The Comptroller and Auditor General of India (CAG) has come down heavily on the Tax Department for fostering “a perception that it has a tendency to opt for appeals even when it is on a weak wicket” and this “appealititis is more detrimental when applied on small taxpayers constituting a large chunk of appellants.” In a first-of-its-kind holistic study of appeals, the CAG report on the Appeal Process, tabled in Parliament on Friday, minced no words when it said point-blank that the proliferation of appeals decisions were prompted by counsels of Income Tax Appellate Tribunal (ITAT). They could also be fuelled by the Assessing Officers (AOs) deciding to play safe “rather than judge a case on its merits and save the system of the strain that weak cases place on it.”
I-T disputes
Stating that the dimensions of disputes in Income Tax remain “staggering,” the report said the aggregate amount locked up in appeal at various levels is Rs 2.2 lakh crore, which could almost wipe off the revenue deficit of the Union Government in 2008-09. It said that for the span 2006-09, the audit analysed data and 48 per cent of the demands raised by AOs remain uncollected with disputes accounting for 45 per cent of the uncollected demands, and 22 per cent of the demands raised in assessments at disputes by taxpayers. Even as the implementation of appellate orders is placed low in the AOs priorities, inadequate attention on correctness in implementation of appellate orders led to mistakes amounting to Rs 1,456 crore in 385 cases, it said, adding that 97 per cent of these mistakes led to under-assessment of tax benefitting the tax payer which “raises doubts on the integrity of the process.”
Constraints
The audit also highlighted the constraints under which it had undertaken this study in the absence of a centralised database on appeals at the State-level which hampered the selection of the audit samples. “Poor maintenance of records across the assessment and judicial wings of the department is an area of concern,” it said, adding that the department produced only 49 per cent of the records it requisitioned for audit and it was as low as 5 per cent in the case of Delhi office. Despite a steady reduction in the number of appeals referred to the Commissioners of Income Tax (CsIT), the inventory of appeals with CsIT was building up because of low disposal of appeals which was one-third of the targeted level, it said. At the current levels of disposal, the CsIT (Appeals) would take 2.4 years to clear the inventory. The average time taken for disposal of a case is 14 months, which is substantially longer than the global norms. It further said low-end appeals (with demand less than Rs 1 crore), constituted 66 per cent of the total appeals. Hence, CAG suggests hiving-off of small taxpayers’ disputes and such segregation would promote greater focus on the “big ticket” appeals with rationalisation of workload of the CsIT (A). Stating that the assessment process is evidently unable to satisfy the small taxpayer, the category which is least equipped to bear the cost of litigation, the CAG said that this must be viewed alongside the fact that the success rate of the department at various levels of appeals is “low and appeals go decidedly in favour of the taxpayers.” Even as there are some provisions in the Act such as imposition of penalty that lead to disputes, it said deviations from prescribed procedures by AOs have also contributed to rows. It also excoriated the tendency to escalate the disputes to higher levels and “instances of inaction in such cases where a second appeal would have safeguarded revenue.” There is lack of consistency while considering a case for second appeal with divergent actions weakening the departmental stand in appeals. “The absence of independent evaluation of decisions for escalation creates unchecked avenues for arbitrary exercise of discretionary powers by the AOs,” it said, and added that there is a need to remove ambiguities in the provisions of the Act to reduce the use of discretion by the AOs. It said the penal provisions of the Act calls for a relook, since “the deterrent edge to these provisions is being blunted due to inability to sustain the penalty orders in appeals.”
Set up dispute resolution mechanism for small taxpayers:-Government auditor the Comptroller and Auditor General of India (CAG) today asked the Income Tax department to set up a separate dispute settlement mechanism for small taxpayers in order to expedite their cases. “We recommend that the small taxpayers’ disputes may be dealt with by the Department separately through an alternative dispute resolution mechanism,” the CAG said in its report tabled in Parliament today. The report said that differentiating corporate disputes from the smaller ones would help in faster disposal of the amount locked in appeals. “This would clear the pendency as in such a situation disposal rate will be higher.. And promote greater focus on big-ticket appeals,” it said. Further, the report also noted that the implementation of the Direct Taxes Code (DTC) would help in simplifying the process of appeal settlement, but the government should work on bridging the holes in the Income Tax Act. The proposed DTC, expected to replace the Income Tax Act from the next fiscal, is intended to provide a simple and broad-based taxation regime which will, in turn, lead to lower tax rates, better tax compliance and reduced litigation. “Lacunae in the provisions of the Act need to be addressed without linking them to the DTC,” it said. The report said between 2006-09, a staggering Rs 2.2 lakh crore was locked up in IT appeal.
No body listens to the small taxpayer. He is left to be fleeced by promotee ITOs intereseted in bribe than knowledge. The small taxpayer ends up paying or inviting all the trouble of costly appeals. Orders are passed simply to shift burden to decide on higher authorities since there is no accountability. CAG also looks for possible revenue leakages and not for inflated and unsustainable assessments and harassments making the system totlly unreliable and small taxpayers scared of disclosing even if they wish to. The remedy lies in minimizing human interface and not in putting more layers of oversight.
The revelations by the CAG appear to be rather lop sided. And it suffers from the infirmity of not pin pointing the reason for this colossus mess in and by the corrupt department, its commission of corruption being compounded in and by a more corrupt ITAT. As an ITP, one should be honest to admit that, once upon a time, the young IRS officers were eager to learn the intricacies of accounts and the finer points of law from senior practitioners. And when these young IRS officers matured into experts themselves, through grueling training as (then) ITOs involving investigations in search and seizure cases, AACs hearing and disposing off appeals and IACs administering their ITOs, they in turn would be guiding the younger practitioners in law, etc. Many such advocates to my knowledge went up to become Supreme Court judges too. But, somewhere along the way, due to the crumbling value pattern in the society including the govt., corruption attacked us all-it was impossible to protect the system and the officers and staff or the entire professions from the carcinomas certain death of corruption. And then the CAG’s threats, Vigilance directorate’s menace, the axe of expensive all-India transfers and the attendant repercussions submerged the remnants of sanity and honesty in this once-efficient department under the filth of inefficiency and ignorance from top to bottom and lack of courage of conviction and resulting into skin saving approach to work and garnering money for transfers to chosen places. No wonder, the appeallate system also got totally crushed.
These comments cover also the item on “Rs. 12,000 crore tax demands locked on account of disputes pending at various courts” in the issue dated 14 August and many earlier ones [viz., “Income tax department biggest litigant” (Jul 25, 2010), “More then two-fold rise in Income Tax department appeals in Supreme Court” (Mar 25, 2010), “Over 30,000 tax litigations pending in ITAT, Most of them filed by department” (Dec 5, 2009), etc].
As a retired Income tax department employee, I find it rather ludicrous to see that the CAG has criticized “the Tax Department for fostering “a perception that it has a tendency to opt for appeals even when it is on a weak wicket” and this “appealititis is more detrimental when applied on small taxpayers constituting a large chunk of appellants.” This sadly reflects the total disregard on the part of the CAG of the real and true genesis of this dangerous syndrome titled “appealititis” from which the department is suffering for the last three decades. The entire responsibility for this lies on the CAG itself-the relative superiority of the IA&AS officers vis-à-vis the IRS punies, mindless audit objections raised by egoistic non-specialist audit officers, the blanket orders issued at the instance of the CAG by the MOF to the CBDT/IT department to immediately take remedial action on receipt of all CAG’s objections on all issues (irrespective of the facts/law) in all cases by way of initiatiating proceedings by resorting to reopening of proceedings, revision, and rectification, and invariably raising demands “somehow or other”. This attitude on the part of the CAG and the Ministry of Finance, coupled with the above stated comparative status issue (IA&AS vs IRS) and a most perverse attitude of the department’s vigilance directorate (morally no better than the general standard obtaining in the bureaucracy) has been responsible for (1) the inhuman and incredible increase in the mounting workload of the department, (3) mounting amounts of uncollectible arrears of tax, (4) a total destruction of the morale of the officers in the department who are compelled to make idiotic and indefensible additions to income returned merely following the audit view, (5) a huge scope for corruption in the next appellate forum outside the department and, of course, (6) the mounting number of appeals (and vigilance proceedings against only the honest officers) pending in courts.
The analogous aspect is, of course, the “foisting” of totally incompetent standing counsel of this extremely specialized department if income tax, a subject which is treated with more respect and awe in the government itself in countries like the USA-the country most of our Economic Advisors and the top bureaucrats obtain their degrees and doctorates in economics and spend several years too in “working for the IMF/WB”.
It would be better, if the Revenue Audit wing in the CAG is instead handled/assisted by either IRS officers on deputation (provided they are accorded the same status of the IA&AS officers of the same provenance) or by a duly qualified and competent team of tax experts (comprised of CAs and Advocates). One must appreciate in the CAG that, the tax laws cannot and should not always be interpreted on the compulsively narrow rules of accountancy but are governed by the ever-widening horizons of legal expertise based on knowledge.
Let the CAG accept its responsibility in the given context and let the ministry of Finance accord a semblance of respect to the huge fund of knowledge and expertise gathered over 150 years and available with the Income tax department. After all, many of the court-made tax laws and legally accepted assessment procedures (like the principle pf ‘peak credit’) happened to have been the handiwork of the then “promotee” officers in the then Class-II cadre! [It would not be irrelevant to mention in the parenthesis that, these brilliantly capable “Class-II” ITOs remained in the same classs for 22-25 years and only a few could make it to class-I, if at all, while their counterparts in the Central Secretariat used to retire as Joint Secretaries!]
The other aspect that the CAG has mentioned about the problem of small tax payers’ appeals could be tackled by the reintroduction of the time-tested mechanism of Appellate Assistant Commissioners which was scrapped overnight wiothour any application of mind. Apart from a better and easier forum available to smaller tax payers, this institution was a extremely effective mode of training younger officers to handle bigger and more complex issues and also to provide them with the opportunity of realizing their own mistakes as assessing officers. Not all of the past are essentially bad and worth discarding-like the DTC is being brought in place of the Indian Income Tax ACT !
The point is that the extent of the damage done to the once-strong solid knowledge-base available with the department and the morale of its officers, by the CAG over the decades, ably assisted by an incestuous vigilance set up, must be appreciated and accepted and ought to have been recorded in the subject study.