classifying a ‘quality’ order in a case where enhancement has been made by CIT(A), besides intervening in the functioning of the AO, raises concerns on the independence of the first appellate forum. It also raises questions on conflict of interest, given that the CIT(A)’s quality order will be judged by his immediate supervisor i.e. the Chief Commissioner. Lastly, how will the CIT(A) apply his mind independently to adjudicate the dispute, given that he is now prejudiced against the taxpayer?
I am reminded of the time I entered the tax profession when over 80 percent of AOs’ orders were either set aside or overruled by CIT(A). It’s a different story today that our economy has moved ‘leaps and bounds’ in the past two decades and tax, besides being a significant contributor to government revenues, is no longer a simple subject.
In the past, relatively fewer orders of first appellate forum traveled to the tribunal and over 95 percent of disputes were closed with tribunal orders.
The reasons were an empowered first appellate forum and, select orders were appealed to tribunals and courts. Regrettably, in past decade most orders of AOs’ are confirmed by the first appellate form. This is due to a combination of factors, including the growing complexity of law, the quantum of tax involved, repetitive appeals by the government to higher forums, an understaffed CIT(A) secretariat, and the subordinate quality of high-pitched assessment orders.
World over, the role of the first appellate forum is most critical for dispute resolution before the case goes to trial before judicial forums.
Successive pronouncements by the Supreme Court have held that the CIT(A) is a quasi-judicial function, and it cannot direct the AO to pass an order in a manner it deems appropriate.
We are moving in the reverse direction, given our failed experiments to address disputes with forums such as the dispute resolution panel and the settlement commission. Given that a statutory framework for the administrative commissioner is available to relook at orders of the AO, which are ‘pre-judicial to revenue’, we need an empowered and independent appellate forum.
In the midst of a declining importance of first appellate authority, to incentivise them for quality orders is a misplaced priority.
It could well result in the pendency of appeals moving to tribunals and clogging the system, which is already over-stretched.
Attempts to bring a degree of discipline and meaning as to how tax laws are interpreted by AOs’ has been inadequate. In a recent bold judgment by the Division Bench of the Karnataka High Court, disposing almost 200 appeals in one order (of the Department) mostly pertaining to transfer pricing cases, it held that there was no substantial question of law involved in the Revenue Department’s appeal. Though the figures for tax involved in these cases are not available, given that all are transfer pricing cases of multinationals, the tax involved in such litigation would be significant.
We need such bold measures to deal with the menace of tax disputes. I am a firm believer of tough administration, but toughness has to be demonstrated to errant taxpayers. Most taxpayers are law-abiding citizens. Well-governed business enterprises comply with the law, taking a reasonable interpretation of the law, subject to established judicial principles. If at all, any difference between the taxpayers and administration arises, the endeavour should be made to settle such disputes and only if they cannot be settled amicably, should either side exercise its right to knock the court’s door. We then leave it to our independent judiciary to adjudicate.
I think lawmakers will do well by reviewing portions of its Action Plan, which in my humble view go far beyond the mandate and intent of the law and certainly will not help address pendency of cases before the CIT(A), the first appellate forum.
I conclude on a philosophical note with Abraham Lincoln’s quote:
Discourage litigation. Persuade your neighbors to compromise whenever you can. Point out to them how the nominal winner is often a real loser -- in fees, expenses and waste of time. As a peacemaker the lawyer has a superior opportunity of being a good man. There will still be business enough.
Mukesh Butani is the founder of BMR Legal. Views are personal.
The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.