Ground Level Difficulties faced by Assessee at Income Tax Department

Mehul Saboo[1]

PREFACE:

This article primarily focuses on the difficulties faced by the assessee[2]about various procrastinating issues such as rectification order; refund intentionally being adjusted  after scrutiny assessment[3], order giving effect to the order of the appellate authorities etc. at the lower level hierarchy of the Income Tax Department (ITD)and the potential measures that could be undertaken by the Government/CBDT/ITD to eliminate it, if not, then to reduce the overall burden and efforts of the assessee for complying with the provisions of the Income Tax Act, 1961 Act (for the sake of brevity the “Act”). The subsequent paragraphs will enshrine upon the prolonged issues that are faced by the assessee with the ITD,while seeking justice from the ITD with regards to various Income Tax matters.

[1] INTRODUCTION:

1.1With the advent of technology, the Government’s effort and utmost desire to digitalize the Income tax procedures/mechanism has undoubtedly reduced the overall burden/efforts of the assessee which has ultimately led to an overall convenience among the assessee while complying with the various provisions of the Act. On one side, there is Government’s constant effort to digitalize the procedures and process under the Act to reduce the quantum of efforts and burden undertaken by the assessee/taxpayers while complying with the Income tax procedures, however on the flip side there are certain shortcoming and procrastinating issues which needs to be dealt with and reworked upon by the Government/CBDT/ITD at the grass root level to attain its vision of making the entire system of taxation optimal and hassle free for the assessee.Some of these shortcoming and procrastinating issues are elucidated in the below mentioned paragraphs.

[2] SHORTCOMINGS / PROCRASTINATING ISSUES:

2.1 Rectification of Mistakeapparent from the records u/s 154 of the Act:-

2.1.2 At the outset, it is imperative to comprehend section 154 of the Act which reads as under[4]:

“154. (1) With a view to rectifying any mistake apparent from the record an income-tax authority referred to in section 116 may,—

(a) amend any order passed by it under the provisions of this Act …………………

(7) Save as otherwise provided in section 155 or sub-section (4) of section 186 no amendment under this section shall be made after the expiry of four years from the end of the financial year in which the order sought to be amended was passed.

(8) Without prejudice to the provisions of sub-section (7), where an application for amendment under this section is made by the assessee or by the deductor or by the collector on or after the 1st day of June, 2001 to an income-tax authority referred to in sub-section (1), the authority shall pass an order, within a period of six months from the end of the month in which the application is received by it,—

(a) making the amendment; or

(b) refusing to allow the claim.”

                                                                                                (Emphasis Supplied)

2.1.3 From the above, it is aptly evident that,mistakes which are apparent from the face of any order passed under the Act can be rectified by the ITD and the time limit for doing so is within a period of six months from the end of month in which the rectification application is received by the ITD (refer section 154(8) quoted above). Further, the citizen charter of the ITD requires that, the applications for rectifications are to be disposed off within two months from the end of the month in which the rectification application is received by the ITD.[5] However, sub-section 8 of section 154 of the Act as well as the Citizen Charter of the ITD is completely ignored and disrespectedby the Assessing officer (AO) and their respective staff (together mentioned as field officers)while disposing the rectification application. To further exemplify this point, we take a situation(see paragraph 2.1.4 below).

2.1.4 Situation:

The assessee case is selected for scrutiny assessment u/s 143(2) of the Act and after thorough vetting of the evidences sought by the AO, an assessment order u/s 143(3) of the Act is passed by the AOeither determining a tax liability payable or a refund to be granted to the assessee. This assessment order u/s 143(3) of the Act is accompanied with a notice of demand u/s 156 of the Act and an Income Tax computation form, which calculates the amount of tax payable/refundable by/to the assessee. Now, the Income Tax computation form is usually prepared by the inspector/staff of the AO, which are not thoroughly vetted by the AO due to paucity of time. This gives rise to mistakes in the Income Tax computation form, wherein the amount of tax payable/refundable is wrongly calculated by the staff of the AO,which needs to be subsequently rectified by the assessee u/s 154 of the Act. 

2.1.5 In order to get the apparent mistake (explained in situation above) rectified in the Income Tax Computation Form, assessee files a rectification request/petition u/s 154 of the Act, with the AO,expecting that the rectification letter/petition will be disposed by the AO within the time duration mentioned in section 154(8) of the Act, after due verification. However, the situation is quite opposite at the ITD.The expectation of the assessee to obtain finality to the scrutiny assessment by getting a rectified order determining the correct demand/refund payable to/by the assessee, ultimately transforms into disappointment. These rectification letters/petition are not disposed by the field officers and are delayed for many months, sometimes even for years, which is more than the specified time limit mentioned in section 154(8) of the Act.Without, the correct Income Tax Computation Form, refund, if any, or the erroneous demand raised by the AO does not get issued or nullified respectively and no finality to the scrutiny assessment is attained by the assessee.

2.1.6 This issue of prolonged delays in disposal of rectification application/petition has not gone completely unnoticed by the Central Board of Direct Taxes (CBDT)/ITD.Recently, the CBDT vide instruction No. 01 of 2016 dated 15.02.2016 [6] has directed its subordinate authorities, that the time-limit of six months mentioned in section 154(8) is to be strictly followed by the assessing officer while disposing off the rectification applications filed by the assessee/deductor/collector. Further, in order to curb the unnecessary delays in disposal of rectification,CBDT has issued a directive vide F.No.225/148/2015-ITA-II dated 05.06.2015 (refer foot note No.5 above for directive) for expeditious disposal of rectification applications and also directs to assessing officer/field officer to observe the standard operating procedures (refer next paragraph) while disposing off rectification application. Paragraph 3 this directive states as under:

“3. I am directed to reiterate that the time line pertaining to this area of work as mentioned above must be strictly adhered to. The supervisory authorities are requested to ensure that the rectification registers are properly maintained by the AO’s as per the standard operating procedures (SOP) prescribed vide instruction No. 3/2015 dated 05.07.2013 and disposal of applications for rectifications is regularly monitored.”

    (Emphasis Supplied)

Also, to simplifythe disposal of rectification application,the CBDT has issued instruction No. 03/2013[7] vide F. NO. 225/76/2013/ITA.II dated 05.07.2013, wherein,set protocolsi.e. standard operating procedures (SOP) have been laid down by the CBDT,which needs to be properly followed and appreciated by the ITD for prompt and expeditious disposal of rectification application.However, even after issuing directives, instructions and circulars by the CBDT which is legally binding on the ITD, the same has been overlooked and disregarded by the field officers, causing grievance to the assessee and allowing the assessee to erode its trust and confidence with the ITD.

2.1.7 Some of the potential recourse which the ITD or CBDT can undertake according to me, for prompt disposal of rectification application are as follows:

i) The CBDT has the power u/s 119(2)(b)[8]of the Act to issue instruction to its subordinate authorities. These instructions should incorporate within themselves stern consequences which the field officer will have to face for non-compliance with the provisions of the Act and the directives, instruction and circulars issued by the CBDT from time to time. Also, there should be come repercussion or consequences that the field officers will have to face for gross negligence in discharging their duties.

E.g. There should be a mandatory requirement for the field officer to report on timely basis to the Additional /Joint Commissioner of Income Tax about the disposal of rectification carried out by them during the specified time frame and the Additional/Joint Commissioner in addition,should make a summary of the rectification disposal carried out by the field officer during the specified time frame and forward the same to the CBDT. This will allow the CBDT to keep a track of whether expeditious disposal of rectification has been taken place or not by the field officers and the additional measures, if any, which needs to be taken for improvising the entire system of taxation can be carried out by the CBDT.[9]

ii) The concept of “Surprise Audit / checking” should commence within the ITD. Given this, a separate division can be formed within the ITD itself, which will keep a check on whether prompt and efficient disposal of various administrative processes such as timely disposal rectification and refunds applications, order giving effects to the order of Hon’ble Appellate Authorities etc. has been undertaken or not by the field officers.Indeed, creation of a separate division will lead to employment opportunities within the ITD for many eligible candidates but on the contrary, it will increase the employment cost of the Government and would lead to an increase in the administrative compliance.However, given the rising grievance among the assessee, appointing new Government employees or creating a separate division could possibly lead to a breakthrough in reducing the grievance and difficulties faced by the assessee at the ITD.

iii) The staff of the AO should be provided with proper training at regular intervals about the correct computational mechanism that needs to be followed within the provisions of the Act while preparing the Income Tax Computation Forms.This will lead to reduction in frequency of rectifications filed by the assessee,since the original order with the Income Tax Computation Form would itself be correct from the beginning i.e. correct at the source itselfand would not require any subsequent rectification.

3.Refund assessed after completion of Scrutiny/Regular Assessment intentionally adjusted by the ITD.

3.1 In order to comprehend the issues with respect to the issue highlighted at point No.3 above, let us first comprehend section 237 of the Act, which reads as under:

“237. If any person satisfies the Assessing Officer that the amount of tax paid by him or on his behalf or treated as paid by him or on his behalf for any assessment year exceeds the amount with which he is properly chargeable under this Act for that year, he shall be entitled to a refund of the excess.”

    (Emphasis Supplied)

3.2 From the above, it is clear that, for an assessee to become eligible for a refund,he should satisfy the assessing officer that the amount of tax paid by him is in excess to the amount of tax with which he is chargeable under the Act. Let us take an illustration to understand this:

Illustration: The assessee’s case is selected for scrutiny assessment for the AY 2012-13 an order u/s 143(3) of the Act is passed by the AO wherein, the income assessed by the assessing officer is same as returned income. Given that, according to the returned income the assessee was eligible for a refund of say Rs X due to excess payment of prepaid taxes[10] by the assessee under the Act. However, in the Income Tax Computation Form attached with the Assessment order u/s 143(3) of the Act, this refund of Rs Xfor the AY 2012-13 is intentionally adjusted by the ITD against the interest payable by the assessee u/s 234B/C of the Act thereby leading to a NIL demand payable/refundable by/to the assessee. If the refund is not adjusted u/s 234B/C of the Act by the ITD, then in the Income Tax computation form the refund gets adjusted by showing that, the refund is already issued to the assessee, even when, no such refund has ever been received by the assessee.

3.3 This is the general practice adopted by the ITD year on yeari.e. to block the amount of refund and defer its actual payment for future years. Upon liaisoning with the field officer, I was given to understand that, the ITD does not intentionally suo moto adjusts the amount of refunds with interest u/s 234B/C of the Act or refunds already issued to the assessee, but are directed by their immediate superiors to do so (i.e. block and defer the refunds) by making wrongful adjustment’s in the Income tax Computation Form. Now, to get the refund from the ITD, which the assessee is genuinely eligible to, a rectification letter/petition has to be filed with the ITD and face the tyranny of the entire refund procedure as explained in paragraph No. 2.1 – 2.1.6 above.

3.4 One particular reply of the assessing officer which I would like to share with regards to the issue of refund after completion of scrutiny assessment was that,“the Government is running into fiscal deficits and therefore the Government has no money to pay to bonafide assessee.” Now, considering such replies from the assessing officer himself, how can the assessee place its trust in the ITD or as a matter of fact, in the Government itself is a question to be asked?

3.5 Finally after many follow ups and filing several reminder letters with the ITD, the amount of refund is issued by the ITD along with simple interest as mentioned under section 244A of the Act.[11] Upon going through the said section, the rate of interest on refunds which the assessee receives from the ITD is only one-half per cent for every month or part of a month comprised in the period or periods from the date or, as the case may be, dates of payment of the tax or penalty to the date on which the refund is granted.Further, deferment of refunds by the ITD not only causes grievance among the assessee but also increasesinterest costs of the ITD/Government, due to delay in payments of interest on refunds. Also, there is always an opportunity cost borne by the assessee due to delay in payment of refund by the ITD, had the assessee invested that money (being the refund amount) somewhere else, where the rate of return on investment could have been higher than the rate of interest given (refer section 244A of the Act) by the ITD to the assessee for issuing delayed refunds.

3.6 Thus, this issue needs serious attention as there are cases which I have personally handled wherein, even after the completion of scrutiny assessment for the assessment year[12] 2010-11 no refund have been issued till date and the rectification process is still going in lieu of obtaining finality to the assessment.To my view, such malpractice of the ITD should be completely eliminated, since it not only causes serious grievance to the assessee and forces the bonafide assessee to erode their trust in the ITD/Government but also, it costs the ITD additional interest u/s 244A of the Act over and above the principal amount of refund. The ITD/CBDT/Government needs to take the necessary initiatives for curbing this malpractice of the ITD and deferring the issue of refunds to the assessee.

4.Order Giving Effect to the Order Passed by the Hon’ble Appellate Authorities[13]:

4.1Under the provisions of the Act, the assessee, if aggrieved by the order passed by the assessing officer u/s 143(3) of the Act, has an option to prefer an appeal before the Commissioner of Income Tax Act Appeals [CIT(A)] u/s 246A[14] of the Act by submitting the grounds of appeal and statement of facts, appeal filing fees and original notice of demand u/s 156 of the Act with the copy of the assessment order u/s 143(3) of the Act against which the appeal is preferred. Once the appeal is filed, a date of hearing will be fixed on which the assessee will present its written submissions along with paper book (evidences in support of the assessee contentions) before the Hon’ble CIT(A) and argue out the matter on those grounds against which the assessee is aggrieved against the order u/s 143(3) of the Act.

4.2After the matter is heard, the Hon’ble CIT(A) will pass an order u/s 250 of the Act either completely  allowing the grounds of appeal of the assessee (i.e. appeal completely allowed) or rejecting the grounds of appeal of the assessee (i.e. appeal is dismissed) or accepting few grounds of appeal and rejecting other grounds (i.e. partially allowing the appeal). Now, for the sake of continuing further in this article, we assume that an appeal was filed before the Hon’ble CIT(A) and an order u/s 250 of the Act was passed by the Hon’ble CIT(A) in favour of the assessee, completely allowing all the grounds of appeal[15] which were not accepted by the assessing officer during the course of scrutiny assessment. The plausible question which arises to mind is “WHAT IS THE NEXT STEP AFTER RECEIVING THE HON’BLE CIT(A)ORDER U/S 250 OF THE ACT?”

4.3The next step is to file a written request/letter enclosed with a copy of the Hon’ble CIT(A) order requesting the respective assessing officer by whom the order u/s 143(3) of the Act was passed to pass an order giving effect to incorporate the decision of the Hon’ble CIT(A) vide his order u/s 250 of the Act. The assessing officer will pass an order giving effect promptly and diligently to the order of the Hon’ble CIT(A) and issue a revised Income tax computation formallowing the necessary relief to the assessee as allowed by the Hon’bel CIT(A)vide his order. This process of order giving effect indeed sounds to be quick, effective and easy to execute,however, the real picture at the ITD is quite different, cumbersome, and extremely time consuming.

4.4The requests/letters filed with the ITD for passing order giving effect to the order of Hon’ble CIT(A) are never discharged by the assessing officer/field officer within a reasonable time frame and there always prolonged delays from the ITD while passing order giving effect to the order of the appellate authorities. This is a situation where, even after the assessee has obtained the desired justice from the Appellate Authorities [CIT(A)] but still justice is not actually served upon or crystallized to the assessee due to prolonged delays in discharging the order giving effect to the order of Hon’ble CIT(A) by the assessing officer/field officer.

4.5It is to be noted that this practice of the ITD has not gone unnoticed by the Government/CBDT and in order to curb such unnecessary delays, the CBDT has issued a direction to its subordinate authorities vide F. No. 279/Misc./141/2015-ITJ dated 07.10.2015 [16]which deals with the grievances on account of delays ingiving effect to the order of the CIT(A). Clause (i) and (ii) ofParagraph 2 of the above said CBDT direction reads as under:

“2 (i) On receipt of the order of the CIT(A), the AO shall give appeal effect promptly and properly. The range Head shall monitor correctness and timely appeal effect in respect or orders of CIT(A).

   (ii) Any pendency in regard to the appeal effect beyond one month shall be reported by the Range Head to the CIT in the DO reporting monthly activities of the Range, along with reasons for the delay.”

From the above quoted clause (i) and (ii) of the CBDT direction, it is clear that the field officer/assessing officer needs to give timely appeal effect in respect of orders passed by the Hon’ble CIT(A). Now what is timely appeal effect is nowhere mentioned or defined within the provisions of the Act, but to my understanding, the appeal effect to the order of the Hon’ble CIT(A) should be passed by assessing officer by keeping in mind and appreciating and honoring the principles of natural justice.  Further, on reading clause (ii) of the CBDT circular (above), reasonable time, prima facie appears to be a period of one month from the date of receipt of the application/letter enclosed with the order the appellate authorities filed by the assessee with the ITD.

4.6Given the above CBDT direction, timely disposal of appeal effect to the order of the appellate authorities is not being passed by the assessing officer/field officer. This amounts to not only disrespecting the order of the Hon’ble appellate authorities but also disrespecting and not diligently disposing the direction given by the CBDT. To my view, when there can be provisions in the Act which confers penalty on the assessee for not observing or following some of the provisions of the Act, then there should also be some consequences or repercussion introduced in the Act,which the assessing/field officer would have to face for not following, appreciating and observing the directions given by the CBDT and for grossly neglecting his duties while discharging his functions for which is appointed for.

5.Rectification for Outstanding Demand of Earlier Assessment Years Appearing in the Intimation u/s 245 of the Act issued by the CPC (Centralized processing Ceter).

5.1Firstly let us understand what section 245 of the Act is? The same reads as under:

“245. Where under any of the provisions of this Act, a refund is found to be due to any person, the Assessing Officer, Deputy Commissioner (Appeals), Commissioner (Appeals) or Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, as the case may be, may, in lieu of payment of the refund, set off the amount to be refunded or any part of that amount, against the sum, if any, remaining payable under this Act by the person to whom the refund is due, after giving an intimation in writing to such person of the action proposed to be taken under this section.”

 (Emphasis Supplied)

From the above, it is clear that,if a refund is found to be due to an assessee for a particular assessment year and the assessee has outstanding tax dues payable for some other assessment years, then the above mentioned refund will first be adjusted against the outstanding tax dues payable by the assessee and the balance, if any, will be refunded back to the assessee along with Interest u/s 244A (explained earlier) of the Act. E.g. Say assessee X is eligible for a refund of Rs 25,000/- for the AY 2015-16 and according to the records maintained by the ITD there is an outstanding demand of RS 5,000/- payable by the assessee for the AY 2012-13. Now the ITD in the AY 2015-16 will issue a refund of only Rs 20,000/- (25,000 – 5,000) to the assessee by invoking section 245 of the Act. It goes without saying that, such an action will be taken by the ITD only after intimating the assessee of its intentions to adjust the refund against the pending tax demands and by providing a proper opportunity to the assessee to explain its case.

5.2The question which arises now is that,how does the records maintained by the CPC differs from the records maintained by the ITD?and how the outstanding demand for earlier assessment years still continues to be in existence within the records of CPC? Let’s take an illustration to understand this.

Illustration:-The assessee received an intimation u/s 143(1) of the Act from the CPC, wherein,a demand of Rs 1,00,000/- is determined as payableby the assessee for the AY 2012-13. Thereafter, the assessee case was selected for scrutiny assessment and an order u/s 143(3) of the Act is passed by the assessing officer determining a NIL demand payable by the assessee for the AY 2012-13. Now, according to the CPC records the assessee is liable to pay an outstanding tax demand of Rs 1,00,000/- for the AY 2012-13, however,according to the order passed by the assessing officer, the assessee is liable to NIL demand for the AY 2012-13. Due to the difference of information between CPC and ITD (i.e. scrutiny assessment is completed by the assessing officer determining NIL demand payable by the assessee) the CPC records will still continue to show an outstanding demand of Rs 1,00,000/- payable by the assessee even in future years.The record of CPC does not get updated in consonance with the records maintained at the ITD.

5.3As explained in example at paragraph No. 5.2 (above), due to this gap in circulation of information between the CPC and the ITD the assessee will now have to file a rectification application with the ITD (If the rectification rights are transferred to the jurisdictional assessing officer or with the CPC by using the online portal at incometaxindiaefiling.com). Even when the assessee has complied with all the requirements sought by the assessing officer during the course of scrutiny assessment, still due to delay in correctly updating the records maintained by CPC in consonance with the ITD, assessee receives notices for outstanding tax demand of earlier assessment years payable by the assessee in future assessment years. Further,the refund, if any,also gets adjusted against the erroneous outstanding tax payable by the assessee for the earlier assessment years even when the assessee has complied with the provisions and procedures laid down under the Act.

5.4To my view, bridging this gap of information between the CPC and the ITD should be undertaken at the earliest by Government/CBDT/ITD as it affects the smoothness of the overall administrative procedures of the ITD/CPC and also forces the assessee to loose its confidence and trust in the ITD. Further, the refunds of the assessee are also adjusted against erroneous outstanding tax demand payable by the assessee against which, the assessee again has to face the tyranny of filing the rectification application and face the prolonged delays as explained from 2.1 till 2.1.6 explained above. There should be adequate measures within the tenet of the tax system to reconcile this difference of information between CPC and the ITD and relieve the assessee of its misery for refunds wrongly being adjusted against erroneous outstanding demands of earlier assessment years.

[6] CLIMAX/DISCLAIMER:

6.1A system is defined as“a group of related parts that move or work together”[17]. Therefore, in order for the Government/CBDT/ITD to achieve its vision of making the entire system of taxation in the County hassle free and function in an optimal manner these trivial/procrastinating issues (explained in the aforementioned paragraphs) needs to given due consideration and necessary initiatives and stern actions should be undertaken to curb this. Only by doing this, will the Government/CBDT/ITD be a step closer in gaining the confidence and trust of the assessee and make the entire system of taxation efficient, leaving only miniscule scope of improvement at the grass root level.This will aid the Government/CBDT/ITD to reduce the grievance among the assessee /taxpayers towards the ITD.

6.2This article builds its foundation on the limited experience, exposure and liaisoning with the ITD that I have attained over the period of time. The explanations, illustrations, suggestions, opinions and other ancillary terminologies explained in the aforesaid paragraphs shall under no circumstances be considered as a legal opinion or have a legal binding for any person. Further, I expressly state that, the aforementioned paragraphs are my personal views and are framed by keeping in the interest of the public in general and the grievance caused to them due to the inherent procedures presently undertaken at the ITD and may not be the same with others.

[1] CA, LLB

[2]Refer sub section 7 of section 2 of the Income Tax Act, 1961 for the definition of assessee.

[3]Refer Section 143(2) of the Act.

[4]http://www.incometaxindia.gov.in/pages/acts/income-tax-act.aspx

[5]paragraph 1 of directive issued by CBDT vide F.No.225/148/2015-ITA-II dated 05.06.2015. This directive is available at https://taxguru.in/income-tax/expeditious-disposal-applications-rectification-section-154.html

[6]This instruction is available at  https://taxguru.in/income-tax/pass-rectification-order-154-6-months-cbdt.html

[7]This circular is available at https://taxguru.in/income-tax/rectification-154-cbdt-prescribes-procedure-receipt-disposal.html AND https://taxguru.in/income-tax/cbdt-enforce-demand-intimation-1431-undelivered-returns-processed-prior-3132010.html

[8] http://www.incometaxindia.gov.in/pages/acts/income-tax-act.aspx

[9]Note that,this suggestion is my personal view on the concerned issue and it was given for me to understand upon liaisoning with the field officers that, the proposed suggestion is already in place within the ITD. All the field officers are required to report to their immediate seniors on a monthly basis with regards to the disposal of rectification request/petition filed by the assessee with the ITD. Given the above internal procedure already in existence, there should definitely be some stern measures undertaken by the CBDT against the field officers for non-compliance and grossly failing to adhere this internal protocol while disposing off rectification application promptly, efficiently, and diligently.

[10] For the sake of understanding,prepaid taxes means Advance tax, Tax deducted at Source (TDS) paid by the assessee under the Act

[11] http://www.incometaxindia.gov.in/pages/acts/income-tax-act.aspx

[12]Refer section 2(9) of the Act.

[13]For the sake of understanding Hon’ble Appellate Authorities in this article means Commissioner of Income Tax Appeals [CIT(A)], Income Tax Appellate Tribunal [ITAT]

[14]Section 246(A) provides with the list of appealable orders under the Act against which an appeal before the CIT(A) can be preferred.

[15]It is further assumed that the ITD has not gone in further appeal before the [ITAT] against the order passed by the CIT(A).

[16] This direction of CBDT can be downloaded at https://taxguru.in/income-tax/monitor-delays-giving-effect-orders-cit-appeals-cbdt.html

[17] http://www.merriam-webster.com/dictionary/system