Cumbersome forms, adding non-taxable items, modifying the computation and denying legitimate deductions by raising disputes, flawed appeals and revisions -- multiple tentacles squeeze the assesse. This is second part of a multi-part series adapted from Justice S Rangarajan Memorial Lecture in Bangalore delivered recently
The first tentacle takes the form of income tax returns, which require disclosure of all income on pain of penalty and prosecution for concealment. Full confession is expected because the department has no way of getting full information about sources of income. Even if they do, they still want the confession. Their advertisements say, “We know you bought a house and you will face penalty for not returning the income used for the purchase” (http://goo.gl/6MLTqP
). The logo on the form states: ‘KOSH MULO DAND’, which appears to mean paying tax is punishment. These words are part of the original Sanskrit phrase as appearing in Kautiliya’s Arthshastra meaning: “revenue is the backbone of administration
Filling the form itself is a pain. The US income tax form 1040 says, 'Check this box if you are blind.' The form is so powerful that it will miraculously give you sight to check the box!
The next tentacle reaches out with the power to search and seize and to collect data about income. The power to search is a tool for gathering data but the processing of that data lead to unexpected results.
I remember a case of a Hindu undivided family (HUF) of 10 brothers in a village in Orissa where the wives were found to be wearing jewelry of Rs1 lakh each. The Wealth Tax Officer concluded that they had concealed Rs10 lakh of wealth in a year and since he can reopen assessments for 10 years, the total wealth concealed was one crore and as, at the time, the penalty for concealment was equal to the wealth concealed, he imposed penalty of Rs1 crore apart from the tax and interest for delay.
The Commissioner (Appeals) had himself cancelled it. In those days, the Appeal Commissioners were quite fair. However, the Wealth Tax officer appealed and we dismissed the appeal, as it was streedhan from their parents and did not belong to the HUF.
In another case, nothing was found in the search but the income tax officer insisted that the assessee, a well respected doctor, should confess that he had concealed the interest of about Rs200, which had accrued on National Savings Certificate (NSC) that he thought was taxable only when the certificate matured, because the department cannot close a search case without finding some concealed income.
Even when the income is returned, further tentacles surround the assessee while making assessments by adding non-taxable items, modifying the computation and denying legitimate deductions by raising disputes such as…
○ the status of the assessee
○ whether a receipt is taxable income or non-taxable capital
○ whether the income has accrued though not received
○ whether an asset is properly valued
○ Whether income is concealed even though particulars are disclosed
○ and, of course, denial or delay of refunds.
The provision of appeals and revisions is only to maintain an error free administration. However, in the case of taxation, the remedies are worse than the disease. We originally had a departmental appeal and an independent appeal to the Tribunal, which was final on facts and a reference to the High Court on questions of law. The department was upset that errors were being corrected often by the independent Tribunal and so changed the reference to appeal and also restricted the powers of the Tribunal to give interim relief. The Supreme Court has just concluded hearing the case against setting up the National Tax Tribunal
, which in my opinion actually corrupted the constitution. It will take years to decide the pending cases and even if the error is corrected, it may not be final.
Tomorrow: Part3- How Delay Undermines the System
(Justice TNC Rangarajan is a former judge of Madras and Andhra Pradesh High Courts. Earlier, for more than 20 years, he was a Judicial Member of Income Tax Appellate Tribunal.