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“Death is not the end. There remains the litigation over the estate”. The above quote by Ambrose Bierce, a noted American journalist sums up the state of litigation in India. Litigation is an inherent component of any modern tax administration as it helps in crystallizing the law and, per se, should not be a cause of concern in a civil society What is of concern is the quantum of appeals, quality of issues litigated, bench capacity to adjudicate and the process of conduct of litigation. As per Economic Survey 2018, over 4,65,000 income tax cases were pending before the judicial fora, out of which 3,28,173 cases were pending before Commissioner (Appeals), 92,338 cases were pending before the Income Tax Appellate Tribunal, 38,481 cases were pending before High Courts and the balance 6,357 cases were pending before the Supreme Court.[1] Under the Vivad-se-Vishwas scheme launched in 2020, over 1,10,000 taxpayers have opted to settle tax disputes of over Rs. 85,000 crore.[2] This clearly shows the taxpayers’ inclination to resolve disputes by adopting a mid-way if nothing else.

Increase in economic activity, liberalization of most sectors of the economy to foreign investors, rising incomes, increasing complexities in digital and financial transactions etc. have given rise to complexities in tax administration and varied interpretations of the tax law. All of these have resulted in substantial increase in litigation. Add to this, the number of amendments to the Income-tax Act, of 1961 which currently number over 7,500 coupled with inadequate guidance from the administration, often patchy drafting of the law and retrospective application of some amendments, and it comes as no surprise that Indian courts are flooded with cases. To add further burden on the judicial forums, particularly High Courts & the Supreme Court, the Union/ tax administration continues as the most significant litigant. Over the past few years, and particularly since 2014, the Government & Department of Revenue has taken several legislative & administrative steps to reduce litigation. Adopting this very outlook and in continuation with other laudable measures like faceless assessment and appeal scheme, taxpayers charter, etc, Ms. Sitharaman’s third Budget has recognized the need to reinvigorate the systems of grievance redressal in India with respect to direct taxes by proposing a set of measures that is expected to enhance taxpayer experience and thrust taxpayer rights.

In line with the Government’s aim to reduce the interface of the tax department, simplify the tax administration, ease compliance, reduce litigation and provide greater tax certainty, Union Budget 2021 has introduced five broad measures.

  1. Revamping the Advance Ruling System to bring certainty by speedy disposals

The need for advance rulings under the Indian law was explained in the budget speech of 1992-93, “in the interest of avoiding needless litigation and promoting better taxpayer relations, a scheme for giving Advance Rulings in respect of transactions involving non-residents, is being worked out and will be put into operation soon. The scope of this can be extended subsequently on the basis of experience gained.”

Nearly after three decades, the Government has proposed to cease functioning of the Authority for Advance Ruling (AAR) owing to its the operational failure – poor disposal rate coupled with inability to fill judicial vacancies, compounded by often conflicting rulings. While it is an admitted position in law that AAR rulings had no binding precedent value, the often-conflicting rulings created great uncertainty amongst the international business community with many ending up in the Courts for final determination. Budget 2021 has proposed to constitute a Board of Advance Ruling (BAR) to provide rulings in a timely and efficient manner.

This budget proposal which while long due, took most by surprise was put in motion due to the scathing remarks made by Supreme Court in the case of National Co-operative Development Corporation[3]. The Supreme Court observed that the ground level situation with the present AAR has proved to be illusionary due to increasing number of applications and low disposal rate. Further, the Supreme Court observed that contrary to the expectation that a ruling would be given in six months[4], the average time taken for disposal was reaching around four years.

The AAR was introduced with an intention to provide early tax certainty to the transactions of non-resident taxpayers and thereby avoiding tax disputes. The AAR benches consisted of a Chairman and regional Vice-Chairmen, revenue members and law members. Considering such benches are headed by retired judges of Supreme or High Court, such positions remained vacant due to non-availability of eligible persons and delayed appointments, thereby seriously hampering the functioning of AAR. It caused serious reputational damage to the working of AARs.

Under the Finance Bill, 2021 proposal, the revamped system i.e. the BAR shall consist of two members, each being an officer not below the rank of Chief Commissioner. The challenge in the said proposal is absence of judicial independence, unbiased and neutral proceedings given that the appointments will be made by the Central Board of Direct Taxes (CBDT). Given that the mandate of BAR remains the same as under AAR, which is expected to make a determination of question of law and fact, in our humble view, the proposal deserves a relook to boost confidence of the taxpayers by way of its independence. Like in the UK, time has come for India to experiment with part-time judges representing senior members of the bar as members. Alternatively, necessary amendments to make way for retired ITAT members to be part of the BAR could be considered.

An alternative proposition could be to allow non-residents to avail MAPs even for rulings issued by BAR. The CBDT had in its MAP Guidance[5] issued on 7th August 2020 stated that the AAR is an independent statutory dispute prevention body. The process of giving advance rulings by AAR is independent from the audit and examination functions of tax authorities. Given the current composition proposed, this could be viewed as an incorrect proposition to deny MAP.

Further, the proposal of a ‘faceless’ BAR could prove to be an impediment. Under the advance ruling mechanism, the transactions for which applicants approach to seek tax certainty are mostly complex.

Under the BAR proposals, orders have been made appealable by the Revenue & the taxpayer as compared to the earlier AAR regime, where High Court writ remedy was the only remedy. Appeal by the tax administration is bound to be a non-starter as non-resident investors will have scanty confidence in the rulings of BAR and hence, a right of appeal should be accorded only to the taxpayer.

The objective of the newly constituted BAR is to provide speedy disposals of the advance ruling applications and provide tax certainty to taxpayers before they undertake a major transaction. To enhance accountability and transparency, it is also suggested that the BAR should release annual reports on the number of applications filed and rulings issued, timelines, etc. for reviewing and monitoring the new advance ruling mechanism.

  • Reforming the scheme for reassessment

Reassessment has been amongst the vexed and litigated issues under the Income-tax Act, 1961 (‘the Act’). As per the proposals of Budget 2021, firstly, the reassessment shall be based on a) any ‘information’ which has been flagged by the Risk Management strategy formulated by the Board or b) final objection raised by CAG stating that original assessment has not been in accordance with the Act.

With advanced application of technology tools, the department is capturing all relevant information related to transactions of taxpayers (Section 285BA containing statement of financial transaction or reportable account). Similarly, information is received from other law enforcement agencies. This has made assessment, reassessment of income escaping assessment, to a greater extent, information-driven.

Under the proposals, a pre-condition for the Assessing Officer to have “reason to believe” (Section 147) that the income has escaped assessment has been done away with. This is in line with the overall theme of other measures to reduce exercise of discretion of tax administration. Instead, an additional step of conducting enquiry (before issuance of notice) with respect to ‘information’ suggesting escapement of income has been added (new Section 148A).

Secondly, the taxpayer shall be afforded an opportunity of being heard, after serving a show cause notice, in a time bound manner. This is similar to the ‘pre notice consultation’ mechanism envisaged under indirect tax laws where, instead of commencing litigation, an opportunity is given to taxpayers to explain their position. After considering such reply, the Assessing Officer shall decide whether it is a fit case for reassessment and pass an order.

Viewed dispassionately, the new reassessment scheme as proposed to be legislated was laid out by the Apex Court in the landmark case of GKN Drive Shafts (India) Ltd. vs ITO [2003] 259 ITR 19 (SC), though, regrettably, was not followed by the field officers despite a catena of High Court & Tribunal decisions affirming the principles and procedural steps laid down by the Apex Court.  

Thirdly, the time-limit for re-opening of assessment has been reduced to three years from the current six years from the end of the relevant assessment year. However, re-opening up to 10 years is proposed only if there is evidence of undisclosed income of Rs. 50 lakh or more in a year. The proposals on revision of timelines seek to convey that belated enquiries were viewed as harassment to the taxpayers. However, with respect to the threshold of Rs. 50 lakh or more, it is noteworthy that the budget speech uses the words ‘serious tax fraud cases’ or ‘serious tax evasion cases’. If this is the intent, most cases where genuine differences on additions would be above such threshold and besides diluting the amendment, it is grossly incorrect to term them as ‘serious tax fraud or evasion cases’. In any event, large cases of reassessments will have to be argued on merits of new principles summarized above. 

Fourthly, the assessments arising due to search cases have been merged with the new reassessment scheme. Since pending assessments shall not abate on the date of the search, search assessment and pending assessments could run parallelly.

In our view, recasting the entire scheme is certainly a path breaking step, with safeguards to check discretionary powers of tax officials, which were often misused and instilling a sense of and accountability for judicious determination of cases to curtail indiscriminate and discretionary reassessments. However, there could be a fresh round of litigation if the proposed law is not supported with FAQ’s particularly, the term ‘information’ as well as the jurisdiction of the risk management strategy / CAG. In the absence of adequate clarity, the new reassessment scheme could give rise to a fresh set of disputes.

  • Extending the new normal of faceless system to the ITAT

In line with the government’s e-Governance initiatives, wherein a host of measures such as Faceless Assessment Scheme, Faceless Appeal Scheme and Faceless Penalty Scheme were introduced in the past year to reduce physical interface of taxpayers with the department, a National Faceless Income Tax Appellate Tribunal (‘ITAT’) Centre has also been proposed. The purpose of the faceless ITAT mechanism is to enable all communication between the ITAT and the appellant to be in electronic form.

With respect to the intent of the scheme, there appears to be a conflict arising in the budget speech. While commencing the relevant part of the speech with the words “For ease of compliance and to reduce discretion, we are committed to make the taxation processes faceless”, it concludes with the words “Where personal hearing is needed, it shall be done through video-conferencing.” This suggests discretion on the part of the ITAT on the requirement of a personal hearing, thereby raising questions on breach of principles of natural justice (audi alteram partem). Based on our experience, oral advocacy is essential to demonstrate the purport of undertaking the proposed transaction besides it goes against the principle of public confidence in judiciary as laid down by the Hon’ble Supreme Court in the case of Naresh Shridhar Mirajkar and Others v. State of Maharashtra & Another [(1966) 3 SCR 744].

Moreover, the newly inserted sub-section (7)(a) of Section 255 refers to eliminating the interface between the ITAT and litigants to the extent technologically feasible. This implies over reliance, rather complete reliance on written submissions of the appellants, which may be insufficient to explain the nuances of taxpayer’s businesses. In a way, the appellants may be restricted to present oral arguments before the members, thereby adversely affecting their right to be heard in person. An opportunity of “being heard” by the ITAT, as envisaged under Section 254 of the Income Tax Act, 1961 should not be interpreted so as to solely include written submissions made by the parties. It is also fitting to mention a recent case of Salem Sree Ramavilas Chit Company Vs DCIT (W.P. No. 1732 of 2020), wherein the Hon’ble Madras High Court observed that an objective assessment without human interaction could lead to an erroneous assessment.

The ITAT is the final fact-finding authority as has been held by the Supreme Court in several cases and hence, its importance cannot be undermined. The inherent challenges of virtual hearings pertaining to standards of fairness, risk of oversimplifying complex facts, technical glitches and internet disruptions may continue to challenges. While it is true that the Assessing Officer is the fact-finding body in the first place, the very fact that the matter reaches ITAT evidences that the appreciation of the facts by the Assessing Officer is in dispute.

As is popularly said “the devil is in the details” and it just seems grossly unfair to expect ITAT members to meticulously scroll through paper books often running into several hundreds of pages to be able to find relevant facts to support the propositions of either parties. As an example, in a transfer pricing dispute often an entire annual report of a company is filed as evidence of authenticity even though only one or two lines from the notes to accounts may be relevant. While these are cross referenced in written submissions, it would mean onerous responsibility on the ITAT member to read the submissions.

Looking at the positives, the dynamic jurisdiction will certainly help achieve even distribution of work between different benches and ensure efficient & centralized administration with the ITAT faceless center acting as a virtual master of the roster and improving the efficacy & functioning. Further, it can be inferred that the decisions taken by the ITAT in one case could be applied uniformly across India. Speedy disposal of cases, reduced litigation costs and time saving proceedings are amongst other advantages of faceless ITAT system.

A faceless ITAT in initial reactions of the ITAT bar members has attracted criticism on the ground that it’s a risky experiment since the faceless assessment, appeal and penalty schemes were only recently implemented which offer limited experience. An desktop survey of experiences of the stakeholders combined with a review of the orders passed under the novel schemes should have been first considered before stepping it up to the ITAT level. A writ petition challenging the mechanism where the approval of the Chief Commissioner is required for video conference facility, is before the Hon’ble Delhi High Court in the case of Lakshya Budhiraja v. Union of India & Anr [WP(C) 8044 /2020]. It is being argued that the mechanism is discriminatory in nature as it gives the officers discretion to deny personal hearing and that no person should be judged without a fair hearing. Clarity on such legal challenges may help decide the fate of the prospective success of faceless ITAT proceedings.

  • Constituting the new Dispute Resolution Committee (DRC)

India’s rank of 88th in the World Justice Project Rule of Law Index in accessible, impartial, and effective alternative dispute resolution improved from 96th in 2019. Continuing its efforts to boost ADR mechanism and for providing early tax certainty to small and medium taxpayers, one or more Dispute Resolution Committee (DRC) is proposed to be constituted with an intention to reduce litigation. Under the proposed scheme, any taxpayer with a taxable income up to Rs 50 lakh and disputed income up to Rs 10 lakh shall be eligible to approach the DRC in respect of a dispute order to see reduction or waiver of penalty and immunity from prosecution, as a result of the assessment.

Such disputed orders exclude those arising on search operation, requisition, survey or information received by exchange of information under tax treaty and prosecution under economic offence cases. This step shall certainly curtail disputes for small tax payers and unclog the judicial machinery to focus on larger cases. This is also viewed as a pilot for suitably extending it to other taxpayers.

  • Abolishing the Income Tax Settlement Commission

Unlike AAR, which shall be notified for discontinuance, Income-tax Settlement Commission (ITSC) has been discontinued with immediate effect i.e., from February 1, 2021. This implies that no applications can be filed after this date.

To deal with pending cases, an Interim Board of Settlement shall be constituted, consisting of three members, each being an officer of the rank of Chief Commissioner. In case of difference of opinion between the members, the decision shall be taken by the majority. This step is viewed as reformative given the efficacy of the functioning of ITSC benches across the nation and the restrictive use by litigants to settle disputes and those opting them for misuse, particularly in search cases.  

  • Conclusion

Continuing the efforts of prior budgets, particularly with regard to revamping of the penalty regime, Vivad se Vishwas scheme for settling past tax cases, this budget has carried forward the message with greater vigor to revamp the tax litigation and dispute resolution mechanism with intensive use of technology. Since the devil lies in implementation of policies, it is to be seen how the above measures pan out in the near future.

Abolishing the Settlement Commission, replacing the AAR with a seemingly less-independent BAR, and finally proposal for faceless ITAT, all of these together certainly point towards a directional shift in the litigation landscape in India.

(The authors acknowledge the contribution of Ms Divyasha Mathur, Associate at BMR Legal).

Mukesh Butani & Seema Kejriwal are Partners and Shreyash Shah is Managing Associate at BMR Legal.


[1] Economic Survey 2017-18

[2] Budget Speech, 2021

[3] CIVIL APPEAL NOS. 5105-5107 OF 2009

[4] Section 245R(6) of the Income Tax Act, 1961

[5] F.No. 500/09/201 6-APA-I

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