Background
1. Last year, it was a one-time compliance window under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 ('the BM Act') to report the undisclosed offshore assets. Now it is an Income Declaration Scheme, 2016 ('IDS, 2016') to declare undisclosed income from a domestic source. The former
scheme received lukewarm response in terms of tax yield, given the high tax rate (60% incl. tax and penalty) and the concept of fair market value for valuing the asset for computing the tax liability. Similar doubts are being raised regarding the latter scheme as it has both these features, i.e., high tax rate (45% incl. tax, surcharge, and penalty) and the fair market value concept to value the asset if the undisclosed income is in the form of investment in any asset. A key argument is often presented that a voluntary disclosure scheme with more generous terms (such as lower tax rate, immunities from various laws) is needed to encourage delinquent taxpayers to pay their due taxes which can be utilised to improve the much-needed infrastructure in the country. In that case, presumably, the counter argument is that such a scheme would be discriminatory against the law-abiding taxpayer (in fact, the VDIS, 1997 could have been struck down by the Supreme Court but for the Government assuring the Court that henceforth they would not come out with such schemes). Thus, the introduction of any such scheme often involves economic efficiency, morality, and constitutionality issues. This article, however, is restricted to certain issues arising from the IDS, 2016.
2. Certain Aspects of IDS, 2016
Broad framework
2.1 The IDS, 2016 is broadly framed on the lines of one-time compliance window provided under the BM Act (sections 59 to 72). Further, the current scheme has some similarities (discussed at appropriate places) with the earlier schemes (scheme of 1965, 1975 and 1997) and, therefore, the CBDT instructions / clarifications and the judicial pronouncements interpreting these schemes shall be useful.
Declarant, Meaning of
2.2 The word "declarant" has been defined to mean a person making the declaration under section 183(1) of the scheme. Since the word "person" is not defined in the scheme, as per section 182(c) of the scheme, reference should be made to the definition of the word "person" as contained in section 2(31) of the Income Tax Act, 1961 ('the IT Act'). Accordingly, it will cover Individual, HUF, Company, Firm, etc., irrespective of its residential status. Therefore, even a non-resident person is eligible under this scheme. Interestingly, while moving the Finance Bill, 2016 in the Lok Sabha, the Finance Minister said that IDS is open for domestic taxpayers. However, it is well-settled that when the language is plain, clear and unambiguous, the speech of the Finance Minister should not be looked into.
Phrase — "Income chargeable to tax"
2.3 Under Section 183 of the scheme, a person may make a declaration in respect of any "income chargeable to tax" under the IT Act within the notified period. In the context of Voluntary Disclosure of Income and Wealth Ordinance, 1975, the Calcutta High Court in the case of CIT v. Sumati Kumar Sunil Kumar held that the concept of income chargeable to tax in the Voluntary Disclosure Scheme is the same as in the IT Act. Further, the phrase "Income chargeable to tax" was used in the VDIS, 1997. In this respect, it was reiterated by the CBDT that the computation of income chargeable to tax would be in accordance with the provisions of the IT Act. Under the IT Act, while computing the income, one is required to take into account all the eligible expenditures, deductions and set-off of allowable losses. However, section 183(4) of the Finance Act, 2016 impliedly overrides the income computation provisions given in the IT Act to provide that "No deduction in respect of any expenditure or allowance shall be allowed against the income in respect of which declaration under this section is made". Thus, it is evident that declarant shall not be allowed to claim any deduction of any expenditure in relation to income offered under this scheme. Interestingly, looking at the current language of section 183(4), it appears that set-off of losses against undisclosed income shall be available. In this context, one may refer to section 5(1) of the BM Act which additionally puts a restriction on "set-off of any loss". The said section reads as follows: [i]n computing the total undisclosed foreign income and asset of any previous year of an assessee, (i) "no deduction in respect of any expenditure or allowance or set-off of any loss shall be allowed to the assessee, whether or not it is allowable in accordance with the provisions of the Income-tax Act"
Will disclosure made by the declarant be subject to examination?
2.4 Unlike Voluntary Disclosure of Income Scheme, 1965, this scheme, on the lines of VDIS, 1997, does not expressly require the Principal Commissioner or the Commissioner to make any enquiry/verification while issuing acknowledgement and certificate of declaration. However, looking at Form 2, it seems that the Commissioner is supposed to decide the eligibility of undisclosed income declared by the assessee and provide the reason for rejection. Further, Form 4 states that "[t]his is to acknowledge that a declaration under section 183 of the Finance Act, 2016 has been accepted". Now the question arises as to whether the Principal Commissioner or the Commissioner while doing so, will ask any question, or request for any relevant documents, to certify the accuracy of the undisclosed income declared. Although the IDS Rules, 2016 are silent on this aspect, the CBDT has clarified that scope of enquiry shall be restricted to check whether any proceeding under section 142(1)/143(2)/148/153A/153C is pending for the assessment year for which declaration has been made. The next question arises as to whether there will be any further scrutiny by the Assessing Officer once the certificate has been issued by the Principal Commissioner or the Commissioner. The Finance Minister in his budget speech said that "[t]here will be no scrutiny or enquiry regarding income declared in these declarations under the Income Tax Act or the Wealth Tax Act". However, this statement reflects only half the truth. The scheme puts the entire onus on the declarant to ensure that he does not come under the prohibited category. Thus, it is clear that in future years, if the assessee claims before the Assessing Officer that he had made certain disclosures under IDS, 2016 and to that extent he should not be subjected to double taxation, the Assessing Officer will primarily examine whether the assessee was eligible for filing the declaration?.
Secrecy of Information
2.5 Secrecy is an important feature of any voluntary disclosure scheme. In the case of one-time compliance window under the BM Act, assurance was given by the Government that the particulars furnished by a declarant shall be kept secret, although there was no reference to section 138 of the IT Act in section 70 of the BM Act (which dealt with applicability of certain provisions of the IT Act and of Chapter V of the Wealth-Tax Act). Under the IDS, there is a specific reference to section 138 in section 195 of the scheme. Thus, under this scheme also the information contained in the declaration will be kept confidential. However, it may be pointed out that under the VDIS, 1997, section 72 of the scheme not only protected the confidentiality of the disclosure but specifically provided that such information shall not be shared with any officers other than officers of the income-tax and Wealth-tax Act. Conversely, Section 138(1)(a)(i) of the IT Act which is applicable to the IDS clearly contemplates the passing of information to any officer under any law for the imposition of any tax, duty or cess or dealing in foreign exchange. In that sense, the risk involved in making a declaration under the IDS appears to be relatively high.
Further, the scheme requires a declaration of income not in a lump sum but income falling under the head of income like business and profession, capital gains or other sources. Thus, based on the information available under section 138(1)(a)(i), the Sales Tax Department may try to link the undisclosed business income to suppressed turnover in the case of a trader. Similarly, the Excise Department may try to link the undisclosed business income to suppressed manufacture in the case of a manufacturer. Thus, a declaration by a trader or manufacturer would expose him to sales tax liability or excise duty liability, as the case may be, for which no immunity has been granted under this scheme.
Whether immunity is to be granted to the employer on the declaration made by the employee?
2.6 Section 197 of the Finance Act, 2016, clarifies that nothing contained in the IDS shall be construed as conferring any benefit, concession or immunity on "any person other than the person making the declaration", except as expressly provided in the Explanation to section 194(1) [although section 197 inadvertently makes reference to section 183(1) which describes the circumstances of undisclosed income to be declared under this scheme].
Under the scheme, a declarant is required to provide the heads of income. Thus, where an employee makes a declaration of undisclosed salary income under the head 'Salary', he shall be granted immunity according to section 197 of the Scheme. In this context, the issue arises as to whether any action shall be taken against the employer for making default in deducting tax at source (TDS). It seems that based on the information collected from the employee, the tax officer may proceed against the employer for non-deduction of tax at source on the salary paid by him. The employer may be liable for payment of interest under the provisions of section 201(1A) of the IT Act from the date on which the tax was deductible on such income upto the date of payment of tax by the declarant. Penalty under section 271C of the IT Act will also be attracted unless he proves that there was a reasonable cause for such failure as per the provisions of section 273B of the IT Act.
Immunity to a company from penalty and prosecution, etc., under the Companies Act
2.7 Where a company is making declaration in respect of its undisclosed income under this scheme, the issue arises as to whether immunity from penalty and prosecution, etc., shall be allowed to the company under the Companies Act. Unlike one-time compliance window under the BM Act, this scheme does not provide immunity from penal provisions under the Companies Act. This is important, given that declaration of undisclosed income by the company may allude to the fact that financial statements filed by the company were not correct.
Protection from Benami Transactions (Prohibition) Act, 1988
2.8 One of the attractive features of the IDS is that unlike all the earlier schemes, it provides immunity from the Benami Transactions (Prohibition) Act, 1988 if transaction relating to benami properties is regularized by 30 September 2017. As such, the IDS provides a limited compliance window of around 1 year. This assumes a lot of significance in the light of a proposed amendment Bill called as the Benami Transactions (Prohibition) (Amendment) Bill, 2015 which allows confiscation of benami property and provides for prosecution, but does not provide for any compliance window.
Section 197(c) — Rebirth of undisclosed Income not declared under the IDS, 2016
2.9 There is no doubt that undisclosed income not offered under this scheme would be subject to tax under the normal provisions of the IT Act. There are chances that the undisclosed income may pertain to earlier assessment years for which the time period for issue of notice would have lapsed. To avoid the limitation period, section 197(c) of the Finance Act, 2016, introduces a deeming fiction. It states that where any undisclosed income [which has accrued or arisen or received prior to commencement of this scheme] shall be deemed to have accrued or arisen or received in the year in which a notice under section 142/143(2)/148/153A/153C is issued by the Assessing Officer, and the provisions of the IT Act shall apply accordingly.
What if a declarant fails the eligibility test
2.10 The burden is on the assessee to prove that he is eligible to make a voluntary declaration under this scheme. In case the assessee fails the eligibility test, his declaration would be treated as null and void and such material can be used by the tax authorities for re-opening the cases. In this respect, the CBDT clarifies that where undisclosed income which has been duly declared in good faith but not found eligible, then such income shall not be covered by section 197(c) of the Finance Act, 2016. However, such undisclosed income may be assessed under the normal provisions of the IT Act. In this respect the CBDT has not clarified as to whether immunity from penalty or prosecution provided under the IT Act and the Wealth Tax shall be available to the said declarant.
No amendment to section 2(42A)— Period of holding
2.11 Section 49 of the IT Act has been amended by the Finance Act, 2016 to provide that cost of acquisition of assets declared under IDS, 2016 shall be the FMV, which was taken into account while computing tax under the scheme. Explaining this, the CBDT in its FAQ no. 1 of Circular no. 17 of 2016, dated 20th May 2016 goes one step further to say that the period of holding shall start from the date of determination of fair market value for the purposes of IDS. However, it may be pointed out that no such amendment has been carried out to section 2(42A) of the IT Act.
Heading of section 196 — "Scheme not to apply to certain persons" creates confusion
2.12 The title of section 196 is "Scheme not to apply to certain persons". However, it appears that this heading is a misnomer as the said section 196 seeks to exclude not only certain persons but also certain undisclosed income. This becomes clearer when one looks at section 64 and section 78 of the VDIS, 1997. Section 64 excluded income assessable for any assessment year for which a notice under section 142/148 had been served and the income in respect of the previous year in which a search/survey was carried out. On the other hand, section 78 debarred persons covered under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974, Special Court Act, 1992, etc.
When one-time compliance opportunity under the BM Act was introduced, the ineligible income, as well as disqualified person, was combined in one section, i.e., section 71 of the BM Act, while the heading was left untouched. This created confusion in case of a person who had received notices under section 142(1)/143(2)/148/153A/153C and in the case of a person against whom a search/survey operation had been initiated. The CBDT had to clarify that person as such was not barred but only the income of the relevant year(s) covered under the notices was barred.
Under the IDS, the same mistake has been repeated, leading to same confusion and subsequent clarification by the CBDT that in case of person who has received notices under section 142(1)/143(2)/148/153A/153C and the proceeding was pending before the AO or in case of person against whom a search/survey operation has been initiated, the person as such is not barred but only the income of the relevant year covered under the notices is barred.
Declarant can disclose income over and above the assessed income in case of completed assessment
2.13 A declarant cannot disclose any income which has already been declared by him in his tax return or income which has already been assessed, since section 189 of the scheme prohibits claiming any set-off or relief in respect of voluntarily disclosed income towards any income already assessed. However, the declarant can avail of the immunities in respect of any income disclosed which is over and above the assessed income where the assessment is completed.
Search/Survey operation
2.14 In case of Search operation, the person is ineligible to make a declaration if a search has been initiated and the time for issuance of notice under section 153A has not expired, even if such notice for the relevant assessment year has not been issued. In this case, the person is eligible to file a declaration in respect of an undisclosed income in relation to an assessment year which is prior to assessment years relevant for the purpose of notice under section 153A. Similarly, the declaration may be filed in relation to any previous year falling after previous year in which the search was made. In case of survey operation, the person is barred from making a declaration in respect of an undisclosed income earned in the previous year in which the survey was conducted. The person is, however, eligible to make a declaration in respect of an undisclosed income of any other previous year. Further, where a search/survey operation is conducted and the related assessment is also completed, but the undisclosed income remains untaxed, then such undisclosed income can be declared under this scheme.
Refund of taxes paid under the Scheme
2.15 Section 191 of the Finance Act, 2016 states that tax, surcharge and penalty paid under the scheme "in pursuance of a declaration made under section 183" shall not be refunded. It may be pointed out that the similar phraseology existed under the VDIS, 1997 under section 70 of the Finance Act, 1997. A question arose before the Andhra Pradesh High Court in the case of Patchala Seethramaiah v. CIT whether a declarant who paid the tax beyond the prescribed period thereunder is entitled for refund of the same? While interpreting section 70, the Court held that the expression 'declaration' was used in the context of a valid declaration and not a declaration which becomes void because of late payment, and, consequently, the revenue was not entitled to retain the amount of tax paid under such declaration. Applying the same analogy, under IDS, 2016 the declarant shall be entitled to claim the amount of taxes, surcharge and penalty in case his declaration is treated as null and void for the reason of late payment. Similar would be the conclusion where the declarant pays the amount in excess of tax amount under a bona fide mistake.
Extension of Due date for filing the declaration and making payment possible under this scheme
2.16 In the context of the VDIS, 1997, the Supreme Court in the case of Hemalatha Gargya v. CIT held that given the wording of the Scheme and the fact that the Scheme does not form part of the IT Act at all, it is doubtful whether the Board could have empowered the Commissioner to extend the time fixed for payment of tax and interest by invoking section 119(2)(b) of the IT Act. However, under the present scheme, this matter has been put beyond doubt by importing section 119 into the IDS (section 195 of the scheme).
Conclusion
3. As discussed above, there are a few issues which need further clarity at the earliest as the scheme has already come into effect from 1 June 2016. The four months window will close on 30 September 2016. The most attractive feature of the scheme is immunity from the Benami Transactions (Prohibition) Act, 1988. A person can include in his declaration any income from benami properties, to the extent such income was not disclosed or assessed earlier. However, he has to give an undertaking that he shall furnish a proof of transfer of benami property in his name ('real owner') on or before 30 September 2017 failing which the immunity from Benami Transactions (Prohibition) Act, 1988 shall not be available.
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