1. All laws of India should pass the test of constitutional validity, that is, they are to be strictly within the constitutional framework. Now, there are many Articles/ provisions embodied in Constitution that every legislation has to conform with and violation of any of such provision will render such legislation as ultra vires to the Constitution and, consequently, bad and illegal. Further, not only a legislation passed by the State but every subordinate laws, rules, procedure and action taken thereunder also have to obey such constitutional mandate.

2. One of the important mandates in the Constitution is grant of certain fundamental rights to the citizens of the country and every law passed by the legislature has to pass this acid test.

3. Now, The Direct Tax Vivad se Vishwas Act, 2020 [“the VSV Scheme”] is, basically, an incentive scheme given to an assessee, to give him reprieve from the time, money and energy to be further consumed with respect to his pending appeal, etc. It is purely optional. As such, so far as the present scheme is concerned, the main Article under which constitutionality of the present scheme, or any provision thereunder, can be challenged, if at all, is Article 14 of the Constitution of India, which reads as under:

   “The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.”

   Of course, there may be other grounds that can be invoked to challenge constitutional validity of such legislation. Besides, the rules, notifications, circulars, instructions, forms, etc. issued under such legislation can also be challenged; either on the ground of excessive delegation or ultra vires to the main section / legislation.

4. An important aspect to be kept in mind is that challenging constitutional validity of a law is very serious matter and it is not a quick-fix tool or a magic wand, which a citizen can rush to invoke for smallest pretext. The burden is very heavy on the person who alleges breach of a constitutional mandate and the presumption, to start with, is always in favour of constitutionality of the legislation under challenge. Especially in the matters of the legislations like the VSV Scheme, which are purely optional and are promulgated to achieve specific purposes, the challenge has to be on a very strong foundation.

5. Now, this topic of constitutionality, even in the context of the IT Act, is very wide, which involves various nuances and complexities. Therefore, the limited purpose of this article will be served by referring to few judgments in the context of similar schemes of the past. The judgments are not only illuminating but self- explanatory.

6. VARIOUS SCHEMES AND THEIR LEGAL PRECEDENTS

   1. Special Bearer Bonds (Immunities and Exemptions) Act, 1981

      With a view to canalise the black money, the Central Government came up with the Scheme in which it gave option to invest unaccounted (black) money in the bonds issued under the said Act. The bond had face value of ten thousand rupees and redemption value, after ten years, was of twelve thousand rupees. A person investing in such bond was given immunity from adverse consequences under the tax laws.

(i) R. K. Garg v/s. UOI – [(1982) 133 ITR 239 (SC)]

On 12-1-1981, while both Houses of Parliament not being in session, the President of India issued the Special Bearer Bonds (Immunities and Exemptions) Ordinance, 1981 [‘the Ordinance’], in exercise of the power conferred upon him under Article 123 of the Constitution. The Ordinance was later replaced by the Act, namely, Special Bearer Bonds (Immunities and Exemptions) Act, 1981 on 27-3-1981 [‘the Act’], which received the assent of the President on 27-3-1981, but which was brought into force with retrospective effect from 12-1-1981, being the date of promulgation of the Ordinance. Before the Supreme Court,

– the said Ordinance was challenged on the ground that it was violative of Articles 14 and 123 of the Constitution

– the said Act was assailed on the ground that it was violative of Article 14.

CONTENTIONS OF THE PETITIONER

– First ground had two limbs, one is that the Ordinance had the effect of amending the tax laws, it was outside the competence of the President under article 123 and other was that the Ordinance had the effect of amending the tax laws, it was outside the competence of the President under article 123 to issue the Ordinance by-passing the special procedure provided in articles 109 and 110 for the passing of a Money Bill.

– The Act passed is unconstitutional as it offends against morality by according to dishonest assessees who have evaded payment of tax, immunities and exemptions which are denied to honest taxpayers. Those who have broken the law and deprived the State of its legitimate dues are given benefits and concessions placing them at an advantage over those who have observed the law and paid the taxes due from them and this is clearly immoral and unwarranted by the Constitution.

HELD

{The arguments and the decision regarding Article 123 are not reproduced, as the issues not relevant for this article.}

– Article 14 does not forbid reasonable classification of persons, objects and transactions by the Legislature for the purpose of attaining specific ends. What is necessary in order to pass the test of permissible classification under Article 14 is that the classification must not be “arbitrary, artificial or evasive” but must be based on some real and substantial distinction bearing a just and reasonable relation to the object sought to be achieved by the Legislature.

– While considering the constitutional validity of a statute said to be violative of Article 14, it is necessary to bear in mind certain well established principles which have been evolved by the courts as rules of guidance in discharge of its constitutional function of judicial review. The first rule that, there is always a presumption in favour of the constitutionality of a statute and the burden is upon him who attacks it to show that there has been a clear transgression of the constitutional principles. This rule is based on the assumption, judicially recognised and accepted, that the Legislature understands and correctly appreciates the needs of its own people, its laws are directed to problems made manifest by experience and its discrimination are based on adequate grounds. The presumption of constitutionality is indeed so strong that in order to sustain it, the court may take into consideration matters of common knowledge, matters of common report, the history of the times and may assume every state of facts which can be conceived existing at the time of legislation.

– It is true that certain immunities and exemptions are granted to the persons investing their unaccounted money in purchase of special bearer bonds but that is an inducement which has to be offered for unearthing black money. Those who have successfully evaded taxation and concealed their income or wealth despite the stringent tax laws and the efforts of the tax department are not likely to disclose their unaccounted money without some inducement by way of immunities and exemptions and it must necessarily be left to the Legislature to decide what immunities and exemptions would be sufficient for the purpose. It would be outside the province of the court to consider if any particular immunity or exemption is necessary or not for the purpose of inducing disclosure of black money. That would depend upon diverse fiscal and economic considerations based on practical necessity and administrative expediency and would also involve a certain amount of experimentation on which the court would be least fitted to pronounce.

– Moreover, as already pointed out above, the trial and error method is inherent in every legislative effort to deal with an obstinate social or economic issue and if it is found that any immunity or exemption granted under the Act is being utilised for tax evasion or avoidance not intended by the Legislature, the Act can always be amended and the abuse terminated.

– We are accordingly of the view that none of provisions of the Act is violative of Article 14 and its constitutional validity must be upheld.

2. VOLUNTARY DISCLOSURE OF INCOME SCHEME, 1997

   The VDIS was introduced to enable the assessees to declare the undisclosed income or assets or investments and after paying the prescribed taxes on such disclosure.

   (i) All India Federation of Tax Practitioners v/s. UOI – [(1997) 228 ITR 68 (Bom)]

   FACTS

   The All India Federation of Tax Practitioners and a practising advocate filed this petition for a declaration that sections 64 to 78 of the Finance Act, 1997 {Voluntary Disclosure of Income Scheme, 1997} are non est, void, unconstitutional and ultra vires in entirety, with a further prayer that the Respondents [Union of India and others] be directed not to implement the same.

CONTENTIONS OF THE PETITIONER

– The honest tax-payers, who had paid the tax all throughout, were at a discount and the dishonest taxpayers were given undue benefits and much more immunities by the present enactment. The honest taxpayer has paid tax as per the prevailing rate during previous years from 90 per cent to 40 per cent. As against this, a dishonest taxpayer is given full immunity and would be required to pay only 30 per cent.

– In the alternative, it was prayed that the Respondents be directed to treat all the normal and honest taxpayers on par with the declarants under the scheme in respect of the tax charged or chargeable to them and the amount of interest pertaining thereto and evolve a mechanism whereby the Respondents are compelled to refund the excess amount collected from the normal taxpayers during earlier years.

CONTENTIONS OF THE DEPARTMENT

– It is true that various Expert Committees have suggested other measures for unearthing unaccounted money, viz., imposing deterrent punishment, establishing special Courts for dealing with tax-evaders by enacting special tax rules and suitable moral atmosphere in the society but, at present, it is an impossibility or in any case a long-term measure. This would not mean that the Parliament cannot take short-term measures to unearth unaccounted black money. It is a known fact that, at present, the atmosphere is not so healthy wherein dishonest tax-evaders would feel ashamed or would be reluctant to avoid legitimate payment of tax. In such an atmosphere, if the Parliament decides to enact law giving certain immunities as inducement for declaration of income to such tax-evaders, it cannot be said that it is palpably arbitrary.

– Other reasonable view also could be, stringent or deterrent laws alone may not be sufficient to deter such tax-evaders.

HELD BY THE COURT

“4. In our view, there is much force in the contention of the learned counsel for the petitioners that, by such type of Schemes dishonest taxpayers get advantage. It is also true that the honest taxpayers suffer, but, at the same time, we have to consider well-established limitations under the Constitution to interfere in such matters. We have also to take into consideration the fact that, when the Parliament adopts a particular mode or method for unearthing unaccounted or black money and considers it to be efficacious, it would not be permissible for the Court while exercising jurisdiction under article 226 of the Constitution to substitute its own decision in place of the policy decision taken by the Parliament by enacting the Scheme. In our view, this course is not permissible. It is well-established law that, with regard to taxation matters and economic affairs, it is for the Executive and the Parliament to decide a suitable method and take policy decisions for the purpose of taxation. It is also established law that, with regard to policy matters, it is for the Parliament to enact appropriate law after taking into consideration various aspects.

32. Some parties in person intervened and submitted that they are honest taxpayers; they are paying tax since years. If dishonest taxpayers, who have not paid tax since years, are given this advantage, the tax which they have paid be refunded or such benefit should not be given to dishonest tax-evaders. In our view, these are all arguments against such type of Voluntary Disclosure Scheme. In our view, all these contentions are known to the Legislature and, after knowing them, it has decided to introduce the Scheme. Apart from this aspect, in our view, the Court’s platform cannot be used for having a debate whether such Scheme would yield results. In no set of circumstances, this Court has jurisdiction to legislate and direct the refund of taxes paid by the honest taxpayers. It is true that honest tax payers have to pay some premium, but that cannot be helped. As against this, Mr. Daga, the learned counsel, who appeared on behalf of the interveners, submitted that such type of schemes are required to be introduced so as to unearth unaccounted or black money. As discussed above, in our view, it is for the Parliament to enact laws pertaining to tax law, giving benefits or immunity to tax- evaders or taxpayers, but it is not for the Court to evolve a scheme and direct the Parliament to enact such schemes on the basis of the view expressed by persons affected and to evolve any such Scheme.

33. Keeping the aforesaid well-settled law in mind, it will be difficult for us to arrive at a conclusion that, as more benefits are given to tax-evaders, the provisions of the Scheme are arbitrary and violative of article 14. It is adopted by the Parliament after taking into consideration the economic and social conditions prevailing in the society.”

Affirmed by Supreme Court: All India Federation of Tax Practitioners vs. UOI – [1998] 231 ITR 24 (SC)]. Interestingly, the Court also took due note of the following assurance tendered by the Government, which is reproduced verbatim as under:

1. “In this special leave petition filed against the judgment of the Bombay High Court in All India Federation of Tax Practitioners v. Union of India [1997] 228 ITR 68/ 93 Taxman 737 , the petitioners are seeking to challenge the validity of the Voluntary Disclosure of Income Scheme, 1997 (VDIS). The High Court in an elaborate judgment has dealt with the various submissions made assailing the constitutional validity of the Scheme. We are in agreement with the said view of the High Court.

2. We have heard Shri Dinesh Vyas, the learned senior counsel appearing for the petitioners, in support of the special leave petition and the learned Attorney General of India for the Union of India. The learned Attorney-General has placed the following statement indicating the policy the Government is following and will be following in checking tax evasion and the said statement is reproduced as follows:

“1. After December 31, 1997, the Income-tax Department will considerably step up survey operations under section 133A of the Income-tax Act, 1961, and search operations under section 132 of the Income-tax Act, 1961.

2. According to Chapter XIV-B of the Income-tax Act as amended with effect from 1-1-1997, if in the course of a search undisclosed income is detected, then the assessee is liable to the following:

(i) tax at the rate of 60 per cent;

(ii) penalty which can be up to 300 per cent on the tax evaded;

(iii) interest under section 158BFA.

3. In addition, the Finance Minister has announced that in every case of detection of undisclosed income, prosecution will be launched. The relevant provisions are in Chapter XXII of the Income-tax Act.

4. Besides tightening up of legal provisions, the following steps have also been taken:

(i) Acceleration of the process of issuing Permanent Account Number (PAN);

(ii) Acceleration of the computerisation of the Income-tax Department;

(iii) Installation of software to detect the assessees who satisfy the criteria laid down under the proviso to section 139(1) of the Income-tax Act.

5. The Government is committed to making a success of the VDIS, 97 for fulfilling the objectives set by the Government in the Finance Minister’s Budget Speech. We also wish to emphasise that section 72 of the VDIS, 97 guarantees complete confidentiality in respect of declarations.”

3. Taking into consideration the aforesaid statement made by the learned Attorney General, we are not inclined to interfere with the impugned judgment of the High Court. The special leave petition is, therefore, dismissed.”

3. KAR VIVAD SAMADHAN SCHEME, 1998

   The Scheme was introduced with the intention to reduce the litigation in direct and indirect taxes. The assessees, whose appeals were pending before any appellate authority and had ‘tax arrear’ due, were eligible for filing the declaration under the Scheme. The declarant was liable to pay the disputed tax computed according to the Scheme and on acceptance of such declaration by the Department such case was settled and, consequently, immunity was provided from other consequential proceedings like penalty or prosecution, etc.

   (i) All India Federation of Tax Practitioners v/s. UOI – [(1998) 236 ITR 1 (Del)]

ISSUE

The Petitioner challenged the Constitutional validity of Kar Vivad Samadhan Scheme, 1998 on following two aspects:

(a) The benefit being given only to the person who had some pending ‘tax arrear’ that is, the amount of tax, penalty or interest (direct tax) or duty (indirect tax) which is determined as on the 31.03.1998, as modified in consequence of giving effect to an appellate order, but remaining unpaid as on the date of declaration- thereby denying benefits of the scheme to diligent taxpayers who had honestly paid the full tax arrear / demand. (Section 87 (m) of KVSS)

(b) The scheme covered only assessee’s appeal and did not cover Departmental appeal. (Proviso to section 92 of the KVSS)

CONTENTIONS OF THE ASSESSEE

(a) Challenge to section 87 (m) of the Scheme

– The disputes pending before the appellate authorities or court may be resolved either in favour of the assessee or in favour of the revenue. This would result either in enforcing the recovery of balance outstanding tax demands or in refunds where taxes have been recovered more than what is determined on the final settlement of disputes. To accelerate the process of arriving at such outcome, the scheme has been brought into force but the denial to the person who has paid the entire tax to arrive at such an outcome is discriminatory under the Scheme.

(b) Challenge to Proviso of section 92 of the Scheme

– The inequality is glaring and obvious between two assessees having identical matter but situated at two different places. While the first assessee, who succeeded before any of the appellate authority that is CIT(A), ITAT or High Court and the Department carried forward the case to the higher appellate forum, is denied the benefit of the Scheme as per the proviso to section 92 of the Scheme, the other assessee, who did not succeed before any of the appellate authority and has carried the case to higher appellate forum, can file the declaration under the Scheme and is allowed to enjoy the immunities provided in the Scheme. This is unequal imposition of tax on the two assessees falling into same class.

HELD

– The classification between the persons who are having unaccounted money and honest taxpayers was held to be not unreasonable in All India Federation of Tax Practitioners vs. UOI (referred above) by the High Court of Bombay as the object sought to be achieved was unearthing unaccounted money by giving some inducement and immunities to such persons. The Bombay High Court decision has been upheld by the Supreme Court in All India Federation of Tax Practitioners vs. Union of India (referred above).

– In R. K. Garg vs. Union of India [1981] 4 SCC 675, their Lordships held that economic matters legislation cannot be struck down on account of crudities, inequities and even possibility of abuse. Immorality by itself cannot also be a ground of constitutional challenge unless the immorality be so seeking as to condemn the legislation as arbitrary or irrational and hence violative of Article 14.

– On challenge to section 87 (m), the Court held that the validity of classification has to be decided and judged in the light of the object sought to be achieved. The objective is two-fold. While judging the validity of the classification, both the limbs of the object are required to be kept in view. Allowing the benefit of the scheme to such litigating assessees from whom the revenue had succeeded in effecting recovery even by adopting coercive methods or by making adjustments would have been destructive of the very objective sought to be achieved. It is immaterial whether the tax was paid voluntarily by the assessee or realised involuntarily by the Department resorting to coercive means of recovery or by making adjustment; the fact remains that the assessee ceases to be in arrears. By giving benefit of the scheme to such class of assessees the revenue not stand to gain anything rather it stand to lose inasmuch as what had been realised would have to be refunded. Therefore, the basis of classification adopted by the scheme to this extent is guided by the objective sought to be achieved by the legislation and therefore could not be held to be arbitrary or unreasonable.

– On challenge to proviso to section 92, it was held that, no sub-classification can be made in the class of litigating assessees in arrears merely by reference to the fact whether they are prosecuting the litigation or defending themselves. Once a liability to pay the tax was incurred and determined on or before 31-3-1998, the assessee would be treated to be in arrears in spite of his having succeeded at one stage of litigation, if the revenue had chosen to continue with litigation and there is no reason why the benefit of the Scheme should be denied to him. To this extent, the scheme is discriminatory and violative of article 14. All the assessees litigating and in arrears belong to one class. Any attempt at carrying out further classes by reference to who is the prosecutor/appellant/applicant in the pending litigation is void as based on no intelligible differentia. It would be arbitrary irrational and evasive. It would have no rational relation to the object sought to be achieved by the Act. Keeping them in one class would enable the twin objective of legislation being achieved (i) the reduction of litigation, and (ii) the realisation of revenue.

– To sum up:

(1) The proviso to section 92 is ultra vires article 14 as it results into creating two artificial classes between the same class of assessees, i.e., the litigating assessees in arrears.

(2) the definition of ‘tax arrears’ was read down, and it was held that the clause (m) of section 87 should be so read as to mean the amount of tax, penalty or interest determined by any competent authority on or before 31-3-1998 though such determination might have been set aside at a later stage if such setting aside has not been accepted by the department and continues to remain under challenge before a Court or Tribunal.

(3) The rest of the Scheme is intra vires the Constitution.

(ii) UOI v/s. Nitdip Textile Processors (P.) Ltd. – [(2011) 245 CTR 241 (SC)]

FACTS

The High Court, vide its impugned judgment and order dated 25-7-2005, had declared that section 87 (m) (ii) (b) of the Finance (No. 2) Act, 1998 was violative of Article 14 of the Constitution of India insofar as it sought to deny the benefit of the ‘Kar Vivad Samadhana Scheme, 1998 to those who were in arrears of duties, etc., as on 31-3-1998 but to whom the notices were issued after 31-3-1998. The High Court further had struck down the expression ‘on or before the 31st day of March 1998’ under section 87 (m) (ii) (b) as ultra vires of the Constitution of India and, in particular, Article 14, on the ground that the said expression prescribes a cut-off date which arbitrarily excludes certain category of persons from availing the benefits under the Scheme.

CONTENTIONS OF THE PETITIONER [GOVERNMENT]

An assessee can claim benefits under the Scheme only when his tax arrears are determined and outstanding, or a show-cause notice has been issued to him, prior to or on 31.3.1998 in terms of Section 87 (m) (ii) (a) and (b) of the Act. The determination of the arrears can be arrived at by way of adjudication or by issuance of the show-cause notice to the assessee. The present Scheme is statutory in character and its provision should be interpreted strictly and those who do not fulfil the conditions of eligibility contained in the Scheme are not allowed to avail the benefit under the Scheme.

CONTENTIONS OF THE RESPONDENT [THE ASSESSEE]

The classification of assessees on the basis of date of issuance of show-cause notice or Demand Notice is unreasonable and has no nexus with the purpose of the legislation. All the assessees who are in arrears of tax on or before 31.3.1998 formed one class but further classification among them just on the basis of issuance of show-cause notice is arbitrary and unreasonable.

HELD

– The object and purpose of the Scheme is to minimize the litigation and to realize the arrears of tax by way of settlement in an expeditious manner.

– Further, the object of the Scheme and its application to Customs and Central Excise cases involving arrears of taxes has been explained in detail by the Trade Notice No. 74/98 dated 17-8-1998 issued by the Commissioner of Central Excise and Customs. In view of the aforementioned Trade Notice, it is clear that the object of the Scheme with reference to indirect tax arrears is to bring down the litigation and to realize the arrears which are considered due and locked up in various disputes. This Scheme is mutually beneficial as it benefits the revenue department to realize the duties, cess, fine, penalty or interest assessed but not paid in an expeditious manner and offers assessee to pay disputed liability at discounted rates and also afford immunity from prosecution. It is a settled law that the Trade Notice, even if it is issued by the revenue department of any one State, is binding on all the other departments with equal force all over the country. The Trade Notice guides the traders and business community in relation to their business as how to regulate it in accordance with the applicable laws or schemes.

– The Scheme defines the meaning of the expression ‘tax arrears’, in relation to indirect tax enactments. It would mean the determined amount of duties, as due and payable which would include drawback of duty, credit of duty or any amount representing duty, cesses, interest, fine or penalty determined. The legislation, by using its prerogative power, has restricted the dues of duties quantified and payable as on 31-3-1998 and remaining unpaid till a particular event has taken place, as envisaged under the Scheme. The definition is inclusive definition. It also envisages instances where a demand notice or show-cause notice issued under indirect tax enactment on or before 31-3-1998 but not complied with the demand made to be treated as tax arrears by legal fiction. Thus, legislation has carved out two categories of assesses, viz. where tax arrears are quantified but not paid, and where demand notice or show-cause notice issued but not paid. In both the circumstances, legislature has taken cut off date as on 31-3-1998. It cannot be disputed that the legislation has the power to classify but the only question that is required to be considered is whether such classification is proper. It is now well-settled by catena of decisions of the Supreme Court that a particular classification is proper if it is based on reason and not purely arbitrary, caprice or vindictive. On the other hand, while there must be a reason for the classification, the reason need not be good one, and it is immaterial that the statute is unjust. The test is not wisdom but good faith in the classification. It is too late in the day to contend otherwise. It is time and again observed by the Court that the Legislature has a broad discretion in the matter of classification. In taxation, ‘there is a broader power of classification than in some other exercises of legislation’. When the wisdom of the legislation while making classification is questioned, the role of the Courts is very much limited. It is not reviewable by the Courts unless palpably arbitrary. It is not the concern of the Courts whether the classification is the wisest or the best that could be made. However, a discriminatory tax cannot be sustained if the classification is wholly illusory.

– The Legislature, in its wisdom, has thought it fit to extend the benefit of the scheme to such of those assessees whose tax arrears are outstanding as on 31-3-1998, or who are issued with the demand or show-cause notice on or before 31-3-1998, though the time to file declaration for claiming the benefit is extended till 31-1-1999. The classification made by the Legislature appears to be reasonable for the reason that the Legislature has grouped two categories of assesses, namely, the assessees whose dues are quantified but not paid and the assessees who are issued with the demand notice and show-cause notice on or before a particular date, month and year. The Legislature has not extended this benefit to those persons who do not fall under this category or group. This position is made clear by section 88 of the Scheme which provides for settlement or tax payable under the Scheme by filing declaration after 1-9-1998 but on or before the 31-12-1998 in accordance with section 89 of the Scheme, which date was extended upto 31-1-1999. The distinction so made cannot be said to be arbitrary or illogical which has no nexus with the purpose of legislation. In determining whether classification is reasonable, regard must be had to the purpose for which legislation is designed. The legislation is based on a reasonable basis which is; firstly, the amount of duties, cesses, interest, fine or penalty must have been determined as on 31-3-1998 but not paid as on the date of declaration and, secondly, the date of issuance of demand or show-cause notice on or before 31-3-1998 which is not disputed but the duties remain unpaid on the date of filing of declaration. Therefore, the Scheme 1998 does not violate the equal protection clause where there is an essential difference and a real basis for the classification which is made. The mere fact that the line dividing the classes is placed at one point rather than another will not impair the validity of the classification.

– Article 14 does not prohibit reasonable classification of persons, objects and transactions by the Legislature for the purpose of attaining specific ends. To satisfy the test of permissible classification, it must not be ”arbitrary, artificial or evasive’ but must be based on some real and substantial distinction bearing a just and reasonable relation to the object sought to be achieved by the Legislature. The taxation laws are not exception to the application of this principle of equality enshrined in Article 14.

(iii) Amit Hemendra Jhaveri vs. UOI – [(2016) 380 ITR 60 (Bom)]

In this case, the assessee filed three declarations dated 31-12-1998 under the KVSS to settle his disputes pending before the authorities. The Designated Authority rejected the declaration u/s. 95 (iii) on the ground that prosecution for offence under Chapter XVII of the Indian Penal Code had been launched against the assessee. Section 95 (iii) of the KVSS excluded various classes of persons from the benefit of the scheme. The assessee filed a writ petition challenging the constitutional validity of section 95 (iii).

CONTENTION OF THE ASSESSEE

– A common thread running through the assessee’s challenge to section 95 (iii) was that the classification made therein is not based on intelligible differentia and the differentia does not bear a rational relation to the objective / purpose of the legislation.

CONTENTION OF THE DEPARTMENT

– The KVSS 1998 is a part of Finance Act, 1998 by which the Parliament has enacted the same with the object of settling the pending dispute between the assessee and the State. These pending disputes have resulted in large amount being blocked up in the resolution of the dispute. Therefore, KVSS 1998 seeks to settle litigation. In the process, the Parliament in its wisdom has sought to exclude certain categories of assessees as specified in Section 95 of the KVSS 1998 from the benefit of the Scheme of Settlement, including those involved in social-economic crimes. This classification of various classes of assessees not being entitled to the benefit of KVSS 1998 is founded on an intelligent differentia between those excluded from the benefit of KVSS 1998 and to those the benefit has been offered having a rational nexus to its object. Therefore Section 95 (iii) of KVSS 1998 does not fall foul of Article 14 of the Constitution of India.

HELD

– The Apex Court in the case of Sashi Laxman Kale v. Union of India [1990] 4 SCC 366 has held that the purpose or the object of the legislation can be found out by looking at the circumstances which prevail when the law was passed including the necessity of the law. It is, therefore, permissible to look at the statement of objects/ reasons while introducing the KVSS and also the historical facts and surrounding circumstances to ascertain the mischief sought to be remedied. In the instant case, the objective/purpose of the KVSS can be discerned from the speech of the Finance Minister while introducing the Finance Act, 1998 as set out by the Apex Court in the case of Union of India v. Nitdip Textiles Processors (P.) Ltd. [2011] 203 Taxman 1/15 taxmann.com 59, the objective of the KVSS was to settle tax arrears in litigation at a substantial discount. This is so, because it was noticed that a large number of cases were pending at recovery stage. The scheme, therefore, was in substance a recovery scheme to put an end to all pending disputes between the revenue and the assessee, whether before the authority or before the Court.

– As regards the contention of the assessee that the ousting a person from the KVSS merely on the ground of the complaint filed in the Criminal Court alleging offence under IPC is arbitrary, it was held that, the Parliament in its wisdom did not desire to make the offer of settlement available to those under a shadow of culpability in respect of socio-economic offences. This wisdom of Parliament of excluding pending prosecution from the benefit of KVSS is not for the Court to question so long it does have a nexus to the object of the KVSS.

– As regards the contention of the assessee that the various categories listed out in section 95 (iii) are persons prosecuted under IPC, TADA, FERA, Prevention of Corruption Act, 1995, Narcotic Drugs and Psychotropic Substance Act, 1985 that has no nexus to the objective of collection of more revenue, it is to beheld that the object of the KVSS is to collect the revenue which is otherwise stuck up in disputes in respect of the persons who are not being prosecuted for the offences which are likely to be illegal/illicit income at the cost of the society. To extend the benefit of KVSS and to grant immunity to such persons from penalty and prosecution, in the view of the Parliament, is not justified / warranted. Further one must not lose sight of the fact that the benefit under the KVSS is a deviation from the strict application of tax laws.

– In any case, at the very highest, the grievance of the assessee appears to be that the classification is not proper and there is room for more classification by including into those categories listed in section 95 (iii), those who have been left out.

– The issue of under inclusion in tax litigation arose before the Supreme Court in the case of Murthy Match Works v. Asstt. Collector of Central Excise [1974] 4 SCC 428 for consideration. The challenge was that while issuing an exemption notification issued under the Central Excise Rule there was a failure to make further classification between larger and smaller manufacturers of match boxes. The Court held that it is a settled position that merely because there is a room for more classification, the provisions cannot be declared unconstitutional.

– In view of the above decision of the Supreme Court, it is not possible to declare section 95 (iii) void on the ground of under inclusion. The non-inclusion of others in the exclusionary section 95 (iii) will not render the classification done by the Parliament as arbitrary or violative of article 14 of the Constitution.

(iv) Micro Labs Ltd. vs. DCIT – [(1998) 231 ITR 934 (Karn)]

{Single Bench}

FACTS

– There was a search in respect of the assessee and four others u/s. 132 on 10-9-1997 and in the course of search, some records pertaining to the assessee were seized and prohibitory orders were issued in regard to certain bank accounts and records. On the assessee seeking the benefit of the VDIS, the department took the stand that the same was not available to them on account of notices u/s. 132 and seizure of books of account in the assessee’s case. Feeling aggrieved by the stand of the department, the assessee, along with others, filed writ petitions challenging the constitutional validity of section 64 (2) (ii) of the Finance Act, 1997 and sought a declaration that Board’s Circulars to the extent to which they precluded them from availing of filing declaration under section 64(1) in the year of search or any earlier year were discriminatory, arbitrary and illegal and opposed to the Article 14 of the Constitution of India.

– Clause (ii) of sub-section (2) of section 64 read as hereunder:

“(2) Nothing contained in sub-section (1) shall apply in relation to—

(i) ******

(ii) the income in respect of the previous year in which a search under section 132 of the Income-tax Act was initiated or requisition under section 132A of the Income-tax Act was made, or survey under section 133A of the Income-tax Act was carried out or in respect of any earlier previous year.”

– The clause in the Bill corresponding to section 64(2)(ii) barred the benefit of the scheme to income in respect of the previous year in which a search under section 132 or requisition under section 132A was made, or in respect of any earlier previous years. The phrase ‘or survey under section 133A under the Income-tax Act’ was later inserted before the phrase ‘or in respect of any earlier previous year’. This led to a situation where a reference to the earlier previous years got attached to the survey operation though it could only refer to the current or specific year and not all earlier years. Both sections 132 and 132A refer to the special procedure for assessment of search cases involving a block of 10 previous years. The resulting anomaly was removed by the clarifications given by the CBDT.

– The CBDT clarified the matter while answering question Nos. 6 and 23 in Circular No. 754, dated 10-6-1997 and question Nos. 27, 35 and 36 in its Circular No. 755, dated 25-7-1997. While answering question No. 23 of Circular dated 10-6-1997 and question No. 27 under the Circular dated 25-7-1997, the CBDT clarified that a survey under section 133A or 133A(5) would bar a person from making a disclosure for the previous year in which the survey was carried out. While answering question No. 36 under Circular dated 25-7-1997, it was clarified that if survey operations were carried out on 30-9-1993, i.e., previous year 1993-94, no disclosure could be made for the assessment year 1994-95, but declarations of income could be made for the assessment year 1993-94 and earlier assessment years and declarations could also be made for the assessment year 1995-96 and subsequent assessment years. Referring to a search under section 132 (Question No. 35 of the Circular dated 25-7-1997), it was clarified that if a search was carried out between 30-3-1992 and 5-4-1992, section 64(2)(ii) would bar disclosure of income in respect of any previous year in which the search was initiated or in respect of any earlier previous year, and that disclosure could be made [except for the income/assets discovered or seized during the search referred to] in respect of the assessment year 1993-94 and subsequent years.

GROUNDS

The grounds urged by the assessees were as follows:

(i) Section 64 (2) (ii) seeks to differentiate between persons who have been searched and persons who have not been searched. This has no rationale or nexus to the object sought to be achieved. Therefore, the provision is unconstitutional, being arbitrary and discriminatory. There is no fetter or discretion on the part of the Income-tax Department to pick and choose whomsoever it prefers to search. Regardless of the fact whether anything is found or not, such person’s eligibility to take benefit under the scheme is destroyed for ever. The power to search is an unfettered discretion vested in the hands of the officers and there are no constraints on the power. The discretion is absolute and unbridled. As such, such provision is arbitrary, discriminatory and opposed to Article 14 of Constitution of India. The classification of the persons who were searched under section 132 and forbidding them from availing the benefit of filing declarations under the Scheme is not based on any intelligible differentia, which distinguishes such persons from the rest and the differentia brought about has no rational effect on the objectives sought to be achieved and, therefore, the impugned provision is liable to be declared as unconstitutional.

(ii) Alternatively, the words “or in respect of earlier previous year” occurring immediately after the words “survey under section 133A of the Income-tax Act was carried out” in section 64 (2) (ii) of the Act merely qualify and apply to survey under section 133A of the Income-tax Act and not search under section 132 or requisition under section 132A. Consequently, clause (ii) of section 64 (2) should be read as prohibiting any person from availing the benefit of VDIS in respect of any year in which the search took place and not in respect of any earlier previous year or years. On the plain reading of section 64 (2) (ii), in case where search u/s 132 or requisition u/s 132A is carried out, such person is not eligible for the benefit of the Scheme only in respect of the income of the previous year of search but, in cases where survey is made as provided u/s 133A, such persons are not entitled to Scheme not only for the income of the previous year of the survey, but also in respect of any period earlier to previous year. However, the Circular issued by the CBDT, wherein it is clarified that in respect of such a case – that is, where search has taken place in any financial year – the persons cannot make a declaration in respect of income of any year prior to the previous year in which search has taken place runs counter to the plain reading of clause (ii) of subsection (2) of section 64 and, therefore, it must be held that even in cases where search has taken place as provided under section 132, such persons are entitled for the benefit of the Act in respect of the income of all the previous years, except for the year prior to the year of search.

If the provisions contained in clause (ii) of sub-section (2) of section 64 are to be understood as denying the benefit of the Scheme to such of those persons who fall under sections 132 and 132A of the 1961 Act in toto, i.e., in respect of the income of the previous year of the search, the same is the position even in respect of the cases which fall under section 133A and, under these circumstances, by means of the Circulars the persons who fall under section 133A cannot be picked up for preferential treatment while not picking up the cases falling under sections 132 and 132A for hostile discrimination. In other words, if the Circulars in question confine the disability, for the benefit of the Scheme, in respect of cases falling under section 133A only in respect of the income of the previous year of survey held under section 133A, there is absolutely no justification to deny the said benefit to the cases who fall under sections 132 and 132A, and to deprive them of the benefit of the Scheme in respect of the income for any year earlier to the previous year of search or requisition ;there being not much of difference between the object and the consequences provided under sections 132, 132A and 133A. , While such of those persons who fall under section 133A are made eligible for the benefit of the disclosure of income for any period earlier to the previous year of search, the persons, who fall under sections 132 and 132A are deprived of the benefit of the Scheme not only for the year of search, but also for the period earlier to the previous year of search. In view of this, if clause (ii) of sub-section (2) of section 64 is so understood in the light of the interpretation or clarification by the CBDT, the said provision is liable to be declared as unconstitutional as being violative of the rights guaranteed to the petitioners under Article 14.

(iii) There are no instructions that no raid or search be conducted during the period when the scheme is in vogue. The entire manner of conducting a search is left to the caprice of the officers without any fetters and with total discretion and the discretion exercised by them will have the effect of denying the benefit of application of the scheme to the persons who are searched. Merely because by a stroke of an accident, a person is searched after 1-7-1997, it does not make him different from any other person not searched in respect of the undisclosed income; an event that has already occurred in relation to both these persons independent of the search. In denying the persons, who have been searched under section 132 of the Income-tax Act, the application of VDIS provisions, clause (ii) of sub-section (2) to section 64 of the Finance Act, 1997 renders itself discriminatory, unreasonable and arbitrary. When time is given upto 31-12-1997 for income-tax assessees to declare the undisclosed income and in future to adopt the path of rectitude and civic responsibility, to deny the said benefit by conducting a search after 1-7-1997 is unreasonable and arbitrary. The scope and object of the VDI Scheme is to harness the black money for productive purposes. For the said purpose, time is available till 31-12-1997 to file declarations. The scheme came into force on 1-7-1997. It is, therefore, reasonable and logical that anything effected during this period should not take away the rights of the taxpayer to join the main stream along with the remaining assessees by declaring their undisclosed income, paying tax thereon and, therefore, to adopt the path of rectitude and civic responsibility. A person who has been searched after 1-7-1997 is no way different from a person who has not been searched in respect of an act done by them in not filing the return of income declaring their income fully. Any raid conducted after 1-7-1997 does not alter this position. Any search conducted before 1-7-1997 alone will prohibit an assessee from availing the benefit of VDI Scheme and any search done between 1-7-1997 and 31-12-1997 cannot impair the rights of the assessee to take benefit of the VDI Scheme.

CONTENTIONS OF THE DEPARTMENT

– Sections 132, 132A and 133A are provided for three different things, and objects and purposes of the said three provisions are quite distinct and different. The survey carried out is not as stringent, or the consequences are not as serious as a search made under section 132 or the requisition made under section 132A. Therefore, in this background, if the Circulars have been issued, on grievance and on that basis, clause (ii) of sub-section (2) of section 64 cannot be declared as unconstitutional as being violative of the rights guaranteed to the petitioners under Article 14.

– The validity of clause (ii) of sub-section (2) of section 64 cannot be decided on the basis of the Circular issued by the CBDT in exercise of the power under section 119 of the Act and the constitutional validity of the said provision has to be independently understood and appreciated keeping in mind the parameters provided for declaring a statute as unconstitutional. The petitioners have neither place any material before this Court nor have shown on the basis of the well-settled legal principles that the provision under challenge is unconstitutional, except asserting that the provision is discriminatory.

HELD

“5. In the light of the rival contentions, the two questions that would arise for consideration are (i) whether clause (i) of sub-section (2) of section 64 requires to be declared as unconstitutional, (ii) whether the benefit of Circulars, dated 10-6-1997 and 25-7-1997 also should be extended to the petitioner as claimed.

9. It is no doubt true that the benefit of the Scheme is extended to a class of people who undisputedly have evaded payment of tax. But, the persons, who do not suffer any disability as provided under sections 132, 132A and 133A, fall under a different category than those who suffer disability provided thereunder. Human experience shows that it is only in cases where there is huge evasion of tax liability, extreme steps of search and seizure, requisition or survey as provided under sections 132, 132A and 133A are resorted to. Further, in respect of those persons, who are falling under those categories, proceedings are already initiated and pending adjudication; and in that background, if a policy decision is taken and incorporated in clause (ii) of sub-section (2) of section 64, in my view, the said policy decision, which has been made as a law, cannot be struck down on the ground that it is violative of the rights guaranteed under article 14 to the petitioners. The persons, who have violated law with impunity, cannot be permitted to say that the impugned provision is violative of the rights guaranteed to them under Article 14 merely on the ground that there is another set of tax evaders who are given the benefit of the Scheme. In what manner and which type of tax evaders in public interest and in the interest of the state revenue, they should be given relief, is essentially for the State of decide. It is a matter of legislative policy. The Court cannot sit in judgment over such legislative policy.

– Further, it is also necessary to notice that the Scheme will be in operation till 31-12-1997. In that situation, if the object of the Scheme is to compel a large number of tax evaders to take the benefit of the Scheme, thereby to minimise the quantity of unaccounted money in the country and to secure huge money to the revenue, and in that situation, if a tax evader is exposed to the threat of search and seizure, requisition or survey as provided under sections 132, 132A and 133A and also the denial of the benefit of the Scheme, in my view, the provision contained in clause (ii) of sub-section (2) of section 64 is more in furtherance of achieving the object of the Scheme. In other words, such a provision would compel more and more persons to avail of the benefit of the Scheme at the earliest point of time than being exposed to the denial of the relief provided under the Scheme on account of search and seizure or requisition or survey as may be resorted to under sections 132, 132A and 133A

Therefore, in my considered view, the persons, who do not suffer the disability of search and seizure or requisition or survey under sections 132, 132A and 133A, fall under a different category than others and, therefore, the classification made is a reasonable classification. In the circumstances and in the background of the classification made, it must be held that it is reasonable classification and there is nexus and rationale with the object sought to be achieved. In a matter of taxing statutes and more particularly, when it relates to undisputedly conferring benefit on tax evaders, this Court must be very slow to interfere with the policy decision taken by the law makers, who have better information and better knowledge in the matter of collection of tax and impunity in which the tax evaders are trying to violate the taxing statute. Therefore, looked at from any point of view, I do not find any justification to hold clause (ii) of sub-section (2) of section 64 as unconstitutional in law.”

Affirmed in

Micro Labs Ltd. vs. DCIT – [(2001) 247 ITR 333 (Karn)]

{Division Bench}

The Single Judge, who heard the matter, dismissed the writ petitions as having no merit at the stage of admission. Aggrieved by the dismissal of their writ petitions, the aggrieved assessees [the appellants] filed writ appeals contending, that section 64 (2) (ii) discriminates between the persons who have been searched and the persons who have not been searched, that prohibition thereunder applies only to the year in which the search took place and not in respect of any earlier previous years and, that any search done between 1-7-1997 and 31-12-1997 during the period when the scheme remained in force could not impair the rights of the assessee to take the benefit of the scheme.

HELD

GROUND NO. (i)

“9. The grounds on which a statute or a provision in a statute can be challenged are limited. In State of AP v. McDowell & Co. AIR 1996 SC 1627, the Supreme Court held that a law made by the Parliament or the Legislature can be struck down by courts only on two grounds, that is, (i) lack of legislative competence, and (ii) violation of any of the fundamental rights guaranteed in Part III of the Constitution or of any other constitutional provision. It was further held that no enactment can be struck down by just saying that it is arbitrary or unreasonable, or because the Court thinks it is unjustified. The Parliament and Legislatures, composed as they are, of the representatives of the people, are supposed to know and be aware of the needs of the people and what is good and bad for them and the Courts will not sit in judgment over their wisdom.

15. As observed by the Supreme Court in the decisions in R.K. Garg’s case (supra) and P.R. Sriramulu’s case (supra), a large discretion in the Legislature is recognised by Courts in making such laws. It cannot be said that there is no rationale in differentiating between the persons who have been searched on the basis of some information regarding concealment of income and persons who have not been searched. To find out whether the classification has any nexus to the object sought to be achieved, not only the object of framing the VDI Scheme, but also the object of introducing sections 132, 132A and 133A of the Income-tax Act should also be kept in view. It is obvious that section 64(2)(ii) is intended to maintain the deterrent effect of sections 132, 132A and 133A on tax evaders. The intention of the VDI Scheme is not to nullify any provision of the Income-tax Act, but to achieve the stated object to the VDI Scheme within the framework of the Income-tax Act without jeopardising the effect of existing provisions of that Act.

16. The VDI Scheme is itself an exception to the provisions of the Income-tax Act, granting certain concessions to tax evaders. When framing such a scheme it is possible and permissible for the Parliament to make a reasonable classification, denying the benefit to a particular class of evaders, in regard to whom some action has been initiated to detect evasion. A tax evader in regard to whom some action has been initiated to detect evasion of tax, is different from an evader in regard to whom there is no such action. The classification is neither illogical nor unreasonable. Nor can it be said that the classification has no nexus to the object sought to be achieved by the scheme. In the light of the principles laid down by the Supreme Court, referred to above, it is clear that section 64(2)(ii) is neither arbitrary nor discriminatory nor does it suffer from any unconstitutionality.

24. On examination of the provisions of sub-section 2(ii) of section 64, we are in agreement with the reasoning of the learned Single Judge in upholding the validity of that provision.”

GROUND NO. (ii)

“21. The complaint of the petitioners that while section 64(2)(iii) treats cases of search under section 132 and survey under section 133A on par, the clarifications under the Circulars dated 10-6-1997 and 25-7-1997 have altered the position and permitted the assessees subjected to survey under section 133A to file declarations in respect of all years other than the year in which survey was done, but has not extended such benefit to the assessees subjected to search under section 132 and, therefore, there is discrimination, or that the benefit of the clarifications should be extended to cases of search also, is, therefore, without merit. It is evident the CBDT has merely relaxed the rigour of law for the purpose of just, proper and efficient management of the scheme and in public interest, in cases of survey, which under the Income-tax Act stands on a different footing when compared to search.

22. It is not, therefore, possible to read the words ‘or in respect of earlier previous year’ as applicable in regard to cases of ‘survey under section 133A’ and not in regard to ‘search under section 132 or requisition under section 132A’. The words ‘or in respect of earlier previous year’ in section 64(2)(ii) refer to all the three categories, i.e., search under section 132, requisition under section 132A or survey under section 133A. But, in view of the hardship and anomaly which has been referred to above or for reasons of public interest, the CBDT has issued circulars ensuring fair interpretation of the provisions.

25. The learned counsel for the petitioner lastly submitted that the Andhra Pradesh High Court in Shankarlal vs. ITO [1998] 230 ITR 536 1while upholding the validity of section 64(2)(ii) has clarified that the benefit of the scheme should be denied only to the income which is detected in a search under section 132, or a requisition under section 132A or in a survey under section 133A, whichever be the previous year to which the detected income relates. Having carefully considered the matter, we are of the view that no such exception need be carved out in the absence of express provision to that effect in the scheme. We do not find any need for making such exception to uphold the validity of section 64(2)(ii).”

GROUND NO. (iii)

“23. It is true that the scheme came into effect on 1-7-1997 and was in force till 31-12-1997. But there is no logic in the contention that any search conducted before 1-7-1997 will alone bar a person from availing the benefit of VDIS and any search done after 1-7-1997 cannot impair the rights of the assessee to take benefit of the VDI Scheme. Merely because VDIS was brought into effect during a particular period, it does not follow that the operation of the provisions of the Act, in particular those relating to search and seizure, gets suspended. If the Parliament intended to suspend the operation of provisions of the Act relating to search and seizure, it would have made specific provision to that effect in the VDIS. The petitioners’ contention, if accepted, would amount to holding that VDIS has the effect of implied suspension of specific provisions of the Act. Such suspension is neither permissible nor contemplated. If any assessee or person was interested in avoiding a search or survey, it was always open to him to make use of the benefit under the Scheme immediately after 1-7-1997. Merely because the Scheme was in force till 31-12-1997, no person can contend that between 1-7-1997 and 31-12-1997, no search should be conducted or that if search is conducted, that should not come in the way of availing the benefit under the VDIS.

26. The learned counsel for the appellants submitted that in pursuance of the interim order dated 18-3-1998, the appellants had made a voluntary disclosure and had paid tax on that basis. The interim direction was made subject to the final decision in the appeals. As we are affirming the decision of the learned Single Judge, upholding section 64(2)(ii), it is for the concerned authority to now consider whether the appellants are entitled to the benefit of sub-section (1) of section 64 or whether they are barred under sub-section 2(ii). If the authorities hold that the appellants are not entitled to the benefit of the scheme having regard to section 64(2)(ii), the amounts paid may be adjusted against any tax liability of the respective appellants.

27. We, accordingly, dismiss these appeals, subject to the observation in para 26 above.”

D. THE DIRECT TAX VIVAD SE VISHWAS ACT, 2020

(i) Satyaprakash Singh vs. UOI & Anr. – [Supreme Court]

{It is given to understand that this Writ Petition (PIL) is filed on 16.03.2020. This is based on the news items appearing in newspapers and tax knowledge portals. However, it is not showing in the official site of Supreme Court.}

By this Public Interest Petition, the Petitioner is impugning the constitutional validity and the amendment made in Section 9 of Vivad se Vishwas Act, 2020 [“VSV”]. The Section seeks to exclude from the Scheme tax arrears relating to an assessment year in respect of which an assessment has been made pursuant to search u/s. 132 or 132A and such assessment is made u/s. 143 (3), 144, 153A or section 153C, where the disputed tax of an assessment year exceeds rupees five crores. The petitioner has also challenged exclusion of the cases in which prosecution has been instituted on or before the date of filing of declaration.