Direct Tax Alert

BACKGROUND

Section 268A of the Income-tax Act, 1961 (IT Act) grants power to the Central Board of Direct Taxes (CBDT) to issue orders, instructions or directions to tax authorities fixing monetary limits for filing appeals before Tax Tribunal / High Court and Special Leave Petition (SLP) / Appeals before Supreme Court. With an overall objective to reduce litigation, the CBDT has issued circulars prescribing monetary limits, from time to time. Recently, the CBDT has issued a circular¹ under section 268A of the IT Act which shall supersede its earlier Circulars² and CBDT’s letter³ to provide detailed guidelines with respect to departmental appeals. We at BDO in India, have analysed and summarised the key provisions of the said circular and provided our comments on its impact hereunder:

1. Is there any change in the monetary thresholds for filing of Income Tax appeals vis-à-vis the previous circular (Circular no. 17/2019 dated 8 August 2019)?

No. Following monetary limit remains unchanged.

Sr. No.	Appeals / SLPs in Income tax matters	Monetary Limit (in INR)
1	Before Appellate Tribunal	5mn
2	Before High Court	10mn
3	Before Supreme Court	20mn

2. Is the above monetary limit applicable to all the cases? Whether matters pertaining to Tax Deducted at Source (TDS) / Tax Collected at Source (TCS) are also covered?

Yes, the above specified monetary limits shall be applicable to all the cases including those relating to TDS/TCS under the IT Act.

3. Whether tax authorities are bound by the above thresholds for all types of appeal / SLP?

While the threshold is prescribed, the Circular lays down the following exceptions – i.e. in the following cases, the decision to file an appeal/SLP shall be taken on merits, without regard to the tax effect and the monetary limits:

• Where any provision of the Act/Rules/Notification of the IT Act is held to be constitutionally invalid

• Where any order, notification, instruction or circular of the CBDT or Government has been held to be invalid

• Where the audit is based on information in respect of any offence alleged to have been committed under any other law, received from any law enforcement or intelligence agencies⁴ and state law enforcement agencies⁵

• Where prosecution has been filed by the tax authorities and the trial is pending in any Court or conviction order has been passed and the same has not been compounded

• Where adverse comments have been passed or cost has been levied against the Revenue Department, CBDT or its officers

• Where the tax effect is not quantifiable or not involved, such as trust registration cases under section 10(23C), 12A / 12AA / 12AB of the IT Act, order passed under section 263 of IT Act etc

• Where addition relates to undisclosed foreign income/undisclosed foreign assets including financial assets)/undisclosed foreign bank account

• Cases involving organised tax evasion, including cases of bogus capital gain/loss through penny stocks or accommodation entries

• Where mandated by the Court’s directions

• Writ matters

• Matters related to wealth tax, fringe benefit tax, equalisation levy and any matter other than the IT Act

• In respect of litigation arising out of disputes related to TDS/TCS matters in both, domestic and international taxation charges, where-

  • Dispute relates to determination of nature of transaction such that liability to deduct TDS/TCS thereon or otherwise is under question; or

  • Appeals of international tax charges where the dispute relates to the applicability of provisions of the Double Taxation Avoidance Agreement (DTAA)

• Any other case or class of cases where in the opinion of the CBDT, it is necessary to contest in the interest of justice or revenue and specified so by a circular issued by CBDT.

4. How does the monetary threshold function for matters covered by Section 158AB⁶ of the IT Act?

For matters covered by section 158AB of the IT Act, exceptions as referred to in Circular No. 8/2023 dated 31 May 2023 remain unchanged. The same are as follows:

• When judicial finality is achieved in favour of Revenue Authorities in the ‘other case’, appeal in the ‘relevant case’ is contested on merits subsequent to the decision in the ‘other case’ irrespective of the extant monetary limits

• If the judicial outcome in the ‘other case’ is not in favour of Revenue Authorities and is not accepted by them, an appeal against the same may be contested on merits in the ‘other case’ irrespective of the extant monetary limits, to arrive at judicial finality.

5. Whether tax authorities contest all the matters where tax effect exceeds the prescribed monetary limits.

No. For matters whose tax effect exceeds the monetary limits, tax authorities decide on the merits of the case, keeping in mind the overall objective of reducing unnecessary litigation.

6. What does the term ‘tax effect’ mean?

The term ‘Tax effect’ has been defined in the Circular to mean the difference between the tax on the total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of the issues against which appeal is intended to be filed (hereinafter referred to as ‘disputed issues’).

7. Does tax effect include surcharge, cess and interest?

The tax effect includes applicable surcharge and cess. However, it will not include any interest. Further, in case the chargeability of interest is itself under dispute, the amount of interest shall be the tax effect.

8. What will be the tax effect where the returned loss is reduced or assessed as income?

In cases where returned loss is reduced or assessed as income, the tax effect would include notional tax on disputed additions.

9. What will be the tax effect in case of penalty matters?

In the case of penalty orders, the tax effect would mean the quantum of penalty deleted or reduced in the order to be appealed against.

10. How will the tax be calculated for the purpose of tax effect if the income is computed for Minimum Alternate Tax (i.e. section 115JB or 115JC of the IT Act)?

Where the income is computed under section 115JB or 115JC of the IT Act, tax on total income shall be computed as per the following formula:
(A+B) + (C-D), where,

A	The total income assessed as per the provisions other than the provisions contained in section 115JB or section 115JC of the IT Act (general provisions);
B	The total income that would have been chargeable had the total income assessed as per the general provisions been reduced by the amount of the disputed issues under the said provisions;
C	The total income assessed as per the provisions contained in section 115JB or section 115JC of the IT Act
D	The total income that would have been chargeable had the total income assessed as per the provisions contained in section 115JB or section 115JC of the IT Act was reduced by the amount of disputed issues under the said provisions. However, where the amount of disputed issues is considered both under the provisions contained in section 115JB or section 115JC of the IT Act and under general provisions, such amount shall not be reduced from the total income assessed while determining the amount under item D.

11.Whether tax effect should be computed for every fiscal year (FY) under dispute? Whether appeal can be filed for all the FYs where the tax effect exceeds the threshold in one year?

The tax officer is to compute the tax effect separately for every FY. Where disputed issues arise in more than one FY, an appeal can be filed in respect of such FY or years in which the tax effect in respect of the disputed issues exceeds the monetary limit.

12. How will the tax effect be calculated in case of composite order of any appellate authority?

In the case of a composite order of the High Court or any appellate authority which involves more than one FY and common issues in more than one FY, no appeal shall be filed in respect of the FY in which the tax effect is less than the prescribed monetary limit. In cases where a composite order involves more than one taxpayer, each taxpayer shall be dealt with separately.

13. How will the tax effect be calculated for cases involving TDS/TCS?

In cases involving TDS/TCS, the cumulative effect of all orders passed for a FY of a deductor, shall be considered and shall include interest under section 201(1A) of the IT Act.

14. If an appeal is not filed only on account of tax effect being less than the prescribed monetary limit, what measures are to be taken by the tax officers?

The tax officers⁷ (PCIT/CIT) shall specifically record that “Even though the decision is not acceptable, the appeal is not being filed only on the consideration that the tax effect is less than the prescribed monetary limit”. In these cases, there will be no presumption that the Revenue Authorities have acquiesced in the decision on the disputed issues.

15. If the appeal is not filed in a particular year for a taxpayer, can the tax officers file an appeal for another year for the same taxpayer?

Yes, the tax officers can file an appeal in case of the same taxpayer for any other FY if the tax effect exceeds the monetary limit.

16. Will this circular apply to pending appeals?

No, this circular will apply only to SLPs/ appeals to be filed henceforth.

BDO IN INDIA COMMENTS

This circular is more on emphasising the need to consider merits rather than solely focusing on the tax effect. Whilst the erstwhile circular 3/2018 had provided certain exceptions on filing an appeal irrespective of the lower threshold, however herein the CBDT has considered various matters such as TDS/TCS, equalisation levy, etc. and thus expanded the scope of filing an appeal by the tax officers. This will provide certainty to taxpayers while taking a decision regarding filing an appeal. Further, it's important to note that the purpose of such CBDT circulars was to reduce unnecessary litigation. However, it's apparent from this circular that the scope for the department to file appeals has significantly broadened, undermining the original objective of minimising litigation.
It may be noted that the Circular is made applicable prospectively. Hence, it appears that the exception contained in this Circular may not be applicable to the pending appeals. Further, the earlier circular was silent on the applicability of the threshold to TDS/TCS and therefore one needs to evaluate whether contention of tax effect lower than the threshold for such matters can be taken or not. Similarly, for appeals filed with respect to equalisation levy before issuance of this Circular, it needs to be seen if the same can be contested on the ground of tax effect lower than the monetary threshold.