The Hindu Business Line : High-pitched `demands' stir up a good supply of views

How does one tackle this situation of huge tax demands? One possible solution could be to link the tax payments to the timely disposal of the appeals at various levels. For instance, a percentage of the demand could be paid at the assessment stage...

Responding to last week's Detaxification titled, `Needed, accountability for adventurous tax demands,' which reported the views of Bangalore-based chartered accountant, K. R. Girish, here is a mail from G. Narayanaswamy, a veteran chartered accountant based in Chennai:

"It may not be correct to say that there are no guidelines regarding stay of collection of disputed tax. The then Deputy Prime Minister, Morarji Desai, had given an assurance in Parliament that `... where the income determined on assessment was substantially higher than the returned income, say, twice the latter amount or more, the collection of the tax in dispute should be held in abeyance till the decision on the appeals, provided there were no lapse on the part of the assessee'.

The Board has also brought to the notice of all assessing officers of this assurance and the powers of stay of recovery in such cases up to the stage of first appeal (CBDT Circular No. 96 dated August 21, 1969).

These instructions have been held to be binding on the Department by the High Courts (in 223 ITR 192 and 182 ITR 413).

There are Circulars of the CBDT to the effect that where the dispute involved has been decided in favour of assessees in earlier years, collection of taxes should be stayed. However, in practice, these instructions are not followed and there is no appellate remedy.

Approaching High Courts by way of writ, etc., is expensive, time consuming and also bothersome for assessing officers (AOs) who are not as fair minded as they used to be. There is a general lack of desire on the part of the departmental officials to be fair.

There is no punishment for erring officials, who make high-pitched assessment, nor recognition for fair minded people."

To this, K.R. Girish responds:

"First of all I respect his views and I am fully with him on this issue, but let me clarify the position. This CBDT circular has been in place, but assessing officers have not been following it.

We had taken the matter with the CCIT here specifically on the high pitch transfer pricing assessments and we have a specific response from his office mentioning that he cannot go by any blanket stay.

And in the discussion we had brought out the Board instruction which his office is fully aware of. If this Board circular is indeed applied, then there would be no need for asking 50 per cent payment as in all these cases the assessed income is much higher than the returned income. So as you see, it is not a case of the revenue adhering to the Board circular and staying the demand as brought out in the circular. Trust this clarifies the position."

And Narayanaswamy replied:

"There is no difference of opinion between KRG and me. The Circulars of the Board and assurance of the then Deputy Prime Minister in Parliament are not being implemented/followed by the tax authorities. My grievance has been that the assurance given cannot be withdrawn except by the Finance Minister in Parliament.

The letter of KRG proves my point that the revenue officials are not helpful or sympathetic. In fact, in a recent Madras High Court case, the court directed 50 per cent of the taxes be paid and the rest stayed. This has emboldened the administration. When the Department is aware that there is no effective remedy for the assessees, they become more arrogant and unfair. The number of high-pitched assessments is so high that the assessees get demoralised and this is what I wanted to be highlighted."

******

On `demands', again, here is a write-up by Krishnan Narayanan and Rohit Jain, both Bangalore-based chartered accountants.

Background

The recent past has seen a number of tax reform initiatives from the Government for making the procedures more taxpayer-friendly. However, of late, huge income-tax demands raised by the tax authorities have put many corporate taxpayers in a spot of bother.

Vide the Finance Act, 2006, the Finance Minister had reduced the time limit for completing the assessments by three months. The Memorandum explaining the provisions of the Finance Bill, 2006, states that the reduction in time limit was made with the objective of collecting tax demands within the same fiscal year in which they are raised. In other words, if the assessments are completed and demands are raised by December, the amendment would facilitate collections by the following March.

It is evident that this collection pressure has percolated to the tax officers (tax administrators) at the ground level. The assessments made this year are in general being seen by the industry as `aggressive'. The major disagreement in these assessments relate to the transfer pricing adjustments made, especially on companies in the IT/ITeS sector, and cases where the tax officers have not ruled favourably even if the issues are covered by the decisions of higher authorities.

For instance, the expectation of the tax authorities is for captive IT/ITeS units to earn about 25-37 per cent operating margins on costs, and this has resulted in transfer pricing adjustments of about Rs 1,300 crore in Bangalore itself! Needless to add, these adjustments have translated into significant tax demands. There have also been numerous cases where the tax officers have reopened closed assessments, and raised significant tax demands.

The taxpayers are finding it hard to cope with the burden of such high tax demands, which are in multiples of the tax declared in the relevant tax returns. When the tax office seeks immediate payment of the full/significant portion of such demands, naturally, the taxpayers are put into serious jeopardy.

Judicial position

The CBDT has recognised this issue of stay of demands, and had issued an instruction in 1969 to the effect that in all cases where the income determined on the assessment is substantially higher than the returned income, the demand should be stayed till the decision on the appeals, provided there is no lapse on the part of the taxpayers.

The judiciary has also taken note of such issues. The Calcutta High Court (in Hooghly Mills Company Limited vs UOI — 1999 108 ELT 637) and the Madras High Court (in R. P. David vs Agricultural Income-tax Officer — 1972 86 ITR 699) have also held that financial soundness of a company cannot be a ground for refusing stay of any demand. Further, the Karnataka High Court has held that where the appeal has been heard by the appellate commissioner, the outstanding demand should not be pressed for payment till the appellate commissioner passes the relevant order.

It may be appropriate to mention here that adjudication of appeals has not kept pace with the annual assessments. Frequent transfer of the appellate commissioners adds to the problem, as part heard, or even fully heard, appeals are typically required to be heard afresh by the new appellate commissioner.

The judicial precedents notwithstanding, it appears that the pressure of tax collection has made the tax officers reluctant to follow the instructions issued by the CBDT, and the guidance laid down by the various High Courts.

The proposed amendment

Under Section 254 of the I-T Act, 1961 (`the Act'), the Income-tax Appellate Tribunal (ITAT) has powers to stay the demand in any proceedings if it relates to an appeal pending before it. The section also provides that the stay shall stand vacated if the ITAT does not dispose the appeal within 180 days from the date of the stay order.

However, in practice, in cases deserving merit, the ITAT has typically been fair, and has allowed stay of demand for additional period(s), upon fresh applications.

The Finance Bill, 2007, proposes to amend Section 254 of the Act to provide that ITATs shall not grant stay of demand for a period exceeding 365 days. This proposal is yet another attempt to facilitate collection of tax demands. In any case, the ITATs do not stay demands in non-deserving cases. This proposal seeks to curtail the discretionary powers of the ITAT and is, therefore, uncalled-for.

A possible solution

So how does one tackle this situation of huge tax demands? One possible solution could be to link the tax payments to the timely disposal of the appeals at various levels. For instance, a percentage of the demand could be paid at the assessment stage; another percentage could be paid once the appeal is disposed of by the appellate commissioner; another percentage once the appeal is disposed of by the ITATs (that is, in cases where the orders of the appellate commissioners are not in line with decisions of ITATs on the same matters), and so on.

The above scheme would make practical sense, especially in transfer pricing cases, where the law is evolving and the tax demands are significant. Further, since the payment/refunds would be linked to the appeals, both sides would be interested in early resolution of disputes.

In conclusion, a clear roadmap is required for stay/collection of tax demands of significant value. Though justice may well prevail ultimately through the judiciary (that is, on the points of law in dispute), given the slow judicial system and the uncertainty involved, it is necessary to ensure that the approach is fair and equitable and that the tax authorities are not purely driven by revenue considerations.

Further, it should be noted that the balance is loaded against the taxpayer on interest payments. While the interest that the taxpayer receives is a pittance, and that too simple interest, the interest payable by him is at a much higher rate and is also not allowable as a deduction while computing his income for tax purposes, thus resulting in an effective interest rate of 18.09 percent per annum.

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