The Central Board of Direct Taxes (CBDT) has reportedly announced a new scheme aimed at a speedier disposal of tax appeals before the First Appellate Forum (FAF), the platform before cases move on to the Income Tax Appellate Tribunals, the high courts and finally the Supreme Court of India. On the face of it, this is a welcome move. The number of appeals before the FAF has been rising and now total over 320,000. As of March 31 this year, the amount involved is over 55 per cent of estimated collections for the current financial year. No wonder, the FAFs are clogged. The CBDT is undertaking this initiative as part of the Vision 2020 litigation management approach, under which the central action plan aims to reduce litigation and enhance the credibility of tax administration in order to secure a fair system. It aims to do so by adhering to stiff timelines for disposing of cases and by instilling a sense of accountability in the whole process. While all of these are commendable goals, the method chosen by the government to achieve these is likely to be counter-productive.
As part of the CBDT Action Plan, Commissioners of Income Tax (Appeals), or CIT (A), will be given additional credits of two units per order in case they pass what is called a “quality” order. Quality orders essentially include those that strengthen the assessment order of an assessing officer and levy penalties on such orders. But, tax experts are asking a valid question: Why should a CIT(A) levy penalties when, under law, its proceedings are supposed to be independent of the assessment process? It is true that a penalty could be levied, but only in cases where there is a “wilful default of evade tax” — a call that can be determined by a quasi-judicial or judicial forum, and not by the first appellate forum. Incentivising CIT(A) to enhance assessment orders introduces a conflict of interest — given that the CIT(A)’s quality order will be judged by his immediate supervisor, i.e. the chief commissioner. It also undermines its impartiality as he or she is prejudiced against the concerned taxpayer. Worse, given that such credits might well be used in determining career growth, they will lead to decisions that will increase litigation further, instead of its stated objective of reducing it.
The current government took over at a time when the notion of “tax terrorism” was gaining currency. It is a known fact that the government is the largest litigant. Over the past decade, there has been a reversal in the trend of disposing of tax cases; more cases now move up the litigation chain to the higher judiciary. This directive will only worsen the situation. Unfortunately, tax authorities have paid little attention to some fundamental reasons behind a rising mountain of litigation in the first place. Chief among them is the tendency to have “high-pitched” assessments. But instead of paying attention to some of the key recommendations of the Tax Administrative Reform Commission (2014) and the Rani Singh Nair Committee (2015) with regard to dealing with issues causing tax disputes, the latest move incentivises CIT(A)s to actually further enhance assessments.