On 10 July, Chief Justice of India D.Y. Chandrachud rejected the income tax department’s appeal against a Delhi high court order in favour of Xerox India because the plea was filed 215 days late.
Chandrachud underscored timely pursuit of litigation is crucial for improving India’s business environment. “MNCs (multinational corporations) invest in India, generate employment and contribute to revenue. They should have confidence in the country’s judicial system,” said the CJI.
Negative impact
Experts caution that delays in appeals place an extra financial burden on MNCs, which affects India’s ease of doing business ranking.
“Due to delays by the income tax department, it unnecessarily burdens taxpayers, including MNCs… If an appeal is unsuccessful, the total taxes owed could significantly increase. Meanwhile, MNCs must retain tax advisors for every hearing, regardless of their effectiveness, leading to substantial costs in terms of bandwidth, time, energy and finances. These factors contribute to India’s declining rank in the ‘Ease of Doing Business’ index,” said S.R. Patnaik, partner (head-taxation) at law firm Cyril Amarchand Mangaldas.
Amit Gupta, partner at Saraf and Partners, said prolonged litigation also undermines the fairness of the Indian tax system.
“Delays in tax-related litigation significantly undermine the certainty and transparency crucial for non-resident investors, thereby creating a trust deficit.”
Under the Income Tax Act, the timeline for filing tax appeals varies by the appellate authority. Appeals to the Commissioner of Income Tax (Appeals) must be filed within 30 days as per Section 249. For the Income Tax Appellate Tribunal (ITAT), Section 253 stipulates a 60-day limit. Appeals to the high courts fall must be filed within 120 days as per Section 260A. Special Leave Petitions (SLPs) to the Supreme Court must adhere to the Supreme Court Rules 2013, Order XXI, which allows a window of 90 days.
Low success rate
Over the past year, courts have struck down several appeals filed beyond the legal limit, saying such actions would result in the erosion of confidence among MNCs investing in India.
In February, a Supreme Court bench led by Justice B.V. Nagarathna dismissed the income tax department’s appeal against Bharti Airtel Ltd due to a staggering delay of over four years in filing.
The bench came down heavily on the income tax commissioner (international tax), Delhi, for tardy appeals and urged the department to formulate a proper litigation policy.
“You [tax department] succeed in one isolated case and then decide to initiate proceedings without sufficient cause, reopening even those cases that have been previously closed,” said Justice Nagarathna.
In August 2023, a division bench of the Delhi high court took the tax department to task while dismissing a plea seeking condonation of a 498-day delay in filing an appeal.
In this “hi-tech click of mouse age”, some government officials had not moved away from a “snail pace” style of working, said the bench.
Patnaik from Cyril Amarchand Mangaldas said the delays are also responsible for the tax department’s low court success rate. “Due to the large number of cases pending with each officer, they often lack the opportunity to thoroughly scrutinize and analyze each case… The officer who originally assessed the case may not be involved during litigation, contributing to the perception that departmental counsels are frequently unprepared.”
Dipesh Jain, partner at Economic Laws Practice, said the current Income Tax Act lacks a defined outer time limit for condoning delays in various instances. Jain suggested that specific extended time limits beyond prescribed thresholds should be established, after which appellate authorities should be barred from entertaining appeals like in the Central Goods and Services Tax Act, 2017.
Solution: Proper litigation policy
Experts also said the government needs to review the income tax department’s litigation policy to efficiently reduce the backlog of cases and ensure objective assessment and timely closure of each case.
“There seems to be no specific litigation policy for tax departments and no unified approach. The income tax department and the Central Board Of Indirect Taxes and Customs keep issuing various circulars, but these only address monetary limits for filing appeals. A unified litigation policy is urgently needed,” said Vidhan Vyas, the founder of Vyas Legal.
To be sure, the government is working on a National Litigation Policy to effectively and timely resolve cases in which the government is a litigant.
Gupta also stressed that “the current litigation policy of the income tax department requires a clear and consistent framework for merit-based appeal filing to reduce frivolous appeals”.
He highlighted the importance of integrating technology, including artificial intelligence, to streamline internal processes and develop a robust strategy for managing the high volume of pending appeals across judicial forums.
In 2021, Pankaj Choudhary, the then minister of state for finance, told the Rajya Sabha that as of 29 July 2021, the Commissioner of Income Tax (Appeals) had 478,608 cases awaiting resolution. ITAT had 62,130 pending cases as of 1 July 2021, and high courts were handling 26,456 cases as of 31 March 2021. A total of 2,894 tax department appeals were pending in the Supreme Court.