On 19th December 2017, Comptroller and Auditor General tabled a report on the performance of direct tax administration and compliances to the provisions of Income Tax Act, 1961. The report revealed some harsh realities about the working of Income Tax Department and their arbitrary work culture.
Some of the remarks are discussed as follows:
Fictitious demands to achieve targets:
The report submitted by CAG said 'We pointed out that the ITD had raised exaggerated demands to achieve its revenue collection targets by resorting to methods that were irregular and unwarranted.
The demands so collected were refunded in the next financial year along with the interest under section 244A, which eventually put a heavy burden on the exchequer in the form of avoidable interest paid on refunds.'
Exaggerated demands were raised by adopting methods such as not allowing full credit of the prepaid taxes in the assessment, levying interest under section 234B or 234C on undue demands etc. that is totally unwarranted for the administration.
Bogus transactions by Assessees:
The report further said 'We pointed out that ITD did not adopt a uniform approach to deal with the cases of fictitious donations or bogus purchases. The AOs did not take cognizance of reports of the Investigation Wing and failed to initiate necessary follow up actions by disallowing the amounts of the fictitious donations or bogus purchases which resulted in loss of revenue.
Moreover, AOs were allowing or disallowing amounts pertaining to Bogus transactions arbitrarily, applying discretion that was not available to them. In some cases, the disallowances made were only partial, where complete disallowance was called for which resulted in loss of revenue.
Shortcomings in the Corporate Taxation:
Coming to the point of corporate taxation, the report added: 'We pointed out 320 high value cases pertaining to corporation tax with tax effect of Rs. 3,850.86 crore. We classified these cases in four broad categories:
(1) quality of assessments involving tax effect of Rs. 625.73 crore (99 cases); and
(2) administration of tax concessions/exemptions/deductions involving tax effect of Rs. 1,789.22 crore (150 cases); and
(3) income escaping assessments due to omissions involving tax effect of Rs. 989.83 crore (31 cases); and
(4) over-charge of tax/interest involving Rs. 446.08 crore (40 cases).
Some of the general observations on the shortcomings of ITD:
- Arithmetical errors in computation of income and tax.
- Application of incorrect rates of tax and surcharge;
- Mistakes in levy of interest;
- Excess or irregular refunds/interest on refunds;
- Mistakes in assessment while giving effect to appellate orders;
- Administration of tax concessions/exemptions/deductions;
- Irregular exemptions/deductions/rebate/relief/MAT credit.
Remarks on Appeal Process in the ITD:
The CAG report made following remarks on the Appeal Process followed by ITD:
'We audited 17,097 appeal cases produced by the ITD and found irregularities in 2,203 cases involving tax effect of Rs. 549.56 crore related to non-compliance of the provisions of the Act/ Rules/ CBDT circulars etc. Such irregularities accounted for more than 12 percent of total cases audited.
We pointed out admission of appeals by the CIT (Appeals) ignoring the precondition of payment of tax by the assessee, besides pointing out other violations of rules noticed.'
In implementation of appellate orders, mistakes in giving effect to the appellate orders on account of non-consideration of the refund already issued to the assessee, short/ non levy of the interest etc were noticed.
There were delays in implementation of appellate orders which resulted in avoidable payment of interest under section 244A to the assessee.
Also there were cases where the appellate authorities gave decisions in favour of revenue, but no action was taken by the ITD to implement the Appellate orders resulting in unrealized revenues.
If you're a practicing chartered accountant, an assessee or someone who has experienced any of the above shortcoming while dealing with the Income Tax Department, comment your experiences in the comment section below.