By TV Mohandas Pai & S Krishnan

The Union finance ministry issued a press release on September 24, 2024, saying the Supreme Court (SC) had disposed of 573 direct tax cases with tax effect of less than Rs 5 crore due to revised monetary limits for filing appeals. Budget 2024-25 increased the minimum monetary limit for appeals related to direct taxes, excise and service tax in Income Tax Appellate Tribunal (ITAT), high courts (HC), and the SC to Rs 60 lakh, Rs 2 crore and Rs 5 crore. Consequently the ministry estimated 843 income tax (I-T) cases to be withdrawn from the SC, 2,781 cases from HCs, and 717 from the ITAT — totalling 4,341 cases.

“This significant milestone aligns with the government’s efforts to reduce tax litigation and promote ease of doing business,” the release added. This is a good start in reducing the humungous tax litigation pending with various judicial forums.

The monetary impact of the withdrawal would be a maximum of Rs 10,200 crore. According to latest receipt Budget of July 2024, total I-T under dispute was Rs 10.48 lakh crore as of 2022-23. The withdrawal would be less than 1% of the total I-T under dispute. Thus, high-pitch assessments beyond revised monetary limits are significant.

I-T under dispute more than doubled from Rs 4.98 lakh crore in 2014-2015 to Rs 10.48 lakh crore in 2022-23. So much for the promise of eliminating tax terrorism! Corporation tax (CT) disputes increased by 170% from Rs 2.21 lakh crore in 2014-2015 to Rs 5.98 lakh crore in 2022-23. CT in dispute for less than five years is Rs 5.63 lakh crore, which is 94% of the total disputes. High-pitch assessments have continued over the past five years and litigation management has been very ineffective.

The Central Board of Direct Taxes (CBDT) Action Plan, 2024-25, provides data on pending appeals (see table). New appeals instituted each year from 2020-21 to 2023-24 is higher than ones disposed of, showing gross mismanagement of dispute resolution. The closing appeals increased from 4.65 lakh in 2020-21 to 5.49 lakh in 2023-24. It is estimated that 5.80 lakh appeals are pending. Appeals filed prior to April 1, 2022, that are pending as on April 1, 2024, are at around 3 lakh.

The Indian tax administration has so far followed an “adversarial approach”, resulting in a huge backlog of cases and unprecedented tax terrorism. Tax disputes arise for multiple reasons. The I-T department unnecessarily pursues appeals at all levels, regardless of outcome, since there is no penalty on officers for frivolous litigation. Also, bad drafting of tax laws lead to varied interpretations. HCs provide divergent opinions on the issue, creating confusion. The judiciary also is unable to address a high volume of pending appeals.

An inefficient/ineffective tax administration also contributes to litigation. The Comptroller and Auditor General’s report 14 of 2024, titled “Specific Compliance Audit on Outstanding Demand on Income Tax Assesses”, states, “Audit noticed instances of exaggerated tax demands such as not allowing credit for taxes already paid, levying incorrect interest, and committing mistakes while giving effect to appeal orders. Audit also noticed outstanding demand continued to include nullified demands. Delay in giving effect to appeal orders resulted in delayed issue of refunds; ITD had to refund the inflated demands collected along with interest under S244A of IT Act, besides resulting in harassment and hardships to assessees. Audit observed delays of up to seven years in giving effect to appeal orders by different appellate authorities, with one case still awaiting orders for over 11 years.” It’s a damning comment, but our finance ministry seems unmoved.

To stop repeat litigation on similar issues, the Finance Act, 2022, inserted a new Section 158AB. It provides that a collegium of high-ranking officials may decide and intimate the commissioner or principal commissioner not to file an appeal if any question of law for a taxpayer for any year is already raised in his/her case or in case of any other taxpayer for any year, which is pending before the jurisdictional HC/SC. This new provision is infructuous till a requisite collegium is formed to advise tax officials to defer litigation.

The CBDT should extend the dispute resolution panel (DRP) process, beyond cases involving transfer pricing, to resolve at the first appeal level itself. A DRP is a collegium comprising three commissioners of I-T with a mandate to dispose of cases within nine months. The government should urgently create adequate collegia to reduce the appeals pending with the commissioners of income tax [CIT(A)]. While the minimum monetary limits are set for filing appeals before the ITAT, HCs and the SC, a maximum time limit of two years should be set for disposing of appeals before CIT(A) beyond which appeals should be deemed in favour of taxpayers. For appeals at higher levels, the CBDT should settle all cases pending at the ITAT in two years and those pending with courts in the next three years. Officials with repeated failures in appeals should be punished for wasting public funds.

The CBDT should increase the minimum monetary limit for filing appeals in the ITAT, HCs and the SC to Rs 5 crore, Rs 20 crore, and Rs 100 crore to honour court judgments. On settlement of cases by courts in favour of the taxpayer, the CBDT should withdraw all appeals in any pending case involving the same subject matter within two months, as recommended by the Tax Administration Reform Commission headed by Parthasarathi Shome. The CBDT should also instruct officials to not litigate on matters that are decided by the SC in favour of any taxpayer. Officials should be penalised for failing to follow this.

India has a failed assessment system and a delayed justice system. We need a transparent tax assessment system that reduces litigation, and a quick resolution process. Only then will the promise to eliminate “tax terrorism”, overhaul dispute resolution mechanisms, provide a non-adversarial and conducive tax environment by the Bharatiya Janata Party in its 2014 manifesto, be fulfilled.

The writers are respectively chairman, Aarin Capital Partners, and tax consultant.

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