Increased threshold for tax litigation – A relief to taxpayer and to overburdened judiciary

Background:

A big question before the Government – How to reduce the overburdened judiciary. A tax issue may take 5 to 7 years to settle at ITAT level and another 5 to 7 years, if matter moves to courts.  The rapidly growing number of tax litigation not only adding to chaos but also pressurizing the available resources with the tax office. Every litigation has its own cost, which at times overruns the opportunity cost to both side – tax office and taxpayer. Tax office may have used those scarce resources in other high value tax cases whereas the taxpayer might have concentrate more on business.

The Solution:

The solution – either augmentation of the overall infrastructure in terms of “efficiency”, “capability” and “resources” or to increase its tolerance limit in term of small value case or combination of both alternative. The first option requires constant efforts and takes its own time and that’s why Govt has chosen the later one – increase its tolerance limit, instruction to tax office not to file appeal against adverse decision in small value tax cases – an immediate relief.  This is third time, in last four years, when the threshold limit is being increased – July 2014, Dec 2015 and now further increased in July 2018.

CBDT and CBIC have issued circulars[1] increasing the threshold limit that to be critically taken care by tax authorities while deciding whether to litigate the issue before tax tribunals/High Courts/Supreme Court. These threshold limits are in terms of tax effect i.e. the underlying quantum of tax amount involved (without including interest), unless pertaining to certain specified type of matters, should be more than the threshold limit to file appeal by tax authorities against adverse decision.

The revised limits are as under:

These limits will apply to existing litigation as well. As per news reports, there would be substantial reduction in the number of tax cases.

Number of appeals expected to be withdrawn[2]:

Key features of the latest circular

1. Tax effect (tax including surcharge & cess but not including interest) = A- B

• A = Tax on assessed income
• B = Tax on income after reducing income pertaining to disputed issues
• In cases of penalty, quantum of penalty reduced/deleted will be the tax effect.
• In cases where losses are being reduced or converted into profit, notional tax on the disputed income, would be the tax effect.
• In the cases, where taxes were paid under 115JB/115JC (MAT/AMT):

Tax effect = (A-B) + (C-D), where A & B are as mentioned above

C= Tax on assessed book profit

D= Tax on book profit after reducing profits pertaining to disputed issues

2. The limit to be applied for each assessment year and for each tax payer separately. Only in the cases of composite order by High court or appellate authority, all the assessment years of a particular taxpayer may be clubbed.

3. Cases not litigated due to these threshold limits, should not be treated as “accepted positions” and not to have any precedent value. Pr. CIT/CIT need to specifically record that the fact that although the decision is not acceptable but due to threshold limit, not being further litigated.

4. Threshold limit is not to be apply in following cases:

• Where constitutional validity of the provision of Act or Rules is under challenge;
• Where Board’s order, notification, Instruction or Circular has been held to be illegal or ultra vires;
• Where Revenue Audit Objection has been accepted by the department;
• Where addition relates to undisclosed foreign assets/bank accounts;
• Cases where tax effect cannot be quantified (e.g. registration of trust),
• Writ matters and direct tax matters other than income tax.

5. The threshold limit is applicable on all pending litigation as well – Pending appeal below the specified threshold limit, may be withdrawn/not pressed.

6. Threshold limit is applicable not only on appeals but also on cross objections.

7. The threshold limit is applicable on the appeals to be filed by tax authorities only. Tax payers are free to litigate as per their wisdom.

Conclusion

Govt is showing generosity and seems keen to reduce the litigation not only by controlling new appeals that to be filed but also by withdrawing/not pressing the existing appeal.  One apprehension is “Whether CIT(A) will adopt pro-revenue approach, particularly when matter is within the threshold limit, as DRP did?” It is just like a “surgery” for the overburdened judiciary system and as every surgery requires safeguards from infections, this current generosity, also, need to be safeguarded and should be followed by tax office in spirit – a big relief to tax payer.

[1] Circular no 3/2018 dated 11^th July 2018 and Instruction dated 11^th July read with DO letter dated 11^th July 2018

[2] Source – Economics Times -12^th July 2018