NEW DELHI (TIP): The Central Board of Direct Taxes (CBDT) has issued internal instructions to tax authorities to cut down on frivolous appeals against favourable orders granted to taxpayers. The threshold limit for filing an appeal before the Income Tax Appellate Tribunal (ITAT) by the tax department has been raised. Such appeals can now not be filed unless the ‘tax effect’ is Rs 4 lakh (the earlier threshold was Rs 3 lakh). However, no change has been made in the threshold for appeals filed by the tax department before a High Court and subsequently the Supreme Court. Such appeals can be filed, if the tax effect is Rs 10 lakh and Rs 25 lakh respectively. In addition, the CBDT has instructed that merit must be the guiding factor while filing an appeal with higher judicial bodies — tax tribunals and courts.

“The monetary limits so prescribed (for filing appeals) are merely a guiding factor. They should not be considered as the only factor in arriving at the decision of going ahead with the appeal process,” states CBDT’s instruction. This instruction applies to income tax appeals filed on or after July 10. While CBDT has always sent a signal that appeals should be filed by the tax authorities, only based on merit (even if the ‘tax effect’ is beyond the threshold limits), it has once again stressed upon this point. In the past, the tax department has faced criticism for filing appeals without due application of mind – the end result is that the taxpayer often wins the case after prolonged litigation. Litigation entails costs not just for the taxpayer but also the tax department.

The Public Accounts Committee (PAC) in its report tabled in both houses of the Parliament last August, pointed out the high volume of decisions that go against the tax department. In 2011-12, 35% of decisions given by ITAT went against the tax department. The corresponding figure was 38% for high courts and 33% for the SC. The tax effect, as defined in the CBDT’s internal instruction, means the difference between the tax on the total income assessed by the tax department and the tax that would have been charged if the total income of the taxpayer was reduced by the income relating to disputed issues.

However, to safeguard the interests of the tax department, certain caveats have been built into the instructions. For instance, just because on a particular disputed issue, the tax department has not appealed as the monetary threshold of the tax effect is low, it does not preclude it from filing an appeal on the same issue for another tax payer (where the tax effect limit is beyond the prescribed threshold). Similarly, it can proceed with filing an appeal against the same taxpayer, on the same issue, in a subsequent year if the tax effect exceeds the monetary limit. Further, the instructions on not filing an appeal If the tax effect is below the prescribed monetary limit will not apply in certain instances. These instances include where the constitutional validity of a tax provision is challenged; where the CBDT’s circular has been held illegal or even when the audit objection has been accepted by the tax department.