December 11, 2017

As tax officials chase to meet stiff revenue targets amid sluggish growth, there is a sudden surge in prosecution notices slapped by the income tax (I-T) department.

Till now prosecution provision was invoked sparingly and primarily on wilful tax evaders. Now, prosecution proceedings are being initiated for not filing tax returns or for short or even delayed remittance of tax deducted at source (TDS) by business entities.

"A list of 8,000-odd non-filers (of tax return) with a past record of earnings has been compiled (by the tax department).

Many in that list have been issued prosecution notices. While this may come across as somewhat harsh, notices have also gone to companies which even after deducting TDS (from salaries, rent, or other heads) have failed to submit it to the government," a senior tax official in Mumbai, which accounts for the highest income tax collection, told ET.

According to tax practitioners, some of the small and mid-sized companies which had earlier admitted their inability to pay on time and subsequently cleared the tax in phases along with interest, have also received prosecution notices.

A prosecution notice can be unnerving to most tax payers, particularly ones with limited resources and legal assistance. The assessee will have to either move the high court seeking to quash the notice or accept the compounding process.

"Prosecution provisions should be triggered in serious tax matters and after confirming a civil liability and not as precursor to civil liability. In most developing countries, prosecution for tax matters is applied only in cases of serious tax frauds and not in general compliance matters... Though the taxman may be driven by compulsions to ensure proper tax compliance, care must be taken that such action does not hurt growth," said Bijal Ajinkya, partner at law firm Khaitan & Co.

On receipt of such a notice, an assessee has to explain reasons for delay in paying taxes or non filing of returns or non payment of taxes. If the tax assessing officer is not satisfied, the assessee has to present himself before the magistrate's court in the jurisdiction.

"There are cases that are two to three years old. Some of them should not in any way attract prosecution. There can be many reasons for not filing tax return.

It does not necessarily mean wilful concealment of income. In respect of admitted tax where the assessee was permitted to pay tax in instalments, the question of wilful defaults cannot rise.

Now the assessee who gets the notice has to go through the trouble to prove the position otherwise. The compounding fees prescribed in the circular are exorbitant," said senior chartered accountant Dilip Lakhani.

So far, prosecution notices — with reference to sections 276C/276CC and 276CCC of the Income tax Act and dealing with wilful attempt to evade taxes — have been served following confiscation of incriminating evidence in tax raid, spotting bogus claims or falsification of accounts to conceal income, or corroboration of undisclosed offshore bank accounts and assets (such as the HSBC Swiss accounts).

"Such moves may purify tax compliance system, but one cannot ignore the reality that this does result in unnecessary hardship to assessees. The rationale is that establishing wilful default does involve subjective and judgemental considerations and hence, everyone would want to play safe and let courts decide," said Mitil Chokshi, senior partner at Chokshi and Chokshi.

ET's email query to the spokesperson for CBDT, the apex direct tax body, about the sharp increase in issuance of prosecution notices and a seemingly harsher interpretation of the law by the tax department, went unanswered till the time of going to press.

[The Economic Times]