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Reducing Litigation
Initiatives and Further Strategies
Chief Commissioner of Income Tax, Nashik

Reducing Litigation

Manifold increase in recent years

Mostly infructuous

Wasteful expenditure for Government and Taxpayers

Infructuous addition, once made becomes recurring unless issue is finally settled

Valuable time and scarce resources are wasted in unproductive work

Adversely affects image of the Government when taxpayer emerges victorious

after protracted litigation

Projects Government as a chronic litigant

Urgent need to prevent unnecessary and avoidable litigation :

To free manpower for productive work

To send message of non adversarial tax regime

To build Governments image as

Present Status of Litigation

Tax Disputed at different levels

CIT(A)s

Rs. 3.83 Lakh Crores

ITATs

Rs. 1.49 Lakh Crores

High Courts

Rs. 39,826 Crores

Supreme Court

Rs. 4,270 Crores

CIT(A)s
ITATs
High Courts
Supreme Court

Disputed Tax

Presentation Flow
Case Analysis
Reasons for increase
Initiatives taken
Suggested initiatives and future strategies

Diagnosis of Litigation
Study of pending litigation at the first appellate stage

Diagnosis of Litigation A Case Study

Sample Nashik and Thane

The type and nature of infructuous additions :-

Additions were made where the AO did not receive reply to notice u/s 133(6)
issued by him or where the assessee was not able to comply with queries raised
by the AO in the given span of time, and the assessee was able to fully explain
such issues during appeal proceedings

Additions were made on adhoc basis without an incriminating evidence

Numerous Appeals were filed in Hawala cases where the information was
received from Sales tax authorities and entire purchases were added only on
the basis of the information received.

Assessees claim had merit but could not be allowed by the AO as the claim was
not part of the return filed

TP adjustments because of non availability of proper comparables and database

Diagnosis of Litigation A Case Study

Appeals filed because of lacuna in the Act, like s. 234E

Appeals filed because the tax was deducted as per treaty and not as per
the Act, as per requirement of 206AA

Due to lacuna in the CPC software where in s. 209 is not applicable for
senior citizens and interest u/s 234B is not applicable

Appeals emanated because of demand raised because of mismatch of

TDS credit with 26AS

Appeals made because the AO applied law retrospectively even though

legislation is silent on this

The above list is illustrative and not exhaustive

Reasons for Increase in litigation

Understanding the reasons for increase in litigation based on the
study of cases

Reasons for increase in litigation

Procedural

Failure of AOs to start investigation in a timely manner (Paretos Principle 20-80

Rule AO to prioritise & investigate high revenue potential cases) and complete
assessments in descending order of revenue potential
Failure to draw clear distinction between cases which require in depth investigation &
routine cases like AIR cases

Mindset & psyche of the AO that some disallowance/additions are required to be

made in every case selected for scrutiny

AOs tendency to make needless, infructuous additions, so that when file is seen
by CIT(A), his responsibility gets shared for the same

Additions are made by the AO on failure of the assessee to make compliance to

certain queries. In these cases adverse inference s are drawn from non
submission of details and no other reason/independent enquiry is made.

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Reasons for increase in litigation

Administrative

Overburdened Assessing Officers time, energy and resources are spread thinly
resulting in superficial assessments

Assessment Charge

Scrutiny workload

DCIT Circle 1, Nashik

435

DCIT Dhule

140

DCIT Circle 2, Nashik

335

After abolition of DC special Range, complicated and intricate cases were handled by
Junior officers with very little experience of unravelling the maze of tax evading
transactions

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Reasons for increase in litigation

Legal

Tendency of AOs to make addition on issues on which information u/s 133(6) is sought but no
reply is received

AO is not able to entertain additional claim of the assesse, not included in the return of income, filed by the
assessee during assessment proceedings due to no such provision in law and assessee has no recourse but
to file an appeal and appellate authorities allow such claims on basis of Supreme Court decision

claims of 80G, 10A, 10B etc.

Provisions giving rise to voluminous litigation

S. 2(22)(e) Deemed dividend
S. 9 Permanent Establishment
S. 14A Disallowance in respect of exempt income
S. 36(1)(iii) Interest amount utilised for business or not when interest is not charged on loans
advanced, and the issue of notional interest income
S. 36(1)(va) Different interpretations by Gujarat High Court and Bombay High Court Employees
contribution income or not, whether s. 43B is applicable
S. 234E - Amendment in section 200A from 01/10/2014 procedural amendment prospective or
retrospective

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Reasons for increase in litigation

Legal

Ratio of directly applicable cases even when cited and relied upon by the
assessee are not applied squarely by the AO and dealt with cursorily in the
assessment order, leading to avoidable litigation

Non Compliance with tenets of natural justice and providing only perfunctory
opportunity

Non Compliance with laws laid down by Supreme Court, e.g. in case of reopening
of assessments (GKN Driveshafts)

Reluctance on part of CIT(A) to decide issues raised by assessee for determination

and giving relief on connected issues only e.g. reopening of cases u/s 148 even
though Department has no case because of incurable mistake by the AO

Appeals involving substantial revenue are confirmed for apprehension that

otherwise it will be viewed adversely

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Reasons for increase in litigation

Technical

Lack of a standard operating procedure for scrutiny assessments issues to be

examined critically viz., cash credits, cessation of liability, tax accounting ratios,
etc.

Lack of uniformity of treatment in dealing with identical issues by the AOs.

Case of Bogus purchases, Hawala cases

On issues of interpretation of law, where no judgment of High Court is available, the

normal tendency is to take a view against the assessee, howsoever incredulous

The department has limited success in unearthing/detecting modus operandi of

concealment in scrutiny cases because of operational limitations. In view of this
adhoc GP additions are made without assigning valid reasons.

Lack of database which can be used to benchmark transactions which affect

profitability in domestic cases

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Initiatives Taken
The steps already taken

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Initiatives taken

Finance Minister in Budget Speech 2016

Reducing litigation and providing certainty in taxation would be one of the nine pillars of
the tax proposals

Income Declaration Scheme 2016

Preventing future litigation

Direct Tax Dispute Resolution Scheme (DRS)

Revision of monetary limits for filing appeal by the Department

Advisory Board of CCITs for withdrawal of appeals from High Courts in cases where
there is no question of law or issue is considered settled

Legal Clarifications

80IA initial year Circular 1/2016

Buyback of shares Circular 3/2016

Transfer of shares whether business income or capital gains Circular 6/2016

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Suggested Initiatives
Future Strategies

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Short Term Measures

Administrative Measures

The Pr.CITs should allocate the work amongst the officers

depending upon the workload at the earliest

The post of JCIT Special Range should be made functional

Functionality should be introduced in ITBA so that AOs issue

questionnaires only through system

Range heads must monitor such questionnaires directly on real time basis

Pr.CIT should see some of the questionnaires on test check basis

Where major additions, say more than Rs. 25 lakhs (Rs. 50 lakhs in
metro), are proposed, they should be mandatorily referred by AOs u/s
144A to the Range heads

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Short Term Measures

The decision to issue notice u/s 133(6) should be preferably taken within
first three months of selection of a case for scrutiny rather than when
limitation expires as is mostly the case today. Thereafter, in case of non
compliance, summons u/s 131 or spot verification etc. should be
considered in consultation with Range head.

Presently, there is quarterly review of the AOs assessment work. This

should be strictly enforced. Where case laws given by the assessee is
not properly rebutted, this should be examined in review.

Quality Assessments made by the AO/Important findings of

search/survey operations should be shared on real time basis by
uploading modus operandi of inquiry and concealment on the
departmental site on regular basis.

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Short Term Measures

For increasing competitive spirit amongst the AOs, each CCIT should be
required to circulate best assessment order in his region on quarterly
basis

Changes in the CPC software for speedy redressal of grievances like

26AS mismatch and providing of functionality for taking care of conflict
of provisions with the Act.

Interest on advance tax in respect of senior citizens

Regarding psyche of the AO, he is required to be given confidence by

conducting workshops and mentoring. For this specific courses by
RTIs/NADT to be conducted, wherein one officer from each charge be
trained who in turn will train others

Where more than one view on interpretation of a provision is taken by

High Courts the acceptable view to be followed by AOs outside
jurisdiction of those High Courts should be clarified by DG(L&R)

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Short Term Measures

Technical Measures

With a view to evolve SOP for scrutiny assessments following measures are
suggested

With regard to examination of balance sheet and profit and loss account, the points of
enquiry are specified in Investigation of Accounts, a departmental publication. AOs
should be required to adhere to this publication for issue of questionnaire and starting
initial investigation.

Assessment work is being handled by very junior officers. This requires workshop to be
organized at the level of each Pr.CIT and for this Sharpening the Cutting Edge: A
Compendium published by Pune Charge maybe taken as base material and further topics
maybe added depending on local requirement.

Wherever a common issue exists (Hawala transactions, or purchase of share profit etc.), a
list of such issues should be prepared in respect of a CCIT region and every CCIT should
constitute a committee to deliberate on such issues and to suggest correct course of
action

Location and region specific issues

Pr.CCIT should ensure that on specific issues in his region there is uniformity in approach

Committee which already exists for high pitched assessments can be mandated with this
responsibility

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Short Term Measures

Dispute Resolution

In multiple Pr.CIT station charges, collegiums on the lines of collegiums of

CCITs for preferring appeal in High Court may be considered for appeal to
Tribunal

Where the Pr.CIT does not want to recommend an appeal in a high

demand case, the CCIT may endorse the decision upon referral by
Pr.CIT, that there is no possibility of it being upheld in appeal

In case involving a particular amount, say more than Rs. 5 cr in normal

charges and more than Rs. 20cr in metro, appeals should be heard by a
collegium of 2 CIT(A)s. This can be tried on pilot project basis and
replicated if found successful.

Instruction should be issued that no GP addition should be made in any

case without rejecting books of accounts after giving reasons and
bringing on records comparable cases

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Long Term Measures

Require data for benchmarking various transactions relevant for

computing profits and gains of business. For this purpose following
measures are suggested

In depth study of different trades/businesses

One or more trade/business maybe assigned to each CCIT for in depth study.
This must inter alia involve 360 degree profiling of such assessees and 100%
verification of items of books of accounts including third party verification

The results and financial parameters so obtained maybe used for guidance by
the AOs

Benefits it will standardise the process of scrutiny, help in developing SOP and
benchmarking business transactions

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Long Term Measures

Forum based Knowledge Database - A forum, similar to lines on

Quora, for the benefit of Assessing Officers and officers at ITAT and other
officers directly dealing with legal issues

Officer can raise a query online on any legal issue

e.g. examination of income based on percentage completion method

Other officers have access to this and can put forward answers

The online discussions are searchable and can be accessed by others

This creates an online and live knowledge database that helps officer to
take consistent and correct legal stand as per the view of the Department

Discussions can be utilised by Board to furnish clarification on typical issues

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Long Term Measures

Uniform treatment of Repetitive Legal issues

A uniform decision on such issues require to be taken

Issues like
Deductions u/s 54B, 54F etc.
Revenue/capital expenditure
Capital gains arising from sale of land outside 8 km limit whether used for agriculture or not
Development agreements where consideration is to be received in kind
Retirement compensation received by outgoing partners on dissolution of firm

Clarification from CBDT will be required by way of instructions and circulars relating to
the above issues which will be referred to it by the CCITs

Domestic AAR

A body similar to AAR maybe setup at the domestic level

Proposed large additions maybe referred to at the instance of the assessee or the
Pr.CIT

The decision of such an AAR would of course be made binding on the assessee as
well as the department

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Long Term Measures

Rationality in TP adjustments

Reasonable Safe Harbour Rules on various issues like

inbound and outbound loans
corporate guarantee
litigated sectors like IT, ITES, Jewellery Manufacturing, Diamond cutting and
polishing, Market support services
Royalty

Availability of robust foreign and local databases

Provision for reference to expert committee on complex and technical issues

like valuation of shares, derivatives

Promoting APA to reduce litigation

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Long Term Measures

Legal Measures

Legislative amendments to take care of lacuna in the Act. Wherever

procedural amendment is made in the Act it is considered to be
retrospective. Therefore, for procedural amendments it should be clearly
provided in the Act that unless provided in the Act, no procedural
amendment should be considered retrospective. E.g. Amendment in
s.200A for levying fee u/s 234E

In definition clause (s.2), inclusion of Principle of Purposive

Interpretation of law for interpreting the provisions of this Act the
principles of purposive interpretation shall apply whether stated or not

Far fetched interpretation not in consonance with legislative intendment

and purpose. All receipts in cash or kind require to be taxed in the hands
of the recipient unless exempted from income expressly by law

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Long Term Measures

Legal Measures

Amendment which allows AOs to entertain additional claim at the time

of assessment

Need for an online and live functionality, where references can be

made by CCITs to Board and clarification can be provided by Board

In cases where AO has not applied and dealt with the ratio of cases cited
and relied upon by the assessee accountability should be fixed and
systemic solution to this lies in effective training and monitoring by
Range heads

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Thank you