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), stated a Times of India news report. However, the circular has also broadened the list of exceptions, allowing appeals to be filed even for ‘insignificant’ sums, the news report stated.

The exceptions now encompass matters related to bogus capital gains/loss from penny stocks and cases of accommodation entries; disputes concerning various aspects of tax deducted at source (TDS) or tax collected at source (TCS); tax assessments based on information from law enforcement and intelligence authorities such 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 known as Google tax), as highlighted in the ToI report.

What is tax effect

Tax experts advocate for a cautious “wait-and-watch” approach, emphasizing that the extensive list of exceptions introduced could potentially result in heightened litigation for individuals, Indian corporations, and overseas entities. As per a Times of India news report, in August 2019, the CBDT had adjusted the limits to Rs 50 lakh, Rs 1 crore, and Rs 2 crore for filing appeals by the I-T department with the Income-tax Appellate Tribunal (ITAT), high courts, and the SC, respectively. With the exception of the now-expanded list of exceptions, appeals by the I-T department to higher judicial forums are permissible only if the ‘tax effect’ surpasses these thresholds.

Put simply, ‘tax effect’ refers to the variance between the tax calculated on the total income assessed by the Income-tax (I-T) department and the tax amount without taking into account the disputed income. Government officials, who spoke with ToI, stated that the current thresholds are fair and expanding the list of exceptions was deemed necessary.


What it means for tax payers

A taxpayer, in conversation with Times of India, highlights a concerning trend of proliferating WhatsApp groups that lure unsuspecting investors into trading stocks of certain companies, often penny stocks. These investors may genuinely make capital gains or losses without involvement in any organized tax evasion scheme. However, the expanded exceptions now allow the Income-tax (I-T) department to appeal even for minimal gains or losses, potentially prolonging the litigation process.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. The ToI news reported Gautam Nayak, tax partner at CNK & Associates as saying 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.”As per Nayak, 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,” Nayak was quoted in the ToI news report

Case where the tax department has filed prosecution in a relevant case and the trial is pending, or if a conviction order has been issued but not compounded by the taxpayer, the latter entails paying a compounding fee, which is a percentage of the defaulted sum. This scenario encompasses cases involving failure or delay in depositing TDS.

Disputes relating to the applicability of a tax treaty are included in the exceptions. Anish Thacker, chartered accountant, who was quoted in the Times of India news reported 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.”

The circular retains most exceptions outlined in earlier years, such as cases concerning undisclosed foreign income or assets. It takes immediate effect and applies to appeals filed from this point onward.

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