Sections 245A to 245L in Chapter XIX-A of the Income-tax Act, 1961 deal with the functioning of the Income-tax Settlement Commission that was set up through the Taxation Laws (Amendment) Act, 1975, i.e. 1st April, 1976 on the recommendation of the Direct Taxes Enquiry Committee, 1971, popularly known as the Wanchoo Committee.
2. Finance Bill, 2015 has proposed wide range changes in its functioning reversing some of the very progressive and forward looking changes made by the present Finance Minister only six months ago in October, 2014 through the Finance (No. 2) Act, 2014. If passed into law, they will make the Commission an unattractive forum for prospective applicants.
Filing of tax return made obligatory for voluntary applicants
3. Finance Act, 2007 had dispensed with the requirement of filing a tax return by deleting proviso (i) to section 245C of the Act. Finance (No. 2) Act, 2014 had further widened the scope of settlement applications by including the proceedings for assessment or re-assessment u/s. 147 on issue of notices u/s. 148 for the relevant years by amending Explanation (i) to section 245A(b) of the Act. The result of this amendment was that the a taxpayer, including a foreign company which has not filed the tax return under the bona fide belief that such requirement was not applicable to it in view of the appropriate tax having been deducted at source by the payer of income, could voluntarily approach the Settlement Commission for regularisation of past non-compliance after getting the notices u/s. 148 issued from the concerned Assessing Officer by representing that it had taxable income for those years. The proposed substitution of said Explanation (i) requires notice u/s. 148 to be issued only for one year and for other assessment year/years for which a notice u/s. 148 has not been issued, the applicant can approach the Settlement Commission only “if the return of income for the other assessment year or years has been furnished u/s. 139 or in response to a notice u/s. 142 of the Act”. Thus, the scope of notice u/s. 148 has been restricted to only one year and for other years valid returns u/s. 139 or 142(1) would have been filed.
4. The amendment proposed to be made appears even contrary to the explanatory notes which appear to give the impression that this is a beneficial amendment to obviate the need for issue of notices u/s. 148 for all the years for which, the settlement application is proposed to be made. This will be evident from the following explanatory note from page 24 of the Memorandum explaining the provisions of Finance Bill, 2015:-
“The existing provision contained in clause (b) of section 245A of the Act defines a case for the purpose of Chapter XIX-A as any proceeding for assessment under this Act, of any person in respect of any assessment year or assessment years which may be pending before an Assessing Officer on the date on which an application under sub-section (1) of section 245C is made. The Explanation to the said clause provides for deemed commencement of proceedings under different situations. Clause (i) of the Explanation to clause (b) of section 245A provides that the proceeding for assessment or reassessment under section 147 of the Act is deemed to commence from the date of issue of notice under section 148 of the Act. It has been observed that issue relating to escapement of income is often involved in more than one assessment year. In such case the assessee becomes eligible to approach Settlement Commission only for the assessment year for which notice under section 148 has been issued. Therefore, to take the proceeding for all other assessment years where there is escapement, the assessee becomes eligible only after notice under section 148 has been issued for all such assessment years.
5. In order to obviate the need for issue of notice in all such assessment years for commencement of pendency, it is proposed to amend clause (i) of the said Explanation to provide that where a notice under section 148 is issued for any assessment year, the assessee can approach Settlement Commission for other assessment years as well even if notice under section 148 for such other assessment years has not been issued. However, a return of income for such other assessment years should have been furnished under section 139 of the Act or in response to notice under section 142 of the Act”. (Emphasis supplied).
6. The requirement of filing the return of income did not exist and the assessee could, after issue of a notice u/s. 148 of the Act, make a settlement application as in search cases, where also, an application to the Settlement Commission can be made after notices u/s. 153A or 153C are issued and without filing the returns of income before the AO. The proposed amendment would pose challenges in approaching the Settlement Commission. The voluntary returns u/s. 139 can be filed only up to a period of two years from the end of the financial year and the issue of notice u/s. 142(1) of the Act can be issued only before the expiry of the time limit for the completion of an assessment; the applicant can approach the Commission only for the year for which the notice u/s. 148 is issued because he will not be able to fulfil the legal requirement of filing the valid returns of income for other years except for two years for which time limit for completion of assessments u/s. 153 is available.
7. What is the need for insisting on the filing of valid tax returns is not understood. The settlement application is akin to the return of income as has been held by the Supreme Court in the case of Brij Lal v. CIT (2010) 328 ITR 477 (SC). The relevant extracts of that judgment are reproduced below:-
“14. As held hereinabove, under Section 245C(1) read with Section 245C(1)(B)(ii) and Section 245C(1)(C)(b), the additional amount of income-tax payable is to be calculated on the aggregate of total income returned and the income disclosed in the settlement application as if such aggregate is the total income. Thus, the scheme of the said sections is based on computation of total income and in that sense we have stated that such application for settlement is akin to a return of income. The said provision deals with the total income….”
8. Keeping in view the fact that the Commission is a one time opportunity for several thousands of non-filers, owing each more than ` 10 lakhs of tax in aggregate for all the years to the State, the objective of law should be enable a person to file the settlement application covering all the years for which income has been omitted or is understated without any procedural restrictions whatsoever as is the case in other countries notably USA and UK from which the Wanchoo Committee borrowed the concept of settlement of income-tax and wealth tax cases.
9. Besides, the settlement application, without insisting on filing the return of income, does not cause any prejudice to the Income-tax Department. A look at the application form in Form No 34B prescribed by Rules 44C and 44CA of the Income-tax Rules read with the legal requirement of disclosing true and full income for each year as per section 245C(1) of the Act would reveal that settlement application has to contain all the information as is required in the return of income like the computation of income according to the Income-tax Act, and the supporting documents like the Profit and Loss Account, Balance Sheet etc. A copy of the application is made available to the CIT and he is heard before its admission by the Commission.
Recommendations against filing of tax return
10. It is, therefore, suggested that clause (i) of the Explanation to clause (b) of section 245A, as it exists at present should be retained without any modification. The proposed clause needs to be modified to bring in two more categories of cases that existed before the amendments by Finance Act, 2007, namely:
(i) Completed assessments where under-reporting of income is admitted by the applicant similar to section 245E of the Act (before its becoming inoperative with effect from 1st June, 2007)
(ii) Cases pending in appeal before the CIT (Appeals) or revision as was the position in the definition of the case in section 245A(b) before 1st June, 2007. If the cases set aside by CIT or the ITAT can come before the Commission, why cannot they come earlier? Income-tax is an annual levy. It will be both in the interest of the Revenue and the taxpayer, if the final determination is made at the earliest possible time.
Anomaly in providing two year limit of completion of assessment
11. Another amendment that needs re-consideration is in clause (iv) of the Explanation to clause (b) of section 245A of the Act. At present, Explanation (iv) of section 245A(b) is a deeming provision stating that for any case not covered by clauses (i) to (iii) of the Explanation, the proceedings for assessment shall be deemed to be concluded when, the assessment is made. The objective is to enable the taxpayer to approach the Settlement Commission for the years till the assessment proceedings are pending. This is to encourage voluntary compliance. The proposed amendment requires that the settlement application can be filed “from the date on which the return of income for that assessment year is furnished u/s. 139 or in response to a notice served u/s. 142 and concluded on the date on which the assessment is made; or on the expiry of two years from the end of the relevant assessment year, in case where no assessment is made”.
12. This amendment, apart from restricting the scope of the settlement application, creates an anomaly since the time limit for completion of an assessment involving transfer pricing adjustment, is not two years from the end of the relevant assessment year but is extended till the Dispute Resolution Panel decides the matter. In such cases, the Assessing Officer sends only a draft assessment order u/s. 144C and the settlement application can be filed for such a year till a reference to the Dispute Resolution Panel is decided.
13. Huge transfer pricing adjustments by the Transfer Pricing Officers have been one of the leading causes that have been responsible for causing great dissatisfaction amongst the taxpayers notably the non-resident taxpayers and foreign companies. Such disputes are so complex and complicated that in several cases, the assessments are set aside by the Tribunal u/s. 254 of the Act and remain pending thereafter for years together. Settlement Commission, which is statutorily required to make a final determination of income within a period of 18 months from the end of the month in which the settlement application is filed, would be a preferred forum for the taxpayers requiring finality and the Government should encourage the foreign companies and non-resident taxpayers, in particular, to approach the Commission.
14. The proposed amendment of restricting the jurisdiction of the Settlement Commission to “two years from the end of the relevant assessment year” needs to be relooked so as to remove the anomaly of the taxpayers in transfer pricing cases not able to approach the Commission.
Proposed amendment of section 245HA to provide for abatement
15. Vide clause 60 of the Finance Bill, 2015, clause (iiia) is proposed to be added to section 245HA(1) to provide that where a final order of settlement u/s. 245D(4) of the Act passed by the Settlement Commission does not provide for the terms of settlement, the settlement application filed by the taxpayer will abate. The consequences of abatement are specified in sub-sections (2) to (4) to section 245HA of the Act. The settlement application, on abatement, will go back to the Assessing Officer or any other income-tax authority before whom the proceeding was pending for the relevant year, at the time of making the application and that authority will deal with the assessment for that year in the normal course that may involve huge addition to the disclosed income, appeals, penalty and prosecution. It is indeed not understood as to the real objective of this amendment. Punishing the applicant for some omission of the Settlement Commission cannot be legally justified. In any case, of the 300 or 400 cases involving 1,200 to 1,500 assessments that are settled every year by the seven benches of the Commission, there may be very few cases where a high powered body like the Settlement Commission would omit to state the terms of settlement specified in section 245D(6) of the Act, namely, mentioning the demand by way of tax, penalty or interest, and grant of immunity from penalty and prosecution. In case, in any particular case, the terms of settlement are not mentioned, the omission can be rectified by the applicant or the revenue making a miscellaneous application to the Commission u/s. 245D(6A) of the Act and the Commission will be duty bound to rectify its order and provide for the terms of settlement. The proposed amendment does not, therefore, appear to serve any useful purpose and may be considered for deletion.
16. In fact, there is a need to clarify to providing that the applicant will be entitled to bring in to his account books the unrecorded disclosed income that is available with him at the time of admission of his application. The admission should be automatic. The applicant is prejudiced if his application is rejected since he pays the entire tax and interest before making the application.
17. To sum up, the present Finance Minister had made some very practical and useful amendments in his maiden budget enacted as Finance (No. 2) Act, 2014 and the applications to the Settlement Commission notably by foreign companies and their Indian subsidiaries had started increasing. That trend should have continued but for the proposed amendments discussed above. They need to be reconsidered for deleting them and make suitable changes as suggested above so as to encourage more and more voluntary compliance and voluntary payment of tax. Needless to add, there are about ` 6 lakhs crores of tax arrears and their size is increasing by about ` … in a fair and reasonable In the cases settled by the Commission there are hardly any tax arrears because the entire tax and interest is paid before making the settlement application on income which, by law, is required to be “true and full”.
18. If the objective of any good tax legislation is to collect revenue and not create disputed demand which remains uncollected for years on end, voluntary compliance needs to be encouraged. More and more errant persons should be enabled to avail of the one time in life opportunity, without any limitations and restrictions, of going to the Settlement Commission and to come back to the path of rectitude in their subsequent compliance with tax laws by getting their incomes settled in a fair and reasonable manner by Senior Chief Commissioners of Income-tax, which, as per section 245B (2) of the Act, are to “be appointed by the Central Government from amongst persons of integrity and outstanding ability, having special knowledge of, and, experience in, problems relating to the direct taxes and business accounts”.
S. R. Wadhwa,
Advocate