Where Legal Compliance Meets Business Success
Your Path to Financial Success Starts Here
Our expert team is here to guide you every step of the way, helping you navigate the complexities of personal finance.
Book a MeetingNeed Help?
Social Networks
Home / Income Tax Return
TAX LITIGATION
"GST registration is essential for legal business operations and unlocking tax benefits."
Enquiry for Tax Litigation
Tax Litigation
In India, the legal process of settling disputes between taxpayers and tax authorities over tax assessment, collection, and enforcement is known as tax litigation. Both civil and criminal cases involving different taxes, such as income tax, GST, excise duty, etc., are included.
In India, the history of tax litigation dates back hundreds of years. There were many different types of taxes in ancient India, and they were frequently gathered through tributes or land levies. It's possible that local adjudication procedures or customary practices were used to resolve disputes involving these taxes.
An important turning point came with the introduction of British rule in the 18th century. The foundation for a more structured tax lawsuit procedure was established by the implementation of Western-style taxing systems, such as the Permanent Settlement in Bengal (1793). Disparities and unhappiness among Indian subjects were also brought about by it, somehow.
India started the process of creating its own legal framework and tax system after gaining independence in 1947. The structure for income tax assessment and dispute settlement was successfully established by the Income Tax Act of 1961.
The government created the Income Tax Appellate Tribunal (ITAT) in 1941 in response to the increasing number of tax issues. The purpose of this specialized tribunal was to give taxpayers a quicker and easier way to challenge assessments made by tax officials.
AUTHORITIES AND ACT GOVERNING TAX LITIGATION
India's tax laws and tax disputes are governed by the Income Tax Act 1961 (ITA) and the Income Tax Rules 1962. In addition, the tax agreements that the Indian government has made with nations across the world and the legal precedents established by different judicial bodies, such as the Supreme Court of India and the lower courts, help to settle tax disputes in India.
The ITA is generally administered and supervised by the Central Board of Direct Taxes (CBDT). All tax authorities must abide by the regulations, circulars, notices, and directives it issues to ensure the proper administration of the ITA. It also gives inputs for the policy and planning of direct taxes in India.
According to seniority, the tax authorities' hierarchy under the ITA is as follows:
• Central board of direct taxes (CBDT).
• Directorate general of income tax or chief Commissioner of income tax.
• Principle Commissioner of Income Tax.
• Commissioner of Income Tax.
• Additional commissioner of Income Tax.
• Joint commissioner of Income Tax.
• Deputy commissioner of Income Tax.
• Assistant commissioner of Income Tax.
• Income tax officer.
• Tax recovery of Income Tax.
• Income Tax inspector
FACTORS OF TAX LITIGATION
The following are some potential causes of tax litigation:
• Disagreements about individual or partnership tax liabilities.
• Difficulties related to taxes that impact businesses that are charity or non-profit.
• Problems with taxes in international commercial transactions.
• Disputes pertaining to royalties' tax liabilities.
• Disagreements resulting from issues with tax withholding.
• Attempts to restructure business structures give rise to tax lawsuits.
• Disagreements about value in accordance with the 1962 Customs Act.
PROCESS OF TAX LITIGATION
• Return filing
Taxpayers have access to the Income Tax Act (ITA) to declare their income, file their income returns, and make timely tax payments.The tax authorities electronically analyze the tax return to confirm that the taxpayer has paid taxes on time and complies with the tax regulations. Upon reviewing the tax return, the tax authorities have the option to choose it for either a limited scrutiny, where the evaluation is restricted to particular causes or issues, or a detailed scrutiny, where the issues concerned are thoroughly examined or assessed. Quasi-judicial processes are what these scrutiny processes are.
• Assessment order
The tax authorities have the power to start a review of the taxpayer's tax return under the ITA. This evaluation must be finished within a year from the end of the relevant fiscal year, and it can be prolonged by an additional year in situations involving transfer pricing. However, through a reassessment action, a taxpayer's tax returns may be subject to a tax review until the end of the seventh year following the conclusion of the relevant fiscal year in cases where income evades assessment under certain conditions. Furthermore, if the fugitive income relates to any asset situated outside of India, the time is extended to 17 years from the end of the relevant financial year.
• Producing books of accounts
Under the Income tax act , during a thorough review or assessment, the tax authorities may ask the taxpayer to produce books of accounts as well as other relevant documents like financial records, vouchers, invoices, agreements, bank statements, and any other evidence the tax officer deems necessary to review in order to confirm the correctness of the tax return the taxpayer filed.
• Imposing penalty
The tax authorities may impose a penalty of 10,000 rupees for each occurrence of willful failure on the part of the taxpayer to provide or produce the papers during the time of inspection or assessment under the ITA. Furthermore, based on the circumstances of the case, the tax authorities may also investigate the taxpayer, who might be subject to severe penalties like a fine and a period of jail that could last up to a year.
• Confidentiality
Under the Indian Evidence Act of 1872, the attorney-client privilege prevents access of the information exchanged between taxpayers and their legal advisors, including corporate secrets, professional advice, and commercial information. The confidentiality of the information provided by the taxpayer is not required by law to be maintained by the tax authorities. The Constitutional Courts provide an effective remedy in cases where taxpayers' privacy is compromised.
ALTERNATIVE DISPUTE RESOLUTION
The following settlement methods or dispute resolution processes are accessible to taxpayers under the ITA.
• When the tax authorities have suggested changing the arm's-length pricing, Indian corporations are subject to a Dispute Resolution Panel (DRP). The DRP directive must be issued within nine months of the end of the month in which the tax officer sends the draft order to the taxpayer. These DRP directives are legally binding on the tax officer, who must issue the final decision based on them. The final order can be appealed straight to the second appellate authority.
• Another alternative dispute resolution process that is accessible to taxpayers covered by the Double Taxation Avoidance Agreement (DTAA) is the Mutual Agreement Procedure (MAP). Regardless of the ITA's remedies, MAP may be used if the taxpayer determines that the taxes is not in compliance with the DTAA. Negotiations between the tax authorities of the nations that are party to the DTAA are conducted with the aim of preventing double taxation.
• Taxpayers can choose between ex-ante settlement solutions such as Advance Pricing Agreements and Advance Ruling Agreements. Before engaging in a transaction, the taxpayer may use the Advance Ruling option to ask the tax authorities if a certain transaction is taxable. This decision is final and binding on the second appellate authority. The arm's-length price of a transaction covered by the transfer pricing rules might also be predetermined by the taxpayer through an agreement with the tax authorities.
• A new scheme is initiated by the central government for settlement of tax disputes known as Vivad se Vishwas Scheme 2.O . Let’s go through this scheme in detail.
VIVAD SE VIHWAS SCHEME 2024
The goal of the Vivad Se Vishwas Scheme 2.0 is to make the process of settling ongoing income tax disputes as straightforward as possible. It enables qualified taxpayers to resolve their tax disputes by paying a predetermined percentage of their dues.
As of July 22, 2024, the following disputes/appeals, including writs, have been submitted by the taxpayer or the tax authorities and are still pending.
The Dispute Resolution Panel (DRP), the Supreme Court, the High Court, the Income Tax Appellate Tribunal, the Commissioner or Joint Commissioner (Appeals),
or in cases where the DRP has given instructions but the final assessment order is still pending.
Application for revision submitted in accordance with Section 264 of the 1961 Income-tax Act.
How to apply for vivad se vishwas scheme
Step 1: Examine any tax issues or arrears you want to settle under the VSV 2.0 plan.
Step 2: Fill out Form-1 with all the information requested by the tax authority. Make that the designated authority—a tax officer with at least the rank of chief income tax officer—receives the declaration.
Step 3: An email receipt acknowledging your declaration will be sent to you upon submission.
Step 4: With effect from the day the certificate is granted by the Designated Authority, any appeal pertaining to the same tax arrears that is still pending before the CIT(A) or ITAT would be deemed withdrawn. You must withdraw your appeals if you have already filed a writ petition with the Supreme Court or High Court.
Step 5: The Designated Authority will issue a certificate in Form-2 verifying the withdrawal of appeals following processing of your declaration.
Step 6: Following receipt of Form-2, follow the given instructions to complete the payment.
Step 7: Fill out Form-3 to provide documentation of withdrawal of any pending appeals and an indication of the money made. Electronically submit Form-3 to the designated authority.
Step 8: The Designated Authority will confirm the end of the tax arrears dispute and issue a final order in Form-4 about the amount made.
Step 9: You must submit an undertaking renouncing your right to pursue any remedy pertaining to the tax arrears along with the declaration.
Forms for vivad se vishwas scheme 2.0
Four forms have been announced by the government for the Vivad Se Vishwas Scheme 2.0. They are as follows:
Form 1: The declarant's declaration and undertaking form.
Form 2: Certificate Application to Be Issued by the Appointed Authority.
Form 3: The declarant's notification of payment.
Form 4: Order for Complete and Final Tax Arrears Settlement by Designated Authority
According to the DTVSV Scheme, each dispute must have its own Form-1 submission. A single Form-1 should be submitted, nevertheless, if the appellant and the income tax authority have both appealed the same order.
Proof of withdrawal of the appeal, objection, application, writ petition, special leave petition, or claim must be sent to the designated authority along with the completed Form-3, which is used to notify payment. The declarant is required to submit Forms 1 and 3 electronically.
Conclusion
The taxpayer has not acknowledged or agreed to the tax assessment by filing a declaration under the VSV Scheme 2024.
For instances that have opted into the system, it offers immunity from any actions, fines, or interest associated with tax arrears.
Certain circumstances are exempt from it, such as those involving search and seizure, prosecution, undeclared income or assets situated overseas, or situations covered by other laws.
Penalties of Tax Litigation
If a person understates their income or misreports their income on their tax return, the tax authorities may apply a penalty under the ITA. Under-reporting occurs when the amount of money assessed by the tax authorities exceeds the amount of money reported by the taxpayer on the tax return, while misreporting occurs when the individual has concealed or suppressed their income.
Either fixed sums or ad valorem fines based on the amount of tax evaded may be assessed under the ITA. Underreporting income carries a penalty equal to half of the tax due on the underreported income. For misreporting income, the penalty is 200 percent of the tax due on the underreported income. The maximum penalty for offenses involving failure to submit returns and disregard for notices is 10,000 rupees per offense.
If the taxpayer can demonstrate that they had a legitimate belief that there was a valid explanation for the failure, they will not be subject to penalties. However, the tax authorities have the authority to decide whether to impose a penalty.
RIGHT OF TAXPAYERS
• The Income Tax Department has produced a Taxpayers' Charter that outlines its dedication to principles including responsibility, equity, and transparency. Additionally, the Income Tax Department has established a hierarchy of grievance cells at the central and regional levels that swiftly resolve public grievances, protect taxpayers' rights and dignity, and enforce higher standards of accountability on department officers and staff by disciplining wrongdoers in specific cases.
• After paying the required fees, a taxpayer can view and acquire certified copies of the assessment and other documents. Requests for copies of the assessment or other records, or for inspection, are typically fulfilled within three days of being received.
• In order to obtain information about any assessee that the income tax authorities have received or obtained while carrying out their duties, a third party may also submit an application in the prescribed form to the Principal Chief Commissioner, Chief Commissioner, Principal Commissioner, or Commissioner. The Principal Chief Commissioner, Chief Commissioner, Principal Commissioner, or Commissioner will provide the information sought by the third party if they believe it is in the public interest to do so.
COMPETENT COURT
Usually, the tax authority, which functions in a quasi-judicial capacity, is the first to hear the tax dispute. It serves as an adjudicator as well as an investigator. The central tax authority and the first appellate body share associated and coextensive powers. The Income Tax Appellate Tribunal (ITAT), the second appellate body, is likewise quasi-judicial and hears appeals similarly to a civil court. The Supreme Court and the High Court, the next two appellate forums, are formal civil tribunals that only hear cases involving significant legal issues.
For the purpose of speedy adjudication, the appellate a forum combine tax claims that impact several tax returns. For the purpose of convenient and quick adjudication where common issues need to be decided, several taxpayers are also presented together before the ITAT and higher appellate forums.
One judge and one accountant member make up the bench that makes decisions in the ITAT. A bench of two or more judges decides appeals in both the Supreme Court and high courts. The adjudication forum and the decision maker will change based on the stage of the procedures.
- FAQ
1.What is income tax litigation?
The legal procedure by which taxpayers challenge their tax assessments or other judgments made by the tax authorities (such as the Internal Revenue Service or its equivalent in other countries) is known as income tax litigation. Conflicts regarding tax liability, deductions, exemptions, penalties, or how tax rules should be interpreted may fall under this category.
2.How does the income tax litigation process work?
Typically, income tax litigation proceeds as follows:
• Assessment: The amount of tax owed by the taxpayer is decided by the tax authorities.
• Appeal: The taxpayer may appeal to the tax authorities (usually at an administrative level) if they disagree with the assessment.
• Legal procedures: The taxpayer has the right to file a lawsuit if the disagreement cannot be settled administratively.
• Final judgment: A court may render a decision that has legal force behind it.
3. What are the common reasons for income tax litigation?
Conflict over income assessment: Arguments about the methods used to determine or report income.
• Deductions or exemptions denied: Taxpayers may contest the denial of deductions or exemptions they feel they are eligible for.
• Interest and penalties: Conflicts over interest and penaltie levied on overdue taxes.
• Misunderstanding of tax laws or regulations: Differing opinions about how tax laws should be applied in particular situations.
4. Can I represent myself in income tax litigation?
Although it is possible for taxpayers to represent themselves in income tax litigation, many people would rather work with experts like accountants or tax attorneys. Non-experts may find it challenging to understand complex tax laws and regulations without help.
5.What is the role of a tax attorney in income tax litigation?
A tax lawyer can help in a number of ways, such as by offering counsel regarding the case's merits. Representing the taxpayer in court or before tax officials. Assisting with alternative dispute resolution or settlement negotiations.
6. How long does income tax litigation take?
The complex nature of the case, the court's caseload, and the parties' willingness to reach a settlement all affect how long the litigation process takes. It could take a few months in certain situations and years in others.
7.What are the possible outcomes of income tax litigation?
• A favourable judgment for the taxpayer could result from the court ruling that they owe less or no additional tax.
• A favourable ruling for the tax authority: The court might maintain the assessment made by the tax authority.
• A negotiated settlement or compromise between the tax authorities and the taxpayer may result in a reduction of the outstanding balance.
8. What are the costs involved in income tax litigation?
Expenses may include: - Legal fees: You will be charged for the services of any tax advisor or lawyer you employ.
• Court fees: In certain countries, submitting an appeal or other court filings entails fees.
• Administrative expenses: These could include the price of document preparation, expert hiring, or hearing travel.
9.Is there a way to settle tax disputes without going to court?
Indeed, a lot of tax authorities provide alternate dispute resolution procedures, like negotiation, which involves the taxpayer and tax authority having direct talks to settle the matter. Mediation: A third person who is impartial helps with settlement negotiations. In arbitration, a third party who is impartial renders a legally enforceable judgment based on the case's facts.
10. What happens if I lose the income tax litigation?
The taxpayer might have to pay the entire amount of taxes owed, plus any penalties and interest, if they lose the case. Furthermore, depending on the jurisdiction, the taxpayer might not be able to appeal the decision.
11. Can tax litigation affect my business or personal finances?
Yes, there can be severe consequences from income tax litigation. The taxpayer's personal or corporate finances may be impacted if they are required to pay back taxes, fines, and interest in the event of a loss. Additionally, the protracted conflict may be time-consuming and financially taxing.
12. How can I avoid income tax litigation?
Make sure that income and spending are reported accurately in order to prevent litigation.
• Keep updated with changes to the tax code.
• Make use of tax planning techniques.
• If you're unclear about any part of your tax position, get guidance from tax experts.