The Government is leaving no stones unturned in making the Income Declaration Scheme, 2016 (‘the scheme’) a success. This is quite evident from the frequency with which the CBDT is coming out with clarifications. CBDT has already issued various clarifications vide Circular no. 17 dated 20 May 2016, Circular no. 24 dated 27 June 2016 and Circular no. 25 dated 30 June 2016. I have already presented the analysis of the earlier Circulars in my articles titled ‘The Income Declaration Scheme, 2016 – will it boomerang?’ dated 20 June 2016 and ‘The Income Declaration Scheme, 2016 – analysis of additional clarifications’ dated 4 July 2016.

CBDT has issued fresh set of clarifications vide Circular no 27 dated 14 July 2016. Interestingly, some of the clarifications are arising out of the clarifications issued earlier. In the present write-up, I shall be dealing with the clarifications issued vide Circular no. 27.

CBDT has clarified that a declarant can file a revised declaration before the closure of the scheme i.e. upto 30 September 2016 provided that the income declared under the revised declaration should not be less than the income declared under the original declaration. This is an interesting clarification in as much as there is no specific provision under the Finance Act, 2016 to this effect. If one sees the provision of section 191, it expressly debars refund of any tax paid under the scheme. Thus, where any payment has made under the scheme, whether rightly or wrongly, the same cannot be refunded to the declarant. However, where income has been wrongly declared under the scheme, similar treatment should not be meted out to such income. The intention of the scheme is to collect tax on undisclosed income not offered for tax; and if the declarant feels that either a particular income declared under the scheme is not a taxable income, or it is an income which is disclosed, there should be a remedy available to the declarant. Also, if proper payment of tax in accordance with the scheme is not made, then as per section 187(3) such declaration is deemed to not have been filed under the scheme and section 197(b) deems the declared income to be the income of the declarant of the AY 2017-18. Therefore, the Board should not debar a declarant from filing a revised declaration where the undisclosed income declared is less than that declared in the original declaration.

Question 2 in the said circular had raised an important issue as to whether provision of section 197(c) overrides the time limit of reopening the assessment i.e. if an undisclosed income/ asset belongs to a year in respect of which assessment cannot be reopened due to lapse of time, can the Department tax such undisclosed income/ asset in the year in which notice is issued? The Board has clarified that Chapter IX of the Finance Act, 2016 being later in time shall prevail over the earlier laws.

As already discussed in article dated 20 June 2016, section 197(c) has done away with the concept of charging income in the year in which it is earned or received as the case may be as it deems the income to be of the year in which it is unearthed by the AO. Say for example, AO has issued a notice u/s 148 on 25th May, 2017 for the AY 2013-14. In the course of the scrutiny proceedings, the AO comes across some undisclosed assets of the AY 2001-02. In such a situation, the undisclosed asset shall be deemed to be the income of the year in which notice u/s.148 is issued which is FY 2017-18.

It is important to bear in mind that section 4 of the Income tax Act, 1961 requires tax to be paid in the year in which the income accrues or is received, as the case may be, and what section 197(c) says is that undisclosed income/ asset shall be deemed to accrue or arise or received in the year in which notice is issued. In so far as taxability of any income on receipt basis is concerned, normally income is taxed in the year in which the income is received. Section 197(c) deems, the income to have been received in the year in which the notice is issued. Therefore, there is no apparent conflict as section 197(c) is a deeming fiction.

Is there any provision under the Income tax Act, 1961 which specifies the year in which income accrues? In context of business income and income from other sources, one can follow mercantile system of accounting wherein there is a rule to derive the income that accrues in a year. However, section 197(c) is a deeming provision which provides for certain situations in which case income is deemed to accrue or arise and which are not covered by the normal meaning of the term ‘accrue and arise’.

Therefore, in my view, there is no direct conflict between section 149 of the Income tax Act,1961 and section 197(c) of the Finance Act, 2016. Even if one feels there is a conflict, section 197(c) is a deeming fiction and shall override the contrary meaning. Even otherwise also, as specified in the Circular, section 197(c) being a latter provision in law, it shall prevail.

Let us have a look at this issue from other angle. By virtue of deeming provision, income becomes taxable in 2 years i.e. the year in which it actually accrues or is received as the case may be and in the year in which it is deemed to have been accrued or received by virtue of section 197(c). It is because the income escaped assessment and under the existing law cannot be brought to tax, the Government came out with the deeming provision u/s 197(c). There were plethora of judgments to the point that once an income belongs to a particular year and it went untaxed in that year, Department cannot tax the same income in other year [See Jagannath Ram Dayal vs. CIT [TS-5060-HC-1949(ALLAHABAD)-O], CIT vs. Partabmull Rameshwar [TS-5736-HC-1975(Calcutta)-O], CIT vs. Planters Co. (P.) Ltd [TS-5708-HC-1979(MADRAS)-O], CIT vs. Spunpipe & Construction Co (Baroda)(P.) Ltd. [TS-5708-HC-1982(GUJARAT)-O]. Sans section 197(c), income belonging to the earlier years could not be taxed as the income of the year in which various notice were issued. However, by virtue of section 197(c), income is now deemed to accrue or arise or received in the year in which notice is issued. Therefore, these judgments are also taken care of by the said provision. However, if an income belongs to a year in respect of which a notice u/s 148 can be issued, will it be taxed in the year in which notice is issued as per section 197(c) or in the year to which it actually belongs.

CBDT has also clarified that where income/asset is disclosed under the scheme and when the same is given effect to in the books of account by increasing the capital balance, then sudden increase in the capital balance due to the disclosure shall not be the only reason to issue notice u/s 143(2) under CASS. Thus, if there are some other reasons also along with increase in the capital balance, then notice u/s 143(2) may be issued. However, as promised by the Government, the Department is expected to not ask any questions or make any enquires as to the declaration made.

Section 190 of the Finance Act, 1961 provides that provisions of Benami Transactions (Prohibition) Act, 1988 shall not apply if an, asset existing in the name of a benamidar, declared under the scheme by a person is transferred in his name within the period notified. Thus, where a person provides consideration for the acquisition of the asset which is acquired in the name of a benamidar, then such person can declare the asset and get the asset transferred in his name within the time notified, thus preventing from any adverse action under the Benami Transaction (Prohibition) Act, 1988. In this regard, a query was raised as to when the asset is transferred by the benamidar to the declarant, any capital gain situation would arise in the hands of benamidar and whether TDS u/s 194IA @ 1% would be applicable? The Board has clarified that transfer of property from benamidar to beneficial owner is only to regularize and there will be no involvement of monetary consideration for transfer of immovable property by the benamidar in the name of the declarant, the question of capital gains in the hands of benamidar and deduction of tax at source thereon shall not arise. Though there is no involvement of any monetary consideration, but in case of an immovable property provision of section 50C deems stamp duty value to be the full value of consideration. Therefore, merely because there is no monetary consideration does not imply that there will be no capital gains implication.  However, as clarified,  since the declarant is the real owner of the asset declared, therefore, there shall arise no question of transfer of property and capital gains, as the property is merely regularised.

CBDT has in reply to Question 5, debunked the theory of reduction of tax rate from 45% to 31%. This reply has been analysed in my earlier article titled ‘CBDT settles 31% IDS tax rate controversy’.

In Circular no 25, the Board had specifically clarified that information contained in the declaration will not be shared with any other enforcement agencies. Even they had specified that the said information will not be shared with the Income tax Department for any investigation as to the validity of the declaration. They had also clarified that immunity will be available only under the Income Tax Act, 1961, Wealth Tax Act, 1957 and the Benami Transactions (Prohibition) Act, 1988 (subject to fulfilment of certain condition) and under no other law however, as clarified the information would not be shared with any other law enforcement agencies.

In my last article I had pointed out that section 195 of the Finance Act, 2016 specifically make section 138 of the Income Tax Act, 1961 applicable to the scheme. Section 138 empowers the Board or any authority specified by it to furnish information received or obtained by the income tax authority to any officer, authority or body performing any functions under any law relating to the imposition of any tax, duty or cess or dealing with FEMA or any other notified authority or body so as to enable them to discharge their functions. However, subsequently, vide notification no. 56 dated 06.07.2016, an order has been passed by the Central Government directing that no public servant shall produce before any person or authority any such document or record or any information or computerized data or part thereof as comes into his possession during the discharge of official duties in respect of a valid declaration made under the Scheme. Same thing has been clarified in Circular no. 27 also.

There is a general belief amongst the declarants that by making declaration under the scheme in respect of any undisclosed income or assets, one can get through the provisions of Income-tax Act, 1961, however, those income or assets which are also subject matter of assessment under indirect tax laws like, VAT, Excise or Service tax and has escaped assessment, would be scrutinised by the relevant law enforcement agencies. Due to this belief, the response to the scheme is not as expected. Therefore, the Government has clarified vide Ciruclar 25, 27 and has also issued a notification to the effect that the information received in the declaration filed under the scheme, will not be shared with any other law enforcement agencies. However, if the other law enforcement agencies get information from some other sources, then they can use the information against the declarant.

CBDT has clarified that Form-3 which is intimation of payment of tax, surcharge and penalty is the same as the time limit specified for payment of tax etc. However, now the Board has extended the time limit for payment of tax etc. vide Press release dated 14.7.2016. They have specified that 25% of the total tax, surcharge and penalty should be paid by 30.11.2015, balance 25% upto 31.3.2017 and the final instalment of 50% upto 30.9.2017. Notification to this effect is still pending. In view of the above extension, one will have to wait for the notification and further clarification as to the date upto which Form-3 can be filed.

CBDT has clarified that immunity from prosecution would be available to the partners and director where the firm or the company is a declarant. This clarification is in line with the provisions of section 278B of the Income tax Act, 1961, wherein the directors and partners of the company and firm are also held to be guilty of offence committed by the company and firm.

CBDT has clarified that a person can declare an undisclosed asset held in the name of the spouse where the funds for acquisition of property has been given by the declarant. Even section 64 of the income Tax Act, provides that where an asset has been transferred without adequate consideration to the spouse of the person, the income arising therefrom should be taxed in the hands of such person.

Lastly, the Board has clarified that, where shares are traded in various recognised stock exchanges, then the quoted price of the share shall be computed with reference to the recognised stock exchange which records the highest volume of trading in the share as on 1 June 2016. Thus, volume of trading of shares has to be seen only in respect of trading taking place on 1 June 2016.

As already seen earlier, clarifications issued by the Board is giving rise to new issues and queries since the clarifications issued may not be supported by the wordings of the statute. I, therefore, expect more clarifications to be issued in due course of time, until the prospective declarants are contented with the certainty of the law.