30 April, 2019
In the Chamber of Tax consultants & ors v. CBDT and Union of India)[1], the Hon’ble Bombay High Court (HC) set aside a portion of the Central Board of Direct Taxes’ (CBDT) action plan that sought to incentivise commissioners of income tax (Appeals) (CIT(A)) whose orders have led to enhanced tax demand from the tax payers. The HC noted that the proviso to the section 119 of the Income tax Act, 1961 (IT Act) specifically prohibits it from issuing any such directions to make a specific assessment or dispose a case in a particular manner.
Facts
Sometime back, the CBDT issued a Central Action Plan for the financial year 2018-19 (CAP) inter alia for the purposes of setting out targets for tax collection, fixing timelines for disposal of cases by income tax authorities and for awarding certain reward points for such disposals. However, since the said CAP proposed to incentivise CIT(A)s who were passing orders favouring the Government, it raised a huge issue and there were widespread protests against such a move.
The Chamber of Tax Consultants and others (Petitioners) filed a public interest litigation (PIL) with the HC challenging the allocation of reward points to CIT(A) for passing orders in favour of the income tax department, since such actions would have been detrimental to tax payers. The Petitioners also challenged the portion of the CAP that required CIT(A)s to dispose-off the cases pending before them within a fixed timeframe since such timelines would put unnatural pressure to conclude the cases in a hasty manner without giving a fair hearing to tax payers and ultimately resulting in miscarriage of justice.
ISSUES
The HC faced the following issues:
- Was the CBDT right in incentivising the CIT(A) for passing the orders in favour of the tax department?
- Was the CBDT empowered to fix timelines for CIT(A) for disposing-off the cases pending before them?
Arguments
The Petitioners referred to a particular portion of CAP, which sought to incentivise the CIT(A) for passing “quality orders”. The term “quality orders” have been defined in the CAP as follows:
“Incentive for quality orders:
(i)With a view to encourage quality work by CITs(A), additional credit of 2 unitsshall be allowed for each quality appellate order passed. The CIT (A) may claim such credit by reporting such orders in their monthly DO letter to the CCIT concerned. Quality cases would include cases where
(a) enhancement has been made,
(b) order has been strengthened, in the opinion of the CCIT, or
(c) penalty u/s 271(1) has been levied by the CIT(A).
(ii) The concerned CCIT shall examine any such appellate orders referred to him by the CIT(A), decide whether any of the cases reported deserve the additional credit and convey the same through a DO letter to the CIT(A), which can be relied upon while claiming the credit at the year end.”
Referring to the above extracts, the Petitioners contended that all the contingencies kept for earning reward points are directly detrimental to tax payers – i.e. it refers to the enhancement made or cases where penalty is levied under section 271(1)(c) of the IT Act, which necessarily refers to the enlargement of the tax payer’s liability before the CIT(A) as compared to what may have been determined by the Assessing Officer.
The Petitioners submitted to the HC that the above requirement is wholly impermissible and invalid since such directions transgress the exercise of discretionary quasi-judicial powers by the CIT(A). The Petitioners further submitted that prescription of higher weightage for disposal of cases through quality orders has every possibility of consciously or subconsciously influencing the mind of the CIT(A) about the outcome of the case; and that there can be no additional weightage to the orders based on the contents or the subject matter since the same would tantamount to transgressing the exercise of quasi-judicial functions of the officers.
In regard to the other question, the Petitioners referred to the portion of the CAP which inter alia fixed the timeline for CIT(A) to dispose-off the cases expeditiously. The relevant extract is below:
“3.2 Accordingly, the targets and norms for FY 2018-19 in respect of disposal of appeals pending with CIT(A) in each PCCIT Region are set out as under
A. Each PCCIT Region shall ensure:
- Disposal of at least 25% of appeals that involve demand of Rs.10 lakhs or more in categories A2, and A3 and 100% of appeals pending as on 01.04.2018 that involve demand of Rs.50 crore and above (category A1);
- Disposal of at least 90% of appeals that involve demand of less than Rs.2 lakhs (new category B3);
- Disposal of at least 70% of appeals that involve demand of less than Rs.10 lakhs, inclusive of the targeted disposal in B3 (less than 2 lakh demand) category.
B. Each individual CIT(A) shall be expected to dispose of a minimum of 550 appeals, or achieve a minimum of 700 units during the year. In PCCIT regions where the average number of Category B3 appeals pending with CITs(A) is more than 500, each individual CIT(A) shall be expected to achieve a minimum of 800 units during the year.”
Referring to the above, the Petitioners submitted that any directives from the CBDT to its officers to dispose-off the cases/appeals pending before them within a rigid timeline has the possibility of denying a fair hearing to the tax payer. The Petitioners pointed out that section 250(6A) of the IT Act does not lay down a rigid time frame for the disposal of an appeal. Therefore, the CBDT vide the instant CAP should not attempt to shorten the time disposal of an appeal and lay down a rigid time frame to decide the appeal.
Countering such arguments, the CBDT argued that it had been formulating the CAP every year for the purpose of identifying the core area of departmental functioning and setting targets therein, including that of the CIT(A)s. The concept of awarding credits has been brought in to ensure parity in the performance of CIT(A)s as they are required to dispose-off small appeals involving a meagre tax effect as well as large and complicated cases, involving multiple issues, requiring greater effort and devotion of time.
Insofar as a definition provided for the term “quality orders” was concerned, it was submitted by the CBDT that in order to avoid litigation, it would amend the definition of “quality orders” from the next financial year onwards, to include all orders passed by the CIT(A)s, whether decided in favour or against the department, and passed exceptionally well-reasoned orders.
In respect of fixing a timeline for disposing-off the appeals, the CBDT submitted that targets and parameters for judging the output of the CIT(A)s are well within the scope of its powers and it is merely laying down targets for the CIT(A)s just like any other organisation would do to fix a target. It further submitted that timelines prescribed by it are not rigid and the officers have always been allowed to take more time, wherever required, in the interest of justice.
Decision
The HC referred to the relevant portion of CAP, which provided additional credit of two units for passing “quality orders” and held that the definition provided to the term “quality orders” necessarily establishes the fact that additional points were being provided for passing the orders in favour of the department.
The HC observed that it has been a well settled position in the field of administrative law that any interference in the discretion of a statutory authority in exercise of its appellate powers from any source, including the superior officers, is wholly impermissible and invalid. It also noted that such general principle of administrative law find statutory embodiment in the IT Act through the proviso to section 119(1) of the IT Act which expressly prohibits the CBDT from issuing any directions which require any income tax authority to dispose-off the case in a particular manner and any transgression into the same would amount to a breach of the provisions of the IT Act.
The HC accordingly held that the CBDT’s act of awarding the additional points for passing “quality orders” would amount to an illegal prescription and, therefore, even though the CBDT had agreed to amend the definition from financial year 2019-20 onwards, it should not be allowed to define “quality orders” in a manner proposed in the said CAP, even for the financial year 2018-19. Based on the above observations, the HC set aside the relevant portion of the CAP that incentivised CIT(A)s for passing “quality orders”.
As far as the validity of fixing timelines for disposing-off the cases are concerned, the HC held that setting out targets for tax collection would not render the policy arbitrary or unreasonable and that in the absence of such norms, it could be extremely difficult to judge the quantitative performance of the persons concerned. It further held that such guidelines are for general directives and prescriptions to enable the department to collect taxes as well as to assess the output of the concerned CIT(A)s. It did not accept the Petitioners’ argument that such guidelines could possibly result in the denial of a fair hearing to tax payers and held that there have been no firm directives that certain kinds of appeals must be decided before a particular date and the CIT(A)s are allowed to take more time in the interest of justice.
Significant Takeaways
This is an extremely welcome decision for tax payers at large because the HC has set aside that portion of the CAP, which rewarded officers for enhancing tax demands. It is also worthwhile to recall that the same HC in the case of Dedicated Health Care Services TPA (India) Pvt. Ltd.[2] had earlier stuck down a circular issued by the CBDT that the same would interfere with the exercise of quasi-judicial discretion of the Assessing Officers.
While it is commendable for the CBDT to agree before the HC that it is willing to revise the definition of the term “quality of orders” in the CAP in forthcoming years, it is very unclear whether the same would be followed in spirit as well. The issue gets further complicated due to the recent alarm raised by the CBDT vide its Press Release dated March 26, 2019 wherein it highlighted that direct tax collections have fallen short by 15%. The said Press Release exhorted its officers that it is an alarming situation and advised them to improve collections urgently by taking all possible actions.
The recent trend of specifically incentivising tax officers for higher collection of taxes has been continuing for some time and there have been attempts, at times in brazen terms like the current one, to incentivise officers who help the CBDT in collecting higher taxes. However, the HC has taken a very good decision and clarified the point that the CBDT cannot unduly coerce the CIT(A)s to take revenue favouring calls and be rewarded for the same.
At the same time, it is also surprising that the HC did not agree with the time limits being imposed on the CIT(A)s to pass their orders. It is understood that if officers are required to pass orders within a stipulated period of time, they will generally tend to do so, sometimes compromising quality. Moreover, till now, there has been no mechanism that proposes to reward the CIT(A)s for writing very good high quality orders. Thus, most CIT(A)s are likely to pass sub-standard orders with a positive bias towards revenue so that they are rewarded since doing the opposite will not earn them any benefit. Such a tendency among officers is bound to create unrealistic pressure on them which would work contrary to the Government’s motto of providing a non-adversarial tax regime.
[1] The Chamber of Tax consultants & ors v. CBDT and Union of India (Writ Petition No.3343 of 2018/PIL No. 144 of 2018 dated April 11, 2019)
[2] Dedicated Health Care Services TPA (India) Pvt. Ltd. and ors v. ACIT and ors (2010) 324 ITD 345
For further information, please contact:
S.R. Patnaik, Partner, Cyril Amarchand Mangaldas
srpatnaik@cyrilshroff.com
