Thought of having a legal case or dispute itself is sufficient to give headache to any person. An, if the dispute is with the Income tax authorities in relation to an income tax matter, it can surely give sleepless nights to the litigant taxpayer.
Even for the Government, litigation in income tax matters have been a major area of concern and from time to time, the Government has been taking several steps to reduce litigation in income tax matters. As per statement of Hon’ble Finance Minister as part of Budget 2020 speech, presently, there are around 4,83,000 direct tax cases pending in various appellate forums, viz. Commissioner of Income Tax (Appeals), Income Tax Appellate Tribunal, High Court and Supreme Court.
In light of above background, we have explained in brief various options available to a taxpayer, in case there is any income tax case or proceedings going on.
Proceedings before Assessing Officer/ Original proceedings
In case a taxpayer receives any notice from an Assessing Officer or any other officer having jurisdiction over him, generally, that is commencement of an Income tax proceedings. Such proceedings can be in nature of an Income Tax assessment proceeding for assessment of own income, or TDS proceedings (in respect of taxes deducted/ not deducted on payments made by the taxpayer) or certain other survey, search or investigation proceedings or any other proceeding seeking certain information/ documents from the taxpayer relating to any transaction which he may be a party to, etc.
First and foremost important aspect, in case any such proceeding is initiated or notice is issued to the taxpayer, if proper representation is made at assessment/ original proceedings, it significantly reduces chances of any potential dispute with Income tax authorities and subsequent litigation.
However, in event, a taxpayer receives an adverse assessment/ other order, there are various statutory or other legal options available, which can be explored by taxpayer if he wants to challenge such order.
Normal appellate process for dispute resolution under IT Act
In case the taxpayer wants to challenge any assessment order, penalty order, order u/s 201 treating the taxpayer as ‘assessee in default’ for non-deduction or short deduction of TDS, it may file a statutory ‘first appeal’ before the Commissioner of Income Tax (Appeals) [“CIT(A)”] u/s 246A of the Income Tax Act, 1961 (‘IT Act’), which contains a list of different orders, which can be challenged by a taxpayer before CIT(A).
In case either the taxpayer or tax officer issuing the order appealed against is not satisfied with order of the CIT(A) in first appeal, it may file second appeal before the Income Tax Appellate Tribunal (‘ITAT’) u/s 253 of the IT Act. ITAT is considered to be the final fact finding authority for income tax matters.
However, in case either the taxpayer/ tax authorities are not satisfied with order of the ITAT, a further appeal may be made to the jurisdictional High Court u/s 260A of the Act, only on ‘substantial questions of law’ arising out of order of the ITAT.
Finally, if either party is not satisfied with order of the High Court, it may file an appeal before the Supreme Court u/s 261 of the IT Act, if the High Court certifies it to be ‘fit for appeal before Supreme Court’. Order of the Supreme Court is considered to be final word on the issue and law of the land.
Dispute Resolution Panel (‘DRP’): Alternate appellate route only for Multinational Enterprises
In order to provide a fasttrack dispute resolution to Multinational Enterprises (‘MNEs’), an alternate appellate/ dispute resolution mechanism was introduced in IT Act in form on Section 144C vide Finance (No. 2) Act, 2009. Section 144C applies to any person: (a) in whose case a Transfer Pricing adjustment1 is proposed; and (b) in case of any non-resident (other than a company) or a foreign company2.
Under this route, for any eligible assessee, to whom Section 144C applies, the Assessing Officer first issues a draft order proposing adjustments/ variations, with an option to taxpayer to file objections against draft order before the DRP, consisting of 3 Commissioners of Income Tax. Post disposal of objections by DRP within a mandatory period of 9 months, the Assessing Officer is required to issue final assessment order in accordance of directions of DRP. If taxpayer is not satisfied with final assessment order, it can straightaway file appeal before ITAT. Practically, time taken to reach before ITAT via DRP route is much faster in most of cases vis-à-vis appellate route through CIT(A).
It may also be noted that Assessing Officer is not entitled to appeal before ITAT against final assessment order passed pursuant to DRP’s directions3, whereas under CIT(A) route, both taxpayer as well as Assessing Officer can file appeal before ITAT.
Revision Application before Commissioner of Income Tax
Section 264 of IT Act provides revisionary power to the jurisdictional Commissioner of Income Tax (‘CIT’) to review and revise any order passed by a sub-ordinate officer, on an application made by the concerned taxpayer if there is no appeal pending in respect of issue for which revision application is made. Such revision order, however, can not be prejudicial to interest of the taxpayer, vis-à-vis original order sought to be revised.
Alternate mechanism for disputes resolution
In addition to the normal appellate route (including DRP, since it forms part of appellate process only), IT Act also provides some alternate dispute resolution forums. Such forums include:
a. Authority for Advance Rulings (‘AAR’): AAR is a forum, where a non-resident taxpayer or a resident taxpayer in relation to its transaction with a non-resident or certain other specified categories of resident taxpayers can file application to get upfront clarity in taxability of a transaction undertaken or proposed to be undertaken. Decisions of the AAR are binding both on the Income Tax authorities and on the Applicant and are considered to be final.
b. Advance Pricing Agreements (‘APA’): An APA is an agreement between a taxpayer and tax authorities determining the transfer pricing methodology for pricing taxpayer’s international transactions for future years, subject to assumptions/ conditions considered at the time of signing the APA. The APA is a forum/ process to minimize transfer pricing disputes between a taxpayer and tax authorities.
c. Mutual Agreement Procedure (‘MAP’): MAP is a process of settlement of tax disputes involving an MNE, where Competent Authorities of India and home country of MNE (based on an application made by MNE) mutually agree on taxability of such MNE in India and in the home country of MNE. Once the MAP is finalized between Competent Authorities of both the Countries, it can be implemented only after the MNE gives its consent to the MAP. This is a tax dispute resolution through mutual negotiation between competent authorities of the countries instead of a litigation process. Once consented upon, resolution under MAP becomes final and binding both for taxpayer as well as tax authorities.
d. Income Tax Settlement Commission (‘ITSC’): ITSC was set up w.e.f. 01 April 1976 based on recommendations of Direct Taxes Enquiry Committee (popularly known as Wanchoo Committee), as a forum, where taxpayers (in whose case any proceeding for assessment is pending before an Assessing Officer) come forward and declare their unreported income and pay additional tax thereon, subject to detailed provisions/ conditions of Chapter XIXA of the IT Act. Orders of settlement passed by the ITSC too are considered to be final and binding both for taxpayer as well as tax authorities.
Amnesty/ settlement Schemes introduced by Government from time to time
With an objective to reduce tax litigation, the Government from time to time launches several schemes for settlement of tax disputes. Recently, the Government has introduced a ‘Vivad Se Vishwas Scheme’4, whereby any appeals or disputes pending before any appellate forum as on 31st January 2020, can be settled by payment of tax, as specified under the scheme, which is open till 31st December 2020.
Such schemes offer a great opportunity for taxpayers to settle their tax disputes and obtain a waiver of interest & penalty, and worth being evaluated by taxpayers, who intend to end their income tax litigation.
Constitutional dispute resolution remedies through High Courts and Supreme Court
In addition to the statutory dispute resolution process (whether normal appellate route or alternate dispute resolution forums), taxpayers can also approach the jurisdictional High Court under seeking a writ remedy under Article 226/ 227 of the Constitution of India.
Normally, writ jurisdiction is invoked in cases, where proceedings are initiated by Income tax authorities without jurisdiction or where IT Act does not provide any statutory remedy or recourse against an order passed by tax authorities or where there is some action/ inaction by tax authorities is causing grievous hardship to a taxpayer, who has no statutory remedy. For example, orders of AAR and ITSC can be challenged in writ jurisdiction before High Court, even when they are considered as final under IT Act.
Similarly, a petition for Special Leave to Appeal can be filed before the Hon’ble Supreme Court of India under Article 136 of the Constitution of India against any order or judgment of any court/ tribunal, on discretion of the Supreme Court. Practically, in income tax cases, against any order passed by the High Courts (including cases when statutory appellate remedy is available under Section 261 of IT Act), appeals are generally filed by way of SLPs before the Hon’ble Supreme Court.
Conclusion
Though, there are a number of remedies/ options available to taxpayers in Income tax proceedings, it is important to select one, after duly considering facts of the case and then selecting the best option considering all pros & cons. As it is said, there is no single panacea for solving every problem. Thus, taxpayers must be aware of their rights and vigilant of recourse available, while selecting an appropriate one.
By Rakesh Nangia, Founder & Managing Partner, Nangia & Co LLP, co-authored by Shailesh Kumar, Partner, Nangia & Co LLP