The new directorate under the income-tax department to be located in the Capital and headed by a special-secretary-rank officer would go through income-tax returns of individuals and companies and select only those cases where the magnitude of possible evasion (revenue risk) and chances of recovery are very high. The idea is to reduce avoidable litigation by not taking up cases that might get struck down at lower courts itself.
Fine-tuning the selection of cases for scrutiny and subsequent action for recovery of alleged dues is seen as necessary, as the 68th report of the parliamentary standing committee on finance chaired by BJPs Yashwant Sinha, which analysed trends in tax litigation, had found that very few appeals filed by the I-T department succeeded in tribunals or courts.
For instance, the report had pointed out that only 19% of the appeals filed by the department with the Income Tax Appellate Tribunal were decided in its favour in 2011-12. At the high courts, the department succeeded in 20% of the appeals it had filed the same year, while in the Supreme Court, the success rate was just 10%. The panel considered this trend as a reflection of avoidable litigation. This also seems to suggest that the original assessment/orders made by the departmental authorities may have been rather high pitched and devoid of merit, the committee had said, adding that assessments and adjudications should be made in a judicious manner.
The directorates scope, however, would not cover transfer pricing transactions, which would continue to be selected for scrutiny by the Foreign Tax Division as per the current criteria of R15 crore of transaction value between associated enterprises in India and abroad.
At present, we scrutinise less than 2% of all the returns filed. The new directorate will help us raise scrutiny to at least 2% and widen the tax base effectively, said a finance ministry official. The new division is also expected to bring trends in taxpayer behaviour to the notice of the government for adjustments needed in the rules.
Currently, claiming income-tax exemption for profits made from businesses covered by export promotion schemes and claiming deductions, such as R&D spending, while calculating taxable income are criteria for selecting companies for scrutiny.
The process of selecting cases for scrutiny must be made risk-based, clear guidance needs to be provided to both taxpayers and officers on complex matters, and work load among officers should be rationalised, said SP Singh, senior director, Deloitte Haskins & Sells.