Krishna Mohan Prasad
Principal Director General of Income
Tax (Legal & Research)
Sh. Krishna Mohan Prasad is an IRS officer of 1984 batch and is currently posted as Principal Director General of Income Tax, Directorate of Legal & Research, New Delhi. He had worked extensively as Commissioner (Appeals) and Commissioner(Judicial). He had been part of several committees formed by CBDT regarding reduction of litigation.
Stability and certainty is important for a good tax policy. Of late, litigation under the Income-tax Act has reached alarming proportions leading to uncertainty in the minds of both taxpayers and budget making authorities. Litigation involves enormous administrative and legal cost. One effective step of reducing litigation is to amend Section 253(2) of the Income-tax Act, 1961, which gives power to the Principal Commissioner of Income Tax to file appeal against the order of Commissioner of Income Tax (Appeals). Once the case has been decided by the Commissioner of Income Tax (Appeals), who is a senior officer of the Department, there is no valid reason for filing further appeal by the Revenue. If the provision is omitted from the Income Tax Act, the litigation would be reduced by approximately in 80% or more cases, as in majority of the cases, it is the Department who files appeal in such cases. The suggested amendment in the Income-tax Act that would go a long way in overhauling tax administration, mobilizing more revenue, improvement of economy, reduction in administrative cost of the Income Tax Department & compliance cost of the tax payers.
1. The litigation under the Income Tax Act has reached alarming proportions leading to uncertainty in the minds of Corporate and Non- Corporate taxpayers regarding their final tax liability leading to indecisions about investment decisions and huge compliance cost, uncertainty about final tax collectible in the minds of Budget making authorities and enormous administrative and legal cost.
2. One amendment in the Income-tax Act that would go a long way in overhauling the entire tax administration and increased collection of revenue, improvement of Indian Economy, reduction in administrative cost of the Income Tax Department & compliance cost of the tax payers, besides reducing frivolous litigation, is to omit the provision regarding filing of appeal by Principal Commissioner of Income Tax (PCIT) against the appellate orders of Commissioner of Income Tax (Appeals) i.e. CIT
(A). To overcome the cases of bad and perverse order of the CIT (A), the power of revision u/s 263 of the Income Tax Act, 1961, in such cases may be extended to the Chief Commissioner of Income Tax, as was earlier available to Commissioner of Income-tax (CIT) to revise the order of DCIT/IAC (Appeals).
The provision that provides for appeal filing power and duty to CIT is sub-section (2) of section 253 of the Income-tax Act, 1961. Section 253(2) reads as:
“The Commissioner may, if he objects to any order passed by a [Deputy Commissioner (Appeals)] [before the 1st day of October, 1998] [or, as the case may be, a Commissioner (Appeals)] under [section 154 or] section 250, direct the [Assessing] Officer to appeal to the Appellate Tribunal against the order.”
3. Deletion of the provisions of Sub Section (2) of Section 253 of the Income-tax Act (and the corresponding provisions of other Direct Tax Laws) is extremely desirable on account of many benefits and reasons as discussed in subsequent pages.
4. The litigation Structure of the Direct Taxes Laws is as under
5. The numbers of appeals pending and amount disputed (as on December, 2018) are:
|Cases pending before||No. of pending cases||Amount disputed (Rs. crores)|
|Income Tax Appellant Tribunal||40879||2,89,837|
The success rate of the Departmental Appeals at ITAT, High Court and Supreme Court is extremely low and is possibly less than 10%. It is interesting to note that no such data is readily available with respect to success rate of departmental appeal filed under the Direct Tax laws. But the success rate of departmental litigation for Indirect taxes in Courts and Tribunal during the last four Financial Years has been as under
|Year||Supreme Court||High Court||CESTAT|
The success rate of a department appeal at Tribunal level, in Indirect-tax cases, in the past 4 years, has varied from 10 to 20 percent.
6. When the success rate of departmental appeal is extremely low no gainful purpose is served in filling departmental appeal against the order of CIT(A), especially when the administrative and other costs of filing departmental appeal far exceeds the revenue collected.
7. In the study covering the period 2006-09, CAG (the topic was also suggested by the Central Board of Direct Taxes during consultations on areas of concern in the Department) observed as under :-
a. The success rate of the Department at various levels of appeals is low and appeals go decidedly in favour of the tax payers.
b. One of the biggest concerns is the lack of credible and reliable data on the volume and impact of appeals. Widely divergent data is compiled by different sources which have not been subjected to reconciliation. Records to monitor filing of appeals and implementation of appellate orders were not maintained properly in the assessment units. Inadequate controls led to time barring of appeals and delays in implementation of appellate orders. AO’s work on appeals is not subjected to internal audit, denying the process an independent appraisal.
8. The Bombay High Court in the case of CIT-2, Mumbai vs. L&T Ltd. order passed on 10 July 2014, the Bench of Justices BP Colabawalla and SC Dharmadhikari, said –
a. The Revenue Officers must realize that just like other powers an executive power conferred in them is in the nature of a Trust. They hold officer as trustees of the public at large. They deal with public revenue and public money and that cannot be wasted in such frivolous litigation. We, therefore, dismiss these appeals with costs quantified at Rs. 1 lakh each.
b. We do not understand why higher officials do not have the courage to take bold decisions particularly of not pursuing such matters up to this court or higher. Because the Assessee is a leading Public Limited Company should not act as a deterrent for them to take an informed, rational decision and sub serving larger Public Interest. The biggest litigant, namely, the State ought to be aware of the Pendency of cases in High Courts of Bombay, Madras, Calcutta and Allahabad; for example. If it is their policies particularly on litigations, then, the least that can be said is that the State has failed to act for public good and in Public Interest, the High Court added.
9. The benefits of omission of sub-section (2) of section 253 are discussed hereunder.
9.1. The compliance cost of tax payers in dealing with the litigation at ITAT, High Court and Supreme Court is massive in terms of huge payments to Chartered Accountants and lawyers and the same for entire economy of India would be at least a thousand crores by a conservative estimation.
9.2. The administrative cost to the Income Tax Department is huge in terms of-
(a) Payments to Departmental Counsel at High Courts and Supreme Court,
(b) Deployment of manpower of the level of Commissioner of Income Tax (CIT) and Additional/joint Commissioner of Income-tax (Add/JCIT) as Departmental Representatives at ITAT. At present 50 out of 635 Commissioners of Income Tax and about 100 out of 1575 ADDL/JCIT are deployed at ITAT. With the omission of section 253(2) of the Income Tax Act, 90% of such officers may be more gainfully deployed for the work relating to tax evasion detection and curbing of black money.
(c) Major time & efforts of Administrative CITs, Add/JCITs and Assessing Officers is consumed in studying the orders of CIT, ITAT, High Courts and writing notes as to why further appeals are required to be filed and preparing petitions for further appeals. The Administrative wing officers do not get much time to deal with the assessment, investigation, collection of tax and other important work relating to current cases.
(d) Prime office space is required to keep the assessment records and other documents relating to litigation and if Department accepts the decisions of its own Commissioner of Income Tax (Appeals), much office space may be freed to be utilized in a better manner. As things stands today, most of the AOs up to the rank of Deputy Commissioner of Income Tax in metropolitan cities, shares a room with fellow AOs and is sitting in a room full with files all around him, constantly being disturbed by the voices coming from the other side of the room. The assessment work requires careful study of accounts and law and most AOs are working in a very difficult working environment. The cost of keeping records of most frivolous appeal is enormous.
10. Once the case has been decided by Commissioner of Income tax in favour of a tax payer, there is no valid reason to for filing further appeal by the Income Tax Department as discussed below—
(a) As a matter of stated policy, 99% Returns of income are not scrutinized and the Government has decided to bear the revenue loss to concentrate in 1 % of the cases, which means the decision of 99% of tax payers to pay taxes are accepted.
(b) Though Administrative Commissioners have powers to revise the orders of AOs, not more than 1 to 2 percent of orders of AOs are revised, which means the decisions in 99% assessment orders of Assessing Officers are accepted.
(c) In large number of cases, the amount of tax involved exceeds monetary limit fixed by CBDT, second appeal is generally filed. The AO defends his/ his predecessor’s order and recommends further appeal; the Add/JCIT plays it safe and agrees with his AO and the Commissioners, generally agrees with his recommendations of his subordinates and authorizes appeal to ITAT. It is pertinent to note that in more than 90% cases, the ITAT has been agreeing with the orders of CIT (A), yet the practice of filing appeal goes on as the Income-tax Act enables the Commissioner to file appeal and most officers feels safe in filing appeal rather than in not filing appeal, due to complex legal positions on various issues and to avoid the perception about the officer’s decision in not filing appeals “favours” the tax payers. When 99% Returns of the taxpayers and Assessment orders of AOs which happen to be much junior to CIT (A) are accepted, what is the harm in accepting Orders of CIT (A), who generally after more than 20 years of service, and after vigilance clearance and on the basis of excellent performance annual reports are promoted as Commissioner by the DPC held by UPSC?
(d) The entire situation looks paradoxical from the Department’s point of view, where decisions of AOs, Add/JCIT, Administrative Commissioners, Chief Commissioner are acceptable to the Department, it is the decision of CIT (A) only which is a matter of scrutiny by his juniors- AOs and Add/JCIT (who send scrutiny report on CIT (A)’s order to the CIT) and subject of litigation by the Department, a Department whose very senior officer, the CIT (A) happens to be.
(e) The entire situation looks paradoxical from the Taxpayer’s point of view, for whom the AOs, is an arm of Government and when he appeals to CIT(A), another arm of Government, and even if he gets relief at the level of CIT(A), another arm of Government, i.e. CIT, files appeal to ITAT. Many such departmental appeals are further litigated at High Courts and Supreme Court and generally it takes more than 10 to 15 years for cases of one assessment year to be finalized and by that time many more cases of dispute of subsequent assessment years starts getting unresolved at various appellate stages and the taxpayers is saddled with large number of pending disputes to be finalized.
If the provision authorizing the CIT to file appeal against the order of CIT (Appeals) is omitted from the Income Tax Act, the pendency of cases could come down to less than 20% of the cases in which the taxpayers file appeals, as approximately in 80% or more cases, it is the Department who files appeal against the order of CIT (Appeals). Moreover, CBDT has time and again reiterated its stand that the orders of CIT (Appeals) on question of fact should be accepted by the Principal Commissioners unless the findings are perverse. Vide various Circulars and Instructions, the Board has directed that Principal Commissioners should adopt a selective approach on filing appeals before the Income Tax Appellate Tribunal and that such appeals should be authorized after careful scrutiny, so that frivolous appeals are not filed and litigation is minimised.
11. The revenue collection in the Departmental appeal cases is extremely low. No data in this regard is readily available but it can be safely stated that the revenue collection in the cases filed by the Department and decided in favour of the Department by the ITAT, High Court and Supreme Court is less than the actual money paid as court fees and fees paid to departmental advocates. As the practice of filling appeal against the order of CIT (A) by the Department is not yielding any significant revenue and the cost of litigation to the department is possibly more than the revenue collection, there is a strong case to omit the provisions of section 253(2) of the Income-tax Act, 1961, giving power & duty to the CIT to file appeal against the order of CIT (A).
12. Stability and certainty is important for a good tax policy and uncertainly over final tax liability greatly discourages important investment decisions and slows down the economic progress. Large numbers of extremely educated and talented Indian citizens both in the department and as tax practitioners are involved in this fruitless litigation works. It is high time the department should accept the decision of its own very senior officer could happen to be Commissioner of Income Tax (Appeals).
[The author is Principal Director General of Income Tax (Legal & Research) and views are personal]