Reforming the income tax tribunal
Nani Palkhivala is reported to have remarked during the golden jubilee celebrations of the Income Tax Appellate Tribunal (Itat) that given a choice, he would either like to argue in the Itat or the Supreme Court. It is only fit that the Itat, which celebrated its 75th year in 2016, is taking the lead in maintaining this vanguard position. A three-member committee, chaired by Sunil K. Yadav, set up to overhaul the Itat rules, has recently circulated draft rules for public consultation, proposing some important changes to the rules first enacted in 1963 (incrementally amended regularly since then); but there is still much that can be done.
The Itat is the first independent forum where tax disputes are examined and where excesses of the state, if any, are remedied. Analysis conducted by us has revealed that about 65% of appeals (whether by taxpayer or the tax department) have been fully allowed, and another 17% have been partly allowed, in favour of the taxpayer. In 2016, the comptroller and auditor general of India reports that 32,834 disputes were pending at the Itat level, with Rs1,35,984 crore of disputed amount. A rough back-of-the-envelope working based on these numbers reveal that the government pays back to the taxpayer about Rs5,000 crore in interest per annum for the cases at the Itat (since disputed taxes are usually deposited in full before the cases reach this level).
The draft 2017 Itat rules
The draft 2017 Itat rules seek to make the tribunal more time-efficient by limiting the number of times a hearing can be adjourned—as any advocate in India will attest, adjournments are used to drag cases on for strategic value at severe cost to the other party. The draft rules also include provisions to ensure that time-sensitive matters are dealt with swiftly: stay applications must be listed the same week they are filed and disposed of within a few days after hearing; and rectification petitions have to be heard within four weeks of filing. It also seeks to incorporate modern technology into the daily functioning of the Itat by allowing e-filing of appeals, communication of notices, pronouncements and adjournments via e-mail and text messages, and carrying out hearings through video-conferencing.
Amendments to the existing draft rules
Perhaps the biggest problem with the way Itat benches currently function is the delay in timelines. Our analysis of Itat cases from the years 2013-16 shows that on an average, it takes around three years for the Itat to dispose of matters. This is a serious problem given that the Itat is not the first level at which a tax dispute is raised. The proposals relating to adjournments stay applications and rectification petitions will go some way towards improving this situation. However, there are ambiguities in the draft rules that could lead to the status quo continuing. For example, there is a draft rule that states that sittings of the Itat must begin at 10.30am but this does not specify the duration of time the tribunal must sit for. This is in keeping with the old rules, under which certain benches end their sessions early, without hearing all the cases listed for the day, resulting in the accumulation of pending cases.
The draft rules, despite providing a limit of five adjournments, permit benches nonetheless to accept more adjournments at their discretion without providing any criteria for this. Even when it comes to the timelines for rectification petitions, the current draft rule only includes a time frame for hearing the petition, not disposing it off. The rules also allow the Itat to remand cases for adjudication as a whole to lower authorities, which high courts have previously held to cause severe prejudice to the parties, and urged against at all costs. The rules should ensure that such ambiguities are ironed out by specifying detailed timings for the Itat and ways of enforcing them, providing more detail on the number of adjournments and reasons for these, providing a time frame for disposal of rectification petitions, and preventing benches from remanding cases entirely to lower authorities, or, in the alternative that they be exercised only in exceptional cases and with time limits.
As with data protection in India in general, there is no word on how contact details of taxpayers and representatives that would be collected will be kept safe and not distributed to third parties; this should be urgently addressed in the final draft.
What more can be done
The committee has an opportunity to truly reimagine the Itat by introducing the principles of case-flow management in the rules. While the draft rules takes some ginger steps to prioritize certain kinds of cases, it does not seem to embrace wholeheartedly case-flow management recommended by the Supreme Court in the Salem Advocates Bar Association ruling. Different kinds of cases currently take on an average the same duration of time to be disposed. An empirical study should be carried out to develop disposal timelines, and limit the number of cases listed per day (some benches have listed more than 100 cases per day) to minimize adjournments. The hearing process could also be streamlined by requiring the parties to engage in a pre-hearing meeting to determine a schedule for hearings.
If the current average time of three years is reduced to say one year, the government gets to save about Rs10,000 crore in interest. Of course, this would also require ramping up the litigation management capacity of the income tax department. The Itat should also consider publishing periodic reports about its functioning. This will provide a valuable resource for reinforcing trust in the institution by allowing for introspection within the institution and feedback from the public. Periodic reviews of such institutions and their rules are a must in the fast changing environment and therefore a sunset clause or review clause should be included.
The redrafting of the rules provides an opportunity for the Itat to demonstrate its ability to be one of the leading dispute-resolution forums in India and take the lead in introducing global best practices in the Indian judiciary. Whether they will take up this challenge remains to be seen.
Dipti Janardhan contributed to this article.
Vakasha Sachdev and Surya Prakash B.S. are, respectively, with Rao Law Chambers and DAKSH.