CBDT maintains the financial thresholds for I-T department appeals, but broadens the range of exclusions

MUMBAI: In a recent circular, the Central Board of Direct Taxes (CBDT) upheld the threshold restrictions for the income-tax (I-T) department to file appeals with tax tribunals, high courts, and the Supreme Court (SC).
On the other hand, it has also broadened the scope of exemptions, permitting appeals for even “insignificant” amounts.

These exceptions now include cases involving fake capital gains/losses from penny stocks and accommodation entries; disagreements over different aspects of tax deducted at source (TDS) or tax collected at source (TCS); tax assessments based on data from law enforcement and intelligence agencies, including the CBI, ED, the department’s own investigative wing, the GST department, and even state law enforcement agencies; disagreements over the applicability of tax treaties; and even the equalisation levy (also known as the “Google tax”).

Although tax experts believe that a wait-and-watch strategy is necessary, the extensive list of exclusions may result in more cases being filed by foreign companies, individuals, and Indian businesses.
The limitations for filing appeals by the I-T department with the Income-tax Appellate Tribunal (ITAT), high courts, and the SC were changed by the CBDT in August 2019 to be Rs. 50 lakh, Rs. one crore, and Rs. two crore, respectively. If the ‘tax impact’ surpasses certain criteria, the I-T department may only submit appeals at higher court forums, unless the list of exclusions has been broadened.
Simply expressed, “tax effect” refers to the difference between the tax levied without taking into account the contested income and the tax on the entire income determined by the I-T department. Speaking with TOI, government representatives maintained that the current standards were appropriate and that adding to the list of exclusions was essential.
A taxpayer brings up the issue of the widespread use of WhatsApp groups, which deceive gullible investors into purchasing and disposing of stocks in firms that may turn out to be penny stocks. They are not involved in any organised tax avoidance activities, and the capital gains or losses they have earned are real. However, the IT department may now file an appeal and continue the lawsuit, even for little wins or losses.
The list of exceptions includes equalisation levy and wealth tax, as well as other matters pertaining to Acts that have been repealed. The tax partner of CNK & Associates, Gautam Nayak, notes that both the department and the taxpayer incur costs when they file a lawsuit. It affects investor sentiment as well. “Litigation over little amounts of money might give the incorrect impression. Maybe boundaries, depending on the issues, have been established.
Nayak provides an example of how certain exclusions may have an effect on India Inc. and its foreign business associates. The exclusion extends to legal disputes involving the assessment of the “nature of transaction” and, therefore, the need to withhold tax in India. For example, when an Indian client pays a US-based corporation for cloud computing or off-the-shelf software, the customer may perceive the payment as not being a royalty or fee for technical services under the rules of the India-US tax treaty, meaning that no tax has to be withheld. If the I-T rules differently, it may file an appeal for a sum that is maybe just a few lakhs.
cases in which the taxpayer has not compounded (by paying a compounding charge that is a proportion of the defaulted amount) a conviction order that has been passed or a prosecution brought by the I-T department in the relevant case that is still ongoing at trial. This covers situations when TDS deposits are made unsuccessfully or slowly.
The exclusions include disagreements over whether a tax treaty is applicable. A taxpayer may have successfully argued at the Commissioner (Appeals) level that a tax residency certificate serves as sufficient evidence and that the terms of a tax treaty and any ensuing benefits—such as reduced withholding taxes in India on income like “royalty” or “fees for technical services”—will apply to income in these categories. Alternatively, an investor based in Mauritius may argue that any gains from the sale of Indian shares acquired before April 1, 2017, are entirely exempt in India. The I-T department may now challenge these situations, even if the amount in question is less than the set standards.
The majority of the exclusions allowed under previous years’ circulars, such as those pertaining to undeclared overseas assets or income, still stand. The circular applies to appeals that are filed going forward and has immediate effect.