How parallel dispute resolution system renders IT dept ineffective

By S Murlidharan

The Indian Express on 20 August carried an interesting story on how the income tax administration is frustrated by the leniency of the parallel and alternative dispute resolution forum, the Income Tax Settlement Commission (ITSC).

The implicit burden of its song is but for such leniency, the department would have collected a lot more by way of tax or penalty or both from the beneficiaries of ITSC’s munificence given the wide-ranging powers it enjoys in conferring absolution for tax-related sins.

The ITSC indeed is an anachronism in a milieu where transparency is the buzzword. Nobody knows what goes on inside its hallowed, if not secretive, portals. Its orders are beyond the pale of scrutiny and not appealable though admittedly amenable to special leave and writ petitions.

Justice V R Krishna Iyer, way back in 1979, in CIT vs B N Bhattacharjee had voiced his concern over the sheer existence of the scheme of settlement when he remarked in the course of hearing before the Supreme Court that its beneficiaries were ordinarily those whose tax liability was astronomical and criminal liability perilous.

This is indeed true even today. The forum of ITSC is open to those who are willing to cough up Rs 10 lakh or more by way of tax on income not disclosed by them in their returns which they must have filed as a precondition for being able to knock at its doors.

And if they have been raided under the income tax law, then they can take the ITSC sanctuary if they are prepared to cough up at least Rs 50 lakh or more by way of additional taxes.

Indeed the dispensation is tailor-made for those who are caught with their pants down i.e. who have filed their returns and suspect that the assessing officer is going to delve deep into the matter to ferret out more income.

In short, the settlement mechanism enables such worthies to preempt the normal proceedings of the income tax law as well as roving enquiry inevitable in a raid proceeding.

Continuing his sarcastic attack, Justice Iyer said the settlement scheme proceeded on the assumption that composition and collection of revenue from tycoons is better than prosecution of their tax related crime.

To wit, the one who has filed his return disclosing a measly income would make a dash for settlement if he apprehends that the additional tax liability assessed could well turn out to be more than say Rs 20 lakh.

He may, in a dulcet voice, kindly agree to pay say Rs 12 lakh as against the minimum entry level barrier of Rs 10 lakh and thus save himself a hefty Rs 8 lakh, not to talk of the relief from penalty that could range from 100 to 300 percent of the tax evaded.

To be sure, members of the ITSC are men and women of integrity but as Justice Iyer pointed out the scheme is fraught with dubious potentialities. His subtle reference perhaps was to the supple conscience of human beings by and large howsoever lofty the seat they may be occupying.

That the income tax administration itself feels frustrated by the scheme is a telling commentary on its desirability. Penalty for concealment of income can in addition culminate in prosecution as well in the normal course. The ITSC can save one from both.

A seasoned tax evader can smell trouble from a distance. If he comes to know in the course of the assessment that the assessing officer has laid his finger on his Achilles heel that could prove to be a tax fount, wisdom lies in scurrying to the ITSC and settling the affairs behind the closed doors, away from the prying eyes of journalists.

Settlement smacks of something wink-wink-nudge-nudge, bordering on the sinister. Indeed it is done sub rosa (secretively).

Of course, the tax officialdom may be indulging in a bit of grandstanding when it opposes settlement. Tax officials are after all entitled to commission on the tax they extract through adversarial proceedings such as raids and reassessment.

Cynics may say that the ITSC must be getting under their skin because entering its portals by tax deviants means denial of such commission to them. That said it must, however, be conceded that there is nevertheless considerable merit in the criticism of the settlement mechanism by them.

It does throw a spanner in the works of the hardworking tax officials who have the spine and guts to take on tycoons and other big fish and who in the process spurn the offer of under the table payments. All their hard work comes to naught when the Commission grants admittance into its hallowed portals.

To be sure, the ITSC has to hear the jurisdictional tax officer before it enters into settlement with the one caught with his pants down but this is mere hearing and it is not bound to accede to the tax officer’s plea one way or the other.

The ITSC mechanism is a sort of permanent tax amnesty scheme that must be mocking at the guileless honest taxpayers. A tax amnesty scheme makes the honest taxpayer rue his decision to have been honest in the first place. So does the settlement mechanism.

The only difference between the two, as far as he is concerned, is while an amnesty scheme is sufficiently publicised and transparent as to how the tax absolution is going to be given, settlement is an opaque process consummated away from public gaze with the terms of settling varying from person to person.

It is no small mercy both to the tax administration and the honest taxpayer that the portals of the ITSC are now open but once in one’s lifetime and that the commission’s power to grant immunity has been clipped-immunity from penalty and prosecution can be conferred by it only under the income tax and wealth tax laws and not under other central enactment like the Indian Penal Code as was the case till 2007.