CBDT retains monetary limits for filing of appeals by I-T dept, but expands scope of exceptions
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The Central Board of Direct Taxes (CBDT) in its recent circular has maintained the threshold limits for filing appeals by the Income-tax (I-T) department with tax tribunals, high courts, and the Supreme Court (SC).
However, it has also expanded the list of exceptions, allowing appeals to be filed even for ‘insignificant’ sums. These exceptions now include matters related to bogus capital gains/loss from penny stocks and cases of accommodation entries; disputes concerning various aspects relating to tax deducted at source (TDS) or tax collected at source (TCS); tax assessments based on information from law enforcement and intelligence authorities as wide ranging as the CBI, ED the department's own investigation wing, GST department or even state law enforcement agencies; disputes regarding tax treaty applicability and even equalization levy (also dubbed as Google tax).
Tax experts view that a wait-and-watch approach is needed, but the broad list of exceptions could lead to increased litigation for individuals, Indian corporations, and overseas entities.In August 2019, the CBDT had revised the limits to Rs. 50 lakh, Rs. One crore and Rs. Two crore for filing of appeals by the I-T department with the Income-tax Appellate Tribunal (ITAT), high courts, and the SC, respectively. Barring the now expanded list of exceptions, the I-T department can file appeals at higher judicial forums only if the 'tax effect' exceeds these thresholds.

In simple terms, ‘tax effect’, means the difference between the tax on the total income assessed by the I-T department and the tax levy without considering the disputed income. Government officials, that TOI spoke with, contend that the existing thresholds are reasonable and that expanding the list of exceptions was necessary.
A taxpayer points out that there is a proliferation of WhatsApp groups that draw innocent investors into buying and selling stocks of certain companies – which may transpire to be penny-stocks. The capital gains/loss made by them are genuine and they are not part of any organized tax evasion activity. However, now even for insignificant gains or losses, the I-T department can appeal and prolong the litigation.

Matters related to statutes that no longer exist such as wealth tax, fringe benefit tax are included in the exception list, as is the equalization levy. Gautam Nayak, tax partner at CNK & Associates points out that litigation has a cost for the taxpayer and the department. It also has a bearing on investor sentiment. “Litigation on insignificant sums could send the wrong signal. Perhaps, issue-based limits could have been set.”


Nayak illustrates that some exceptions carved out could impact India Inc and its international business partners. “The exception covers litigation relating to the determination of the ‘nature of transaction’ and thus the obligation to withhold tax in India. For instance, the Indian customer making payment to a US company for cloud-computing or off-the-shelf software could view that owing to specific terms it is not Royalty or Fees for Technical Services under the India-US tax treaty and no tax is to be withheld. The I-T could hold otherwise, resulting in its filing an appeal for an amount which may be a few lakhs only.”


Case where prosecution has been filed by the I-T department in the relevant case and trial is pending or conviction order has been passed and the same has not been compounded by the taxpayer (which entails paying a compounding fee which is a percentage of the defaulted sum). This includes instances of failure or delay in depositing TDS.


Disputes relating to the applicability of a tax treaty are included in the exceptions. Anish Thacker, chartered accountant, states, “A taxpayer may have won an appeal at the Commissioner (Appeals) level that a tax residency certificate is adequate proof and the provisions of a tax treaty and its consequential benefits such as lower withholding taxes in India will apply on income such as ‘Royalty’ or ‘Fees for technical services’ or a Mauritius-based investor could contend that gains arising on sale of Indian shares purchased prior to April 1, 2017, are fully exempt in India. Such cases can now be contested by the I-T department, even if the disputed amount involved is below the prescribed thresholds.”


Most of the exceptions carved out by circulars of earlier years, including cases relating to undisclosed foreign income or assets continue. The circular comes into effect immediately and applies in respect of appeals to be filed henceforth.

 

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