Assessment and Litigation - Income Tax Controversy

The Indian Constitution has empowered only the Central Government to levy and collect income taxes. The Ministry of Finance (Department of Revenue) through the Central Board of Direct Tax (CBDT), an apex tax authority, implements and administers direct tax laws. CBDT is a large organization with commissioners in charge of specified areas assisted by deputy commissioners and officers, who issue assessment orders and collect taxes.

Assessment:

All taxpayers are required to file a Return of Income on or before specified dates each year. The Assessing Officer (AO) examines the return of income filed by the taxpayers and frames the assessment by applying the provisions under Income Tax. 

The Income Tax Act and the general principles of natural justice mandate that the AO gives the taxpayer adequate opportunity of being heard in case the taxpayer disagrees with the quantum of income and tax declared by him or certain positions adopted in the return of income. During the assessment, where the taxpayer is expected to provide necessary clarifications to the AO, the points of dispute  or potential disputes are averted through explanations and clarifications.

The AO can serve the notice in case of understatement of income or underpayment of tax for hearing for regular assessment/limited scrutiny assessment within 6 months from the end of the financial year in which return is furnished. The Assessment Officer requires to issue the order within 1 year from the end of the financial year in which return is furnished.

Appeal to Commissioner:

Any taxpayer aggrieved by an order of Assessing Officer can file an appeal before the Commissioner of Income Tax (Appeal).

Documentation:

The taxpayer is required to submit the following documents before the Commissioner of Income Tax:

1. Prescribed form (including Statement of Facts and Grounds of Appeal)
2. One certified copy of the order, appealed against
3. Notice of demand in original
4. Copy of challans of fees.

Time Limit:

The taxpayer is required to submit within 30 days from the date of service of notice of demand relating to assessment or penalty order. The Commissioner (Appeals) may admit an appeal after the expiration of the period of 30 days if he is satisfied that there was sufficient cause for not presenting the appeal within 30 days.

Appeal Decision:

After the hearing is concluded, Commissioner (Appeals) passes an order in writing, disposing of the appeal and stating the decision on each ground of appeal with reasons within one year from the end of the financial year in which appeal is filed (where it is possible). In case of assessment and penalty, Commissioner (Appeals) may confirm, reduce or enhance it.

- As of 1st July 2019

Income Tax Appellate Tribunal:

Any taxpayer aggrieved by an order of Commissioner can file an appeal before the Income Tax Appellate Tribunal (ITAT).

Documentation:

The taxpayer is required to submit the following documents before the Income Tax Tribunal:

1. Prescribed form in triplicate (including Statement of Facts and Grounds of Appeal)
2. One certified copy of the order, appealed against
3. Ground of appeal before the first appellate
4. Statement of facts filed before the first appellate authority
5. Copy of the assessment order
6. Copy of challan for fee payment

Time Limit:

Appeal to ITAT is to be filed within 60 days from the date on which the order sought to be appealed against. The ITAT may admit an appeal even after 60 days if it is satisfied that there was sufficient cause for not presenting the appeal within the prescribed time.

Appeal Decision:

After the hearing is concluded, Income Tax Appellate Tribunal passes an order in writing, disposing of the appeal and stating the decision on each ground of appeal with reasons within 4 years from the end of the financial year in which appeal is filed (where it is possible).

Appeal to High Court:

Appeal against Appellate Tribunal’s order lies with the High Court, where the High Court is satisfied that the case involves a substantial question of law. Appeal to the High Court against Appellate Tribunal’s order can be filed by the taxpayer or the Chief Commissioner/Commissioner within 120 days of receipt of the order and in the form of a memorandum of appeal, precisely stating the substantial question of law involved.

Appeal to Supreme Court:

Appeal against High Court’s order in respect of Appellate Tribunal’s order lies with the Supreme Court in those cases which are certified to be fit one for an appeal to the Supreme Court. Special leave can also be granted by the Supreme Court under Article 136 of the constitution of India against the order of the High Court.

Alternate Dispute Resolution Mechanism

Advance Authority Ruling (AAR):

To facilitate certainty regarding taxation, a non-resident can approach the Authority for Advance Rulings (AAR) to determine the income tax liability of any proposed or current transaction. An advance ruling can also be sought by a resident to determine the tax liability of a non-resident with whom a transaction has been undertaken or is proposed to be undertaken.

Specified resident taxpayers can obtain an advance ruling in respect of their income tax liability arising out of a transaction undertaken or proposed to be undertaken with other residents. The class of residents eligible for obtaining an advance ruling is yet to be notified by the Central Government.

Such an advance ruling will be binding on the person seeking it about the transaction, and the income-tax department cannot disregard the ruling unless there is a change in the facts or laws affecting it.

Dispute Resolution Panel (DRP):

The DRP consists of a collegium of three CITs or Director of Income-tax (DIT) appointed by the CBDT. The CIT or DIT, in addition to their regular administrative duties, carry out the functions of the DRP. The DRP has the mandate to guide the Assessing Officer (AO) in deciding cases where the addition involves Transfer Pricing (TP) or cases of foreign companies.

The AO passes a draft order and within a month, the taxpayer has to either approach the DRP or inform the AO that the draft order is acceptable as final. In case of the latter, the taxpayer can approach the CIT (A). In case of the former, the taxpayer disputes the draft order before the DRP and the DRP has to decide within nine months whether the AO’s draft order is fine or whether it needs to be amended.
 
The AO passes a final order based on the directions of the DRP. The taxpayer may further dispute such final order before the ITAT. By a recent amendment, the revenue department has also been given the power to dispute such orders before the ITAT.