National Conference on

Backlog of Cases & Court Management

Indian Income Tax Law & Protracted Litigation – A Study

By Prabhakar K S
_______________________________________________

Organized By

Gujarat National Law University, Gandhinagar

Under the aegis of

Department of Justice, Ministry of Law & Justice , Govt. of India

Electronic copy available at: https://ssrn.com/abstract=3373202

Indian Income Tax Law & Protracted Litigation – A Study
There should be leniency while deciding the tax structure. The government
should collect taxes like a honeybee, so that both can survive. - Koutilya

I love to pay my taxes because that is the price which I pay

for my civilization – Justice Oliver Homes

Taxes are the Sinews of the State. - Marcus Tullius Cicero

For who would bear the Whips and Scorns of time, the Oppressor’s
wrong …… the Law’s delay. Hamlet

1) Indian Income Tax Law – An overview1

India’s Income Tax law has 150 years of long history for which records go back to
1860s. The first Income Tax Act was introduced in the year of 1860 to overcome
financial stress due to 1857’s Sipay Mutiny but that law was in force just for a period of
five years. In 1867, the said Act was revived as ‘License Tax’ to levy tax on the trade and
professions. Again, in 1868, the then Legislature has replaced the 1867 Act with
‘Certificate Tax’. Under both the statutes, Agricultural Income was (even now also)
excluded. In 1877, Licence Tax with ‘Cess on land’ was been introduced. During the
same period, local Acts were introduced in the erstwhile Presidencies such as Madras,
Bombay & Bengal. Thereafter, but before the current Act of 1961, three more Acts
including one thoroughly amended Acts were been introduced over a period of time,
namely, “The Indian Income Tax Act, 1918, The Indian Income Tax Act, 1922 and The
Indian Income Tax (Amendment) Act 1939”. The current Act or the Income Tax Act,
1961, has received the assent of the President on 13th September, 1961 and became law
with effect from 1st April, 1962 along with the Income Tax Rules, 1962 to replace the
immediate erstwhile ‘Indian Income Tax Act, 1922’. The current Act now consists of 48
Definitions for key terms, 296 Sections with more than a thousand of sub-sections,
clauses, sub-clauses and Fourteen Schedules. One of the major salient features of the
erstwhile Act was adopting a new way of fixing tax rates vide Finance Acts, annually,
which is even continuing in the current regime. During 1961 to 1994, substantial
changes have been made to the 1961 Act to meet the changing economic scenario. It is
very opt to note that almost all Finance Acts brought one or the other changes to the
Act and the Rules very decisively since then. In 1991, the Central Government has set
up a “Tax Reforms Committee” under the Chairmanship of Raja J. Chelliah to examine
the then tax structure and suggest changes therein. The Committee has made several
recommendations such as lowering the tax rates, avoiding double taxation,
differentiating the corporate tax between domestic and foreign companies among
others. In 1997, another ‘Expert Group’ was constituted to submit a ‘Report on
Simplification of Income Tax Law’. The Committee had also submitted its ‘Report’
however the Bill never became law due to the dissolution of the Parliament. Thereafter,

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KANGA & PALKHIVALA’S The Law And Practice of Income Tax

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 acceptance of Recommendations made by “Kelkar Committee Report, 2003” impacted
the current tax regime to a certain extent.

While presenting the Union Budget for 2007-082, the then Finance Minister said a
comprehensive review is under consideration. The Central Government has introduced
a new ‘Direct Taxes Code’ in the Parliament during the same year. Again, after two
years i.e. in August 2009, the Central Government released the draft of ‘Direct Tax
Code’ along with a discussion paper for public comments. Following, on 27 th August,
2010, the Direct Tax Code 2010 was introduced in the Lok Sabha. However, the Code
was been referred to a ‘Parliamentary Standing Committee’. The Committee had
submitted its Report with due Recommendations during March 2012. It was decided to
implement the Code with effect from 1st April, 2011 due to administrative reasons the
same was postponed to 1st April, 2012, however, both the deadlines were missed. The
previous Government again put a ‘Revised Direct Tax Code’ on the public domain for
stakeholder comments. The final draft was cleared by all the Ministries but lapsed due
to the dissolution of the 15th Lok Sabha in 2014. The new Government, instead of
reconsidering the ‘Code’, simply adopted its few provisions such as General Anti-
Avoidance Rule (GAAR), Transfer Pricing Guidelines among others. In its renewed
interest, the Central Government is again revisiting the ‘Code’. Accordingly, to review
and draft a new Direct Tax Law, the Central Government has constituted (re-
constituted due to the resignation of the earlier Convener) one more Task Force is
headed by Sri. Akhilesh Ranjan, Member (Legal) CBDT and other five Members. In
that direction, the Task Force, on 21st March 2018, sought feedback and suggestions
from the stakeholders and the general public in the form of a ‘Questionnaire’.
Suggestions sought on ‘Tax Litigation’ are among others. The Task Force is giving its
final touch to its ‘Initial Draft’ and is expected to submit it on 29th February, 2019.

2) India’s Tax Dispute Resolution Mechanism 3

India’s Tax Dispute Resolution Mechanism consist of Jurisdictional Assessing Officer,

Commissioner of Income Tax (Appeals), Income Tax Appellate Tribunal, High Courts,
the Supreme Court and as alternative dispute resolution mechanism, the Authority for
Advance Rulings, Settlement Commission and a Dispute Resolution Panel. In the case
of International Tax Disputes e.g. Vodafone, Cairn Plc., the aggrieved Parties may
approach the International Arbitration Chair at Hague. The Assessing officers include
‘Centralised Processing Centre (CPC) and Transfer Pricing Officers, in the hierarchy4,
the Commissioners of Income Tax (Appeals) are the First Appellate Authority. The
Income Tax Appellate Tribunal is the final ‘fact-finding’ authority. Against the Order of
the Tribunal, an aggrieved party can file an appeal before the jurisdictional High Court,
however, only against on substantial question of law. Further ‘Appeal’ lies with the
Apex court of the Country. As said above, the Settlement Commission is an alternative
dispute resolution body which allows one-time tax evader or an un-intending tax-
defaulter to come clean after paying the due tax amount with the applicable interest on

2
Union Budget 2007-08
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KANGA & PALKHIVALA’S The Law And Practice of Income Tax
4
FICCI’s Dispute Resolution in Tax Matters – A Discussion Paper March 2013

Electronic copy available at: https://ssrn.com/abstract=3373202

 the additional income disclosed before it. In case of Transfer Pricing related issues, the
parties may approach ‘Disputes Resolution Panel’ instead of prolonged Judiciary. Sri.
P. Ramanatha Aiyar’s Concise Law Dictionary defines “Appeal” as “A Proceeding
taken before a superior Court or authority for reversing or modifying decision of an
inferior Court or Authority on ground of error, a case so appealed”. Right to appeal
under the Indian Tax Laws is a creation of statute and is not an inherent right. An
Appeal can be filed only against Orders listed in the Income -Tax Act. Income Tax
liability is determined at the level of Assessing Officer. When a taxpayer is adversely
affected by Orders passed by Assessing Officer, he can file an appeal before the
Commissioner of Income Tax – (Appeals), having jurisdiction over the taxpayer.
Income Tax Appellate Tribunal is the Second Appellate Channel available for the tax
payers. On substantial questions of law, a further appeal can be filed before the High
Court and Special Leave Petitions can be filed before the Supreme Court.

Appeals in Income Tax Act, 1961 - A Glance 5

CIT - (A) Income Tax High Court Supreme Court

Tribunal
Stage First Appeal Second Appeal Third Appeal Fourth & Final
Appeal
Under Section 246A 253 260A 261
Appeal by Only by Assessee Both by Assessee & Department
From specified Assessing Officer Ao / DRP/ Tribunal High Court
Order of (Ao) CIT(A) /CIT
Time Limit for 30 days 60 Days 120 Days 90 Days
filing appeal
On question of Both Fact & Law On substantial On certificate by
question of Law High Court to be fit
Administrative CBDT Law Ministry Independent from Government
Control of
Hearing by One Person Two or more Two or more Judges
Members
Appeal fees as U/s. 249(1) U/s. 253(6) High Court Supreme Court
prescribed by Rules Rules
Set aside / Cannot Set aside Set aside but cannot enhance
enhance but enhance
Additional Can be admitted Cannot admit
Evidence
Award of Cost No Can award cost
Grant of No interim Stay Can grant interim Stay
Interim Stay

Is decision Not a precedent But only of Only in its Throughout the

binding? Special Bench Jurisdiction Country

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Taxmann’s Income Tax Appellate Tribunal (ITAT) Practice and Procedure 2nd Edition

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3) The Backlog of Tax law Cases – Status Quo 6

No doubt, India has a good system of ‘Tax Dispute Resolution Mechanism’ in place or
one can say on ‘Rule Book or Paper’. The system is also not free from darker sides
which will be depicted in the following lines - According to Economic Survey – 2018,
(Economic Survey – 2019 will be tabled in coming July while presenting the full
Budget for 2019-20 by newly elected Government) the country’s biggest litigator is the
Tax Department which unambiguously losses 65 per cent of them. The Survey points
out that the total number of direct tax cases pending at Income Tax Appellate
Tribunals, High Courts at 83 per cent and the Supreme Court at 88 per cent. The
petition rate at the Supreme Court is 87 per cent, while the success rate is only 27 per
cent. Similarly, at High Courts, the petition rate is at 83 per cent and the success rate is
merely 13 per cent as far as Direct Taxes concerned.

Backlog of Cases at various forums as on 31st March 20177

Dispute Resolution Number of cases Tax amount locked

Forum pending in litigation
Commissioner of Income Tax (Appeals) 3,28,173 Rs. 6.38 lakh crore
Income Tax Appellate Tribunal 92,338 Rs. 2.01 lakh crores
High Courts 38,481 Rs. 2.87 lakh crores
Supreme Court 6,357 Rs. 0.08 lakh crores

The approximate timeframe involved at each level is depicted as follows - 8

Tax Dispute Resolution

Jurisdicional Assessing Officer Commissioner of Income

1 to 2 years Tax (Appeals)
3 to 4 years

Income Tax Appellate

High Court Supreme Court
Tribunal
3 to 5 years 5 to 8 years
2 to 3 years

From the above Table, it is clear that a dispute arisen at the Assessing Officer level may take
any time between 10 to 20 years approximately before it reaches finality at the Supreme
Court.

6
Economic Survey 2017- 18 Volume 1
7
Report of the Comptroller and Auditor General of India for the year ended March 2017
8
FICCI’s Dispute Resolution in Tax Matters – A Discussion Paper March 2013

Electronic copy available at: https://ssrn.com/abstract=3373202

4) Few contentious Issues which lead to Court of law 9 10

After detailed ‘Studying’ of Income Tax Department’s Notices, Assessments Orders,

Orders of the Commissioner of Income Tax (Appeals), Appellate Tribunals, High Courts
and Supreme Court, certain contentious issues which lead to protracted litigation can be
listed as follows -

1. Accommodation Entries
2. Additions on account of low Gross Profit - under Section 144 and 145
3. Capital Gains on income from Sale of Agricultural Land - under Section 45, Section
50C, Section 54B, Section 194LA
4. Cash credits in the Books of Account under Section 68
5. Deemed Dividend- under Section 2(22)(e)
6. Deduction in respect of profits and gains from industrial undertakings- under
Section 80 IA and 80 IB
7. Deduction of Interest Expenses - under Section 36(1)(iii)
8. Disallowance on account of Non-deduction of Tax Deduct at Source – under
Section 40(a)(ia)
9. Exemptions under Special Provisions- under Section 10A, Section 10AA and
Section 10B
10. Expenditure incurred in relation to Income not included in Total Income- under
Section 14A
11. Minimum Alternate Tax- under Section 115JB
12. Non-deductible Expenses or Payments – under Section 40A
13. Rejection of Books of Accounts – under Section 145(3)
14. Re-opening of Assessments under Section 147
15. International Taxation -
 Royalty Payments
 Share Premium
 Mergers & Acquisitions with respect to the share sale and Asset sale
 Permanent Establishment and Significant Economic Presence
 Transfer Pricing Issues with respect to Arm’s Length Price, Global
benchmarking, Advertising, Marketing etc
 Indirect Transfer of Indian Assets like in Vodafone case

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Taxmann’s income Tax Act as amended by Finance Act, 2019
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A Step Ahead A Compilation of Contentious Issues in Assessment, Income Tax Department, Gujarat

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5) Suggestions / Recommendations

1. Taxing Statue’ must be in its ‘Simplest language

Mark Twain, an American writer, in one of his letter to a twelve-year- old boy, ‘I
notice you use plain, simple language, short words and brief sentences. That is the
way to write English – it is the modern way and the best way, stick to it, don’t let it
fluff and flowers and verbosity creep in’. Law Reform Commission of Victoria righty
said “The language of the law has been a source of concern to the community”. It is
sad that the legal language has always remained the language of the few.
Unfortunately, in India also there is no change in drafting ‘Statues’ especially taxing
statutes which are still plagued by jargons, verbosity, legalize and archaic words and
phrases. It is appropriate to recall the words of Sri. Y.P. Trivedi, an eminent Supreme
Court Advocate quoted in one of his featured11 columns that ‘the current Act has
become so complicated that nobody even with the computer mind can claim that it
knows the law with certainty at any particular time. The present Act was introduced
in order to make the 1922 Act simple but over the years it is a great maze of words.
There are sections with several sub-sections. There are explanations and provisos
overlapping with each other. At several stages, there are sections which start by
saying “notwithstanding anything” contained in any other provisions of this Act’. The
Central Government shall give a try to draft the proposed Law on a simple language
which will save cost and valuable time of the ‘Tax Benches of the High Courts and
Supreme Court who spend most of their time to unearth the ‘Legislators’ intention,
interpreting the provisions, pronouncing the judgments rather than concentrating on
disposal of huge pale of pending cases for years together and also more importantly,
voluminous Commentaries by tax experts in the domain such as latest edition of
Sampath Iyengar’s Law of Income Tax in 11 Volumes, Chaturvedi & Pitisaria’s Income
Tax Law in 10 Volumes and most important one Kanga & Palkhivala’s ‘The Law and
Practice of Income Tax in 2 volumes.

2. Restrictions on Adjournments

Like in the Civil and Criminal Courts, adjournments on frivolous grounds have been
extending its foot into the Tax Court and extending the life of the ‘Tax Cases’ for
indefinite period. It is very difficult to rule out an unhealthy understanding between
the Departmental pleaders and assessees pleaders which delay the settlement and
increases the pendency of cases at all stages, say, Tribunals, High Courts and even
Supreme Court and also hitting the ‘Revenue’ badly. To ensure speedy disposal of Tax
matters at Income Tax Tribunals and High Courts the Central Government shall
restrict the adjournments to a single digit, leaving exceptional facts and
circumstances of the case. On 7th Feburary, 2019 the Hon’ble Supreme Court in Ram
Siromani Tripathi & Ors State of U.P & Ors. (Civil Appeal No. 6156 of 2012) 12 has
refused the adjournment sought on the ground of ‘Appellant’s legal counsel was out-
of station’ by dismissing his appeals for non-prosecution. If not by the Central

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The Chamber’s Journal Vol. V - No. 8 May 2017
12
[2019] 102 taxmann.com 329 (SC)

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 Government, the Apex Court, suo motu, restrict the ‘Adjournments on frivolous
grounds’ in all genres of ‘litigation’ in a strict manner or direct the ‘Executive’
appropriately.

3. Retrospective Amendments 13

The Act, religiously, changes every year with insertions and deletions bringing
through Finance Acts and Taxation Law (Amendment) Acts. As on 31.03.2017, the
1961 Act has been amended one hundred and eighteen (118) times. In addition to
Amendments, the Act also overloaded to accommodate Court Rulings, Notifications,
Circulars which has legal backing turned the Act into one of the most complex
Statutes on the Earth and also difficult to interpret and understand. The Hon’ble
Finance Minister while presenting his Union Budget for 2014-15, said that "The
sovereign right of the Government to undertake retrospective legislation is
unquestionable. However, this power has to be exercised with extreme caution and
judiciousness keeping in mind the impact of each such measure on the economy and
the overall investment climate. This Government will not bring about any change
retrospectively which creates fresh liability. However, the Government again fell to its
old practice of introducing certain amendments ‘Retrospectively’ all of a sudden
without any public consultation or such a very limited extent. The Government has
brought a number of retrospective amendments w.e.f 1 st April, 1961 and this makes
interpreting the tax law even more difficult and affected the foreign investors’
confidence and much needed foreign direct investments. As bad precedence, the
Revenue is indulging in the practice of ‘Reversing of Judicial Pronouncement as per
their need’ which is highly unjustifiable and disrespecting the Judiciary which is
already plagued by lakhs of pending cases.

4. Voluntary Direct Tax Dispute Resolution Schemes 14

In its endeavour to reduce the ‘Tax Litigation’, the Central Government has
introduced a Scheme called ‘The Direct Tax Dispute Resolution Scheme – 2016’
under Section 200 to 201 of the Finance Act, 2016 vide Notification No. 34/2016
dated 26th May, 2016. The said Scheme was in force from 1st June, 2016 to 31st
December, 2016 or for a period of 6 months to settle a certain set of ‘Tax Disputes’ on
a voluntary basis. It is high time to introduce similar ‘Schemes with One year window’
to reduce the backlog of cases, stress on Judiciary and also in the interest of the
economy. Unfortunately, the government's this ambitious Tax Dispute Resolution
scheme has ended with a sober with just Rs 1,200 crore being collected and none of
the high-profile ‘Retrospective Tax Cases’ such as Vodafone and Cairn Energy did not
opt to settle the issue once and for all. The Scheme provided for waiving of interest
and penalties if the principal amount involved in tax cases were paid. Apart from
‘Retrospective Tax Cases’, the Government also allowed the pending appeals with
Commissioners of Income Tax (Appeals) as on 29th February, 2016 to settle by paying
the disputed tax amount with due interest up to the date of assessment. Further,

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The Direct Tax Dispute Resolution Scheme – 2016

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 specified and cases with disputed tax amount up to Rs 10 lakh, the penalty was fully
waived. For cases of exceeding Rs 10 lakh, in excess of the 25 per cent of minimum
penalty was levied and any pending appeal against a penalty order could have been
settled by paying 25 per cent of the minimum of the imposable penalty. Even though
the tepid response to the last scheme, the new Government shall introduce the said
scheme in a lucrative mode and encourage the disputed assessees to opt the voluntary
schemes.

5. Tax Administration & Its overhaul

1. E-Assessment & elimination of corruption 15

The Central Government by the Finance Act, 2018 has launched a new system of
assessment proceedings on a pilot basis i.e., "Jurisdiction-Free Assessment" for
scrutiny related assessments, where system envisages allocation of a particular
taxpayer's profile to any Assessing Officer across the country via special software.
For e.g., Bangalore based assessee can be assessed by an Assessing Officer
deputed at Chennai or Hyderabad or even at Himachal Pradesh or vice versa. The
new system would do away with the Assessing Officers' discretionary powers to
call for additional documents, records and most importantly, ask the taxpayer to
appear in person. Further, the new system will –

 Minimize interaction between the taxpayer and the Assessing Officer;

 Curb corrupt practice in the Department;
 Ensure a transparent and no-harassment culture;
 Deal with all kinds of tax-related matters, returns for scrutiny, etc.
 Identities of the taxpayer and his Assessing Officer will be kept confidential.

Extending of digital technology to all sphere of the Tax Administration will

gradually reduce the burden on Tax Administration which is now relied on
manpower. That saved time, energy and resources can be utilised in a better
manner to reduce the backlog of cases to a greater extent.

2. Income Tax Officials

Detailed guidelines and commentaries may be provided for all key Sections by
CBDT to address the taxpayers concerns and provide regulatory perspective.
Those guidelines shall be in binding nature on Revenue. This will prevent further
tax disputes on the same or similar Issues. Reducing the Assessment workload of
each Assessing Officers will go a long way. Currently, around 100 to 200 scrutiny
assessments are being handled by each Assessing Officer. Ideally, this can be
reduced 50 for a Deputy Commissioner of Income Tax and 25 to an Income Tax
Officer. Due to the increase in quality assessments will reduce the litigation to a
great extent and also corruption. Further, the Government shall resist from the
fixing of ‘Revenue collection targets’ by each Assessing Officer which again

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 improves their quality of working without any stress and also avoids unhealthy
practices among Tax officials.

3. Large Tax Payer Units & Centralised Processing Centre

The revival of Large Tax Payers Units (LTUs) and Centralised Processing Centre
(CPC) are the need of the hour. LTUs provide a single window to large tax payers
to pay all central taxes. LTUs were introduced in 2006 which is in dormant status
now. The Government must redevelop them as prevailing in developed countries.
In the light of recent tax refund scams, the CPC is also required to be upgraded its
technology backed administration to avoid of such scams in future.
6. Dispute Resolution Panel & Its overhaul

The Dispute Resolution Panel was introduced by the Finance (No. 2) Act, 2009 to act
as an Alternative Dispute Resolution (ADR Forum) in respect of foreign companies
and disputed tax issues involving transfer pricing adjustments arises under section
144C (15)(b) of the Act. An aggrieved party has the option of making a reference to
the DRP, instead of filing an appeal to the Commissioner of Income Tax (Appeals).
The Panel is consisted three Commissioners Rank - level officers. The key drawbacks
of the ‘Panel’ are proper guidelines and instructions on issues involving very
complicated Transfer Pricing Issues and established school of Interpretation on
Double Taxation Avoidance Agreements. The Government shall clarify those Issues
by issuing due Circulars after considering OECD’s guidelines and latest International
Taxation developments around the world. Other suggestions are liberalized ‘Safe
harbour Rules’. An independent expert should be assigned to the ‘Panel’ to oversee or
to issue guidelines and decisions. It is appropriate to extend this mechanism even to
domestic taxpayers.

7. Advance Ruling Mechanism & Its Overhaul

The Authority for Advance Ruling (AAR) has been constituted from 1st Janaruy 1993
to determine such question of law or to obtain an advance ruling with respect to tax
liability arising from a transaction proposed to be undertaken by or with a non-
resident. During 2014, the facility of obtaining an advance ruling was extended to
specified domestic transactions made by residents. In spite of its initial success,
Advance Rulings became a dead letter. The reason is lack of public confidence in the
selection procedure for constituting Authority. Rulings are no longer a preferred
method to have certainty in relation to cross-border transactions. The Central
Government vide Finance Act (No. 2) of 2014 has inserted a provision for increasing
the number of benches. However, no such benches have been constituted so far. The
Taskforce should study the prevailing international standards /practices and suggest
a suitable model to revamp the whole AAR Mechanism.

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 8. Advance Pricing Agreements & Its overhaul16

Advance Pricing Agreement Programme (APAs) is a watershed programme,

successfully, completing its Seven years term for this July, 2019. In 2016-17 and
2017-18 fiscal, India has entered 88 APAs and 67 APAs, respectively, with tax payers,
which shows, APA Programme is emerging as an alternative dispute resolution
mechanism as far as concerned Transfer Pricing related issues.

Agreements Signed: Year – wise

S. No Financial Year Unilateral Bilateral Total

APAs APAs
1. 2013-14 05 00 05
2. 2014-15 03 01 04
3. 2015-16 53 02 55
4. 2016-17 80 08 88
5. 2017-18 58 09 67
Total 199 20 219

A total of 67 APAs were entered last year. With no input on fresh applications
received during the year, one can conclude that pending applications lay with Indian
authorities are 684. It is reported that India has taken an average of 38.62 months to
sign or to conclude Unilateral APAs. Similarly, an average 42.10 months to conclude
Bilateral APAs. Interestingly, even very complex Transfer Pricing issues are also
being sorted through APAs successfully. Presently, two Advance Pricing Officials
team has been duly constituted. The three Advance Pricing Agreement Offices are
located at Delhi, Mumbai and Bengaluru. To clear all backlogs, fresh applications and
speed-up its process, the Central Government shall constitute more APA Offices with
sophisticated teams and infrastructure at various cities such as Chennai, Hyderabad,
and Calcutta. Nevertheless, the role of APAs cannot be overlooked. While overhauling
of APA Regime, the Government shall avoid frequent transfers of APA personnel.
APA with definite long and timeframe for finalization will go a long way and sustains
its continuity. In India there is no dearth for talented tax experts, hence the
Government shall induct qualified ‘Subject Matter Experts (SMEs) for better
understanding and interpretation of the Law.

9. Double Tax Avoidance Agreements & Its revisit

India must wake up to the reality of the abuse of the Double Taxation Avoidance
Agreement (DTAA) provisions using by Multinational companies. Treaty shopping, a
way of tax avoidance, has become the order of the day. The Act has provided that in
case of conflict of provisions, the treaty will prevail over the Act. Having treaties with
the rest of the world is highly impossible. There are signs of formidable changes
occurring in recent times such as revised DTAA with Mauritius, Singapore, Cyprus

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CBDT’s The Advance Pricing Agreement (APA) Programme of India Annual Report (2017-18) August, 2018

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 and other tax heavens. However, a complete revamp of the Double Taxation
Avoidance mechanism is need of the hour. The Taskforce, after consultation with
OECD countries, can suggest suitable measures.

10. General Anti-Avoidance Rule (GAAR) Mechanism & Its Revisit

There is no lack of bright Tax officers in the Country, GAAR must equip with brilliant
honest officers to curb tax avoidance. Onus also lies on the CBDT to bring rules and
best practices effectively. The CBDT can use latest OECD Guidelines with minimal
modifications according to country’s requirement. GAAR provisions should be
drafted in such way where GAAR provisions should not overrule the treaty
arrangements.

11. Adoption of Best International Practices

The United Kingdom

In the United Kingdom, HM Revenue & Customs (HMRC) gives standard guidance to its
Revenue Officials regarding tax law provisions and the judgments of courts and
Tribunals. There will be guidance available online to be considered by its Officials Staff
while enforcing the tax laws. And after every ruling of a Court or Tribunal, the HMRC
gives its view on the judgment - whether it accepts it or whether it is going on an appeal.
This guidance helps in having a uniform stand being taken by all its Officials. This
guidance will make their Officers take a common stand-in interpretation of tax laws
provisions and also in following any judgment of any court. In India, no such guidelines
are being issued by the Central Board of Direct Taxes so far. However, it issues a limited
number of Circulars, Instructions on some sections but Indian Revenue Officials need
complete guidance on all the Sections of the Income Tax Act and also whenever a Court
gives a judgment. This will prevent different Assessing Officers from taking different
stands and also brings down litigation to a great extent.

Singapore

Unlike India, Tax disputes in Singapore are generally resolved in a non-contentious ways.
The Inland Revenue Authority of Singapore (IRAS) nodal Revenue agency and includes
the Comptroller of Income Tax, the Comptroller of GST and the Commissioner of Stamp
Duties. It is said that IRAS is generally conservative and risk-averse which prefers to take
on taxpayers only in tax disputes where revenue exposure is significant, interestingly, the
number of tax disputes remains constantly low since last many years. Theirs tax litigation
is relatively uncomplicated due to simple procedures and definite timelines have been
provided in the tax legislations. Its award of costs is entirely discretionary. Like India,
Singapore also has simplified alternative dispute and lacunae free GAAR and DTAA
Mechanism and principle based BEPS Regime.

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6) Central Government’s Proactive Measures

1. The Taskforce on Direct Tax Code 17

In its one more attempt, 60 years old Income Tax Act, 1961 is all again set for an
overhaul. During the ‘Rajaswa Gyan Sangam’, an annual conference of senior officials
of the Central Board of Direct Taxes (CBDT) and the Central Board of Indirect Taxes
and Customs (CBIC), held on 1st September 2017, the Hon’ble Prime Minister has
opined necessity of redrafting of Income Tax law. Accordingly, to review and draft a
new Direct Tax Law in consonance with the economic needs of the country, the
Central Government constituted the task force. The Terms of Reference (ToR) of the
Task Force are Study of the direct tax system in various countries, Prevailing
International best practices, Economic needs of the country and any other matter
connected thereto.

In that direction, the Task Force, on 21.03.2018, sought feedback and suggestions
from stakeholders and the general public in the form of a questionnaire. Suggestion
and feedbacks sought on Filing of income tax returns, grant of tax credits, processing
/ scrutiny of returns, Litigation and recovery of disputed tax demand and Penalties
and prosecution. Suggestions sought on ‘Tax Litigation’ include whether there should
be a strong Alternate Dispute Resolution mechanism for reaching effective
resolutions? Whether the Mutual Agreement Procedure (MAP) is effective, quick and
transparent? Whether appeals are being disposed off by the Commissioner of
Income-tax (Appeals) in a time -bound manner? Whether the Authority for Advance
Ruling mechanism can be extended to all the assessees irrespective of residential
status for determining the tax liability? Whether is there any specific views on
working of the ‘Settlement Commission and the Income Tax Appellate Tribunal’.

Proposed Measures to reduce ‘Tax Litigation’ 18

 Provision on ‘Fast-Track Settlement’.

 Voluntary Tax Litigation Settlement Mechanism
 Tax Arbitration Mechanism with six months’ timeframe.
 Further Increase in the Monetary Limit for filing ‘Appeals’.
 Separate Mechanism or Benches to deal with ‘International Tax Disputes’

The Taskforce is expected to submit its ‘Initial Draft Report’ on 28th February, 2019.

17
https://www.incometaxindia.gov.in/Pages/task-force-on-direct-taxes.aspx
18
https://www.business-standard.com/article/economy-policy/dtc-panel-seeks-to-curb-tax-litigation-haritable-
trust-may-face-the-heat-119021201287_1.html

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2. Increase in Monetary Limit for filing or withdrawal Income Tax and
Wealth Tax Appeals by the Department before the Income Tax Appellate
Tribunal, High Courts and Supreme Court

In its proactive measures, the Central Government suo motu increased the ‘Monetary
Limits’ for filing or withdrawal of Income Tax and Wealth Tax Appeals by the
Department before the Income Tax Appellate Tribunal, High Courts and Supreme
Court on various occasions by issuing due ‘Instructions and Circulars’ time to time.
They were -

1) By vide Instruction No. 5 of 2014 Dated 10th July 2014, the Government has
increased the monetary limit in the following parameter –
Sl. No. Appeals in Income Tax Matters Monetary Limit in Rs.
1. Before the Appellate Tribunal 4,00,000
2. Before a High Court 10,00,000
3. Before Supreme Court 25,00,000

2) By vide Circular No. 21 of 2015 dated 10th December, 2015

Sl. No. Appeals in Income Tax Matters Monetary Limit in Rs.
1. Before the Appellate Tribunal 10,00,000
2. Before a High Court 20,00,000
3. Before Supreme Court 25,00,000

3) By vide Circular No. 3 of 2018 dated 11th July 2018

Sl. No. Appeals in Income Tax Matters Monetary Limit in Rs.
1. Before the Appellate Tribunal 20,00,000
2. Before a High Court 50,00,000
3. Before Supreme Court 1,00,00,000

4) In the interest of Revenue, the Central Government by amended the said Circular
No. 3 of 2018 from 20th August 2018 without touching the ‘Monetary Limit but
excluded certain cases subject to Constitutional validity, Department’s Circulars,
Instructions held as ultra vires, additions pertaining to undisclosed foreign
income and assets including financial assets and undisclosed foreign bank
accounts.

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 5) Status of Withdrawal of appeals from Appellate Tribunal and High Court as on
15th January, 2019 as follows – 19

At various Income Tax Appellate Tribunal Benches

Appeals Appeals Appeals Percentage of Percentage of

proposed to be withdrawn pending for withdrawal pendency
withdrawn By Actually withdrawal
vide Circular
No. 3 of 2018
dated 11th July
2018
7,785 6,010 1,775 77.20 22.80

At various High Courts

Appeals Appeals Appeals Percentage of Percentage of

proposed to be withdrawn pending for withdrawal pendency
withdrawn By Actually withdrawal
vide Circular
No. 3 of 2018
dated 11th July
2018
8,309 6,329 1,980 76.20 23.80

The CBDT in its Letter dated 15th Janauary, 2019 addressed to the concerned
Department Personnel insisted to conclude the exercise of identification and closing
of such cases by holding personal meetings with senior officials of Registry of Income
Tax Appellate Tribunal (ITAT) and High Courts so that the appeal withdrawal
process is completed by 31st January, 2019. The latest communication shows that
there is a "substantial scope" of withdrawal of identified appeals are still exists.
Withdrawal latest status is awaited.

3. Latest Committees headed by Chief Commissioners of Income Tax 20

In addition to the task force on Direct Tax Code, the Central Government in last
month has constituted ‘Two-High Powered Committees’ to suggest ways for ‘Better
Litigation Management’, to examine the ‘Best Global Practices’ among others to
adopt them suitably to the country’s ever-changing economic need.

19
CBDT’s Letter dated 15th Janaury, 2019
20
https://cfo.economictimes.indiatimes.com/news/cbdt-constitutes-2-committees-of-to-suggest-better-litigation-
management/67977705

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 The First Committee

The Five-Member Committee headed by a Commissioner of Income Tax has been

assigned the 'Terms of Reference – (ToR)' with a four-point agenda to suggest ways
to reduce and streamline the Tax Disputes. It is reported that the Committee will
examine suggestions and issues on litigation management, cases where the Income
Tax Appellate Tribunal has passed perverse or irregular orders, exclusive Tribunal
Benches to deal with ‘International Taxation Disputes’ and to Report its solutions and
the way forward within a month. Thereafter, the Report will be forwarded to the Law
Ministry, Government of India.

The Second Committee

The Four-Member Committee headed by a Commissioner-Rank Officer has been

assigned to examine how the International Good Practices on tax disputes and the
diagnostic tool could be used for tax litigation in India’s context. The Second
Committee will also submit its report to the CBDT within a month.

7) Concluding Remarks

The current Government’s honest efforts to make business and commerce easy have been
widely accepted and India moves 77th Rank in Ease of Doing Business. The next big
challenge is addressing the backlogs in the judicial forums. No doubt is hampering
dispute resolution, contract enforcement, failing in attracting foreign investments and
most importantly clogging the due tax collections which in turn increasing the legal costs
to both tax payer and the Government. The great extent of coordination between the
government, the judiciary and Taxpayer would pave way for addressing the “Law’s delay”
and boost economic activity. This Government’s serious track record on ‘Economic
Development front’ drawn from introducing of much awaited Goods and Services Tax
Law, Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Bill,
2015, Insolvency and Bankruptcy Code, 2016, Benami Transactions (Prohibition)
Amendment Bill, 2016 and Fugitive Economic Offender Bill, 2018, all stakeholders
including Multinational Companies can positively look forward for an overhauled and
‘Friendly Tax Litigation Regime’ in near future.

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