The high-level panel to be set up to review fresh retrospective tax cases will give instructions to the assessing officers (AOs) to avoid far-fetched and unsustainable tax demands even if it amounts to restricting the statutory authority of these quasi-judicial officers in taking up such cases. The panel would have the power to turn down the assessing officers’ plan for scrutiny of certain cases. Issue of demand notices could be pre-empted too.
The panel, the terms of reference of which is currently being finalised by the Central Board of Direct Taxes (CBDT), however, may not give directions to the AOs to act in a certain way in the case of a specific company, as it might vitiate the process, sources said.
For this, the revenue department would rely on the 2003 Supreme Court ruling that upheld the CBDT’s power to restrict field officers from probing into the tax residence status of Mauritius-based foreign institutional investors by going beyond the residence certificates issued by the island nation, although the income tax law allows them to undertake detailed investigations to lift the corporate veil.
Industry has been waiting to see what relief the high-level panel announced by finance minister Arun Jaitly could provide from the rigors of the 2012 retrospective amendment of the Income Tax Act that sought to tax past transactions between offshore companies involving Indian assets.
Experts said that only offshore transactions involving Indian assets between 2008-09 and 2011-12 would be brought before the panel for review. Deals that happened before this period are already in courts, while provisions on indirect transfer of Indian assets become prospective from 2012, the year of its enactment.
“All such schemes are subject to the period of limitation in relation to commencement of proceedings in concluded cases of indirect transfer of Indian assets,” said Sunil Jain, Partner, J Sagar Associates.
While Jaitley made no attempt to repeal the 2012 retrospective amendments in the Budget speech, he promised the proposed high-level panel would review all fresh cases arising from the amendment before action is taken by officers. It appeared to be a tough call for a panel set up by the executive to give directions to quasi-judicial authorities implementing an Act of Parliament and provide significant relief to the industry without interfering with the officer’s statutory discretion.
The finance ministry officials explained the Board has powers flowing from the Supreme Court judgment in the Azadi Bachao Andolan case which held the CBDT can issue instructions to assessing officers meant for ‘appropriate use of resources’. The idea is to ensure that field officials do not chase all cases of indirect transfer of Indian assets where the retrospective tax provision could be applied.
“This (instructing the AOs to desist from such a move) is possible despite the power of scrutiny of assessing officers are granted in Section 143(3) to make an assessment of income after seeking a return, hearing evidence in support of claims of relief or exemption, and then determining the total income on which tax is to be paid,” according to a finance ministry official.
In April 2000, the CBDT told field officers in Circular 789 that the residence certificate issued by Mauritius to FIIs was sufficient evidence for residence status as well as for beneficial ownership for treaty benefits. The Delhi HC struck it down saying a mere circular of the CBDT cannot usurp the quasi-judicial power of officers to lift the corporate veil and see the actual resident status and that asking them to accept the certificate as sufficient proof was beyond the CBDT’s power. However, the Supreme Court subsequently said CBDT was within its powers to issue directions to eliminate avoidable wastage of time, talent and energy of assessing officers in revenue collection.
“The executive may take a policy decision not to pursue all cases and lay down classes of cases that may be pursued. It would be a tightrope walk as such classification would be liable to extremely strict scrutiny of constitutionality and should have a reasonable nexus with the object sought to be achieved, which itself should be legally permissible,” said Manoj SR, a New Delhi-based expert in constitutional law.