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2021-10-25
The Taxation Laws in India are litigation prone, and even though Indian Judiciary is internationally recognised for its detailed and unbiased verdicts on controversial issues, it lags behind when it comes to the time involved in closing an assessment.
CA Sachin Kumar BP (Chief Strategic Partner, Manohar Chowdhry & Associates) and CA Urvi Asher in this article highlights the issue of lack of consistency in tax litigation and suggest ways to step in the direction of adopting a consistent approach. The authors refer to certain recent judicial precedents and state that for the principle of consistency to apply, it is the taxpayers’ responsibility to ensure there is no change in the fact pattern.
They further touch upon recent amendments in reassessment proceedings and opine that “need for consistency in assessment orders from year to year may also draw support from judicial precedents where reassessment proceedings have been quashed on a mere ‘change of opinion’ or without having ‘reasons to believe”. They aver that there are numerous benefits of adopting a consistent approach in tax litigation and suggest some ways in which the consistent approach can be maintained.
“Tax Litigation – Need for Consistency”
This article encapsulates the burning issue of the lack of consistency in tax litigation, the strong judicial precedents in favour of the taxpayer and the ways to step in the direction of adopting a ‘consistent approach.’
India is one of the countries with a comprehensive tax legislation. The Indian judiciary is also known internationally for laying its detailed and unbiased verdicts on controversial matters. Yet when it comes to the time involved in closing an assessment, India lags behind.
In the Comptroller and Auditor General’s Audit Report[1], an analysis of tax demand for five financial years from 2014-15 to 2018-19 in paragraph 1.7.1 reveals that the quantum of demand ‘Difficult to recover’ is more than 95% of the total tax demand.
One of the important reasons could be that the assessment notices are issued with the intention of meeting revenue targets or perhaps without analysing the Revenue Department’s own stand in the past years under an identical fact pattern. Many taxpayers are receiving assessment notices on matters which have been settled in the taxpayer’s case itself in the past years.
Although the principle of res judicata[2] does not apply in the context of income tax proceedings, which are separate for each assessment year, the principle of consistency does apply. The Revenue Department cannot deviate from its decision taken in the earlier years without establishing any change in the factual pattern.
As I pen down my thoughts on consistency in tax litigation, I recall Shri Nani Palkhivala’s statement[3] in 1991 - “A stable fiscal policy is to a nation what a stable family life is to an individual.”
Recent Judicial Pronouncements
In a recent decision of the Hon’ble Delhi Income Tax Appellate Tribunal (‘ITAT’) reported in [TS-6715-ITAT-2021(DELHI)-O], the Court held that deduction under section 10B of the Income tax Act, 1961 (‘ITA’) cannot be denied in the subsequent years when there is no change in the facts and circumstances of the case. The Court observed that:
“… we find that the assessee has been allowed deduction under section 10B of the Act on the same activity for assessment year 2003-04 to 2008-09. Even in assessment year subsequent to the present assessment year i.e. AY 2010-11 also, the assessee has been allowed the deduction under section 10B of the Act. In such circumstances, we do not find any justified reason for not allowing the deduction only in the year under consideration by the Assessing Officer. In our opinion, there is no infirmity or error in the order of the Learned CIT(A) on the issue in dispute of deduction under section 10B of the Act, and accordingly, we uphold the same.”
In delivering its judgement, the Hon’ble ITAT rightly relied on the Apex Court’s decision in Excel Industries Ltd[4] and other decisions of Western Outdoor Interactive (P) Ltd[5] and Cat Labs Pvt Ltd .
There are numerous other decisions upholding the same view, viz.:
- Deduction under section 80IC of the ITA allowed for subsequent years as the position in the initial years was not disturbed - Indica Industries Pvt. Ltd.[6]
- Selection of comparables under transfer pricing may remain the same in subsequent years in the absence of change in - functions - Standard Chartered Pvt. Equity Advisory India (P.) Ltd.[7]
‘Fees for technical services’ held not to be chargeable in India under Article 12 of the India-Sweden tax treaty in earlier years; the taxability does not change in the subsequent year even if the income is taxable under covered under Section 9(1)(vii) of the ITA - Sandvik IT Services AB.[8]
An essential element in the aforesaid analysis is that the fact pattern or the circumstances continue to remain the same in the subsequent years. It is the taxpayer’s responsibility to ensure that there is no change in the fact pattern. In the event, the Revenue Department challenges facts or circumstances, the taxpayer must be able to justify the same with adequate documentary evidence.
Precedents on Re-assessment
The Finance Act, 2021 ushered in a drastic change to the re-assessment provisions. The revised provisions seem to have belittled the established concepts of ‘change of opinion’ and ‘reasons to believe.’ A question arises whether the Revenue can re-open past assessment considering that these important terms do not find reference in the new reassessment provisions. However, this may be challenged in the higher forums considering that the principles of ‘change of opinion’ and ‘reasons to believe’ are essentially the ‘principles of natural justice.’
The need for consistency in assessment orders from year to year may also draw support from judicial precedents where re-assessment proceedings have been quashed on a mere ‘change of opinion’ or without having ‘reasons to believe.’ They are enumerated below:
- Where aspect of non-deduction of TDS on machine hire charges was discussed by the Assessing Officer (‘AO’) during original assessment and he allowed said charges, on a mere change of opinion, the AO could not have invoked reassessment proceedings to disallow the said hire charges under section 40(a)(ia) of the ITA - Bharathi Constructions.[9]
Where the question as to how and to what extent deduction should be allowed under section 10A of the ITA was well considered in original assessment proceedings itself, initiation of re-assessment proceedings merely because of fact that now AO was of view that deduction was allowed in excess, was based on nothing but a change of opinion – TechSpan India (P.) Ltd.[10]
- The rejection of a system of accounting maintained by the assessee in a subsequent year cannot be a reason for reopening an already concluded assessment. The same would be nothing but 'change of opinion' of the AO, which cannot be a reason for reopening an already concluded assessment. - Dell India (P.) Ltd.[11]
- There must be a live link or close nexus between the material coming to the knowledge of the AO and formation of belief for the purpose of reopening the original assessment – Lakshmani Mewal Das.[12]
When is departure from earlier decisions justifiable?
- In genuine cases, the Revenue Department may observe a different fact pattern and circumstances to justify taking a divergent view as compared to the earlier years. In simple words, a departure from decisions taken in the earlier assessment years is justified when the facts or circumstances in the relevant year are different from those in the earlier assessment years. However, the onus of establishing the change in the factual pattern lies with the Revenue.
- In Godrej & Boyce Manufacturing Co Ltd.,[13] the Apex Court held that the principles of res-judicata will not apply only if the Revenue is able to establish compelling reasons for a departure from the settled
Way forward
Needless to say, the benefits of following a consistent approach in tax litigation are numerous. It reduces unwanted litigation and improves the disputed demand statistics. Besides, the time, effort and taxpayers’ money spent on such litigation can be directed to address the new-age tax evasion mechanisms.
Some of the ways in which a consistent approach can be maintained could be:
- Introduction of a threshold tax limit where no contrary view can be taken in case of the taxpayer in the subsequent years. The threshold may be linked to the tax amount of the previous year in case of the taxpayer himself, eg. tax variation within 5% / 10%.
- Artificial intelligence too has a role to play here. The systems may deter the assessing unit to take a stand different from the previous years, unless authorised by the higher authority.
- Introduction of mediation as an alternate process of dispute resolution which can be faster and cheaper than the traditional assessment and appellate process.
- Publishing estimated and actual data on tax demands can act as a check on the Revenue. In fact, it can be a step in the direction of Tax Transparency.
There could be other ways too; yet taking the first step towards consistency could go a long way in assuring the existing taxpayers as well as encouraging global investors to invest in India.
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[1] https://cag.gov.in/uploads/download_audit_report/2020/5%20Chapter%201-05f911994112353.32142979.pdf
[2] A matter that has been adjudicated by a competent court and therefore may not be pursued further by the same parties.
[3] https://itatonline.org/articles_new/dear-finance-minister-will-you-listen-to-nani-palkhivala-before-it-is-too-la
[5] [TS-614-HC-2012(BOMBAY)-O]
[6] [TS-7339-ITAT-2021(DELHI)-O]
[7] [TS-7340-ITAT-2021(MUMBAI)-O]
[8] [TS-5653-ITAT-2021(PUNE)-O]
[9] [TS-5823-HC-2020(Madras)-O]
