Bombay High Court does well to set aside the CBDT’s plan to try and distort the process of appeals at the CIT stage.
Though one of the BJP’s election campaign planks in 2014 was about ending tax terror of the UPA, it has had only moderate success here. When it came to high-profile cases like Vodafone Plc and Cairn Energy that were hit by the retrospective tax, there was no movement since the BJP refused to scrap the law. Instead, it came up with an alternative that seemed reasonable, but didn’t really work. In his first budget, finance minister Arun Jaitley said that, while the statute would remain, the BJP would never use it and, as for the existing cases, the BJP would accept various court/arbitration rulings on this. While that sounded reasonable, in the case of both Vodafone Plc and Cairn Energy, the government opposed their arbitration pleas by arguing that tax matters couldn’t possibly be the subject matter of arbitration. Both the arbitration, in overseas locations, are in an advanced stage of hearing now.
When it comes to the taxman slapping unreasonable tax demands, the BJP has had more success, but nowhere near what was required. Between FY09 and FY14, disputed tax arrears rose by over seven times, from Rs 70,985 crore to Rs 503,344 crore, or from around 12% of tax collections during the year to around 44%. From FY14 to FY18—the data on arrears is not available for FY19—disputed arrears rose at a much slower pace to Rs 777,322 crore; at 1.54 times, however, the growth is still significant considering that tax collections rose 1.68 times during this period. At the end of FY18, disputed taxes were around 40% of total collections in the year.
While the government has tried to reduce the number of pending disputes, more so since the CAG had pointed out that just a fifth of the tax cases passed the appeals process, it has not had much success on this front. Indeed, there are sections of the tax bureaucracy that seems to be pulling in another direction. So, when, some months ago, the Central Board of Direct Taxes (CBDT) set up a committee to look at litigation management, one the terms of reference was “to examine the cases where ITAT (Income Tax Appellate Tribunal) has passed perverse or irregular orders or where the submissions of DRs (Departmental Representatives) have not been recorded by ITAT”, and to then take them up with “President, ITAT/Ministry of Law”. The ITAT, the second stage of appeal, is under the administrative control of the law ministry while the Commissioner Appeals, the first stage, is under the finance ministry’s control. In other words, this looked like it was subverting the process of appeal since there is no reason to approach either the President of the ITAT or the law ministry if there is a logical ground for appeal; the taxman can simply go in appeal. And, will any order that goes against the taxman be considered perverse or irregular?
If this wasn’t bad enough, when the last Central Action Plan (CAP) of the CBDT was drawn up, it said an additional credit of two points would be given for each ‘quality’ order passed by the CIT (Appeals) and ‘quality’ was defined as increasing the tax demand made or finding a way to strengthen the taxman’s case. In other words, the CAP was giving incentives for the CIT (Appeals) to increase tax demands instead of genuinely adjudicating them. Fortunately, the Bombay High Court has set this order aside, saying “any temptation in the guidelines, referred to as incentives for disposal of an appeal in a particular manner would not stand the test of law”. Hopefully, the CBDT will now focus on reducing tax arrears and on trying to understand why so many tax demands collapse in court; once it does this, it can ensure the practice of frivolous tax demands stops.