Raising Tax Appeal Thresholds Promises Finality—But Not Without Caveats

The government's recent move to increase the monetary threshold for tax appeals reflects a shift towards more selective and strategic appeals, experts say.

This step follows the government's vision to reduce trifling litigation and aims at bringing in an element of finality to income tax cases.

As per the finance ministry notification from earlier this week, the thresholds for filing appeals before the Income Tax Appellate Tribunal, the High Courts, and the Supreme Court have been increased to Rs 60 lakh, Rs 2 crore, and Rs 5 crore respectively.

In 2019, these limits were pegged at Rs 50 lakh, Rs 1 crore, and Rs 2 crore.

As a result of the notification, the tax department will not be able to pursue appeals against lower court orders if the disputed amount does not cross the threshold limit.

The tax department has often filed appeals even in cases involving relatively small tax amounts. This tendency of the tax department has overwhelmed the judicial forums with a significant backlog of tax-related cases, Ankit Jain, partner at Ved Jain & Associates, told NDTV Profit.

According to the 2018 economic survey, 0.2% of cases constituted nearly 56% of the total demand value. In addition, the survey found that the tax department loses more than two-thirds of the appeals it files before the ITAT, high courts, and the top court.

This suggests that many cases filed by the department may have been frivolous or lacking in merit. These increased thresholds can help discourage unnecessary appeals and create a more predictable and stable tax environment, said Kunal Savani, partner at Cyril Amarchand Mangaldas.

It is also pertinent to note that before the Vivad Se Vishwas scheme was launched by the government in 2020 to reduce pending litigation, 4,83,000 direct tax appeals were pending across various forums, with Rs 4.96 lakh crore in tax amounts locked.

The increase in thresholds reflects a shift towards more selective and strategic appeals, said Amit Bansal, partner at Singhania & Co.

Bansal, however, remarked that with fewer cases being escalated to higher courts, there may be fewer opportunities for the judiciary to establish consistent legal precedents, leading to potential uncertainty in how the law is applied.

It is crucial to note that the government has prescribed exceptions for cases involving undisclosed foreign income or assets, tax evasion, instances where courts have made adverse comments against the department, and the like. The exception will also be available for instances where the department considers it is necessary to appeal the order in the interest of justice.

The government’s move to raise the monetary ceiling could lead to a discrepancy where certain taxpayers may have to face continued litigation on the same issues of law, simply because their tax demands exceed prescribed thresholds.

The notification prescribes that in cases where the monetary limits are breached, the department doesn’t have to file appeals mechanically. An appeal, in such cases, should only be filed on the merits of the case.

Experts believe that enforcement of this provision will likely be challenging and the success of this initiative will depend on the consistency with which these guidelines are applied and the ability of the tax department to exercise discretion judiciously.

To ensure consistent application, the CBDT may need to provide further guidance or training to tax officers on how to evaluate the merits of appeals, Savani said.

Internal checks and oversight mechanisms will need to be strengthened to ensure that appeals are filed only when warranted, based on the merits of the case, and not just because a dispute crosses a certain threshold, Bansal added.