In line with the Government’s objective of freeing India from the menace of black money and with the intention of providing last opportunity to come out clean in so far as the undisclosed income is concerned, the Hon’ble Finance Minister of India, Shri Arun Jaitley, introduced The Income Declaration Scheme, 2016 in the Finance Bill, 2016 and which culminated into a law on 14 May 2016 and which came into force from 1 June 2016 (S. 181).

Last year, Government had come out with a similar scheme but in respect of the undisclosed income and assets sourced outside India vide Chapter VI of ‘The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015’ (hereinafter referred to as ‘Black Money Law’) and now they have come out with a scheme for undisclosed income other than that covered by the Black Money Law.

At the threshold itself, one has to test the validity of the scheme based on the undertaking given by the Central Government to the Hon’ble Supreme Court in the case of All India Federation of Tax Practitioners v. Union of India [TS-5092-SC-1997-O]. Notably, the earlier scheme under the Black Money Law, on similar lines, has not yet been challenged. The revenue officials are defending the present scheme as well as the scheme brought out under the Black Money Law as being different from VDIS on the ground that both the schemes are treating the honest and dishonest tax payers at par. However one has to guess the repercussions, in case, after filing the declaration under the present scheme, if the scheme is declared unconstitutional by the Hon’ble Supreme Court.

Be that as it may, we may deal with certain issues arising under the Income Declaration Scheme, 2016 read with The Income Declaration Scheme Rules 2016 (Notification number 33 of 2016), Circular 16 of 2016 (Explanatory notes on provisions of the scheme), Circular 17 of 2016 (Clarifications on the Scheme) and the talkathon organised by the CBDT on 31^st May, 2016.

Eligibility

As everyone is aware that any person may make a declaration under this scheme on or after the commencement of the scheme i.e. 1 June 2016 but before 30 September 2016. Thus, the scheme applies with equal force to a resident and a non-resident. However, the scheme shall not apply in certain scenarios as has been given in the scheme itself. One of the condition as given in the scheme  is that it shall not apply in relation to prosecution of any offence punishable under the Narcotic Drugs and Psychotropic Substances Act, 1985 or Prevention of Corruption Act, 1988 (S. 196).Surprisingly, this provision has been interpreted by the Department in two mutually exclusive ways. Vide Circular 16, the Department clarified that only those persons in respect of whom proceedings are pending under the said Act are barred from making an application under the scheme. Whereas vide Circular 17 in reply to question 11 and in the talkathon also, the Department has clarified that no disclosure at all can be made in respect of money earned through corruption. In any case, only the income earned through corruption is disqualified and not the person earning such income.

The present scheme is also not applicable to any undisclosed foreign income and asset which is chargeable to tax under the Black Money Law, so as to avoid duplicity. Further, no disclosure can be made under the scheme in respect of income of any assessment year where the proceedings are pending before the Assessing Officer. The Department has clarified in Circular 16 and 17 of 2016, that the said condition would apply only in a case where the assessee has received notice upto 31 May 2016. So, if a declarant receives a notice u/s 143(2) or 148 for any assessment year after 31 May 2016, the declaration made in respect of income of those year shall be valid.

Further, declaration can also not be filed where the search or survey proceedings are carried out and time limit for issue of notice u/s 153A or 153C or 143(2) has not expired. In case of a third party in whose case search has not been conducted, but who is covered by the provision of section 153C especially under the expanded scope of section 153C, and is not aware about such possibility of notice being issued, and he files the declaration, then what shall be the fate of such declaration? In reply to question 9 (circular 17), the Department has clarified that if declaration is made in good faith, however, it is found ineligible, then the income disclosed therein shall not be hit by section 197(c), but shall be dealt with under the normal provisions of the Act. However, once the payment of tax and penalty is made, section 191 does not entitle the declarant to any refund. Can therefore, such payment be adjusted against the demand arising in the normal scrutiny proceedings?

Also, doubt arises in case of an assessee, where a survey has been conducted u/s 133A and something has being found pertaining to earlier years. Since, in survey there is no specific assessment section like in case of search (s.153A), therefore the Department has to resort to section 148 to make an assessment, wherever notice u/s 143(2) cannot be issued due to lapse of time. However, there is no specific provision for barring the person from filing declaration in case where a survey has been conducted and where material has been found pertaining to the earlier years and time limit to issue notice u/s 148 has not expired and notice has not been issued upto 31 May 2016.This situation is also accepted by the Department in reply to question 6 (Circular 17).

Subject matter and computation

A person can make a declaration in respect of his undisclosed income chargeable to tax prior to financial year 2016-17. While calculating undisclosed income, no deduction in respect of any expenditure or allowance shall be granted. If income is in the form of investment in any asset, then the asset can also be declared. If disclosure of asset is made, then the same is taxable on its fair market value as on the date of commencement of the schemeto be determined as per Rule 3 of the Income Declaration Scheme Rules.

There’s no clarity as to whether one is bound to disclose the undisclosed investment in assets or whether option is given to disclose the undisclosed income invested in such asset, since if the asset is disclosed, then the tax is payable on its current fair market value and thus the quantum of income will differ. What section 183(2) says that, where the income is declared in the form of investment in any asset, then fair market value is to be taken, which means that option is given to the applicant to declare either the underlying income or the value of the asset. However, one has to ponder that if the income is declared instead of the fair value of the asset as on 1 June 2016 and tax is paid at the rate of 45% on such income earned many years back, then the declarant will be better off than the honest taxpayers which may put the scheme itself in danger.

Also, one has to then see, that if instead of assets the underlying income is disclosed, whether immunity available in respect of wealth tax assessments will still be available or not. In such a scenario, in so far as the cost of acquisition and period of holding is concerned, there shouldn’t arise any issues as the same may be done as per the normal provisions, wherein the total cost as on the date of acquisition including the one disclosed now be taken and the period of holding be reckoned from the original date of acquisition.

Where the assets are disclosed and the fair market value of the same as on 1 June 2016 has been offered to tax, then in case of subsequent transfer of such assets, the cost of acquisition shall be the fair market value of the asset as on 1 June 2016. This provision as to the cost of acquisition has been inserted in the Income Tax Act in the form of sub-section (5) to section 49.

However, where the only part of the cost of the asset was undisclosed, which is now been disclosed in accordance with Rule 3(2), then what shall be the cost of acquisition is something which is still uncertain. In my view, section 49(5) only lays down that once the asset is declared under the scheme and the fair market value has been considered for payment of tax and penalty, then fair market value should be taken as the cost of acquisition and even in case of declaration of the part of the amount, conditions of section 49(5) gets fulfilled as the fair market value is considered in payment of tax and penalty, and therefore, the cost of acquisition should be the fair market value as on 1 June 2016.

In so far as a depreciable asset is concerned, there is no clarity. Say for example, a person has bought a business premise, wherein part of the cost is paid from undisclosed sources which is declared under the present scheme. What shall be the implications? Will the amount disclosed be added to the block of asset? If subsequently the asset is sold, will the computation u/s 50 be made so as to take care of the amount disclosed in the scheme? There are no concrete clarifications available from the Departments side.

In Circular 17,in reply to question 1, they have said that period of holding shall begin from 1 June 2016 in case of assets declared under this scheme, however, no amendment is made in the Income Tax Act. A problem will arise in case if a house property is held by the assessee for more than 3 years prior to the applicability of the scheme; declaration under the scheme will disentitle him to reckon the period from the original date of acquisition and if such asset is sold within 3 years from 1 June 2016, then the person shall not be entitled to deduction u/s 54 on purchase of new residential house property. In this case, since there is no amendment in the Act, declarant may argue than the circulars are not binding on the assessees and therefore, they can choose the period of holding to be from the original date and claim deduction u/s 54.

Deemed Income

The draconian deeming provisions of the Black Money law have been continued in this scheme also. The first deeming provision says that where the declaration has been filed but payment in respect of taxes has not been made, then the undisclosed income shall be treated as the income of previous year in which such declaration is made.

What if the declarant realises that the income was not chargeable to tax as the same was in the nature of capital receipt or for any other reason he feels that the income is not chargeable to tax and therefore abstains from making payment of tax and penalty; then such declared amount will be treated as the income of the declarant. Further, if there is any error in making the declaration, there being no provision to revise the declaration, if lesser amount of tax is paid as relatable to the proper disclosure made, then also the declaration shall be deemed to be invalid and the entire declared amount including the error shall be treated as the income of the declarant.

In respect of undisclosed income or asset acquired out of such income, for which no declaration has been made, the other deeming provision [S. 197(c)] provide that:

1. such income shall be deemed to have accrued, arisen or received and
2. such assets shall be deemed to have been acquired or made

in the year in which notice u/s 142, 143(2), 148, 153A or 153C is issued by the AO and the provisions of the Income Tax Act shall apply accordingly. In simple words, the undisclosed income shall be deemed to the income of the year in which it is unearthed by the AO.

Thus, this deeming provision has done away with the concept of charging income in the year in which it is earned or received as the case may be. One may think that the said provision is going against the basic charging section of the Income tax Act, however, it is worth noting that the basic charging provision requires the tax to be paid in the year in which the income accrues and what section 197(c) deems is the accrual of such income in the year and therefore, there is no conflict between the two provision. Even if one feels there is a conflict, section 197(c) is a deeming fiction and shall override the contrary meaning.

Indirectly, even the limitation for reopening of assessments for past six assessment years has been done away with because under the aforesaid provision of this scheme, such income shall be deemed to have accrued, arisen or received or such assets shall be deemed to have been acquired or made in the year in which the prescribed notice is issued by the AO.

However, important point to be noted is that, this section deems the income to be the income of the year in which a notice is issued. Say for example, notice u/s 143(2) is issued on 25^th May, 2017, then the undisclosed income or the asset which is discovered in the assessment proceeding shall be deemed to be the income of the previous year 2017-18, in which case the assessee can include such undisclosed income in his computation for the said year, make payment of tax at the rate of 30% and forget about any interest, surcharge or cess or penalty. Further, if the income is assessed under the normal provisions of the Act, the person can also claim deduction of expenses and allowances. Thus, in their endeavour to catch all the undisclosed income of all the previous years, the Government has made this scheme, in a way totally redundant, as a person will rather pay tax in the year in which it is caught and pay tax at normal rates rather than pay 45% in accordance with the scheme.

One more important thing to be borne in mind is that, this deeming fiction shall apply only to the undisclosed income and asset that has accrued or arisen upto 31^st March 2016, because the scheme is applicable only to those undisclosed income and asset. Thus, undisclosed income and asset of the financial year 2016-17 and onwards shall be taxable as per the normal provisions of the Act i.e. in the year in which they accrue. However, under the Black Money Law, the scene is little different. There is a separate chapter dealing with the assessment of the undisclosed foreign income and assets under the Black Money Law and it also deals with the undisclosed foreign income and assets of future years i.e. of AY 2016-17 and subsequent years. Such assets and income are to be taxed and penalised at 120% of the value of the income or the asset. Thus, the undisclosed income and assets sourced outside India covered by the Black Money Law are worse off than those sourced in India and covered by the Income Disclosure Scheme, 2016.

Impact on income tax/ wealth tax assessments as well as on other Statutes

Where there is total compliance with the provisions of this Chapter viz. filing of declaration and payment in accordance with the scheme, then the undisclosed income so declared shall not be included in computation of total income for any assessment year under the Act and similar treatment is accorded to the undisclosed asset while computing net wealth.

The Hon’ble Finance Minister has in his speech also specified that there will be no scrutiny or enquiry regarding incomedeclared in these declarations under the Income Tax Act or the Wealth TaxAct. Further, this has been also clarified by the Department in Circular 17.The scheme also does not require the applicant to state the source of income. However, the Revenue officials have also clarified that in case if they find that the disclosure is not validly made, then they may treat the entire disclosure as invalid on the ground of misrepresentation; which clarification bothers me as once a declaration is filed will they investigate into the disclosures made, as they have promised to not ask any question (see reply to question 12 in Circular No 17 of 2016)? And if out of ten assets disclosed, there was some misrepresentation as to one or two items, then the entire declaration will be treated as void?

Immunity is provided from penalty and prosecution under the Income Tax and Wealth Tax Law as no such declaration shall be used as an evidence for penalising or prosecuting a declarant. Immunity is also provided from Benami Transaction (Prohibition) Act, 1988 subject to fulfilment of certain conditions. However, what about other laws? No immunity is provided from actions that can be taken under other laws.

In all, the hastily drafted scheme of the Government, clouded with uncertainties, may not be a successful strategy to lure the taxpayers to come clean as non-compliance does not entail some serious and prejudicial consequences on the assessee rather it may boomerang on the Government. This scheme reminds me of an old English proverb ‘Haste makes waste’.