Why you shouldn't be afraid of tax department anymore

The tax department has recently issued 12 commandments to its field offices in an effort to usher in a customer-friendly regime. This is contained in a three-page note called “Steps towards nonadversarial tax regime”. This is in line with the new government’s vow to end tax terrorism.

The courts have also not been sitting quiet. On November 18, the Bombay High Court ruled in favour of the Indian arm of Royal Dutch Shell Plc in a transfer pricing dispute with the Indian tax authorities that made waves internationally and was seen as symptomatic of the troubles facing foreign investors in India. The judgment comes as a boost not only to Shell, but will help several other multinationals, improving the sagging investment sentiment in the country.

Earlier, the Bombay High Court ruled in favour of Vodafone in a long-running similar matter. In another exemplary order passed by the same court, a penalty of Rs 1 lakh was levied on the tax department directing it to recover from the official responsible for filing the frivolous appeal. The court held that the revenue officers must realise that an executive power conferred on them is in the nature of a trust. They hold office as trustees of the public at large. They deal with public revenue and that cannot be wasted in such frivolous litigation. The court went on to wonder why higher officials did not have the courage to take bold decisions particularly of not pursuing such matters up to this court or higher. They ought to take an informed, rational decision subserving larger public interest and the power to file appeals should not be abused to harass innocent assessees.

Jurisdiction

Again recently, the Supreme Court struck down the National Tax Tribunal Act, on the grounds that it encroached upon the power of the judiciary and the principle of separation of powers. The apex court said though the Parliament could create tribunals, these should have the trappings of a court. Indeed, specialised tribunals are functional in many sectors, but what rendered NTT unconstitutional was the faulty legislation. The judgment will have repercussion on speedier disposal of appeals before high courts. All the cases mentioned above are emblematic of what ails the tax department. In a startling revelation, the Central Board of Direct Taxes reported in 2013 that 97 per cent of income tax demand arrears, quantified over Rs 4.66 lakh crore, are “difficult” to be recovered. The same precarious position continues in 2014. It is virtually impossible to recover nearly 90 per cent  of the money which authorities had claimed as unpaid taxes.

System

What has the situation come to such a pass? Why is the legal system clogged with tax litigation?

1) As a measure to reduce litigation, the tax department has fixed monetary limits of tax effect below which it does not (or ought not) pursue litigation. Even if the limit is exceeded, litigation needs to be decided on merits. But violations are galore. Many officers play it safe. I recall that whilst working in the Judicial Section of CBDT, proposals were received from chief commissioners recommending SLP which, as per instructions, were not to be filed. In many instances, the members, rather than not pursue any further action, went along with the recommendations in violation of their own instructions. This is not likely to happen now. As per the latest directive, decision to file reference before the high court will be taken by two chief commissioners.

2) The income tax department, in trying to meet its steep collection targets, makes high-pitched assessments. Officials fear that their career prospects would depend on their success in meeting collection targets. They are thus forced to make perverse disallowances. I recall that whenever there used to be a budget shortfall, the commissioner and his officers were under huge pressure to plug the gap. Meetings upon meetings were held with the assessees to pay more advance tax with a promise to refund the excess at the start of the new financial year. If that didn’t work, there was a strong likelihood of disallowances being made, however unjustified.

This approach will hopefully change with the new directive which specifically mentions that high-pitched assessments without proper basis are strictly disallowed.

3) The appellate system, within the tax department, is still, by and large, informed by a pro-revenue mindset instead of an objective approach. These are manned by tax officers after all. The tax department whilst taxing small assessees usually makes ad-hoc disallowances of expenses such as telephone, petrol, entertainment, local travel and others holding these to be personal in nature. This is a wrong way to pass an order and done mostly on account of fear of audit or vigilance. The officers feel that acceptance of the income as per tax return without making any variation will be looked askance by these authorities. How does the appellate authority deal with this unsubstantiated addition? I took the matter to the chief commissioner. He was well respected for his erudition. “How much has the tax officer disallowed?” he asked. “1/4th, Sir”, I replied. “Look, as appellate commissioner it's your duty to be fair to the assessee. The excesses suffered by them in the tax assessments need to be redressed by you”, he stated. Then came the punch line-" Instead of 1/4th, disallow 1/ 6th”.

4) In matters concerning cross-border transactions, this is still an evolving area of taxation. The tax department adopts a very narrow view which is followed through very aggressively. Frequently, this leads to jettisoning established canons of taxation and making outlandish disallowances, such as the Shell and Vodafone cases mentioned earlier.

Playing it right

But there are many good men and women who work with objectivity and fair play; who do not treat the tax proceedings as adversarial and the assessee as a foe; who carry out their job without fear or favour; who collect not a paisa less nor more than what is due. The climate in the tax department is changing. The courts are stepping up and prodding the department to do the right thing. The present dispensation is making the right moves. The plaque which has jammed the judicial arteries should hopefully soon begin to disintegrate. The litigative mindset would, sooner than later, be put out to pasture.