Tax Terrorism in India – Causes And Solutions To Eradicate It

Shri Saurabh Soparkar, Senior Advocate, has expressed outrage at the undue harassment of taxpayers by the income-tax department. He calls this harassment ‘Tax terrorism’ and argues that the root cause for it is lack of accountability. He submits that an institutional framework of “checks and balances” has to be created to prevent abuse of power and authority by the tax officials

Justice Oliver Wendell Holmes said “I like paying taxes. With them I buy civilisation.” It is also said by Veda Vyasa said in the Mahabharata that a king should collect taxes like a bee collects nectar from flowers, painlessly.

However, Sabyasachi Mukherji in CWT vs. Arvind Narottam 173 ITR 479 has observed as under:

“……..true that tax avoidance in an under-developed developing economy should not be encouraged on practical as well as ideological grounds. One would wish, as noted by Reddy, J. that one could get the enthusiasm of Justice Holmes that taxes are the price of civilization and one would like to pay that price to buy civilisation. But the question which many ordinary taxpayers very often in a country of shortages with ostentious consumption and deprivation for the large masses ask, is does he with taxes buy civilisation or does he facilitate the wastes and ostentiousness of the few. Unless wastes and ostentiousness in the Government’s spendings are avoided or eschewed, no amount of moral sermons would change people’s attitude to tax avoidance..”

Nobody “likes” to pay tax and perhaps tax administration may have to take stern action against the defaulting or erring taxpayers. But the short question is: can the State, as a Tax collector adopt strong arm tactics in the matter of tax administration? Answer, obviously would be in negative. The experience, regretfully, is otherwise. This is so in spite of the Courts, time and again, warning the tax administration to follow the rules of natural justice and good conscience while implementing tax laws.

Despite concerns shown by various High Courts and Highest Court of land on the undesirable attitude and discriminating treatment shown by the tax administration to the taxpayers of the country, the situation has yet not significantly improved. This is visible from a number of judgments delivered by the Courts in recent times in which, the irk is shown towards such attitude of the Officers of the Income-tax Department and the Courts have even fined the erring Officers.

The issue of tax terrorism in India may be classified in following different aspects.

1. Retrospective legislation
2. Judicial Indiscipline
3. Not following binding law
4. Mindless Appeals, Revisions and Reopening of cases
5. Coercive action during Search and Survey
6. Defiance of law in favour of the Assessee
• Refunds
• Recovery of Taxes
• Adjustment of refunds
• Creating artificial demands to meet the “targets”

1. Retrospective legislation

1.1 It is often said that it is necessary for the taxpayers to understand and comply with laws and also to plan their business /financial affairs, there should be stability in tax laws. While one cannot deny that in consonance with the social necessities of our country, amendments in tax laws might be unavoidable. However any retrospective amendments in tax laws leads to distrust and shakes the confidence of the tax paying community in the tax laws and results in adverse effect on the desire to invest and growth of Industrialisation . Retrospective legislation also leads to a great amount of litigation and results into no real benefit in the matter of timely tax recoveries.

1.2 It is a good sign that the present Government is not keen to make retrospective amendment in tax laws . As we find from the Speech of Hon’ble Finance Minister while presenting Union Budget for. 2014-15 , he has said that

“The sovereign right of the Government to undertake retrospective legislation is unquestionable. However, this power has to be exercised with extreme caution and judiciousness keeping in mind the impact of each such measure on the economy and the overall investment climate. This Government will not ordinarily bring about any change retrospectively which creates a fresh liability. Hon’ble Members are aware that consequent upon certain retrospective amendments to the Income-tax Act, 1961 undertaken through the Finance Act, 2012, a few cases have come up in various courts and other legal fora. These cases are at different stages of pendency and will naturally reach their logical conclusion. At this juncture I would like to convey to this august House and also the investors community at large that we are committed to provide a stable and predictable taxation regime that would be investor friendly and spur growth.”

1.3 While it is true that the legislature as well as President and the Government in the exercise of their legislative powers can promulgate laws which are retrospective or retroactive in effect and pending assessment or other proceedings must be disposed of in conformity with the statutes made applicable retrospectively, the issue of vested right assumes significance when by making the retrospective amendment, the right of deductions granted to the taxpayers is taken away. Reference is invited to the judgment of the Gujarat High Court in the case of Niko Resources Ltd. vs. Union of India (2015) 374 ITR 369 (Guj.) where the High Court held in favour of the assessee and held that the amendment made was clearly unconstitutional, violative of Article 14 of the Constitution of India and is liable to be struck down.

1.4 The problem with the retrospective amendments is that it leaves a bad taste and is extremely unfair to the assessee. How can one expect to have a fair game where the player also acts as the umpire!!!

2. Judicial indiscipline

2.1 At times, we come across cases where the doctrine of judicial discipline is flagrantly flouted by not following the binding precedents. It has been observed by the Supreme Court in the case of Union of India vs. Kamalakshi Finance Corporation Ltd. AIR 1992 SC 711 that judicial discipline requires that decision of higher authority should to be followed in the case of quasi-judicial authority and, therefore, a lower officer is bound to follow the decision of the higher authority e.g. Assessing Officer is bound to follow the decision of the Tribunal particularly so in the case of the same assessee. This principle requires that decisions of higher authorities such as Tribunal should be followed by lower officers, viz., CIT(A) and Assessing Officer. Even decision of the Tribunal though may not be of a jurisdictional Tribunal, is required to be followed by the lower authority. It is not uncommon to find cases in which an argument is raised by the Revenue, even by the CIT(A) who is performing a judicial function, a binding judgment/order is not followed because the Department has “not accepted” the said decision and an appeal has been preferred. However, the Courts have repeatedly held that phraseology of not accepting the decision is wholly unjustified and unless, in the further appeal against the decided case, a stay is granted, it operates as a valid binding decision to the lower authority not only in the case of the same assessee but also in other cases where the same legal issue is similar. If the statute is an All India Statute, decisions of benches of the Tribunal at various places are considered as binding on the law point decided on the principle of judicial discipline.

2.2 It is unfortunate that some times judicial precedent is not followed even by a body like the Income Tax Appellate Tribunal (ITAT) by wrongly drawing distinction. This was so found by Bombay High Court in the case of HDFC Bank Ltd. vs. DCIT (2016) 383 ITR 529 (Bom.) where the ITAT did not follow the judgment of Bombay High Court in assessee’s own case on the issue of disallowance u/s. 14A on the ground that in the said judgment, the Court relied upon the its decision in Reliance Utilities & Power Ltd.. but the decision in Reliance Utilities & Power Ltd. was rendered in the context of Section 36(1)(iii) of the Act and its parameters are different from that of Section 14A of the Act. The High Court observed that it is not the office of Tribunal to disregard a binding decision of the court. The High Court made following concluding observations :

“…………….. Once there is a binding decision of this Court, the same continues to be binding on all authorities within the State till such time as it stayed and / or set aside by the Apex Court or this very Court takes a different view on an identical factual matrix or larger bench of this Court takes a view different from the one already taken.

………………… We are also conscious of the fact that we are not final and our orders are subject to appeals to the Supreme Court. However, for the purposes of certainty, fairness and uniformity of law, all authorities within the State are bound to follow the orders passed by us in all like matters, which by itself implies that if there are some distinguishing features in the matter before the Tribunal and, therefore, unlike, then the Tribunal is free to decide on the basis of the facts put before it. However till such time as the decision of this court stands it is not open to the Tribunal or any other Authority in the State of Maharashtra to disregard it while considering alike issue. In case we are wrong, the aggrieved party can certainly take it up to the Supreme Court and have it set aside and / or corrected or where the same issue arises in a subsequent case the issue may be reurged before the Court to impress upon it that the decision rendered earlier, requires reconsideration. It is not open to the Tribunal to sit in appeal from the orders of this Court and not follow it. In case the doctrine of precedent is not strictly followed there would be complete confusion and uncertainty. The victim of such arbitrary action would be the Rule of law of which we as the Indian State are so justifiably proud“.

3. Mindless Appeals, Revision and Reopening of cases

3.1 This again contributes heavily to the tax terrorism and increases the load of pending cases before the Courts. While positive step in this direction is taken by the Government as the CBDT has increased the financial limit of tax effect for not filing appeals before ITAT and Courts, frivolous appeals are still being filed and Court fumes the Departmental Officers for their approach of preferring appeals without application of mind to the merits of issues involved. It is interesting to note that in almost every circular fixing the monetary limits for not preferring appeal, the CBDT prescribes that “an appeal should not be filed merely because the tax effect in a case exceeds the monetary limits prescribed above. Filing of appeal in such cases is to be decided on merits of the case” and yet, we know that in every matter where the financial stakes are high, howsoever frivolous the case of the Revenue might be, the Department invariably files appeal. Nobody wants to bell the cat by acknowledging on the file that the case of the Revenue is worthless and there should not be waste of time, money and energy. This results into two serious problems. Firstly the assessees undoubtedly suffer tremendously. But secondly, and equally importantly, the attention of the Revenue also gets deflated and serious matters do not get as much attention as they deserve.

3.2 The Courts have come heavily on such sort of tax terrorism when frivolous appeals are preferred. In the case of CIT vs. Sairang Developers and Promoters Pvt. Ltd. Income Tax Appeal No. 2603 of 2011, the Bombay High Court awarded cost of ` 50,000/- to be personally paid and observed as under:

“We do not find how Officers lower down in the hierarchy can take decisions to file Appeals and that too against the decision of the Tribunal. The tendency not to accept any adverse verdict on facts results in frivolous Appeals being filed in this Court. That causes huge loss to the public exchequer and results in wastage of precious judicial time of this Court. All this ought to have been discouraged long time back. The High Court has not adopted a strict approach and that has possibly encouraged the Revenue in filing Appeals to challenge essentially findings of fact and with regard to matters which should stand concluded at the level of the authorities. The officials should realise that the authorities like Commissioner of Income Tax (Appeals) and the ITAT are envisaged as appellate and possibly final fact finding authorities and at least the Tribunal is last in that hierarchy. The fact finding therefore if demonstrably perverse or palpably erroneous and as would amount to unsettling the settled position in law alone should be questioned by filing Appeals to this Court. However, a routine exercise and by people who do not wish to take any responsibility, results in number of Appeals being filed and pending. This benefits no one and rather defeats larger public interest. The Revenue collection and equally the participation of the assessee in the exercise undertaken by the authorities to assess their income, therefore is affected adversely. None takes a position or decision because of pendency of matters and for a long time. In these circumstances, while dismissing this Appeal, we impose costs quantified at ` 50,000/. The costs be paid to the assessee within four weeks from today. We at least now expect the authorities to take cognizance and initiate proceedings for recovery of this amount personally from such of the Officers who do not take decisions or postpone them endlessly.”

3.3 The Bombay High Court again in the case of CIT vs. Proctor & Gamble Home Products Ltd. Income Tax Appeal No. 37 of 2013 dealt with the issue of frivolous appeals by Department. The Court observed as under:

“These appeals are filed by the Revenue in a very casual manner without indicating the basis of the challenge i.e. some distinction in facts from the order of the High Court or that the order of the jurisdictional High Court is a subject matter of challenge before the Apex Court. In the absence of the above explanation, it follows that there are times when even though the decision of the jurisdictional High Court has been accepted by the Revenue and yet the Revenue chooses to file an appeal on the same issue before this Court. Rule of law implies certainty of law and the State filing appeals on settled issues arbitrarily and/or without any application of mind. This filing of appeal without due application of mind leads to attempting to unsettle settled position without reasons. This casual manner of filing appeals subjects an assessee to unnecessary expenditure and at times anxiety. Even the Revenue incurs substantial expenses in pursuing unwarranted cases, which are a sheer waste of public money. The least that the Revenue should do is to examine whether or not the decision of the jurisdictional High Court being relied upon by the Tribunal, is subject matter of challenge before the Apex Court or is otherwise distinguishable and the same must be indicated in the appeal memo. In the above view, we were contemplating to impose costs on the Revenue.

However, we noticed that on earlier occasion when costs were imposed on the revenue, it seemed to matter little to the Officers, for after all the amount came out of the general pool of tax paid by the taxpayers. In the circumstances, we are now putting the Officers of the Revenue to notice, that in all cases including where appeals are filed, the Offices instructing the Counsel would review whether the appeal should at all be pressed in view of the Revenue having accepted the jurisdictional High Court’s order on an identical issue and take necessary instructions from the Commissioner of Income Tax to withdraw and/or not press the appeal.”

3.4 And yet we find no improvement in the situation. One more example of tax terrorism is in filing frivolous appeals where there is no implication on tax revenue, like dispute as to the year of allowability of a deduction/expenditure or taxability of income, the issue otherwise being tax neutral. The Supreme Court, in the case of CIT vs. Excel Industries Ltd. (358 ITR 295) had to observe as under.

“32. Thirdly, the real question concerning us is the year in which the assessee is required to pay tax. There is no dispute that in the subsequent accounting year, the assessee did make imports and did derive benefits under the advance licence and the duty entitlement pass book and paid tax thereon. Therefore, it is not as if the Revenue has been deprived of any tax. We are told that the rate of tax remained the same in the present assessment year as well as in the subsequent assessment year. Therefore, the dispute raised by the Revenue is entirely academic or at best may have a minor tax effect. There was, therefore, no need for the Revenue to continue with this litigation when it was quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to the public coffers.”

3.5 Almost 75 years back Bombay High Court in the case of CIT vs. Edulji F.E Dinshaw (1943) 11 ITR 340, 347 – observed as under:

“I have been hearing income-tax references in this Presidency for the last thirteen years and I would say that in at least ninety per cent of the cases which have come before this Court the Assistant Commissioner has agreed with the Income-tax Officer and the Commissioner has agreed with the Assistant Commissioner, however complicated and difficult the questions may have been. But although , that may have been the result in practice of giving a right of appeal to superior Income-tax Officers, I apprehend that that was not what was in the contemplation of the Legislature when they gave the right of appeal. I have no doubt they contemplated that superior officers would exercise their powers in judicial spirit, and consider on merits the cases which came before them.”

3.6 And yet we find the practice to be continuing with no signs of improvement!!!!

4. Coercive action during Search and Survey

4.1 Search & survey action are necessary to unearth the black money as also to bring to tax income which has not been disclosed. As per the section 132, a search and seizure action can be undertaken against any person who is or is likely to be in possession of any money, bullion, jewellery or other valuable article or thing and such money, bullion, jewellery or other valuable article or thing which represent either wholly or partly income or property which has not been disclosed or would not be disclosed for the purpose of this Act (i.e. to unearth undisclosed income or property). The search and seizure action can also be taken when the assessees fail to produce books of account, documents etc. in response to summons issued or notice issued under section 143(2).

4.2 At the same time it is pertinent to note that at the same time search and seizure is an invasion into the privacy of the individual. A house, hut, home or castle of a person is his /her personal property and no one has a right to enter and disturb the peace without prior permission of the person in occupation. While the proceedings of search and survey might be for good reasons, there are certain ground rules which need to be strictly followed by the search and survey team. Quite often, it is seen that those rules are not adhered to in the enthusiasm to show that the proceedings was a grand success.

4.3 At times, it is seen that the taxpayers are forced to declare the income even if there is no evidence found during search and survey. The CBDT had to come out with instruction vide F No. 286/2/2003 dated 10-3-2003 stating as under:

“Instances have come to the notice of the Board where assessees have claimed that they have been forced to confess the undisclosed income during the course of the search & seizure and survey operations. Such confessions, if not based upon credible evidence, are later retracted by the concerned assessees while filing returns of income. In these circumstances, on confessions during the course of search & seizure and survey operations do not serve any useful purpose. It is, therefore, advised that there should be focus and concentration on collection of evidence of income which leads to information on what has not been disclosed or is not likely to be disclosed before the Income Tax Departments. Similarly, while recording statement during the course of search it seizures and survey operations no attempt should be made to obtain confession as to the undisclosed income. Any action on the contrary shall be viewed adversely.”

4.4 It is not uncommon to find that when additions are based on confessional statements recorded during the course of search which are later retracted, the argument from the side of Revenue is that in the statement recorded, the assessee has put his signature by writing that there was no force or coercion while recording statement. In this regard, the decision of the Bombay ITAT in the case of Deepchnad & Co vs. ACIT 51 TTJ 421 may be noted in which the ITAT has held that :

“The stereotyped mention at the end of the statement that whatever was stated was true and to the best of the knowledge and belief and the statement given was voluntary without any threat, force or undue influence, would not mean that the partners agreed for making additions. Putting certain expression at the end of the statement cannot be taken as true in view of the retraction……”

It would not be out of context to mention here that the statements recorded by the search party during the search of more than two days and two nights cannot be considered to be free, fearless and voluntary. There is a considerable substance in the assessee’s contention that the statements were recorded under pressure and force.”

4.5 The judgment of Gujarat High Court in the case of Kailashben Manharlal Chokshi vs. CIT 328 ITR 411 (Guj.) the High Court disapproved the attitude of Department and observed that :

“So far as case on hand is concerned, the glaring fact required to be noted is that the statement of the assessee was recorded under section 132(4) of the Act at mid night. In normal circumstances, it is too much to give any credit to the statement recorded at such odd hours. The person may not be in a position to make any correct or conscious disclosure in a statement if such statement is recorded at such odd hours…..”

It is however strange that despite the above position of law clarified by the Courts and also as instructed by Board, the recent provision in section 271AAB provides for levy of penalty at varying percentage based on admission or non admission of undisclosed income during search in statement recorded u/s. 132(4).

5. Defiance of law in favour of assessee

(A) Creating artificial demands to meet the “Targets”

5.1 As back as in the year 1942 vide Circular No. 3 of 1942 dated 16-1-1942 it was instructed as under:

“Except that he should give precedence to cases which are likely to yield more revenue, the ITO should not be obsessed by the budget figures. He has certain number of assessments to complete in a year and his merits will be judged by the way in which he completes those cases and not by the extent to which he has collected his budget estimates…..”

5.2 Again in the year 1973, vide Instruction No: 574 dated 27-7-1973, it was instructed as under:

“The assessment have to be made in a reasonable and fair manner after considering all the relevant circumstances of the case. Even where an assessment has to be made ex parte, the information available should be reasonably weighed and a proper estimate made in the exercise of best judgment in the circumstances. There should be no tendency to frame assessments even in such cases mechanically on past basis, if there is evidence to the contrary e.g. the business of the concern has become defunct or is in clear adverse circumstances. If unjustified over assessments are avoided, this will inter alia, curtail the feature of exaggerated demands which unnecessarily inflate arrears figures.”

5.3 Once again instructions were issued vide Instruction No. 767 dated 4-10-1974 as follows:

“Overpitched assessments have been target of adverse criticism by inter alia Parliamentary Committees. They throw up a host of problems like inflation of demands and generation of unnecessary and unproductive work. The necessity of curbing the tendency on the part of Income-tax Officers to make high-pitched assessments and raise heavy uncollectable demands has been emphasised by the Board from time to time. Despite these instructions, the tendency has not been checkmated. The Board, therefore desire that you should once again impress upon the Income-tax Officers in your charge to avoid making such type of assessments. You and your inspecting Assistant Commissioners should periodically review the statistics regarding the number of ex parte assessment made and demand raised therein as also, statistics of application under section 146 lying disposal of-”

44 years have rolled by but there is no improvement. Despite above instructions issued on the assessing authorities, in actual practice, we come across several cases in which demands are artificially raised which ultimately get deleted in further appeals. A mere look at the figures of number of appeals decided against Revenue will reveal that in many such cases assessments were only high pitched far from being just and fair.

5.4 Many a times, the defence of the Officers making assessment is that their duty is to collect more revenue and in so doing, they need to adopt alternative methods whereby more amount of taxes can be imposed. However, this approach has not stood the test of judiciary. The Supreme Court in the case of CIT vs. Simon Carves Ltd. 105 ITR 212 (SC) has observed as under:

“….Although it is part of their duty to ensure that no tax which is legitimately due from an assessee should remain unrecovered, they must also at the same time not act in a manner as might indicate that scales are weighted against the assessee. We are wholly unable to subscribe to the view that unless those authorities exercise the power in a manner most beneficial to the revenue and consequently most adverse to the assessee, they should be deemed not to have exercised it in a proper and judicious manner…”

5.6 It is thus evident that there is tendency on the part of few officers to raise huge demand by making high pitched assessment even in a case of best judgment assessment. Unless therefore requirement of accountability on the erring officers is introduced in the statute, this tendency may continue to remain uncurbed. High pitched assessments not only results in unproductive work but it seriously affects the business of the taxpayers and the same is reflected in the business results in which the Department is also a sharer.

(B) Non-granting of refunds

6.1 This is another area which creates distrust in the minds of the taxpayers. While payment of legitimately due taxes has to be made in time, it is equally a duty of the Department to refund the excess tax paid without any delay. Unfortunately the Revenue adopts two diametrically opposite standards in the matter of collection and refund of taxes. Quite often we come across cases where refund amount is very sizable, the same is held up on the ground of budget. In many cases it is sheer lethargy on the part of the Revenue in issuing the refund orders. It is important that there should be prompt issue of refunds due to the taxpayers either of advance tax or amount due to him in consequence of appellate orders. Interest paid on refund is at a lower rate than the rate charged when there is default in tax payment. There seems to be no justification for the same.

6.2 With the system of giving direct credit of refund to the account of the taxpayers, there is some improvement in realising refund but this procedure must be followed and monitored strictly and any laches on the part of the defiant officers must be seriously viewed. In any case the said system does not work satisfactorily so as to give a prompt refund on the favourable appellate order.

(C) Recovery of taxes

7.1 An assessee suffers huge additions. And to add to his woes, he does not get even stay against recovery pending his appeal. There cannot be any two views about the fact that the demands created due to high pitched assessments must be stayed till the decision of the higher forum. Various circulars are issued from time-to-time regarding guidelines to be followed in case of recovery of demands and stay of recovery.

7.2 The latest instruction bearing No. 404/72/93-ITCC, dated 29-2-2016 requires AO to grant stay till disposal of appeal by FAA on payment of 15% of demand or lower than that subject to conditions mentioned therein. However the experience is that even this instruction is not being followed in a few cases requiring the assessees to approach the High Court.

7.3 In a great number of cases however, it may not be possible for a small businessman or taxpayer to pay even 15% of demand raised under a high pitched assessment. Although the instructions permit assessee to approach Pr. CIT / CIT in case he is not satisfied with decision of the AO, in actual practice, it remains to be seen how expeditiously, his grievance on this account stands resolved.

(D) Adjustment of refunds

8.1 Law is clear that under section 245 that the authorities have to intimate the proposed action of adjusting refund due to the taxpayer against demands raised. In actual practice however, the Revenue rarely puts the assessee to notice of the proposed action. An order is passed, straight away, adjusting the refund against demand, quite often created unjustifiably, and thereby deny the assessee the fruits of the litigation for years. Power to set off refund is not an unguided power and intimating the proposal to set off refund against tax demand is not merely a matter of formality.

8.2 Cases have come before the High Courts challenging the adjustment of refunds. In the case of Kerala State Beverages Corporation vs. JCIT 388 ITR 600(Ker.) it was held that where for earlier assessment years, additions made towards surcharge on sales tax and turnover tax were deleted and, consequently, certain amount became refundable to assessee, such refund could not be adjusted against demand of tax due for relevant assessment year wherein total income was determined by making similar additions. In the case of Oriental Insurance Co Ltd. vs. DCIT 229 Taxman 521 (Delhi), the order of adjusting refund was quashed as intimation under section 245 was issued and adjustment was made simultaneously on same date and no opportunity of hearing was given to assessee before adjustment was made. In the case of Baljeetsingh Bakshi vs. ACIT 51 taxmann.com. 278 (All) it was held that in terms of provisions of section 245, dues of firm in which assessee is a partner cannot be recovered/set off against refund due to him in his personal capacity.

Conclusion

It is unfortunate that taxpayers, who contribute to the development of nation, are looked down as if they are enemies of the State. Instead of treating them with respect and dignity, quite often, they are subjected to harassment and harsh treatment. Tax terrorism must stop. But that would not till the Authority is made accountable for the action taken by him. Presently the Authority gets away, even after most inhumane treatment meted out to the assessees because there is no method to check abuse of power and authority. One hopes that some day very soon a method of “checks and balances” would be devised so that this harassment would stop. Otherwise, as is well said, “the power corrupts, and absolute power corrupts absolutely”.