Burgeoning tax litigation: Untangling the web

According to a report prepared by the CBDT, in more than 30 per cent cases, appeals are filed mechanically “without appreciation of the maintainability of the issue involved”.

Written by Shruti Shrivastav , Anil Sasi | Updated: July 7, 2015 6:25 am
Tax Administrative Reforms Commission, Authority for Advance Rulings, AAR, tax, NDA government, UPA National Litigation Policy, legal disputes, indian express, business news A look at litigation on the tax side during the last few years bears out the tax department’s dismal success rate in appeals filed by it before various appellate authorities across both direct and indirect taxes.

The NDA government’s move to revive the UPA’s National Litigation Policy, which aimed at nudging different arms of the administrative machinery to curb prolonged litigation and draw a line beyond which there will be no appeal in legal disputes could be central to the Centre’s efforts to make India a better place to do business in. About 80 per cent of cases in courts pertain to government appeals, including tax cases.

A look at litigation on the tax side during the last few years bears out the tax department’s dismal success rate in appeals filed by it before various appellate authorities across both direct and indirect taxes. In fact, the department’s success rate of cases before the income tax appellate tribunal, high court, and Supreme Court, where it has filed appeals, is even more unfavourably tiled against the department, highlight the futility of needless litigation.

According to the data collated by the income tax department, of the appeals filed by the department in ITAT, 52 per cent were decided against it in 2011-12, rising to 58 per cent in 2014-15. Similarly, in the Supreme Court (SC) 39 per cent appeals were decided against the department in 2011-12, rising to 43 per cent in 2014-15. In high court, the number of appeals decided against the department stood at 59 per cent in the last fiscal vis-a-vis 63 per cent in 2011-12 (SEE CHART).

hc 2Bishwajit Bhattacharyya, former additional solicitor general of India and senior advocate in the SC, said that the reason for such dismal performance by the government is “a combination of total insensitivity on the part of the government in handling litigation within the high court and SC.”

“It is the most callous and insensitive litigant in the country and if the government becomes serious then half of the cases would not be filed and the success rate in rest of the cases will go up considerably. But government never takes litigation seriously. Its approach towards tackling litigation in superior judiciary is most unsatisfactory and leaves a lot to be desired,” he told The Indian Express.

Earlier, terming it as the biggest litigant, the high court had rebuked the government and said that it ought to be aware of the pendency of cases in the high courts and should work towards reducing frivolous and speculative litigation, which involves public money that can not be wasted in such litigation. Acknowledging the criticism faced from various courts over the quality of appeals filed before the Income Tax Appellate Tribunal (ITAT), HC and SC, the income tax department asked its officials to ensure that “frivolous appeals are not filed and where an appeal is filed, proper grounds of appeal or questions of law are framed”. It has also enhanced the monetary limit for filing appeals before ITAT from Rs 3 lakh to Rs 4 lakh to cut down on litigation.

hc 3According to a report prepared by the Central Board of Direct Taxes (CBDT), in more than 30 per cent cases, appeals are filed mechanically “without appreciation of the maintainability of the issue involved; in 15 per cent cases all the points prescribed in the instruction were not properly followed; while in more than 15 per cent cases grounds of appeals were not appropriately framed”.

As a fallout, amount worth Rs 3.83 lakh crore is locked in litigation at the CIT (appeals) level, Rs 1.49 lakh crore at the level of ITAT, Rs 39,826 crore at the HC level and Rs 4,270 crore at the level of SC till the quarter ending September 2014.

“In my view one of the reasons for cases filed by the government and its agencies being turned down, more often than private cases, by the courts is that often the government tends to over litigate and does not follow its own litigation policy. Due to systemic gaps in transmission of records and delivery of instructions, cases are either delayed in filing or even while pending cannot be as ably defended as they ought to be, despite capable lawyers being there on the government panel… Often there may be justifiable causes not to challenge but rarely are officers willing to take that decision. And with an entire chain of recommendations to litigate, it is only rarely that a law officer (anyway hard pressed for time) would take an alternate view,” Sidharth Luthra, senior advocate, SC, said.

As per the department of justice, the Supreme Court has a pendency of 61,000 cases, high court has a pendency of 41 lakh cases and the subordinate courts have a pendency of 2.64 crore cases.

hereSaddled with these facts, the BJP-led government is reviewing the National Litigation Policy which was launched by the UPA government in 2010. The revamped policy proposes to appoint a law officer in each department to take a holistic view while filing new cases or defending the pending cases. Cases where the chances of winning are lean, will not be pursued further.

The move would help strike a more conciliatory note in the government’s disputes with India Inc., effectively ensuring that the administration does not keep opening new fronts in its battle against private companies on tax issues and other legal disputes by appealing nearly all cases from lower courts through to the SC.

However, the UPA government does get the credit for setting the ball rolling on this. As far back in April 2013, former Planning Commission Deputy Chairman Montek Singh Ahluwalia had indicated that the government had initiated discussions on constituting an internal mechanism for settling disputes with the private sector. “The government needs to set up an internal mechanism to ensure that it does not appeal a case all the way up to the Supreme Court. At some point, we have to decide (that) we will not appeal further… We are working on this,” Ahluwalia had said at the India Summit 2013 organised by The Economist.

According to the World Bank Group’s comparative survey on doing business, India came in at the bottom of the heap when it comes to enforcing contracts to resolve a commercial dispute, with a rank of 188 among 189 countries. Making a case for a better regulatory environment in India, the NDA government has already pitched reforms such as doing away with the minimum paid-up capital for companies, single-step incorporation of companies, and reduced documentation for exports and imports, to a two-member team from the World bank collating data for the Doing Business Report, 2016. The World Bank defines ease of doing business around the rules and regulations that assist in creating a “dynamic private sector”.

The solution lies in strengthening the judicial infrastructure, Luthra said. “Any government must ensure that there is an effective system in place to deliver complete support to its legal counsel. There must be effective and fast decision making as to the feasibility of litigation with specified parameters to enable officials dealing with files to take decisions with confidence,” Luthra added.

According to the department-related parliamentary standing committee on personnel, public grievances, law and justice, number of appeals filed in 2014 was higher than the number of appeals disposed off, apparently due to existing vacancies in the courts and tribunals. Though the fourteenth finance commission has recommended Rs 9,749 crore to the department of justice for pendency reduction by establishing additional courts, fast track courts, and establishment of family courts among other steps, “judiciary should be made financially independent and number of judges should be increased three fold to cut down the pendency,” Bhattacharya asserted.

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