The author is severely critical of the Government for the failure of the Settlement Commission to achieve its desired objects. He blames bad administration, lack of transparency in the process of appointment and failure of the Government to appoint Members from the profession as the root causes of the problem. He has identified a few critical areas and makes a fervent plea for reform.
One can say that Income-tax Act was the first fiscal law that had an alternative dispute resolution (ADR) mechanism inasmuch as Income Tax Settlement Commission (ITSC) existed since 1976 on the statute book. Wanchoo Committee had suggested formation of a Permanent Settlement Tribunal in its report instead of repetitive disclosure schemes in following words: “this, does not mean that the door for compromise with an errant tax-payer should for ever remain closed. In the administration of fiscal laws, whose primary objective is to raise revenue, there has to be room for compromise and settlement.”
By Finance Act, 2007 far reaching changes have been made to provisions for settlement of tax cases and with effect from 1-4-2008 one can say that ITSC is on statute book only for name sake. Only a few applications have been filed under the new provisions – though one can say that approximately only 400 applications being filed annually even under the old provisions showed that there was something seriously wrong with the provisions and its implementation. It cannot be denied that what Wanchoo Committee said in 1976 is true even today, rather type of dispute between the department and the assessee has undergone a sea change and it is the experience of the bar that there is need for a proper alternative dispute resolution forum. For a long time, it has been suggestion of AIFTP that there has to be a mechanism for resolution of tax disputes otherwise than by way of litigation. Like in commercial transactions, where conciliation proceedings are resorted to instead of litigation, similarly for tax disputes there has to be an alternative dispute resolution mechanism.
As the Legislature in its wisdom has done away with old provisions, we feel that one should first find out what went wrong with earlier provisions and what needs to be enacted to have a proper ADR forum. According to us two major defects in earlier provisions and its implementation lead to ITSC being criticised by one and all; bar, administration or the judiciary.
The first and foremost error was of administration in not following the legislative dictates in letter and in spirit. To our knowledge this is the only provision which specifically says that persons of highest integrity only should be appointed as members (S. 245B(3)). All persons are honest until proved otherwise but when legislature prescribes such a qualification a positive action ought to have been taken about appointments. The notification prescribing conditions for appointment only talks about number of years of service put in and not a word about honesty and integrity. A condition ought to have been there that even one doubt or suspicion and a person would not be appointed even if nothing is proved against such person. Not only members of bar but even departmental officer had no faith in some of such members and it was this disbelief in their integrity that one saw complete non-co-operation both from bar and department with ITSC in many instances.
The second error was in drafting of S. 245C(1) which required offer of income which has not been disclosed before the Assessing Officer. This ensured that only concealment cases could be filed and the forum became a criminal reform system rather than alternative dispute resolution forum.
In addition to ensuring that above two errors are not committed, if some changes are made, we are sure Income-tax Act would have a proper ADR. Some steps in the said direction have been initiated in the new provisions. Some of which are: (i) no elaborate procedure for admission of a case; (ii) final disposal of case within twelve months of filing application; and (iii) case to go back if settlement does not take place within twelve months. Time is essence in any economic activity and a provision whereby within twelve months, all the issues for an assessment year, whether of tax, interest or penalty, being decided by a single authority will attract many assessees to give a quick quietus to an issue rather than prolong it for 20 years before finality is achieved.
In its new role, the ITSC would be settling primarily non ‘concealment’ cases and if following changes are made to the provisions, it would ensure that proper alternative dispute resolution mechanism is available to all types of non concealment cases:
i) The term income in S. 245C has not been defined and we feel that wider definition of income escaping assessment in explanation 2 to S. 147 may be made applicable even to S. 245C for determining additional income offered. This will ensure that disputes relating to allowance of relief or deduction or claim for deduction of expenses can also be settled.
ii) The need to offer income not disclosed before assessing officer needs to be done away with and to ensure minimum revenue collection it can rather be provided that tax effect shall be minimum prescribed amount.
iii) Definition of case in S. 245A may be widened to include case of short deduction of TDS, FBT and Transfer Pricing issues.
iv) Definition of pending proceedings needs to be clearly clarified that a proceeding is pending before final assessment u/s. 143(3) is made. This would ensure that even though time for issuing notice u/s. 143(2) has expired but if notice u/s. 148 is not issued, assessee can make a suo motu voluntary offer to settle his case.
v) As per section 245B(3) of the Income-tax Act, even professionals are eligible to be appointed as members of the Settlement Commission, however till date not a single member from the profession of law or accountancy has been appointed as members of the Settlement Commission. The members of the ITAT is selected by the committee headed by the senior Judge of Supreme Court, hence the selection process of the members of the Income Tax Appellate Tribunal is one of the best methods adopted, which can be adopted by the Government for appointing the members of the Settlement Commission which can bring more transparency in the process of appointment of members and best talent from the tax administration and profession can be appointed as members of the Settlement Commission.
vi) It has been observed that the tenure of the Chairman, Vice Chairman and Members of the Settlement Commission is also very short, hence they cannot take a major policy decision for better administration. It is always desirable to have at least few years of service as a Chairman to improve the administration.
vii) Some of the members of the Settlement Commission has lacked the experience to function as members of the quasi-judicial body. It is very essential that members must be trained and must be given basic training as how to function in a court atmosphere.
viii) Many of the Benches of Settlement Commission could not function as per schedule time. In the ITAT all the courts all over India starts at sharp 10.30 a.m. such a punctuality has been maintained ever since the Tribunal is constituted, where as Settlement Commission in some of the places functioned at the whims of members.
ix) Members of the ITAT adopted the code of ethics adopted by the Judges of Supreme Court and High Courts, hence it is desirable that the members of Settlement Commission should also adopt certain code of ethics which will enhance the image of the Institution.
x) We have observed that retired Chairman of SAT never appears before the SAT similarly retired President of ITAT never appears before the ITAT, though legally no bar for appearing. This practice has been adopted by convention and not by law, it may be desirable that in the interest of the Settlement Commission at least the retired Chairman or Vice Chairman should restrain from appearing before the same forum.
xi) The report of the secretary Settlement Commission should be made available to both the parties, which will bring more transparency in the functioning of the Settlement Commission, it will be help to reduce the unethical practice of trying to get the report.
These are some of the thoughts in the interest of better functioning of Settlement Commission. I am thankful to Mr. Chetan Karia member of our Association for his valuable contribution to this editorial.
Dr. K. SHIVARAM
(Reproduced with permission from the AIFTP Journal – August 2008 issue)