By TV Mohandas Pai & S Krishnan
The Budget FY22 presented by finance minister Nirmala Sitharaman on February 1, 2021, was commendable for various reasons—not imposing additional tax burden on taxpayers, substantially increasing capital expenditure, choosing to go beyond the fiscal deficit of 3.5% to spur growth and announcement of disinvestments to meet the deficit. One of the changes not announced in the Budget speech, but mentioned in the Finance Bill, 2021, is the abrupt replacement of two quasi-judicial authorities with administrative bodies.
The Finance Bill, 2021, proposes to replace two quasi-judicial bodies such as the Income-Tax Settlement Commission (ITSC) and the Authority for Advance Rulings (AAR) with administrative bodies, comprising of chief commissioners of income-tax. The finance ministry abruptly discontinued the ITSC from February 1, 2021, and replaced it with one or more ‘Interim Boards for Settlement’. Every Interim Board will consist of three members, each being an officer of the rank of chief commissioner, nominated by the CBDT. Consequently, no new application can be made for settlement of cases from February 1, 2021. In the case of a pending application, the taxpayer may, at her option, withdraw such application within three months from the commencement of the Finance Act, 2021, and inform the assessing officer (AO) about such withdrawal. If not, the pending application will be deemed to have been received by the Interim Board. And the central government is yet to make a scheme for the settlement of pending applications by the Interim Board!
The finance ministry also proposed to replace the AAR with a ‘Board for Advance Rulings’, consisting of two members, each being an officer not below the rank of chief commissioner, nominated by the CBDT. Advance rulings of the new ‘Board for Advance Rulings’ will not be binding on the applicant or the Income-Tax Department (ITD). The applicant or the ITD may appeal against the order passed by the Board, before the High Court.
This is a major let-down to existing taxpayers who approached the AAR to obtain tax certainty on complex international tax questions with an expectation of a binding ruling. The proposal that the ITD may appeal against the order passed by the Board will only make this Board irrelevant.
The Income-tax Act provided for a time-bound manner for settlement of cases before the ITSC. It provided an avenue to taxpayers to avoid protracted litigation and get immunity from penalty and prosecution under the Income-tax Act and helped the revenue authorities to collect taxes faster and with certainty. If a taxpayer withdraws her application before the ITSC, the proceedings with respect to such application shall abate on the date of withdrawal and she will lose the immunity from penalty and prosecution. The AO or any other income-tax authority before whom the proceedings were pending prior to the application to the ITSC will dispose the case now. This is a gross injustice to litigants whose cases are pending with the ITSC at various stages of the settlement process and clearly prejudices the interests of the litigating taxpayers.
The Finance Bill provides that the income-tax authority will not be entitled to use the material and other information produced by the taxpayer before the ITSC or the results of the inquiry held or evidence recorded by the ITSC in the course of proceedings before it. The significant time and effort spent by the ITSC and taxpayers relating to the appeal would just go waste! To add insult to injury, the income-tax authority will be entitled to use material and other information collected, or results of the inquiry held or evidence recorded by the AO during the course of any other proceeding under the Income-tax Act irrespective of whether such material or other information or results of the inquiry or evidence were also produced by the taxpayer or the Assessing Officer before the ITSC. Taxpayers are forced to either withdraw or continue their cases before an Interim Board without even knowing the details of the new settlement scheme. This is a gross abuse of power and miscarriage of justice.
Explaining the context of withdrawing the ITSC, the ‘Statement of Objects and Reasons’ to the Finance Bill, 2021, states that the Vivad se Vishwas Act was enacted in 2020 with the objective of reducing pending income-tax litigation, generating timely revenue for the government and giving benefit to taxpayers by providing them peace of mind, certainty and savings on account of time and resources. The settlement provisions under the Income-tax Act, 1961, provide for an alternate mechanism to a taxpayer who chooses to exit the regular assessment process and instead approached the Settlement Commission for settlement of cases. Since the Vivad se Vishwas Act was enacted for the resolution of disputed tax, cases covered by a Settlement Commission were outside its purview. With a view to remove any ambiguity, the Finance Bill, 2021, proposed to amend the provisions of the Vivad se Vishwas Act retrospectively from March 17, 2020, to clarify that the original legislative intent was to include cases covered by the ITSC. The government has become wiser by hindsight and admits to inefficient drafting of legislations. Retrospective amendments continue despite the BJP government stating that it will not make any retrospective amendments!
The BJP’s 2014 election manifesto stated that “UPA Government has unleashed ‘Tax terrorism’ and ‘uncertainty’, which not only creates anxiety amongst the business class and negatively impacts the investment climate, but also dents the image of the country. BJP realises the importance of having a Tax Policy Roadmap, so that people are aware of the future and plan accordingly”. The finance minister in her recent Budget speech proposed to reduce the time limit for reopening of assessment to three years from the present six years, which benefits taxpayers. However, the limitation period is increased from six years to 10 years in serious tax evasion cases where the AO has evidence of concealment of income of Rs 50 lakh or more in a year.
The Memorandum to the Finance Bill, 2021, states, “Due to advancement of technology, the department is now collecting all relevant information related to transactions of taxpayers from third parties and from other law enforcement agencies. This information is also shared with the taxpayer. Department uses this information to verify the information declared by a taxpayer in the return and to detect non-filers or those who have not disclosed the correct amount of total income. Therefore, assessment or reassessment or re-computation of income escaping assessment, to a large extent, is information-driven.” It is ironical that the limitation period is getting extended to 10 years in serious tax evasion cases whereas due to advancement of technology the tax department should be completing assessments in lesser time, more so when the assessment or reassessment or re-computation of income escaping assessment, to a large extent, is information driven.
Under the proposed changes, an AO can issue a notice for reassessment if the AO has ‘information’ which suggests that income has escaped assessment. Such information means, (i) ‘any information’ flagged in the case of the assessee for the relevant assessment year in accordance with the risk management strategy formulated by the CBDT from time to time; (ii) any final objection raised by the Comptroller and Auditor General of India to the effect that the assessment in the case of the assessee for the relevant assessment year has not been made in accordance with the provisions of the Income-tax Act. The term ‘information’ is loosely described and may mean particulars obtained from third parties or due to change in facts or subsequent court rulings. Based on such particulars, the reassessment can be initiated by the AO if such information is flagged in the ‘risk management strategy’ by the CBDT, but this term is again not described.
Under the current regime, a reassessment can be conducted when the AO has ‘reason to believe’ that any income chargeable to tax has escaped assessment and records such reasons. This criterion is now replaced with ‘information which suggests that income has escaped assessment’.
Consequently, an AO can now reopen an assessment even if the earlier assessment was completed after taking into account all relevant material gathered by the AO and there is no failure on part of the taxpayer to disclose fully and truly all material facts necessary for assessment.
Consequently, settled judicial precedents that reopening of cases cannot be on the basis of ‘change of opinion’ has now become irrelevant. The new scheme of reassessment places heavy reliance on administrative oversight resulting in gross abuse of power.
Extending the limitation period to 10 years merely based on ‘information available’ with the AOs will increase the period of uncertainty by another four years, particularly for those whose assessment would be time-barred this year due to the six-year limit. This puts taxpayers at the mercy of an abusive tax system not liberating them, a great let down by political leaders who promised to protect taxpayers from tax terrorism and uncertainty. The government should reduce the limitation period to three years in all cases.
The decision to abruptly replace two quasi-judicial authorities with administrative Boards negatively impacts the investment climate and dents the image of the country and does not help in the ease of doing business. In the hierarchy of tax litigation in India, the first stage of appeal is with the Chief Commissioner of Income-tax (Appeals). Replacing the quasi-judicial authorities with administrative bodies comprising of chief commissioners of income-tax is only duplicating the existing redressal mechanism and will make these administrative Boards irrelevant! If the intent of the government is to withdraw these quasi-judicial authorities, it should be done only after all the pending cases are settled. The government should withdraw its decision to abruptly end the working of both the quasi-judicial authorities and reduce the limitation period to three years in all types of assessments, during the current Budget session of Parliament. The government should increase the number of judges and the number of benches to decide all pending litigation instead of creating tax administrative bodies.
Pai is chairman, Aarin Capital Partners, and Krishnan is a tax consultant