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I. Introduction

Amidst the Opposition-lead protests over demonetization of high denomination currency notes (HDNs) ensuring little or no business being transacted by Parliament in its current winter session till now, on 28th November, 2016, the Hon’ble Minister of Finance and Corporate Affairs moved the Taxation Laws (Second Amendment) Bill, 2016 in the Lok Sabha proposing certain amendments to the Income-tax Act, 1961 (the “IT Act”) and to the Finance Act, 2016 (the “Finance Act”).

Chapter IX of the Finance Act contained provisions pertaining to the Income Declaration Scheme (IDS) which provided an opportunity to assessees to make a declaration and come clean on their previously untaxed domestic incomes and unaccounted domestic assets by paying tax, surcharge and penalty (hereinafter referred to as “Penal Tax”) totalling to 45%. The latest amendment proposes to introduce sections 199A to 199R under Chapter IXA in the Finance Act titled “Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016”. Providing another opportunity to black money holders, these provisions are being seen as yet another (and perhaps, the last) chance for them to come clean albeit not without paying Penal Tax totalling to 50%. The Government has adopted a carrot-and-stick approach whereby failure to avail of this latest compliance window and subsequent detection during assessment proceedings could attract Penal Tax at the rate in excess of 80%.

In the wake of announcement of demonetisation of HDNs on 8th November, 2016, sections of the media have reported that unscrupulous persons were employing dubious ways of converting their black money into white. As Jonathan Swift said, “Laws are like cobwebs, which may catch small flies, but let wasps and hornets break through”, even the Hon’ble Prime Minister in his 26th Mann Ki Baat on 27th November, 2016 acknowledged the possibility of misuse of Jan Dhan accounts of unsuspecting and gullible people by black money holders to deposit their illicit wealth. A need was felt to harness this opportunity to generate additional revenue for the Government rather than letting black money holders find systemic loopholes to get around the currency ban. Emboldened by the massive declarations of Rs. 65,250 crores [Source: Press Information Bureau – http://pib.nic.in/newsite/PrintRelease.aspx?relid=151330] in the recently concluded IDS, the Government has moved this amendment, the purpose of which as stated in the Statement of Objects and Reasons accompanying the Taxation Laws (Second Amendment) Bill, 2016 is both laudable and noteworthy:

"In the wake of declaring specified bank notes as not legal tender, there have been representations and suggestions from experts that instead of allowing people to find illegal ways of converting their black money into black (sic) again, the Government should give them an opportunity to pay taxes with heavy penalty and allow them to come clean so that not only the Government gets additional revenue for undertaking activities for the welfare of the poor but also the remaining part of the declared income legitimately comes into the formal economy. Thus, money coming from additional revenue as a result of the decision to ban Rs. 1000 and Rs. 500 notes can be utilized for welfare schemes for the poor."

II. Pradhan Mantri Garib Kalyan Yojana, 2016

As per section 199C(1) of the Finance Act, this latest compliance window enables assessees (individuals/ HUFs/ companies/ firms/ AOPs/ BOIs, artificial juridical persons) to make a declaration in respect of incomes, in the form of cash or deposit in their accounts maintained with specified entities (banks/ cooperative banks/ post offices/ RBI etc.) which were chargeable to tax under the IT Act for FY 2016-17 or any year prior thereto but were not offered to tax. The language of this section does not seem to suggest that the declaration ought to be made only in respect of previously undeclared incomes. However, going by the title of the section “Declaration of undisclosed income.”, its objective and background, in my view, it is clear that declaration ought to be made only in respect of such income and not incomes which have previously been declared. It is important to note that the scheme is available to both residents as well as to non-residents but only for incomes which are in the form of cash deposits in banks/ post offices etc. and not otherwise. In other words, if for instance, certain undeclared income of FY 2015-16 is utilized for acquiring assets in FY 2016-17, such incomes should not be eligible for being declared under this scheme.

Furthermore, just like in the IDS, section 199C(2) prohibits deduction of any expenditure or allowance or set-off against the income do declared under this scheme.

Sections 199D and 199E deal with levy of tax, surcharge and penalty on the incomes being cash deposited in banks/ post office etc. (hereinafter referred to as “Undisclosed Cash Deposits”) declared under this scheme. While the Penal Tax for declarants under the IDS was 45%, the same under the current scheme is marginally higher at around 50%. The incremental 5% Penal Tax can in my view be termed as cost owing to recalcitrance on part of assessees who despite opportunities in the past (such as the IDS) have not come up with the requisite declarations. Section 199F(1) requires declarants to deposit at least 25% of the amount of their Undisclosed Cash Deposits in the Pradhan Mantri Garib Kalyan Deposit Scheme, 2016 (the “Deposit Scheme”) wherefrom no withdrawals shall be permitted and whereon no interest shall be paid as per section 199F(2). Therefore, after paying 50% Penal Tax on Undisclosed Cash Deposit, 25% shall have to be put in the Deposit Scheme for a period of four years without any interest. In other words, only 25% of the Undisclosed Cash Deposit shall be available to the declarants for immediate use. To give an illustration, a declaration of Undisclosed Cash Deposit of Rs. 5,00,000/- shall be treated in the following manner:

S. No.

Particulars

Amount (Rs.)

(a)

Undisclosed Cash Deposit

5,00,000

(b)

Deposit in Deposit Scheme – In terms of section 199F[(a) * 25%] {Lock-in period of 4 years without interest thereon}

1,25,000

(c)

Balance available for payment of Penal Tax and for use [(a) – (b)]

3,75,000

(d)

Tax on (a) @ 30% – In terms of section 199D(1) [(a) * 30%]

1,50,000

(e)

Pradhan Mantri Kalyan Cess (i.e. surcharge) on (a) @ 33% of tax – In terms of section 199D(2) [(d) * 33%]

50,000

(f)

Penalty on (a) @ 10% – In terms of section 199E [(a) * 10%]

50,000

(g)

Penal Tax [(d) + (e) + (f)]

2,50,000

(h)

Balance available for immediate use [(c) – (g)]

1,25,000

The declarant in its discretion can deposit an amount in excess of 25% of the Undisclosed Cash Deposit under the Deposit Scheme. As per section 199H, the payment of Penal Tax and the Deposit Scheme deposit should be made before filing the declaration and the declaration should be accompanied by proof to this effect. After the lapse of four years, the amount so deposited (whether 25% of Undisclosed Cash Income or higher) can be withdrawn for use. As per section 199K, the amount of Penal Tax shall not be refundable.

III. Concerns of potential declarants and protection available

One of the greatest incentives of an amnesty scheme or a compliance window for any delinquent is immunity from prosecution. As per section 199L read with section 199-O, a declarant shall be accorded immunity from prosecution from all statutes including the IT Act, the Wealth Tax Act, 1957 (WT Act) and the Indian Penal Code, 1860 (excluding offences under Chapter IX – Offences by or relating to public servants and under Chapter XVII – Offences against property) but not from offences under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974; the Narcotic Drugs and Psychotropic Substances Act, 1985; the Unlawful Activities (Prevention) Act, 1967; the Prevention of Corruption Act, 1988; the Prohibition of Benami Property Transactions Act, 1988; the Prevention of Money-Laundering Act, 2002; the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 and the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 [the “Anti Black Money Act”].

Thus, it can be seen that the immunity accorded to declarants under the scheme is wider than that available to declarants under the Anti Black Money Act which accords immunity only from prosecution under the IT Act; the WT Act; the Foreign Exchange Management Act, 1999; the Companies Act, 2013 and the Customs Act, 1962 or that available under the IDS which accords immunity only from prosecution only under the IT Act and the WT Act. In this regard, section 67 of the Anti Black Money Act and section 192 of the Finance Act may be referred to.

Though the tax laws prohibit double taxation, another concern of declarants is that the amount of undisclosed income should not again be taxed in some other year. To quell this concern, it has been provided in section 199-I that amount of Undisclosed Cash Deposits declared under the scheme will not be included in the total income of the declarant for any other assessment year. However, it remains to be seen whether the Undisclosed Cash Deposit of a company or of an individual or an HUF in excess of Rs. 50,000/- is treated as part of the “net wealth” for Wealth Tax purposes of the relevant assessment year. In my view, including such Undisclosed Cash Deposits in “net wealth” should not be against the principles of double taxation and due to absence of provision to this effect, the tax authorities may be seek to levy wealth tax on such Undisclosed Cash Deposits. This could potentially be a damper for declarations under this scheme unless the declaration form does not require the declarant to disclose the assessment year to which the Undisclosed Cash Deposit pertains. However, to prevent future litigation on this point, it is advisable that the Government bring in proper amendment to clarify their stand in this regard. Going by the objective of this scheme, the Government should clarify that wealth tax will not be levied on such Undisclosed Cash Deposits.

Another concern of potential declarants under such schemes is confidentiality of their identities and their declarations. Section 199N seems to take care of this concern by making applicable the provisions of section 138 of the IT Act to declarations under this scheme. As per section 138 of the IT Act read with section 199N, disclosure of information pertaining to declarants and their declarations can be made by Income-tax authorities only if the authority concerned is satisfied that it is in public interest to do so. This is in line with the provisions of the Anti Black Money Act and the IDS and the earlier Voluntary Disclosure of Income Schemes of the past.

IV. Impact of declarations under this scheme on assessment of other years

As per section 199J, a declarant under this scheme shall not be entitled to re-open any assessment or reassessment made under the IT Act or the WT Act, or to claim any set-off or relief in any appeal, reference or other proceeding in relation to any such assessment or reassessment. This provision is similar to the one found in the IDS (section 189 of the Finance Act) and to section 65 of Anti Black Money Act and prohibits declarants to derive any benefit of a declaration made under this scheme in any other year or to have his assessment reopened or reassessment made on that ground or claim any benefit in any appeal, reference, appeal etc.

For example, if the Assessing Officer (AO) has reopened an assessee’s assessment for AY 2010-11 and made addition under section 68 of the IT Act in respect of cash credits, it shall not be permissible for a declarant under this scheme to claim in an appeal against the AO’s order that the Undisclosed Cash Deposits declared by him under this scheme is the same as that added under section 68 of the IT Act assessed in AY 2010-11. However, it is unclear whether the declarant in the above example can claim so before the AO himself during the course of reassessment proceedings. This is because by claiming so, the declarant cannot be said to be claiming any set-off or relief in “any appeal” or “reference” or “other proceeding in relation to any such assessment or reassessment” but in the reassessment itself. In my view, the provisions of section 151(2) of the IT Act can come into play in such a situation and if the declarant-assessee shows to the AO that by virtue of making a declaration of the Undisclosed Cash Deposits and paying Penal Tax thereon, he had been assessed to a sum not lower than what he would have been rightly liable for even if impugned cash credit had been taken into account. Furthermore, the title of this section 199J if “Undisclosed income declared not to affect finality of completed assessments.” which in my view makes the intent of Legislature clear that in so far as pending assessments are concerned, the declarant-assessee may claim the benefit of declaration under this scheme.

V. Ancillary provisions of the scheme

The scheme will come into force on such date as the Central Government may by notification appoint and declarations under the scheme can be made only after the commencement of the scheme and till such time as the scheme continues. As per section 199G, the declaration must be made to the Principal Commissioner or the Commissioner notified in the Official Gazette for this purpose in the form prescribed by the Central Board of Direct Taxes (the “CBDT”) in this regard and must be verified in such manner, as may be prescribed by a person competent to verify the return of income under section 140 of the IT Act. While this scheme applies to cash deposits in accounts maintained with banks, cooperative banks, post offices and the RBI, the Central Government, as per Explanation to section 199C, can notify any other entity with which account is maintained to which the scheme can apply.

It is important to note the provisions of section 199M in this regard as per which a declaration made by misrepresentation or suppression of facts or without payment of Penal Tax or without depositing the amount in the Deposit Scheme shall be void and shall be deemed never to have been made under this Scheme. Consequently, no protection will be available to such declarants under this scheme. The provisions pertaining to liability in special cases contained in Chapter XV of the IT Act such as liability of representative assessees, executors, recovery of tax in respect of non-residents, discontinued business etc. As per section 199Q, the Central Government may, till two years from the date on which the provisions of this scheme come into force, by order, not inconsistent with the provisions of this scheme, remove any difficulty that arises in giving effect to the provisions of this scheme.

The CBDT may also make rules for carrying out the provisions of this scheme which should have the approval of the Parliament in terms of section 199R.

VI. Amendment to the IT Act - Sections 115BBE and 271AAC

The above were the provisions governing the Pradhan Mantri Garib Kalyan Yojana, 2016. The consequences of failure to come clean with unaccounted cash by way of a declaration under this scheme and its subsequent detection are severe and amendments to this effect have been made to the provisions of the IT Act. Section 115BBE which was introduced vide Finance Act, 2012 w.e.f 1st April, 2013 provides that incomes referred to in sections 68, 69, 69A, 69B, 69C and 69D would be taxable at the rate of 30% without deduction of any expenditure or allowance. This section has been amended to provide that such incomes whether suo motu reflected in the return by the assessee or whether an addition to this effect being made by the AO would be taxable at the rate of 60% without deduction of any expenditure or allowance in addition to surcharge calculated at the rate of 25% of such tax i.e. 15% of the unaccounted cash. This makes the effective tax rate 75%.

This amendment is to take effect from 1st April, 2017 and would apply for AY 2017-18 i.e. FY 2016-17 and not merely after the demonetization of HDNs. The objective of the above amendment is to coax assessees to avail of the Pradhan Mantri Garib Kalyan Yojana, 2016 by making cost of non-compliance exorbitant. But, this amendment does not seem to restrict its application to deposit of unaccounted incomes and cash in the wake of demonetization of HDNs. In my view, the proposed amendment seems to have lost sight of the Statement of Object and Reasons which reads as follows:

…As a step forward to curb black money, bank notes of existing series of demonination of the value of five hundred rupees and one thousand rupees (hereinafter referred to as specified bank notes) issued by the Reserve Bank of India have been ceased to be legal tender with effect from the 9th November, 2016.

2. Concerns have been raised that some of the existing provisions of the Income-tax Act, 1961 could possibly be used for concealing black money. It is, therefore, important that the Government amends the Act to plug these loopholes as early as possible so as to prevent misuse of the provisions.

On the contrary, what the amendment seeks to do in the name of “plugging loopholes” is only increase the tax rate of certain types of incomes/ additions and has no correlation with the demonetization of HDNs. It covers in its sweep all additions that the AO may make on account of failure of assessee to explain source and genuineness of loans, identities of donors/ lenders, unexplained expenditure/ investments, amounts borrowed or repaid on hundi. For instance, if a company receives share application money from some subscribers of shares through banking channels but is unable to prove their identities or is unable to prove the genuineness of the same to the satisfaction of the AO, such share application money could be taxed at the rate of 75%. This despite the fact that the impugned addition may not have any correlation with demonetization of HDNs and the transaction be routed through banking channels. Though largely Courts have treated bank transactions with greater sanctity, there have been cases where even Courts have held that mere payment through banking channels is not sufficient to prove genuineness. The decision of the Delhi High Court in Sarita Aggarwal v. ITO [2015] 373 ITR 586 (Delhi) may be referred to in this regard.

Similarly, if a firm receives loans through proper banking channels from a party who after the end of the year and before the assessment proceedings becomes untraceable or unable to give evidence in favour of the assessee, the amount of loans could be subject to tax at the rate of 75%. This in my view is a draconian provision because due to factors such as lapse of time/ loss of documentary proof etc., an assessee may not be able to prove his claim to the satisfaction of the AO, which in most cases is highly subjective. Due to the implementation of this provision, a situation may arise where the AO is not convinced about the genuineness of assessee’s claim despite voluminous documentary evidence as a result of which the exorbitant tax rate of 75% is invited on the assessee.

Amendments have also been proposed to the penalty provisions for additions under sections 68, 69, 69A, 69B, 69C and 69D. In addition to the above mentioned 75%, if the AO makes any addition of the nature referred to in sections 68, 69, 69A, 69B, 69C and 69D, in addition to being taxed at the rate of 75%, penalty at the rate of 10% of the tax payable under section 115BBE (i.e. at the rate of 6% of the unaccounted cash/ addition made) is payable under the newly proposed section 271AAC which makes the Penal Tax rate in excess of 80%.

Furthermore, it also does not view with much leniency the case of an assessee who believing that it does not possess the requisite documentary evidence to support his claim suo motu offers a particular income in his return. In spite of offering the same in his return, the tax rate would be of 75%. This is clear from the use of the words “and reflected in the return of income furnished under section 139” in the amended section 115BBE(1)(a). Though, respite is proposed to be give from penalty of 10% under section 271AAC in such cases cases by virtue of proviso to the sub-section (1) therein, the assessee must not only disclose the incomes of the referred nature in its return but also pay tax thereon before the 31st March of the financial year for the penalty to be not leviable. Thus, even the flexibility to pay self assessment tax is denied to the assessee.

By virtue of sub-section (2) of section 271AAC, levy of penalty in cases of addition under sections 68, 69, 69A, 69B, 69C and 69D are taken out of the purview of the newly introduced penal provisions in section 270A vide the Finance Act and dealt with exclusively by this proposed section 271AAC. As per section 273B of the IT Act, if the assessee shows reasonable cause for failures referred to in the sections mentioned in section 273B, no penalty can be levied. However, no leeway has been made in the said section 273B for penalty leviable under section 271AAC. This means the moment the AO makes an addition under section 68 of the Act, levy of penalty under section 271AAC would be automatic. This too in my view makes the provision unwarrantedly harsh and unfair.

While it cannot be denied that evasion of taxes deprives the nation of critical resources which could enable the Government to undertake anti-poverty and development programmes as rightly stated in the Statement of Object and Reasons, this amendment seeks to treat all cases of additions under section 68 as instances cases of tax evasion which in my view is not correct. It has sought to treat unequals equally which in my view is the greatest form of inequality. Perhaps only time may tell whether this amendment is guilty of class legislation which the Supreme Court has held in a number of cases as violative of Article 14 of the Constitution of India.

VII. Amendment in section 271AAB

Section 271AAB of the IT Act deals with levy of penalty in search cases for the year in which the search has been conducted and for the year which has ended before the date of search but the date furnishing return under section 139(1) of the IT Act has not expired and the assessee has not furnished the return for that year before the date of the search. As per the current provision, graded penalty at the rate of 10%/ 20% and 30% – 90% of the undisclosed income unearthed during search conducted on or after 1st July, 2012 is levied depending upon whether the assessee admits the undisclosed income in the statement recorded under section 132(4) or not and pays taxes thereon or not.

Vide the proposed amendment, the above provision has been rendered applicable only for searches conducted on or after 1st July, 2012 but before before the date on which the Taxation Laws (Second Amendment) Bill, 2016 receives the assent of the President. And for all searches thereafter, a newly introduced sub-section (1A) is proposed to be made applicable. As per this sub-section, if the assessee in the course of the search, in a statement under section 132(4) admits the undisclosed income and specifies the manner in which such income has been derived; substantiates the manner in which the undisclosed income was derived and on or before the specified date [i.e. due date under section 139(1) or as the case may be date specified in notice under section 153A], pays tax and interest on undisclosed income and offers the undisclosed income in the return, a penalty of 30% of the undisclosed income of the specified previous year will be levied but in all other cases a penalty of 60% of the undisclosed income of the specified previous year will be levied.

This amendment also seeks to make the cost of non-compliance with the latest compliance window exorbitant for assessees.

VIII. To sum up

While the Government has responded quickly to introduce amendments to the Finance Act and to the IT Act apprehending ingenious devices being employed by tax evaders to convert their black moneys into white, much remains to be desired as far as the nature of the amendments is concerned. While introduction of the Pradhan Mantri Garib Kalyan Yojana, 2016 and its avowed objectives are laudatory, the amendments pertaining to the taxability of cash credits etc. in my view need greater musing. Past experience has shown that people are willing to avail of the compliance windows provided to them by paying additional tax, and it is only in the interest of the nation that maximum number of tax delinquents avails of this latest scheme. Though creation of a higher tax slab may be perceived as prohibitive for persons who do not intend to come clean now as well, it could also lead to higher litigation where AOs seek to tax even normal business/ profession incomes/ capital receipts under section 68 etc.

The author can also be reached at sandeepjadhav.co@gmail.com


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Category Income Tax, Other Articles by - Sandeep Jadhav 



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