Enhanced limits to reduce pending direct tax litigation in one stroke

A recent circular (number 17/2019) issued by the Central Board of Direct Taxes (CBDT) on August 8, 2019 is in one stroke set to dramatically reduce pending direct tax litigation. The monetary limit of “tax effect” for filing of cases by the Income-Tax Department has been revised significantly upward compared to the limits in the earlier circular no. 3 of 2018. The limit for filing appeal before the Appellate Tribunal has been increased from Rs 20 lakh to Rs 50 lakh, the limit for filing of appeal before the High Court has been increased from Rs 50 lakh to Rs 1 crore, and the limit for filing an appeal before the Supreme Court has been increased from Rs 1 crore to Rs 2 crore.

Further, in a landmark ruling dated August 14, 2019, the Income Tax Appellate Tribunal (ITAT) Ahmedabad in the case of ITO Vs. Dinesh Patel (ITA No. 1398/Ahd/2004) disposed of approximately 628 appeals in which the tax effect was less than Rs 50 lakh.

The annual report of the Finance Ministry for financial year 2017-18 summarizes the pending appeals and tax effect. It is an indicator of the huge number of cases piled up or pending and the significant amount stuck in litigation (see table).

The CBDT circular has come at an appropriate time. It will provide much needed respite to business entities and taxpayers, who are already facing the onslaught of slowdown in business and tightening of liquidity conditions. It is expected that at least 30 per cent of cases will be covered by this circular. It will enable the appellate and judicial authorities to focus on high-value litigation and clear the massive backlog of pending cases. Next, let us turn to some of the key points of the circular and their implications for taxpayers.

What is tax effect?

The term ‘tax effect' means the difference between the tax on the total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of the issues against which appeal is intended to be filed. 'Tax effect' includes surcharge and cess. In cases where returned loss is reduced or assessed as income, the tax effect would include notional tax on disputed additions.

Implications of ITAT–Ahmedabad’s ruling

As mentioned above, the ITAT Ahmedabad, in the case of ITO vs. Dinesh Patel (ITA No. 1398/Ahd/2004), disposed of approximately 628 appeals in which the tax effect was less than Rs 50 lakh. It ruled that it does not have slightest hesitation in holding that the concession extended by the CBDT not only applies to appeals filed in the future but equally to those pending for disposal currently.

It held that the circular dated August 8, 2019 is not a standalone circular. It is to be read in conjunction with the CBDT circular no. 3 of 2018 (and subsequent amendments to it). All it does is replace paragraphs three and five of the said circular. Further, it noted that all other portions of circular no. 3 of 2018 have remained intact.

It referred to para 13 of circular no. 3 of 2018, which remains intact. This para reads as follows: “This Circular will apply to SLPs/ appeals/ cross objections/ references to be filed henceforth in SC/HCs/Tribunal and it shall also apply retrospectively to pending SLPs/ appeals/ cross objections/references. Pending appeals below the specified tax limits in para 3 above may be withdrawn/not pressed.”

Retrospective applicability may be for older cases too

As circular no. 3 of 2018 was in supersession of the earlier circular no. 21 of 2015, it is a complete code in itself, except for the amendments made in clauses 3 and 5 by the recent circular of 2019. As such, based on the interpretation of the Ahmedabad Tribunal’s ruling, it can be inferred that all pending matters for earlier periods even before 2018 shall also be eligible to claim the benefit of the enhanced limit. It is worth noting that the main appeal decided by the ITAT Ahmedabad in the case of ITO vs. Dinesh Patel was for assessment year 1998-99. While ruling on this, the ITAT observed as follows: “The lead case before us is an appeal filed over fifteen years ago by the Income Tax Officer and it deals with an assessment year which pertains to a period over twenty years ago. Yet, the matter had not reached finality and the revenue’s challenge to the relief granted by the Commissioner (Appeals) had remained undecided. That is nothing but prolonged agony of uncertainty to taxpayers.”

However, no official clarification has been issued by the CBDT on retrospective applicability.

Tax effect to exclude interest and penalty

In case the chargeability of interest is the issue under dispute, the amount of interest shall be the tax effect. In case of penalty orders, the tax effect will mean quantum of penalty deleted or reduced in the order to be appealed against.

In case of composite orders

It has been clarified in the recent circular that in the case of a composite order of any High Court or appellate authority which involves more than one assessment year and common issues in more than one assessment year, no appeal shall be filed in respect of assessment year or years in which the tax effect is less than the monetary limit. In cases where the composite order involves more than one assessee, each assessee is to be dealt with separately.

The above provision was also there in the earlier circular and the above provision regarding composite orders is in consonance with the earlier provisions and provides for distinct determination of tax effect for each year in case of composite orders.

SC’s quashing of SLPs is encouraging

In a welcome and swift move, even the Supreme Court, in a few matters vide its various rulings, has dismissed Special Leave Petitions (SLPs) filed by the income-tax department, wherein the tax effect was less than Rs 2 crore.

Thus, the above developments will dramatically reduce pending direct tax litigation and improve the business environment. This coupled with the scheme for indirect tax disputes settlement, which will become operative shortly, will result in a new era of swift resolution of tax disputes and the end of multi-stage, never-ending litigation.

The writer is founder, RSM India