CBEC does a good job, even if 33 years too late
Such was the fear of being pulled up by the CAG that, 33 years ago, the Central Board of Excise and Customs (CBEC) issued a circular that as soon as there was any objection by the CAG audit party, a demand-cum-show-cause-notice was to be immediately issued to the company concerned based on the objection, never mind if the CBEC found the audit objection specious—after all, the CBEC must have argued, should this not be done, the tax officer could be pulled up later on. Theoretically, the taxman could have gone and explained his position to the public accounts committee—this deals with CAG reports—should the audit objection be converted into an audit paragraph, but no one wanted to take this chance. This concept of ‘protective demands’ has been flagged as a serious problem in the past. In May 2014, the Tax Administration Reform Commission (TARC) made a strong pitch for abolishing the practice and pointed out that 33,128 cases were pending in the CBEC’s call book involving R54,000 crore on this account alone, and in May 2015, an internal paper of the Central Board of Direct Taxes (CBDT) listed R21,622 crore worth of protective demands as difficult to recover.
The finance ministry and the CBEC have to be congratulated for trying to curb this menace of protective demands. After finding that the number of protective show cause notices was piling up and looking at the number of audit objections that got converted into audit paras over the past few decades, the CBEC has decided that show-cause notices will be sent only in those cases where the department agrees with the audit objection—what this also means is that several protective demand notices sent out in the past could now also get withdrawn. Going ahead, it has decided that even in the cases where the CBEC accedes to the audit objections, the cases will be adjudicated fast by adhering to a strict timeline in responding to the audit findings. So, the CBEC move now could set the tone for a long-awaited crackdown on the malpractices and risk aversion of the tax officials under the umbrella of ‘protective demands’ and also reopening of the past cases due to the audit objections, which leads to long-drawn litigation and harassment of the taxpayers. Indeed, the Central Board of Direct Taxes should also take a cue from the CBEC and find a way to curb the menace of ‘protective demand’ notices based on possible audit paras. Based on instructions of the prime minister, the CBDT has already changed its assessment parameters of officials and started looking at whether the demands raised are frivolous—this is being done by looking at the proportion of the demands that get upheld at the level of the tribunals and the courts.