In order to reduce litigation and fine-tune the legal machinery in the Income Tax department, the CBDT today issued fresh directions asking the taxman to go into appeal strictly based on merits of a case even as it fixed a new monetary limit for these cases.

Under the new instructions, the I-T department will file an appeal before a tax tribunal or appellate body only when the tax effect exceeds an amount of Rs 4 lakh, in a High Court if the demand exceeds Rs 10 lakh and in the Supreme Court when the tax demand is above Rs 25 lakh.

The Central Board of Direct Taxes, in the latest communication, however, made it clear to all the Chief Commissioners of I-T that "an appeal should not be filed merely because the tax effect in a case exceeds the monetary limits prescribed and filing of appeal in such cases is to be decided on merits of the case."

The CBDT said the new set of guidelines have been issued as there have been "several instances wherein department has had to face criticism/flak/stricture for filing appeal without due application of mind."

A senior CBDT official said it also was meant to "reduce litigation" in the department as backlog of cases "runs into thousands".

The "tax effect", the CBDT said, would mean "the difference between the tax on the total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of the issues against which appeal is intended to be filed."

The CBDT also specified that these new instructions would not apply in three instances.

"Where the Constitutional validity of the provisions of an Act or Rule are under challenge or where Board's order, notification, instruction or circular has been held to be illegal or ultra vires or where revenue audit objection in the case has been accepted by the department."