Budget 2020 suggestions for more result orientation in tax litigation administration.

[CA DEV KUMAR KOTHARI]

Result orientation:

From some policy decisions taken during last few years and / or expansion of scope of such decisions we can feel that the thinking of result orientation is slowly working in minds of our legislator and bureaucrats.   We find bureaucratic whims is one of reason for legislation of many provisions which are not result oriented but only creates difficulties to all,  complexities and litigation.  For example:

1. Provisions of first collect then allow credit or refund for example TDS/ TCS, GST- input credits. All these provisions make tax administration difficult for governments and taxpayers. As far as possible final tax collection can be better option.
2. Amendments to overcome judicial pronouncements
3. Provisions of  assumptions  to make work of tax authorities easy.
4. Amendments and provisions which hardly have revenue impact over a period of time of more than one year for example S.40 and 43B of IT Act.
5.   Provisions  for scrutiny and disallowance on petty matters and petty amounts like for club expenses, disallowance u.s. 14A, disallowance of some  expenses and losses etc.

All such provisions or policies make tasks of all ( tax authority and tax payers and concerned persons) difficult, time consuming and without much benefit to revenue. Therefore, such provisions, policies and practices adopted by tax authorities are not result oriented.

Result oriented approach can be found in some policies. For example one of such aspect is to amend law to overcome judicial pronouncements. When through judicial process, legislative intention has been gathered, there is no reason to make changes, in name of legislative intention. This is because legislative intention at the time of original legislation is important and not subsequent changes.  Amendment should only be to meet requirements of time and changed situation and no in name of legislative intention.

Tax effect for appeals for result orientation:

Increasing limits of tax effect for filing of appeals by revenue is a good decision to achieve result orientation.

However, sometimes more exceptions are prescribed from monetary limits and even if tax effect is low, appeals are filed and contested and are not withdrawn by tax authorities and litigation is perpetuated. Ultimately most of such appeals are dismissed by Tribunal and Courts for low tax effect. We find several appeals of revenue have been dismissed even by  the Supreme Court.

The question is why those appeals were not withdrawn by the concerned authorities and / or by counsels? Why any action is not taken by The Supreme Court, High Court and Tribunals against erring officers and counsels of revenue who deliberately did not withdraw appeal rather contested at several occasions.

Furthermore, foremost question is that why  un-necessary litigation by revenue is initiated on frivolous grounds by making frivolous additions  and disallowances and raising demands?

 Un-necessary litigation on low tax effect cases:

On search with “low tax effect”  and low tax effect for Income-tax Act author found results as follows on 04012020 at about 20:35 hours:

Courts                 “low tax effect”                and   low tax effect

Supreme Court           5                                and     80   results.

High Courts                102                             and   1131 results

Tribunals                      283                           and     3204 results.

These are only illustrative  because all such cases are not found reportable and are not reported due to limitations for publication.

Circulars for withdrawal of appeals of revenue on settled legal position/ accepted issues etc.:

Besides circular based on tax effect we find some circulars for withdrawal of appeals and not filing of appeals in cases in which department has accepted judgment of Tribunal or High Court. However, we find that in spite of such circulars revenue authorities are filing and contesting appeals on settled issues.  For example cases of deemed dividend, and salary earned by NRI out of India.

Increase limits for re-assessment, revision and rectification by revenue authorities:

At present there is no limit fixed for initiating these proceedings by revenue authorities. We find that reassessment proceedings and revision proceedings are being initiated for small amount of alleged tax effect. There should be substantial amount of tax effect for taking such actions.

This is more important because as per past experience, we that many of such proceedings initiated by authorities are ultimately found futile, sometimes due to lack of jurisdiction, limitation other technical and procedural reasons and many times on merit also.  By the time such litigation settles lot of time is wasted by tax authorities and Courts and as a result assesse has also to protect himself and take remedial measures to contest such proceedings.

Audit objections should not be accepted in a routine manner:

It is experienced that many audit objections are accepted in a routine manner mainly because concerned officers find it easiest to accept and initiate proceedings. Many of such proceedings see ultimate result of futility. Audit parties must have practical approach and consider law properly. Golden rule that when a view in favour of assesse is possible and has been accepted by courts, it should be followed and litigation should not be initiated disregarding view favourable to assessee which is not only correct but is also reasonable.

Due to audit objections revision, re-assessment and rectification proceedings are initiated many of them are futile because objection is due to disregard of ground realities, facts and circumstances binding precedence and even settled legal position.

Penalty provisions should not be invoked  as a routine and in mechanical manner:

Penalty or penal action itself is frightening to anyone. A tax payer who is regularly complying provisions and paying taxes should not be threatened by penal provisions. Tax payer must be regarded as contributor to the exchequer and nation. However, there is no credit for most of compliance and huge tax paid and penal actions are taken for some delays and omissions or inadvertent,  bona fide mistakes or omissions.

While considering penal provisions by way of penalty and prosecutions overall picture of assessee  should be seen.  We can recall case of ITC Ltd who paid huge taxes but its chairman was dragged like a criminal for allegation of tax evasion, which was very small in comparison of taxed paid by company and its associates. That shows that there is no credit for contributions and compliances made. This is wrong approach.

Initiation of penalty proceedings in a routine and casual manner is causing lot of litigation and wastage of time of tax authorities and tax payers. We have seen cases in appeals for petty amount of penalty, because penalty was imposed wrongly and assessee has to protect himself from being branded as violator and also to save amount of penalty, because if accepted in one year or one case, the authority concerned can treat it as a handy tool for levying penalty in other years and cases.

Therefore, even small amount of penalty which can be imposed under penalty provisions are also used by tax authorities as a tool to frighten and harass tax payer.   For example, in most of notices calling any person for hearing or other compliance a threatening message is given to the effect that in case of failure a penalty can be imposed.

In case of allegation for penalty for concealment of income or furnishing of inaccurate particulars of income tax authorities must consider complexities and should not initiate provisions in a routine manner.

Once a penalty proceeding is initiated, taxpayer has to protest it forcefully. Penalty proceedings also remain live for longer period because of other proceedings which taxpayer adopts to save his skin from illegal demand raised by tax authority.

Additions and disallowances having some time factor only should be avoided:

There are some specific provisions which have only time factor about allow ability of relevant sums whereby a deduction is generally deferred to subsequent year or some other year in future. For revenue, in overall context it does not make much difference if a sum is allowed in year one or year two or even say after few years. In case of loss returns, it may make adverse impact on revenue because deferring a deduction will have impact of prolonging period of carry forward of loss.

Therefore, there should not be provisions which merely defer a deduction. For example some clauses of S.40, 43B, in some cases lower rates of depreciation and amortization in comparison to higher rates under other provision, adjustments for stock valuation etc.

On such issues there should not be litigation by revenue.   

Clubbing provisions:

Provisions for clubbing of income of spouse (generally of wife in Indian context) and minor children are against the spirit of formation of making Indians and India strong. Capital in hands of woman and children will make stronger foundation for future. Tax effect for such clubbing is not significant. 

Clubbing provisions are difficult for compliance by tax payers and more difficult to tax authorities to detect non-compliance. Whenever an issue arises it involves litigation. 

Tax effect of clubbing is also not significant. This is for the reason that family of tax payers who have substantial income will save only few thousands of rupees if separate assessment is made on wife and minor children because in HNI income of wife and children will also be subject to higher and marginal rates if they are assessed separately.

For low middle class and upper middle class, if clubbing is not applied and income which could be clubbed is assessed in hands of wife or children there will not be significant loss to revenue, however not clubbing can have a significant role in capital building and reduce black money.

Therefore, such clubbing provisions should be omitted.

For legitimate income earned there should not be litigation for alleged tax saving or avoidance:

 Businessman, professionals, investors, and even salaried people in private sector are earning income by efforts and risk taking and their income is generally legitimate. Some tax saving or even tax avoidance should not be a ground to harass them. For legitimate income earned there should not be litigation for alleged tax saving or avoidance. Even if some doubt arises , the situation should be considered from positive angel that capital has been brought into productive channel and unaccounted capital has been made accounted and in future more income will be earned on which more tax will be collected.

For example department is litigating due to bias, presumption and conjectures on some issues like bringing unaccounted income in form of  capital receipts. Let us assume that there may be  few  cases of tax avoidance but for  that reason public at large should not be viewed with a doubt. For example, because  some politicians and bureaucrats  have introduced their black money through capital, gifts, and donations but for that reason public at large is assumed to have earned income and not received gift or capital receipt is wrong.

Author hopes that suggestions to reduce un-necessary litigation by revenue due to litigation oriented complex provisions and procedures shall be reduced.