One can say that Income-tax Act was the first fiscal law that
had an alternative dispute resolution (ADR) mechanism inasmuch as Income Tax
Settlement Commission (ITSC) existed since 1976 on the statute book. Wanchoo
Committee had suggested formation of a Permanent Settlement Tribunal in its
report instead of repetitive disclosure schemes in following words: “this, does
not mean that the door for compromise with an errant tax-payer should for ever
remain closed. In the administration of fiscal laws, whose primary objective is
to raise revenue, there has to be room for compromise and settlement.”
By Finance Act, 2007 far reaching changes have been made to
provisions for settlement of tax cases and with effect from 1-4-2008 one can say
that ITSC is on statute book only for name sake. Only a few applications have
been filed under the new provisions – though one can say that approximately only
400 applications being filed annually even under the old provisions showed that
there was something seriously wrong with the provisions and its implementation.
It cannot be denied that what Wanchoo Committee said in 1976 is true even today,
rather type of dispute between the department and the assessee has undergone a
sea change and it is the experience of the bar that there is need for a proper
alternative dispute resolution forum. For a long time, it has been suggestion of
AIFTP that there has to be a mechanism for resolution of tax disputes otherwise
than by way of litigation. Like in commercial transactions, where conciliation
proceedings are resorted to instead of litigation, similarly for tax disputes
there has to be an alternative dispute resolution mechanism.
As the Legislature in its wisdom has done away with old
provisions, we feel that one should first find out what went wrong with earlier
provisions and what needs to be enacted to have a proper ADR forum. According to
us two major defects in earlier provisions and its implementation lead to ITSC
being criticised by one and all; bar, administration or the judiciary.
The first and foremost error was of administration in not
following the legislative dictates in letter and in spirit. To our knowledge
this is the only provision which specifically says that persons of highest
integrity only should be appointed as members (S. 245B(3)). All persons are
honest until proved otherwise but when legislature prescribes such a
qualification a positive action ought to have been taken about appointments. The
notification prescribing conditions for appointment only talks about number of
years of service put in and not a word about honesty and integrity. A condition
ought to have been there that even one doubt or suspicion and a person would not
be appointed even if nothing is proved against such person. Not only members of
bar but even departmental officer had no faith in some of such members and it
was this disbelief in their integrity that one saw complete non-co-operation
both from bar and department with ITSC in many instances.
The second error was in drafting of S. 245C(1) which required
offer of income which has not been disclosed before the Assessing Officer. This
ensured that only concealment cases could be filed and the forum became a
criminal reform system rather than alternative dispute resolution forum.
In addition to ensuring that above two errors are not committed,
if some changes are made, we are sure Income-tax Act would have a proper ADR.
Some steps in the said direction have been initiated in the new provisions. Some
of which are: (i) no elaborate procedure for admission of a case; (ii) final
disposal of case within twelve months of filing application; and (iii) case to
go back if settlement does not take place within twelve months. Time is essence
in any economic activity and a provision whereby within twelve months, all the
issues for an assessment year, whether of tax, interest or penalty, being
decided by a single authority will attract many assessees to give a quick
quietus to an issue rather than prolong it for 20 years before finality is
achieved.
In its new role, the ITSC would be settling primarily non
‘concealment’ cases and if following changes are made to the provisions, it
would ensure that proper alternative dispute resolution mechanism is available
to all types of non concealment cases:
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The term income in S. 245C has not
been defined and we feel that wider definition of income escaping assessment in
explanation 2 to S. 147 may be made applicable even to S. 245C for determining
additional income offered. This will ensure that disputes relating to allowance
of relief or deduction or claim for deduction of expenses can also be settled.
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The need to offer income not
disclosed before assessing officer needs to be done away with and to ensure
minimum revenue collection it can rather be provided that tax effect shall be
minimum prescribed amount.
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Definition of case in S. 245A may be
widened to include case of short deduction of TDS, FBT and Transfer Pricing
issues.
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Definition of pending proceedings
needs to be clearly clarified that a proceeding is pending before final
assessment u/s. 143(3) is made. This would ensure that even though time for
issuing notice u/s. 143(2) has expired but if notice u/s. 148 is not issued,
assessee can make a suo motu voluntary offer to settle his case.
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As per section 245B(3) of the
Income-tax Act, even professionals are eligible to be appointed as members of
the Settlement Commission, however till date not a single member from the
profession of law or accountancy has been appointed as members of the Settlement
Commission. The members of the ITAT is selected by the committee headed by the
senior Judge of Supreme Court, hence the selection process of the members of the
Income Tax Appellate Tribunal is one of the best methods adopted, which can be
adopted by the Government for appointing the members of the Settlement
Commission which can bring more transparency in the process of appointment of
members and best talent from the tax administration and profession can be
appointed as members of the Settlement Commission.
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It has been observed that the tenure
of the Chairman, Vice Chairman and Members of the Settlement Commission is also
very short, hence they cannot take a major policy decision for better
administration. It is always desirable to have at least few years of service as
a Chairman to improve the administration.
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Some of the members of the
Settlement Commission has lacked the experience to function as members of the
quasi-judicial body. It is very essential that members must be trained and must
be given basic training as how to function in a court atmosphere.
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Many of the Benches of Settlement
Commission could not function as per schedule time. In the ITAT all the courts
all over India starts at sharp 10.30 a.m. such a punctuality has been maintained
ever since the Tribunal is constituted, where as Settlement Commission in some
of the places functioned at the whims of members.
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Members of the ITAT adopted the code
of ethics adopted by the Judges of Supreme Court and High Courts, hence it is
desirable that the members of Settlement Commission should also adopt certain
code of ethics which will enhance the image of the Institution.
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We have observed that retired
Chairman of SAT never appears before the SAT similarly retired President of ITAT
never appears before the ITAT, though legally no bar for appearing. This
practice has been adopted by convention and not by law, it may be desirable that
in the interest of the Settlement Commission at least the retired Chairman or
Vice Chairman should restrain from appearing before the same forum.
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The report of the secretary
Settlement Commission should be made available to both the parties, which will
bring more transparency in the functioning of the Settlement Commission, it will
be help to reduce the unethical practice of trying to get the report.
These are some of the thoughts in the interest of better
functioning of Settlement Commission. I am thankful to Mr. Chetan Karia member
of our Association for his valuable contribution to this editorial.
Dr. K. Shivaram
Editor-in-Chief