Income Tax Litigation: What You Need to Know

Income Tax
Income Tax Notice

Litigations over income tax account for more than 400,000 crores worth of Indian currency pending release for public expenditure according to a speech given by Finance Minister, Arun Jaitley in Parliament in 2014. In the same year, the number of proceedings continuing before the Commissioner of Income Tax (Appeals) was 250,656. Those before the Income Tax Notice Appellate Tribunal (ITAT) were 98,422 and those in either a High Court or the Supreme Court amounted to 37,709 in aggregate.

Income Tax Litigation

The Income Tax Appeals process in India is actually a four tier structure with the Commissioner of Income Taxsitting at the bottom and the Civil Judiciary at the top. Acclaimed legal luminary, Nani Palkhivala is believed to have expressed his preference to argue his cases either in front of ITAT or the Supreme Court earlier this year. This bodes well for tax appeal reforms in India.

One analysis by newsagent, Live Mint, claimed that roughly 65% of the appeals referred to the tribunal have been fully permitted and another 17% partly permitted in favour of the taxpayer. This is significant considering that the government pays thousands of crores merely in the name of interest per annum reimbursing wrongly assessed taxpayers.

Proposed changes to the working of the tribunal, some of which have already been implemented, include setting limits on the number of adjournments to be allowed per case, sensitizing the court to time-bound cases, provisions for listing of stay applications in the same week they are filed and their subsequent disposal in the days following, completion of arguments in rectification petitions within four weeks of submission, e-filing of appeals, online income tax notices and intimations, orders and rulings and making adequate use of facilities for video-conferencing.

The ITAT may extend the number of adjournments to more than five (the limit prescribed) at its discretion (but without notified guidelines to use this discretion). It may send proceedings back to first rung authorities in situations where High Court level precedents lament on the severe prejudice caused to one party.

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What has still failed to be addressed satisfactorily is the ambiguous interpretations certain rules carry, discretion in allowing adjournments, pressing time frames for fair disposal of cases, recording reasons for rejecting petitions in writing and using extraordinary powers exceptionally rather than frequently.

Concerns over protection of citizen data have generally been frustrated by advocates of overarching policy (corporate or security benefits) in India. What is needed is a comprehensive mechanism to oversee what data is distributed to public entities, whether commercial or state owned, and how it can be kept safe from misuse.

In terms of legal lexicon, a case flow management approach to tax dispute resolution could have been allowed to include recommended courses of action based on arbitration, conciliation, adversarial argument and mediation after going through each party’s opinions of fact.

Further, dropping time-lines for resolution and enabling a climate of openness to criticism and improvement could go a long way in establishing trust in this institution of governance, so essential to proper functioning of civilized society.

In this backdrop, the Supreme Court ruling on the 12th of October in Commissioner of Income Tax, Bengaluru v. Gemini Distilleries barring retrospective effect to the CBDT circular dated 09.02.2011 becomes significant.

Thus even income tax assessees who owe the Income Tax Directorate, demands between Rupees 4 to 10 lakhs before this circular and a subsequent notification in 2015 came into effect, can still be raked up by tax authorities should they so choose.

Every law when enacted applies to violations in the future (prospective effect) as opposed to violations in the past (a retrospective effect).

Income Tax Litigation

The CBDT had argued that its intention was to reduce the number of cases pending litigation and it follows that the similar arguments would be applicable to direct tax (income tax, corporate tax, wealth tax etc.) hearings.

The silver lining is that the government in power may yet decide to stay the hand of zealous tax authorities.

Tech enabled tax solution platforms such as AllIndiaITR (a product of Corwhite Solutions Private Limited) are making a difference to the tax challenged throughout the country by enabling affordable and accessible services as financial experts.

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