Income Tax 27 Jan,2020
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Litigation Management - An expected reform from Budget 2020
Amit KChartered Accountant

Long pending income-tax litigation has always picked the intrigue of those wanting to carry out business in India. However, tax litigation laws haven't really kept up with the transformational changes that we are seeing in other areas of the economy. The upcoming budget would be a ripe moment to address those niggling issues and adopt international best practices in relation to handling and managing tax-litigation.

The Government from time to time has introduced a series of measures to catalyse the economic growth by reducing corporate tax rates and roll back of enhanced surcharge levied on foreign portfolio investors. Despite the said measures, a lacuna still exists in gaining investors' confidence in the field of tax litigation management in India.

As the nation awaits another budget presentation for the next fiscal year, simplification of the existing litigation system under the direct taxes regime is a highly anticipated area of reform. The existing litigation system is not for the faint hearted and involves cumbersome processes involving procedural complexities, unwarranted delays and huge costs.

Present system of litigation management

The current income-tax litigation system allows a taxpayer to prefer an appeal at various levels of judicial forums, in case it is aggrieved with the decision of the lower authorities. Also, the tax authorities can prefer an appeal if the ruling at higher levels are not in favour of Revenue. The present hierarchy of the litigation system in India is depicted below:

Sl. No. Authority Role
1 Tax Officer known as the Assessing Officer Undertakes audit of tax return filed by the taxpayer.

2

Commissioner of Income-Tax (Appeals) [CIT(A)]

First appellate authority.

The taxpayer can challenge order of the Assessing Officer before CIT(A).

3

Income Tax Appellate Tribunal (ITAT)

Final fact finding authority.

Both the tax department and the taxpayer can challenge order of the CIT(A).

4 High Court (HC) Order of ITAT can be challenged before the High Court. Further, constitutional remedy of Writ Petition before the HC is also available.

5

Supreme Court (SC)

Apex Court of the country.

Apart from the Constitutional remedy of Special Leave Petition before the SC, the taxpayer or the tax department can also appeal against the order of HC.

In the existing structure, obtaining finality on a tax dispute by following the above hierarchy may take more than ten years. As per a recent report1, tax related disputes to the tune of over INR 6.38 lakh crore as on 31 March 2018 are locked up only at the CIT(A) level. The unrealistic tax collection targets followed by frivolous appeals and baseless litigation by tax authorities in several cases have increased the quantum of unresolved cases. This is evident as the quantum of tax department 's petition rate is high but its success rate is low and declining2 (well below 30%).

Recent initiatives taken by CBDT for reducing litigation

With a view to reduce avoidable litigation, the Central Board of Direct Taxes (CBDT) has taken certain steps like increasing the monetary limits for filing appeals by Revenue before ITAT, HC and SC3.

Implementation of the National Judicial Reference System (NJRS), a comprehensive electronic database of judicial precedents in direct tax cases, is another key measure taken by CBDT to streamline the litigation management system in the Income Tax Department and to avoid filing of unnecessary appeals in cases where judicial precedents are already available.

Expectations from Budget 2020

Despite various steps taken by the government in recent past, a lot remains to be done to improve trust between Income tax department and the taxpayer community. Various Committees4 set up by CBDT has analysed and provided recommendations on effective litigation management under the income-tax regime from time-to-time. Certain key recommendations which are expected by the tax fraternity at large from the upcoming budget are:

  i.  Adoption of Alternative Dispute Resolution mechanisms;

 ii.  Obtaining approval of a Range authority before initiating penalty proceedings to ensure that the penalty is levied only in appropriate cases;

iii.  Rationalization of the provisions relating to set-off of refund receivable against outstanding tax demand and avoiding undesirable delay in issue of refunds;

iv.  Further enhancement of monetary limit5 for filing appeals at various levels;

 v.  Setting up of a separate dispute management vertical to manage the entire tax litigation process, right from deciding in which cases the appeals ought to be filed, to devising the strategy to defend a case;

vi.  Administrative guidelines on capping the number of scrutiny cases per Assessing Officer and mandatory use of NJRS by tax department for litigation management; and

vii.  Adoption of global best practices in litigation management.

Adoption of global best practices in litigation management

A close examination of reports of the CBDT committees reveals that their recommendations are in line with the global best practices for litigation management. Practices prevalent in key economies are summarized below along-with their relevance to the Indian context:

Country Practices followed Relevance in Indian context

United State of America6

If the appellate authorities ruling favours the taxpayer' s contention, then the litigation and administrative costs incurred for filing appeals including the attorney fees, court costs, expenses of expert witnesses and reasonable costs of the related studies and analyses can be recovered by taxpayer. However, this is subject to compliance with certain requirements including specified net worth thresholds.

Lengthy litigation procedures come with a heavy cost to the tax payer.

In India, the recovery of the litigation costs is not a norm but an exception. The compliance requirements for awarding the reimbursement should be tailored to fit into the Indian context, to ensure that, the benefit is available only to the eligible assessees.

United Kingdom7

Adoption of Alternative Dispute Resolution (ADR) systems for specified cases of tax disputes, without affecting the right to appeal on the disputed matter.

The RSN Committee report8 has recommended to implement ADR mechanisms in India to reduce litigation.

In cases where an area of dispute has been identified during the course of assessment, ADR may be initiated prior to finalization of assessment. If the assessee opts for ADR, the Commissioner of Income-tax (Appeals) may mediate between the taxpayer and the Income-tax Officer to come into an agreement on tax disputes and issue a formal order binding on both the parties post mediation. Taxpayers with identical issues may be advised to adopt similar ADR mechanism to avoid protracted litigation.

Australia9

Use of precedential view approach wherein a tax officer is required to apply the relevant precedential view issued by the Tax Department about the application of any statutory provisions while deciding on an interpretative issue. If there is no precedential view available on a interpretative issue, the Tax Department is required to create the same.

Issuing settled view/ Departmental view circulars on interpretation of statutory provisions on a more real time basis is recommended.

Further, RSN Committee has recommended to develop a platform wherein the taxpayers and the Officers can participate in identifying the areas and issues where a settled view is required.

Most of the aforementioned recommendations were also anticipated to be part of the proposed Direct Taxes Code ('DTC'). However, with the upcoming budget, one would hope that the various recommendations of the Departmental Committees on effective litigation management will get incorporated into the existing tax regime.

CA Amit K (with inputs from CA Piyush Mohan Thakur and CA Banu Chander)

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 1.  Central Action Plan- 2018-19- issued by CBDT

 2.  Source: Economic Survey 2017-18

 3.  Circular No. 17/2019 dated 08 August 2019

 4.  Report by the Rani Singh Nair Committee to Study the Appellate Orders to Examine the Filing of Appeals by the Income Tax Department before Various Forums (2014), Report by the CBDT Committee chaired by Sunita Bainsla on Comprehensive roadmap to minimize litigation and strengthen litigation management and Report by the Tax Administration Reform Commission

 5.  Present monetary limits for filing appeals by Tax Department: Before ITAT- INR 50,00,000; Before High Court- INR 1,00,00,000; Before Supreme Court- INR 2,00,00,000 (Circular No. 17/2019 dated 08 August 2019)

 6.  Your appeal rights and how to prepare a protest if you don't agree- Publication 5 (Rev. 01-1999) Catalog Number 46074I- issued by Internal Revenue Service

 7.  Use Alternative Dispute Resolution to settle a tax dispute- Published by HMRC- updated as on 08 July 2019

 8.

 9.  Precedential ATO view- PS LA 2003/3