As the Narendra Modi led government has decided to tighten its grip over undisclosed income and correct the tax to GDP ratio, it has come out with the scheme called the Income Declaration Scheme ("IDS") to act as a window for all and sundry to disclose their past undisclosed income and assets. Amidst a host of representations being made by experts from all corners, CBDT on 14 July 2016 came out with a rather cryptic circular, being Circular No. 27 of 2016 in which it clarified the law of limitation being nullified by the provisions of the Finance Act, 2016. It clarified that the Scheme being a later law, would prevail over the provisions of the Income Tax Act, 1961. The clarification appears to be rather discomforting since it gives a blanket prevalence to the IDS over the provisions of the Income Tax Act, 1961. There are many underlying problems with the scheme.
Firstly, Section 183 of the Finance Act, 2016 talks about declaration of undisclosed income in respect of any person who wants to make a declaration in relation undisclosed domestic income and assets. This section is similar to Explanation 2 to Section 147 of the Income Tax Act, 1961 ("the IT Act") which is in relation to income escaping assessment. Explanation 2 to Section 147 creates a deeming fiction and lists out certain cases in which income chargeable to tax would be deemed to have escaped assessment. This is similar to situations contemplated under Section 183 of the Finance Act, 2016.
To simplify, a deeming provision artificially imports into a word or expression an additional meaning which they would not otherwise convey besides the normal meaning which they retain where they are used. It also seeks to create a legal fiction by declaring that something exists or has occurred regardless of the truth of the matter.
Further, Section 184 of the Finance Act, 2016 talks about charge of tax and surcharge and opens with a non-obstante clause. It is therefore clear that with respect to any undisclosed income which has been declared under Section 183, shall be chargeable to tax at the rate of 30% and would override anything contained in Income Tax Act or in Finance Act. The language of the statute is unequivocally clear and unambiguous.
To clarify, a non-obstante clause is usually used in a provision to indicate that the provision should prevail despite anything to the contrary in the provision mentioned in such non-obstante clause. Courts have held that in case there is any inconsistency or a departure between the non-obstante clause and another provision, one of the objects of such a clause is to indicate that it is the non-obstante clause which would prevail over the other clause.
There is no doubt that the undisclosed income not offered to tax under the IDS would be subject to tax under the normal provisions of the IT Act. The chances that the undisclosed income may pertain to earlier assessment years for which the time period to issue notice might have lapsed. In order to avoid the clutches of limitation, Section 197(c) of the Finance Act introduces a deeming fiction. There are some grave problems as far as interpretation of this provision is concerned.
For clarity, it is necessary to understand the purpose of these two special legislations. The primary purpose of IDS is basically to give an opportunity to assessees to disclose their undisclosed income of previous years where as the Income Tax Act is concerned with the charge of tax of both disclosed as well as undisclosed income.
To further buttress the point, the relevant extract of the Memorandum explaining the provisions of Finance Bill, 2016 is provided below:
"An opportunity is proposed to be provided to persons who have not paid full taxes in the past to come forward and declare the undisclosed income and pay tax, surcharge and penalty totalling in all to forty-five per cent of such undisclosed income declared."
In cases of undisclosed income declared under Section 183 of the Finance Act, 2016, Section 184 trumps all other provisions in any other Act in the wake of the non-obstante clause. Thus, for the purpose of the declaration of undisclosed income and its taxability, IDS would be a special act and would override provisions of the IT Act. In cases where no declarations have been made by the assessee, Section 197(c) cannot be construed to be a special Legislation overriding the provisions of the IT Act. In absence of a non-obstante clause, Section 197(c) which does not talk of the levy of tax on non-disclosure and rather refers to the provisions of the IT Act cannot obviously override the provisions of the IT Act in relation to limitation provided for assessment.
Therefore, the IT Act would be the special statute in cases of non-declaration of income and would prevail over IDS in terms of chargeability of tax of even undisclosed income and thus the provisions of section 147 will override section 197(c) to that extent. It can therefore be stated that this oblique reference of rendering limitation prescribed under the provisions of the IT Act nugatory, is unacceptable and leads to a patently unworkable situation and also against the very famous legal maxim of generalia specialibus non derogant meaning that wherever there is a special provision specifically dealing with a subject, a general provision howsoever widely worded, must yield to the former.
Secondly, even if for the sake of argument if we consider that section 197(c) in actuality supersedes the law of limitation it cannot under any circumstances render null and void the entire basis of charge of tax under Section 4 and Section 5 of the IT Act. Section 4 of the IT Act lays down that incomes is charged in respect of total income of previous year which has been defined under Section 3 of the Act. Section 5 talks about scope of total income of any previous year. Therefore, total income is always calculated with respect to "previous year" which means the financial year immediately preceding the assessment year. Section 197(c) of IDS peculiarly contemplates the situation where income shall be deemed to have accrued arisen or received in a year in which notice under section 142/143(2)/148/153A/153C of the Act is issued and the provisions to apply accordingly.
This effectively means that income would be taxed in the current year, which goes against the basic tenets of the IT Act and may be unconstitutional as under Article 265 of the Constitution of India "no tax shall be levied or collected except by authority of law".
Thirdly, another anomalous situation is created, that is, for undisclosed income prior to 1 April 2017 there is no time limit prescribed. However if undisclosed income is pertaining to years post 1 April 2017, Section 149 is applicable and time limits apply. This distinction is unreasonable and arbitrary. Since there is no intelligible differentia in this regard, this situation appears to violate Article 14 of the Constitution of India and may be struck down as being unconstitutional.
Fourthly, when the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 ("BM Act") was introduced to tax undisclosed foreign income and assets, Section 88 of the BM Act brought in necessary amendments to the Prevention of Money Laundering Act, 2002 in order to criminalise the wilful attempt to evade any tax, interest or penalty under the BM Act, thus making wilful attempt to evade tax under the BM Act a criminal act in relation to foreign income and assets.
Thus in the case of Black Money Act, which has a similar provision, the law of limitation not applying is understandable because of criminalisation of the act of evading tax in relation to foreign income. However non-disclosure and consequent non-payment in case of domestic income remains a civil liability and as such dispensing with limitation is not warranted. Enacting a provision disregarding settled limitation principles is grossly unjust and only leads to incongruity.
Although much clarity was warranted from CBDT, the panacea seems to be lying with courts and unnecessary, painful and protracted litigation.
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