Dr. Raj K. Agarwal & Dr. Rakesh Gupta point out that the Income Declaration Scheme, 2016 has several ambiguous provisions which have remained unclear despite clarifications issued by the CBDT. The learned authors explain that the question whether the Scheme supersedes the law of limitation applicable to reopening of cases u/s 147 of the Act is one such ambiguity which requires urgent clarification by the CBDT
Government has introduced “Income Declaration Scheme, 2016” which has come into force from 1st June, 2016. The scheme provides an opportunity to persons who have not paid taxes in the past in respect of undisclosed income, to come forward and declare such undisclosed income and pay tax, surcharge and penalty totaling in all to 45% of such undisclosed income so declared.
The initial response of the tax payers and tax consultants regarding the scheme is not encouraging. It is, inter alia, for the reason that the scheme has ambiguities relating to various issues. Though CBDT has issued multiple sets of frequently asked questions (FAQs) containing clarifications relating to various aspects during last one month, still doubts exist. One such provision is regarding consequences in case of non-declaration of undisclosed income which has been drafted in an ambiguous manner and may have severe consequences.
CONSEQUENCES IN CASE OF NON-DECLARATION
In case no declaration is made in respect of the undisclosed income relating to earlier years prior to commencement of this scheme, Clause (c) of section 197 of the Finance Act, 2016 provides as under,
“where any income has accrued, arisen or received or any asset has been acquired out of such income prior to commencement of this Scheme, and no declaration in respect of such income is made under this Scheme,—
- such income shall be deemed to have accrued, arisen or received, as the case may be; or
- the value of the asset acquired out of such income shall be deemed to have been acquired or made,
in the year in which a notice under section 142, sub-section (2) of section 143 or section 148 or section 153A or section 153C of the Income-tax Act is issued by the Assessing Officer, and the provisions of the Income-tax Act shall apply accordingly.”
A plain reading of the said Clause suggests that a person should make declaration of all the undisclosed income generated or undisclosed assets acquired in any year prior to commencement of this scheme even if such year is a year which is beyond the limitation period. This is so because as per the said Clause in case no declaration in respect of undisclosed income relating to such earlier years is made under this scheme, such undisclosed income shall be deemed to be the income of the year in which a notice u/s 142 or u/s 143(2) or u/s 148 / 153A / 153C of the Income Tax Act is issued by the Assessing Officer. Needless to say, the above provision has been drafted in such a manner which would have far reaching consequences as discussed hereunder.
It seems that the intention of incorporating such a provision in the Scheme is to do away with the law of limitation for re-opening of the earlier year(s) cases to bring to tax the undisclosed income as given under the Income Tax Act, 1961. As per section 149 of the Income Tax Act, income escaping assessment can be brought to tax by re-opening the assessment for maximum seven earlier years. In case there is any undisclosed income detected by the department, say, relating to A.Y. 2005-06 in the Current F.Y. 2016-17, such income cannot be brought to tax since there is no power with the department to re-open and assess or reassess such income of the assessee. But by incorporating the above provision viz. section 197(c) in the Scheme, an attempt has been made to state that in case such income is detected by the department, say, in the year 2017-18 or subsequently and a notice u/s 142/ 143(2)/ 148/ 153A/ 153C is issued during such year, then such undisclosed income relating to A.Y. 2005-06 shall be deemed to be the income relating to A.Y. 2017-18 or the year in which such notice is issued and shall be assessed in the hands of the assessee in accordance with the normal provisions of the Act.
The above intention is evident by a clarification issued by CBDT on 27th June, 2016 as per Circular No. 24/2016 while answering FAQ No. 4 in the above circular which is reproduced as under:-
Question No.4: If undisclosed income relating to an assessment year prior to A.Y. 2016-17, say A.Y. 2001-02 is detected after the closure of the Scheme, then what shall be the treatment of undisclosed income so detected?
Answer: As per the provisions of section 197(c) of the Finance Act, 2016, such income of A.Y. 2001-02 shall be assessed in the year in which the notice under section 148 or 153A or 153C, as the case may be, of the Income-tax Act is issued by the Assessing Officer. Further, if such undisclosed income is detected in the form of investment in any asset then value of such asset shall be as if the asset has been acquired or made in the year in which the notice under section 148/153A/153C is issued and the value shall be determined in accordance with rule 3 of the Rules.
It is strange to note first of all as to how notice u/s 148 or 153A or 153C can be issued relating to income of A.Y. 2001-02 during F.Y. 2016-17 or later on. Further, it is also not clear from the language of the above provision of section 197(c) that notice u/s 148/153A/153C etc. is to be issued in pursuance to undisclosed income of any earlier year detected by the department, or undisclosed income of any earlier year can be brought to tax in the year in which such notice has been issued in connection with any other proceeding under the Act. In other words, it is not clear as to whether detection of such undisclosed income for any earlier year is the triggering point for issuance of such notice, or any undisclosed income relating to earlier year may be brought to tax deeming it to be income of the year in which notice has already been issued & when any proceeding in pursuance to any such notice is pending.
The Principle of limitation and time-barring of cases has all along been recognized under the Income Tax Act for the reason that the underlying jurisprudence has dictated that there has to be finality of the assessment and stale issues should not be reactivated beyond a specified period & that lapse of time must induce repose in and set at rest judicial and quasi judicial controversies as it must in other sphere of human activity. A useful reference may be made to the decision of Hon’ble Supreme Court in the case of Parashuram Pottery Works Co. Ltd. vs. ITO 106 ITR 1, 10(SC).
By incorporating the above provision i.e. 197(c) under this scheme, the mechanism of limitation prescribed under the Act seems to be erased by the legislature which cannot be reversed or amended. In our opinion, such provision cannot pass the judicial test before Hon’ble Courts. The entire law of limitation and time barring of proceedings cannot be brushed away in a single stroke by incorporating the above provision under the present scheme in such oblique manner.
If we analyze further the implication of the above provision of section 197(c), it would result into unintended consequences from the point of view of the department too which in our considered opinion has perhaps not been thought by the framers of law. The above provision of section 197(c) would mean that after the closure of the scheme, in case any notice u/s 148/ 153A/ 153C is issued by the department, any undisclosed income relating to any earlier year i.e. A.Y. 2016-17 or any earlier year shall be deemed to be the income relating to the year in which such notice is issued e.g.: if there is an income relating to A.Y. 2011-12 for which notice u/s 148 is issued during A.Y. 2017-18, the above provision of section 197(c) would mean that such income relating to A.Y. 2011-12 shall be deemed to be the income relating to A.Y. 2017-18 and tax on such income shall be charged as applicable during A.Y. 2017-18 without levy of any interest from A.Y. 2011-12 to 2017-18. Further, the above provision would mean that after closure of the above scheme, any undisclosed income / assets detected by the department as a result of search relating to any of the years for which notice is issued u/s 153A / 153C of the Act, such entire income relating to all the earlier years shall be deemed to be the income relating to the year in which notice u/s 153A / 153C is issued and shall be assessed accordingly.
In this manner, after the closure of the scheme the whole machinery of the Income Tax Act relating to the year in which income is to be charged to tax, is prone to be interpreted in this manner which could never be the intention of the legislature.
It seems that the above provision of section 197(c) has been incorporated with the intention to bring to tax income relating to any earlier year irrespective of any time limitation but without considering the other consequences and impact it may have on the other provisions of the Act and on the entire scheme of the Act as explained above.
It seems that the background of the above provision incorporated in the present scheme lies in the earlier scheme on Black Money in Foreign Assets introduced last year by the government. It may be recalled that the government brought the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 requiring a person to declare undisclosed income / assets kept out of country in the shape of foreign assets.
The above said Black Money Act provided an opportunity to declare all undisclosed foreign income / assets and a stern warning was issued that after the closure of the scheme in case any undisclosed income / assets are detected, there may be severe consequences relating to imposition of tax, interest, penalty and prosecution. The above scheme also incorporated a similar provision so as to by-pass the law of limitation and principle of time-barring for re-opening of the earlier year(s) cases.
Clause (c) of section 72 of the “The Black Money (Undisclosed Foreign and Assets) and Imposition of Tax Act, 2015” provided in case no declaration in respect of any undisclosed income / asset relating to earlier years prior to commencement of this Act is made, as under:
(c ) where any asset has been acquired or made prior to commencement of this Act, and no declaration in respect of such asset is made under this Chapter, such asset shall be deemed to have been acquired or made in the year in which a notice under section 10 is issued by the Assessing Officer and the provisions of this Act shall apply accordingly.
It is pertinent to mention that in the case of person having foreign income/ assets the time-barring period under the Income Tax Act has already been extended from 6 years to 16 years by Finance Act, 2012. Notwithstanding the same, above provision was incorporated in that scheme to by-pass the law of limitation for opening of earlier year(s) cases given under the Income Tax Act.
There was not much reaction regarding the above provision incorporated in the above scheme regarding undisclosed income in the form of foreign assets. It seems that enthused by the earlier scheme, the provision in the present scheme has been drafted on the similar lines without analyzing and contemplating the consequences of such provision. However, it is significant to note that the above scheme relating to foreign black money could not be successful and only 638 declarations were made mopping up revenue of Rs. 2,488 crores only.
We expect the government to come out soon with the clarification explaining the above provision of section 197(c) so that there does not remain any doubt and ambiguity regarding the interpretation of the provision of the scheme.
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