The Finance Minister has, in his Budget Speech on 29th February 2016, stated that the tax litigation in our country is a scourge for a tax friendly regime and creates an environment of distrust in addition to increasing the compliance cost of the taxpayer and administrative cost of the Government. He has also stated that there are over 3 lakh tax cases pending with the commissioner of Income- tax (Appeals) with disputed amount of tax of about 5.5 lakh crores. In order to reduce these appeals before the first Appellate Authority he has announced a new scheme called “Direct Tax Dispute Resolution Scheme – 2016” Two separate Schemes are announced in this Budget, one for settlement of disputed taxes under Income-tax and wealth tax Act and the other for disputed taxes under Indirect Tax Laws.
1.1 In paras 163 to 165 of his Budget Speech, the Finance Minister has given the outline of Dispute Resolution Schemes and stated as under:
“163. A taxpayer who has an appeal pending as of today before the Commissioner (Appeals) can settle his case by paying the disputed tax and interest up to the date of assessment. No penalty in respect of Income-tax cases with disputed tax up to ₹ 10 lakh will be levied. Cases with disputed tax exceeding ₹ 10 lakh will be subjected to only 25% of the minimum of the imposable penalty for both direct and indirect taxes. Any pending appeal against a penalty order can also be settled by paying 25% of the minimum of the imposable penalty. Certain categories of persons including those who are charged with criminal offences under specific Acts are proposed to be barred from availing this scheme.
164. I had in my Budget speech of July, 2014 assured that this Government would not retrospectively create a fresh tax liability. I had also hoped then that the cases pending in various Courts and other legal fora relating to certain retrospective amendments undertaken to the Income tax Act, 1961, through the Finance Act, 2012 will soon reach their logical conclusion. I would like to reiterate that we are committed to provide a stable and predictable taxation regime. We will not resort to such amendments in future. I had also announced constitution of a High Level Committee which would oversee any fresh case where the assessing officer proposes to assess or reassess the income in respect of indirect transfers by applying the retrospective amendment. In order to allay any fears of tax adventurism, this Committee will now be chaired by the Revenue Secretary and consist of Chairman, CBDT and an expert from outside. This Committee will effectively oversee the implementation of the assurances.
165. In order to give an opportunity to the past cases which are ongoing under the retrospective amendment, I propose a one-time scheme of Dispute Resolution for them, in which, subject to their agreeing to withdraw any pending case lying in any Court or Tribunal or any proceeding for arbitration, mediation etc., under BIPA, they can settle the case by paying only the tax arrears in which case liability of the interest and penalty shall be waived”.
1.2 In chapter X of the Finance Act, 2016 (Act), Sections 200 to 211 provide for “The Direct Tax Dispute Resolution Scheme – 2016”. Similarly, Chapter XI (Sections 212 to 218) of the Act provides for “The Indirect Tax Dispute Resolution Scheme – 2016”. In this article the provisions of the Direct Tax Dispute Resolution Scheme are discussed.
2. The Scheme
2.1 The Direct Tax Dispute Resolution Scheme 2016 (Scheme) has come into force on 1st June, 2016. This scheme enables all assessees whose assessments under the Income-tax Act or the Wealth-tax Act have been completed for any assessment year and whose appeals are pending before the Commissioners of Income tax (Appeals) as on 29-2-2016 to settle the tax dispute. The scheme also applies to those assessees in whose cases any disputed additions are made as a result of retrospective amendments made in the Income-tax or Wealth- tax Act and whose appeals are pending before the CIT(A), ITA Tribunal, High Court, Supreme Court or before any other authority.
2.2 Section 202 of the Act provides that the assessee who wants to settle the tax dispute pending before the concerned appellate authority as on 29-2-2016, can make a declaration in the prescribed Form No. 1 (in duplicate) on or after 1-6-2016 but before 31-12-2016. In the case of an assessee in whose case the assessment or reassessment is made in the normal course and not due to any retrospective amendment, and the appeal is pending before CIT(A) as on 29-2-2016, the tax dispute can be settled as under:
(i) If the disputed tax does not exceed ₹ 10 lakh for the relevant assessment year, the assessee can settle the same on payment of such tax and interest due up to the date of assessment or reassessment.
(ii) If the disputed tax exceeds ₹ 10 lakh for the relevant assessment year, the dispute can be settled on payment of such tax with penalty leviable of 25% leviable and interest up to the date of assessment or reassessment. It is difficult to understand why minimum penalty is required to be paid when the disputed addition may not be for concealment or inaccurate furnishing of particulars of income.
(iii) In the case of appeal against the levy of penalty, the assessee can settle the dispute by payment of 25% of minimum penalty leviable on the income as finally determined.
2.3 In a case where the disputed tax demand relates to addition made in the assessment or reassessment order made as a result of any retrospective amendment in the Income-tax or Wealth-tax Acts, the dispute can be settled at the level of any appellate proceedings (i.e. CIT(A), ITA Tribunal, High Court, Supreme Court or any other Authority) by payment of disputed tax. No interest or penalty will be payable in such a case.
3. Procedure for declaration
3.1 The declaration for settlement of disputed tax for which appeal is pending before CIT(A) is to be filed in Form No. 1 in duplicate. Once this declaration is filed for settlement of a tax dispute for a particular year, the appeal pending before the CIT(A) for that year will be treated as withdrawn.
3.2 In a case where the tax dispute is in respect of any addition made as a result of retrospective amendment, the assessee can file the declaration in Form No. 1 in duplicate with the designated authority. The assessee will have to withdraw the pending appeal for that year before CIT(A), ITA Tribunal, High Court, Supreme Court or other Authority after obtaining leave of the Court or Authority whereever required. If any proceedings for the disputed tax are initiated for arbitration, conciliation or mediation or under an agreement entered into by India with any other country for protection of Investment or otherwise, the assessee will have to withdraw the same. Proof of withdrawal of such appeal or such other proceedings will have to be furnished by the assessee with the declaration in Form No. 1. Further, the declarant will have to furnish an undertaking in Form No. 2 waiving his right to seek or pursue any remedy or any claim for the disputed tax under any agreement.
3.3 It is also provided that if (i) any material particulars furnished by the declarant are found to be false at any stage, (ii) the declarant violates any of the conditions of the scheme or (iii) the declarant acts in a manner which is not in accordance with the undertaking given by him as stated above, the declaration made under the scheme will be considered as void. In this event all proceedings including appeals, will be deemed to be revived.
4. Payment of Disputed Tax
4.1 On receipt of the declaration from the assessee the Designated Authority will determine the amount payable by the declarant under the scheme within 60 days. He will have to issue a certificate in Form No. 3 giving particulars of tax, interest, penalty etc., payable by the declarant.
4.2 The declarant will have to pay the amount determined by the Designated Authority within 30 days of the receipt of the Certificate. It may be noted that there is no provision whereby the Designated Authority can extend the date for payment of tax, interest or penalty. He will have to send the intimation in Form No. 4 about the payment and produce proof of payment of the above amount. Upon receipt of this intimation and proof of payment, the Designated Authority will have to pass an order in Form No. 5 that the declarant has paid the disputed tax under the scheme. Once this order is passed it will be conclusive about the settlement of disputed tax and such matter cannot be re-opened in any proceedings under the Income-tax or Wealth-tax Acts or under any other law or agreement.
4.3 Once this order is passed, the Designated Authority shall grant immunity to the declarant as under:
(i) Immunity from instituting any proceedings for offence under the Income-tax or Wealth tax Acts.
(ii) Immunity from imposition or waiver of any penalty or interest under the Income -tax or Wealth-tax Acts. In other words, the difference between interest or penalty chargeable under the normal provisions of the Income-tax or Wealth-tax Act and the interest or penalty charged under the scheme cannot be recovered from the declarant.
4.4 It is also provided that any amount of tax, interest or penalty paid under the scheme will not be refundable under any circumstances.
5. Who cannot make declaration
5.1 Section 208 of the Act provides that in the following cases declaration under the Scheme for settlement of disputed taxes cannot be made.
(i) In relation to assessment year for which assessment or reassessment under Section 153A or 153C of the Income-tax Act or Section 37A or 37B of the Wealth-tax Act is made.
(ii) In relation to assessment year for which assessment or reassessment has been made after a survey has been conducted under Section 133A of the Income-tax Act or 38A of the Wealth-tax Act and the disputed tax has a bearing to findings in such survey.
(iii) In relation to assessment year in respect to which prosecution has been instituted on or before the date of making the declaration under the scheme.
(iv) If the disputed tax relates to undisclosed income from any source located outside India or undisclosed asset located outside India.
(v) In relation to assessment year where assessment or reassessment is made on the basis of information received by the Government under the Agreements under Section 90 or 90A of the Income-tax Act.
(vi) Declaration cannot be made by following persons.
(a) If an order of detention has been made under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.
(b) If prosecution has been initiated under the Indian Penal Code, The Unlawful Activities (Prevention) Act, 1967, the Narcotic Drugs and Psychotropic Substances Act, 1985, The Prevention of Corruption Act, 1988 or for purposes of enforcement of any civil liability.
(vii) Declaration cannot be made by a person who is notified under Section 3 of the Special Court (Trial or Offences Relating to Transactions in Securities) Act, 1992.
6. To Sum Up
6.1 The Act authorises the Central Government to issue directions or orders to the authorities for the proper administration of the scheme. The Act also provides that if any difficulty arises in giving effect to any of the provisions of the scheme, the Central Government can pass an order to remove such difficulty. Such order cannot be passed after expiry of 2 years i.e., after 31-5-2018. Central Government is also authorised to notify the Rules for carrying out the provisions of the scheme and also prescribe the Forms for making declaration, for certificate to be granted by the Designated Authority and for such other matters for which the rules are required to be made under the scheme. Accordingly, the Government has notified “The Direct Tax Dispute Resolution Scheme Rules, 2016” on 26-5-2016.
6.2 This is probably for the first time when such a unique scheme has been introduced for reducing litigation. The only objection that can be raised is with regard to levy of penalty when the disputed tax is more than ₹ 10 lakh. There is no logic in levying such a penalty. Even if the assessee is not successful in the appeal before CIT(A), his liability will be for payment of disputed tax and interest. Penalty is not automatic. The disputed addition or disallowance may be due to interpretation of some provision in the tax law for which no penalty is leviable. Therefore, in case where disputed tax is more than ₹ 10 lakh, the assessee will not like to take benefit of the scheme and to that extent litigation will not be reduced. It may be noted that u/s. 214 of the Act, in the scheme for resolution of Disputes under Indirect Taxes, the provision is that the declarant has to pay tax due along with interest due and “penalty equivalent to 25% of penalty imposed in the impugned order”. Under the Income-tax Act or the Wealth-tax Act Penalty proceedings are separate and separate order is passed for levy of penalty. Therefore, it is suggested that the provision for levy of minimum notional penalty at 25% in a case where disputed tax is more than ₹ 10 lakh should be deleted.
6.3 As stated earlier, section 202 of the Act provides that declaration can be filed for settlement of disputed taxes only in respect of an appeal pending before CIT(A). There is no reason for restricting this benefit to appeal pending before the first appellate authority. It is suggested that the scheme should have been made applicable to appeals filed by the assessee before ITA Tribunal, High Court or the Supreme Court which are pending on 29-2-2016. If this provision had been extended to all such appeals, pending litigation before all such judicial authorities will get reduced.
6.4 Further, Section 208 provides that an assessee in whose case assessment order is passed u/s. 153A/153C of the Income-tax Act or 37A / 37B of the Wealth-tax Act or order is passed after survey u/s. 133A of the Income-tax Act or 38A of the Wealth-tax Act cannot make a declaration under the scheme. This provision will also be an impediment for the success of the scheme.
6.5 The provision in Section 202 of the Act relating to settlement of disputed taxes levied due to retrospective amendment in the Income-tax and Wealth-tax Acts is very fair and reasonable. In such cases only tax is payable and no interest or penalty is payable. This provision is made with a view to settle the disputed taxes levied due to retrospective amendment made in section 9 by the Finance Act, 2012. This related to taxation as a result of acquisition of interest by a non-resident in a company owning assets in India. (Cases like VODAFONE, CAIRN and others). However, there are some other sections such as sections 14A, 37, 40 etc., where retrospective amendments have been made. It will be possible to take advantage of the scheme if appeals on these issues are pending before any Appellate Authority or Court as on 29-2-2016.
6.6 It may be noted that last year the CBDT had made one attempt to reduce the tax litigation by issue of Circular No. 21/2015 dated 10-12-2015 whereby appeals filed by the Income tax Department where disputed tax was below certain level were withdrawn with retrospective effect. This year the Government has issued this scheme whereby assessees can settle the demand for disputed taxes and thus reduce the tax litigation. From these efforts, one can conclude that the efforts on the part of the Government to settle tax disputes and reduce tax litigation to that extent are commendable.