The Author rues that the Direct Tax Code 2010 is a golden opportunity gone waste. What could have been a revolutionary exercise in tax reforms has been reduced to a pedestrian re-numbering of sections, agonizes the author. But, eternal optimist that he is, all is not lost, says the author and sets out an 11-point agenda to salvage the DTC 2010. Is the draftsman listening?
The discussion paper on Direct Taxes Code Chapter 1, reads as under “The Code is not an attempt to amend the Income-tax Act, 1961, nor is an attempt to “Improve” upon the present Act. In drafting the Code, The Central Board of Direct Taxes (The Board) has to the extent possible started on a clean drafting slate. Some assumptions which have held the ground for many years have been discarded. Principles that have gained international acceptance have been adopted. The best practices in the world have been studied and incorporated. The tax policies that would promote growth with equity have been reflected in the new provisions. Hence while reading the Code it would be advisable to do so without any preconceived notions, and as far as possible without comparing the provisions with the corresponding provisions of the Income-tax Act, 1961”. I have made an attempt to discuss certain conceptual issues which may be considered as we are proposing to bring new Income Tax to our country which will be in statute for at least for another 50 years.
First question to be asked is “Do we need the new code in the present form”? I am of the opinion that the present code may not achieve the desired object of simplification, on the contrary it will lead to more litigation. If the Government really desire to simplify the tax law, there has to be a committee of experts and the committee should travel all parts of the country, interact with the judiciary, members of the Tribunal, tax professionals, tax payers, tax officials and there after bring the new Code
1. Direct Taxes Code 2010 (2010) 326 ITR (St) 41 – Framed by tax officials and not on the basis of experts opinion
The replacement of the 1922 Act, with 1961 Act, was made by considering the experts opinion on its panel like N. A. Palkhivala, P. Satyanarayan Rao, G. N. Joshi, etc. Before the introduction of 1961 Act, the government had the input of various committees like Kaldor’s Committee (1956), Tyagi’s Committee (1958), Law Commission Report (1958). Whereas the present Code is drafted by few tax officials and without interacting with the tax professionals and tax-payers. In the process one will find in the code that, most of the issues decided in favour of the assessees by the Courts have been tried to overcome by making necessary amendments. This is the major change in the Direct Taxes Code. The Income-tax Act, 1961 became more complicated because of frequent amendments, and not due to any drafting error. One could have achieved desired objects of simplification by retaining the same sections and making few amendments wherever desired. First question to be asked is “Do we need the new code in the present form”? I am of the opinion that the present code may not achieve the desired object of simplification, on the contrary it will lead to more litigation. If the Government really desire to simplify the tax law, there has to be a committee of experts and the committee should travel all parts of the country, interact with the judiciary, members of the Tribunal, tax professionals, tax payers, tax officials and there after bring the new Code.
Dr. Raja Chellia (Tax Reform Committee) in his report (1992) 197 ITR 257 (St) Pa-ra 5.9. “Accountability” reads as under “Ways must be found to hold the officer ac-countable for the kinds of assessments he makes. Under the present procedure an Assessing Officer, whether he be a Superintendent of Central Excise or an Income Tax Officer, can over-assess, raise additional demands without sufficient grounds and yet remain unconcerned and unaffected if over-assessments and additional demands or orders confirming, demands raised by him are dismissed as untenable by the Tribunal. In fact, there is tendency on the part of some of the Assessing Offi-cers to recommend to the Commissioner / Collector that almost every case in which the Commissioner (Appeals) or the Collector (Appeals) has not sustained the additional demands created by them should be referred to the Tribunal be-cause they stand to lose nothing if the Tribunal also rules against their action. The Assessing Officers should be made accountable for their action by being blamed for raising demands which are not upheld by the Tribunal”. However the Direct Taxes Code has not addressed to this issue at all. Unless the provision of accountability is introduced whatever may be the law, simplification cannot be achieved.
3. Clause 123 – General Anti avoidance Rule (GAAR).
All along the Government was satisfied with the functioning of Tribunal and there is no reason to bring an outsider to head the Institution. The legislature has not given any reason as to how the institution will be benefited by bringing the retired Chief Justice to head the institution. As the order of Tribunal is subject to challenge before the High Court, according to me it will lower the status of Chief Justice of a High Court. I am of the opinion that as the present system is working satisfactorily there is no need to bring an outsider to head the Institution
This is a new concept which is introduced in the Code; very wide powers are given to the commissioner. GAAR provides for declaration of arrangement by commissioner as “impermissible avoidance arrangement” if the same has been entered in to by the tax payer with the objective of deriving tax benefits. Such arrangement may be determined by,
– Disregarding, combining or re characterizing any step in the arrangement
– Treating ,the arrangement as if it had not been entered into or carried out or such other manner as in the circumstances of the case ,the commissioner deems appropriate for the prevention or reduction of the relevant tax benefit.
– Disregarding any accommodating party or treating any accommodating party and any other party as one and the same person.
– Deeming persons who are connected persons in relation to each other to be one and the same person.
– Re-allocating, amongst the parties to the arrangement , any accrual or receipt of a capi-tal or revenue nature or any expenditure , deduction relief or rebate, or
– Re-Characterising any equity in to debt or vice versa any accrual or receipt of a capital or revenue nature or any expenditure , deduction relief or rebate.
The arrangement entered in to by the tax payer would be presumed to have been entered in to for the main purpose of obtaining tax benefit unless other wise proved by the tax payer. It is implied that GAAR provisions shall override all other provisions including provisions of DTAA.
As the law understood today one may arrange his affairs with in frame work of law ,tax planning is permissible and tax avoidance is not valid. GAAR will have far reaching consequences for the assessees engaged in the business on a larger scale with Indian and Foreign parties.
4. Clauses 159 and 163 – Reopening of Assessment and Search and Seizure
The reopening of assessment and regulation pertaining to the search and seizure matters are also incorporated in clauses 159 and 163.
As per the new provision if the Assessing Officer has reason to believe that any tax base chargeable to tax has escaped the assessment for the relevant assessment year, he only has to record the reasons in writing. The scope of deemed escaped assessment is widened to include the cases where e.g. (i) Computation or assessment has not made in accordance with any order, direction, instruction or circular issued by the Board (ii) Any objection has been raised by the Comptroller and Auditor General of India to the effect that the assessment has not been made in accordance with the provisions of Income- tax Act. Concept of change of opinion is done away with. As per present sections 147 to 152, 153A to 153C, Assessing Officer may assess or reassess such income other than the income which are subject of any appeal; reference or revision. As per the new code the assessee will be at the mercy of the Assessing Officer. For issue of notice the period is extended from the present six years to seven financial years immediately preceding the financial year in which the search and seizure has been carried out or material has been obtained. There cannot be any finality to the assessment though the Assessing Officer might have applied his mind and passed the speaking order. It is desired that the present provision of law may be retained.
5. Clause 179(3)(b), Power of CIT(A), 183(7) Power of Tribunal, Clause 192(6) Power of Commissioner
As per the new code, Appellate Authorities have no power to condone the delay beyond one year. There may be delay due to mistake of tax consultant, or due to any genuine reason. As there is no power to condone the delay, the assessee may have to approach the High Court by way of writ. Whereas under present Income-tax Act, if the CIT(A), CIT or Tribunal is satisfied they may condone the delay. It is desired that, present position of law may be retained.
6. Clause 181(2) – Power of CIT(A)
Clause 181(2), provides for extending the power of the CIT(A) while disposing an appeal to consider and decide on any matter which was not considered by the Assessing Officer. No such power is there under the present income-tax Act under section 251.
7. Clause 182(6) – Chief Justice of High Court to head the Income Tax Appellate Tribunal
As per clause 182(6), the Central Government may appoint a person who is or has been a Chief Justice of High Court to be the President of the Appellate Tribunal. Under the present Income-tax Act the President of ITAT is selected amongst the Sr. Vice President and Vice Presidents on merit by the committee headed by Sr. Most Judge of Supreme Court and the system is working satisfactorily. At present the Income Tax Appellate Tribunal has benches in 27 cities having sanctioned strength of 126 members. Normally a member is selected as President after serving more than 20 years in the Tribunal. As a member he is transferred at least once in four years. When a member is selected as a President he is fully aware of functioning of various benches of Tribunal and knowledge and integrity of each and every member which makes him to discharge his duties more efficiently. By bringing an outsider for a period of less than three years may affect the functioning of Tribunal. All along the Government was satisfied with the functioning of Tribunal and there is no reason to bring an outsider to head the Institution. The legislature has not given any reason as to how the institution will be benefited by bringing the retired Chief Justice to head the institution. As the order of Tribunal is subject to challenge before the High Court, according to me it will lower the status of Chief Justice of a High Court. I am of the opinion that as the present system is working satisfactorily there is no need to bring an outsider to head the Institution.
8. Clause 185(5) – Constitution of Special Bench
As per the clause 185(5), the President shall on a reference received from the Board for disposal of any particular case, constitute a Special Bench consisting of five members or more. The wording “shall” means whenever a reference is received from the Board the President shall constitute a special Bench. It may lead to interfering with the judicial functioning of the President. As the law stands today the President may constitute the Special Bench, considering the importance of law involved and not on a particular case at the sweet will of the Board.
9. Clause 257 – Authority for Advance Ruling and Dispute Resolution
As per clause 257, the qualification fixed for appointing vice Chairperson is concerned, even the members of the ITAT who have completed more than 7 years of service in the ITAT may be considered as eligible for the appointment as “vice chairperson” and members who have completed 5 years of service may be considered eligible for appointment as members of authority for Advance Ruling and Dispute Resolution. By qualification and experience the members of the ITAT possess, are most suited as members of Authority for Advance Ruling and Dispute Resolution.
10. Recovery and attachment – Mode of Recovery – Gift held to be invalid – Fifth Schedule – Rule 3(2)
In 5th Schedule on recovery rule 3(2), the provision is made permitting the Tax Recovery Officer to challenge transfer to spouse, or minor child, otherwise than for adequate consideration. However, there is no time limit provided as to how far back the transfer can be challenged. There has to be time limit to be fixed. It may be reasonable to fix one year prior to arising of tax liability by passing of order by Assessing Officer. Further, the expression “inadequate consideration” will be a matter of debate and appeal.
Further, if transfer is to a minor child and he attains the majority then it should not be permitted to be challenged.
It may be noted that similar provision was not there in Second Schedule Rule 4.
11. Clauses 112 to 114 – Wealth Tax
All assessees are covered other than a non profit organization. At present only few assets are covered, however, the proposed code proposes is to include also following specified assets for the purposes of levy of wealth tax.
• Archaeological collections, drawings, paintings, sculptures or any other work of art
• Watch having cost in excess of Rs. 50,000/-
• Any interest in foreign trust or any other body located outside India (Whether incorporated or not) other than a foreign company.
• Any equity or preference shares held by a resident in a controlled foreign company, as referred in the Twentieth Schedule.
• Cash in hand in excess of Rs. 2,00,000 in case of an individual and Hindu undivided families.
• Deposit in a bank located outside India, in case of individuals and undivided families and in the case of other persons, any such deposit not recorded in the books of account.
How to value drawings, paintings, archaeological collections, work of art can be a issue for debate.
No doubt the present Bill has incorporated many of suggestions of the Federation and other professional organizations still, when we have to bring a new Income-tax Act to our country, it has to be joint efforts of tax officials, tax practitioners and tax-payers. Unless the Government involves the tax practitioners in the drafting process of the New Direct Taxes Code, the Government may not achieve the desired objects. No doubt there are number of good provisions in the present Code which can be incorporated by making desired amendments in the present income tax itself and we can achieve the object of simple and rationalize Income Tax Act. Federation is preparing a detailed representation and proposing to make a presentation before the select committee of the Parliament. The readers may send their suggestions to the office of the Federation for making better representation. For better understanding of the Direct Taxes Code, the Journal Committee of the Federation is proposing to publish at least one article written by eminent professional on various important provisions of Direct Taxes Code, in each issue of the Journal, which may be useful to the readers to understand the implications of Direct Taxes Code.
Dr. K. Shivaram
Reproduced with permission from the AIFTP Journal, September 2010