[Surya Prakash BS is a chartered accountant and law graduate working at DAKSH, a non-profit working on transforming the law and justice systems. He has handled finance and tax functions at corporates in his previous roles. Views are personal]
The 2022 Union Budget makes one more attempt to reduce the volume (the number of cases) and velocity (frequency of filing) of income tax litigation. The proposed section 158AB under the Income Tax Act, 1961 enables the Revenue department to stop filing repeated appeals with the High Courts and Supreme Court on a question of law that is already pending before a jurisdictional High Court or the Supreme Court. Coming in the backdrop of the rolling back of the retrospective tax provisions and the setting up of the Dispute Resolution Commission in 2021, these signal a definite shift in tax policy. However, translating intent into impact will need fine-tuning of the legal provisions and clarity on certain aspects.
This post provides context to the proposed amendments to understand their implications and suggests areas that need further clarity on to make these changes effective.
Background
Indian tax authorities are required, where their opinion differs from the taxpayer’s, to raise tax demands within certain time limits to protect Revenue interests. In many cases where the difference of opinion is a question of law (and not merely a question of fact), the dispute is likely to arise with respect to the income tax returns of more than one year. Disputes with respect to each year take their own time traversing through the Income Tax Appellate Tribunal (ITAT), the High Court and the Supreme Court. There are statutory time limits for filing of appeals under the rules of the respective dispute resolution fora. This effectively compels the Revenue department to file an appeal (so as to protect Revenue’s interests) with the ITAT, High Court or Supreme Court on questions of law that are already pending with the High Court or the Supreme Court or may have been ruled in favour of other taxpayers by these fora on the same questions of law.
The proposed section 158AB effectively stops the clock of limitation for the Revenue Department to file an appeal on the same question of law till the matter reaches finality.
At the root of these repeated appeals is the low success rate of the appeals of the Revenue Department. As per the Economic Survey 2018, the success rate at the Supreme Court and the ITAT level was 27% and just 13% at the High Court levels.
In summary, the proposed section 158AB provides for:
- a group of two or more Chief Commissioners or Principal Commissioners (called a ‘collegium’), as may be specified by the Central Board of Direct Taxes;
- to advise the Assessing Officer (through the jurisdictional Principal or Chief Commissioner);
- to not file an appeal with either the ITAT or the High Court;
- until a question of law has reached finality.
For this mechanism to be invoked, there needs to be a ‘question of law’ under dispute: either for other years in the case of the same taxpayer or another taxpayer. In this context, it may be noted that under the Act, appeals can be filed with the High Court when there is a ‘substantial question of law’ (section 260A).
Previous similar efforts
The Budget proposals build upon similar attempts in the past. Provisions to enable the Revenue department to pause the filing of appeals were first introduced in 2015 pursuant to section 158AA. There are, however, significant differences between section 158AA and the proposed section 158AB:
1. A collegium to advise the Principal Commissioner/Commissioner has been introduced now. Earlier, the discretion to invoke this mechanism was with the Principal Commissioner/Commissioner. This model of using a collective body to diffuse responsibility and use expertise follows that of the Dispute Resolution Panel (section 144C) in use since 2009 for transfer pricing and international tax disputes. The Dispute Resolution Committee under section 245MA set up in Budget 2021 also follows this model.
Given the constraints of the legal and institutional framework applicable to civil servants in India (the oversight of the 3 Cs – the Central Bureau of Investigation, the Central Vigilance Commission, and the Comptroller and Auditor General), the diffusion of responsibility for not filing appeals is indeed a welcome innovation.
2. The proposals envisage considering questions of law that have been appealed in the cases of other taxpayers’ cases. Currently, only those of the same taxpayer can be considered by tax authorities when deciding whether to pause the filing of appeals.
3. Currently, the filing of appeals is paused only where a question of law is pending before the Supreme Court – the proposal is to include questions of law pending at High Courts also under this framework.
A sunset clause for section 158AA has also been proposed due to the expanded provisions envisaged under section158AB.
While the above provisions cover situations where the Revenue department has to file an appeal, and the process can be initiated only by the Revenue department, section 158A, which has been in place for some time now, enables the taxpayer to take the initiative to invoke a similar mechanism where the taxpayer has paid/needs to file an appeal. The taxpayer can claim that the questions of law in appeal in his case for the other years are the same; if the tax officer and the taxpayer mutually agree on the application of the ruling of the Court to other years, then the taxpayer can agree notto raise the same question for other years.
Glass half full
The distinction between questions of fact and questions of law has been debated for a long time now (see this example of a 1957 judgment of the Supreme Court). Tax disputes are mostly mixed questions of facts and questions of law. E.g., whether a person was dealing with shares as a business or as an investor is dependent on the frequency of trading in shares, intention as apparent from records, and classification of such activities.
As noted earlier, under section 260A of the Act, High Courts can admit appeals only where there is a substantialquestion of law. However, as a matter of practice, High Courts no longer distinguish between questions of law and fact; all appeals are admitted routinely. Applying the mechanism under the proposed section 158AB only to questions of law may turn out to limit its benefits. Indeed, it may potentially open up further unnecessary questions and complications. For example, tax officers may still be required to file appeals to the ITAT as they are the last appellate body on questions of fact. As a strong governance mechanism and guardrails for the process have been established, and the intention is to reduce litigation, the provision should be amended to allow tax authorities to merely consider judgments/rulings as applicable to the dispute on hand. In other words, there should be no need for a ‘question of law’ as a precondition to qualify for this mechanism.
Questions of law are broad and generally remain the same for many taxpayers. Section 158AB has taken a step in the right direction by allowing the collegium to consider questions of law under appeal for other taxpayers also in deciding on the course of action for a taxpayer. It is possible to go one step further and allow the collegium to apply the mechanism under the proposed section 158AB to more than one taxpayer at the same time. The collegium can adopt ‘batch processing’ to cover all taxpayers facing the same question of law in their cases. Such a provision may make it easier for the collegium to take a decision from defending their position too.
The model of the Dispute Resolution Process (DRP) introduced in 2009 in connection with transfer pricing and international tax disputes under section 144C is largely viewed as a success due to a combination of factors: the taxpayer was provided with the option to choose what route to take for every single draft order; the DRP was bound by timelines, as was the tax officer thereafter. In the proposed section 158AB, it needs to be clarified who will initiate the process of referring cases to the collegium – whether they will do it on their own or whether tax officers can also/need to refer it to them. Section 158A requires the taxpayer to take the initiative – but this is limited to only those cases where appeals need to be filed to the ITAT or other lower appellate authorities. Since the Revenue department files most appeals after the ITAT, the mechanism under the proposed section 158AB should be amended to bring it on par with 158A by allowing the taxpayer also to initiate the process. Timelines for the collegium to decide such applications and for the Principal Commissioner/Commissioner to inform the respective tax officers also need to be specified to make these processes time-bound.
Where orders pursuant to a DRP process would be considered under the proposed section 158AB, it needs to be ensured that the collegium composition is not questioned/questionable from the perspective of conflict of interest and principles of natural justice.
It is not clear whether the act of the tax officer to give effect to the decision of collegium is appealable or not. Subsection (6) of section 158A says the taxpayer cannot further appeal order in this regard under the Act (the right to file a writ under Article 226 can of course never be taken away). Similar language needs to be included in section158AB – if the option of allowing taxpayers to initiate the process is allowed.
Lastly, the proposals now allow for questions of law as decided by the jurisdictional High Courts also to be applied by the Revenue department (as against only those of the Supreme Court provided under section 158AA). This presents a practical challenge where High Courts take different views on the same matter. While the provision clearly states that only those of the jurisdictional High Court shall be considered, what if there is no view of the jurisdictional High Court,but there exists a favourable/unfavourable view of another High Court? Or where the Revenue appeals to the Supreme Court – either because it believes in the merits of the case or because of divergence of views between High Courts. Solutions for such situations (which are not infrequent) may need to evolve as the new provisions are applied over thecourse of time.
Conclusion
The proposal to further strengthen provisions to curb the Revenue department from filing appeals is a welcome step in the right direction. It should be noted here that the route under section 158A (where the taxpayer can take the initiative) has been used only very rarely and can by no stretch of imagination be said to have met its objective. Making these new ideas work will require more imagination and thinking through the details and implementation aspects.
– Surya Prakash BS