Income Tax Officers Misused System to Block Refund causing hardship and harassment to taxpayers CAG Report
Blockade of refunds have result of inflating the net tax collection CAG
Sections 234A, 234B and 234C of the Income Tax Act (hereinafter referred to
as ‘Act’), 1961 provide for levy of interest for errors on part of the assessee at the rates prescribed by the Government from time to time. Further, section 244A of the Act provides for payment of interest if there is a delay in the payment of refund due to the assessee.
Assessment Information System (AST), a software module of the Income Tax
Department (ITD), inter alia, undertakes the functions of calculation of tax and calculation of interest under various sections of the Act.
CAG audited 6,217 assessment cases which were processed/completed through AST module/system and examined the correctness of interest, calculated through the system and modified by AOs with respect to sections 234A, 234B, 234C and 244A of the Income Tax Act. We found that interest was calculated incorrectly through the AST system in 70.51 per cent cases.
Incorrect amount of interest was calculated under section 234A, 234B, 234C and 244A of the Income Tax Act, through the system despite the fact that the system was designed, inter alia, to undertake assessment functions of calculation of interest under various sections of Income Tax Act. Interest
The CAG audit findings are as under
a) The interest was wrongly computed by ITD, in 76.68 percent of cases of the sample of 6,217 selected out of a population of 8,35,727 records, either
due to systemic deficiencies or due to incorrect interventions by the AOs.
Thus, 68.92 per cent of cases with respect to individual assessees were levied interest at excess amount through the system. Amount of excess levy of interest was charged against the individual assessee upto
803.35 lakh under section 234A of the Act, 2,728.31 lakh under section 234B of the Act and Rs 559.59 lakh under section 234C of the Act, causing unnecessary harassment and hardship to the assessee.
b) Input of the other ITD module was not being captured properly in the AST system leading to incorrect computation of interest in number of cases
which has an impact on final tax collection and refund.
c) AOs did not take any step to rectify the incorrect interest, under sections
234A, 234B, 234C and 244A of the Act, calculated through the system even
though AST system allowed the AOs to modify the value of interest in
accordance with the provisions of the Act, thereby leading to either short
levy/payment or excess levy/payment of interest.
d) AOs modified the interest under sections 234A, 234B, 234C and 244A of
the Act against the incorrect interest calculated through the system in
some cases. However, not all these cases were modified at correct amount,
which resulted in either short levy/payment or excess levy/payment of
e) AOs manually modified the interest amount which was not warranted in
instances where correct amount of interest was calculated through the
system, leading to either short levy/payment or excess levy/payment of
interest causing hardship and harassment to taxpayers.
It is not clear why manual modification is permitted, that too apparently
without a protocol for seeking senior level clearances if, in exceptional
cases, manual intervention is required. In fact, if manual intervention at
every level is needed, or continued, it either points to an ill designed IT
System, or a deliberate attempt to retain discretion, for no apparent good reason.
f) Incorrect levy of interest (excess levy) by AOs using modification feature of AST led to blockade of refunds due to the assessees. This was not only violation of provisions of law but also resulted in non-fulfilment of Citizen’s Charter. On the one hand the efficiency of the department was affected and on the other there was undue harassment to the assessees.
g) All Income Tax Returns (ITRs) are first summarily processed under section 143(1) at Centralized Processing Centre (CPC), Bengaluru. Processing of ITRs by CPC is supposed to be completely automated. However, refunds of the assessees’ were blocked by modifying the interest amount even in cases processed in summary manner through CPC.
h) The net collection of taxes is computed by allowing for the refunds Blockade of refunds, therefore, have the result of inflating the net tax collection. Further, unreasonable tax demand from the assessee, by way
of excess levy of interest, results in disputes and further snowballs into
large arrears. Thus, the blockade of refund and excess demand would have
consequent effect on the revenue collection of the Government.
CAG recommended that
a) CBDT may institute appropriate checks and balances in Income Tax
Business Application (ITBA) to prevent recurrence of error in computation
of tax and interest.
b) The IT system for direct taxes needs to be designed in such a way that it
should ensure zero or minimal physical interface between the assessee and
the tax officers. The Government may consider the IT System for direct
taxes being placed at arms length from CBDT, with an independent
governmental body or organisation.
C) AST module allows manual modification of interest amount which resulted in errors in computation of interest. ITD needs to inquire into the reasons for errors in computation of interest through AST and reasons for allowing manual modification to co-exist with IT system.
d) The system should be designed to provide audit trail for modifications, if
any, being carried out by AOs. All justifications for modification by AO must
be available on the system.
e) CBDT may examine whether the instances of “errors” noticed are errors of omission or commission and if these are errors of commission, then ITD
should ensure necessary action as per law.
f) The IT Department may fix accountability on the part of the AOs to ensure that the risk of recurrences of similar types of irregularities are minimised.
g) CBDT may ensure that the refund due to the assessee is released in
prescribed time limit, upholding its commitment through the citizen
charter, rather than to withhold/block it by manual intervention.
h) AO’s action regarding blockade of refund as well as under charging of
interest may be investigated upon.
i) While audit carried out test check of a sample of cases, CBDT should
examine all the cases where modifications were carried out in AST to
identify instances of omission and commission and take necessary action as