The Income Declaration Scheme, 2016 – analysis of additional clarifications

The Hon’ble Prime Minister of India, Shri Narendra Modi, in his 21^st edition of ‘Mann ki Baat’ program, appealed and at the same time warned the people to come out clean by disclosing the undisclosed income as this was the last chance of coming clean. He also said that, as promised no inquiry into the source of the undisclosed income and assets would be made if the declaration is made voluntarily. An appeal of this nature from the person occupying the top position of the nation speaks about the keenness of the Government in cleaning the mess of black money.

In my last article titled ‘The Income Declaration Scheme, 2016–will it boomerang?’ published on 20 June 2016, I had pointed out various lacunas in the scheme which one may consider before making any declaration. I also opined that 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. 

With the increasing numbers of issues arising, CBDT is coming out with clarifications in its bid to encourage the public to make a disclosure. Recently, the CBDT has issued circular bearing number 24 dated 27 June 2016 and circular bearing number 25 dated 30 June 2016, wherein they have clarified 11 queries each. In this article, I have analysed these circulars in detail.

Eligibility

CBDT has again clarified that even non-residents can make a declaration under the scheme (question 3 – circular number 24). Further, it has also clarified that in case where a search has taken place in April 2016 and no notice has been issued u/s 153A and where the time limit to issue such notice has not expired, then in such case, benefit of the scheme cannot be availed in respect of the assessment years for which notice can be issued (question 5 – circular number 24).

CBDT has clarified that where proceedings are pending before the Settlement Commission in respect of any assessment year, no declaration can be filed in respect of those years (question 8 – circular number 24). This is an indirect interpretation of section 189 which provides that no relief or set off can be claimed in respect of any proceedings in relation to any assessment or reassessment. Thus, one can file a declaration in respect of assets covered by the proceedings before the Settlement Commission, as there is no express prohibition, however, it will serve no effective purpose as no set off or relief of the declared income or the asset can be claimed in the proceedings, before the Settlement Commission. Similar clarification was there in Circular Number 17 of 2016 dated 20 May 2016, in reply to question 5, that no disclosure can be made in respect of a subject matter of any appellate proceedings.

To dispel any doubt as to eligibility to make a declaration in case where a notice u/s 131(1A) or u/s 133(6) is received or where letter under Non-filer Monitoring System (NMS) is received, the CBDT has clarified that, a person can make a declaration though such notices/ letters have been received provided no notices u/s 142/ 143(2)/ 148/ 153A or 153C is received (question 10 – circular number 24).

CBDT has also clarified (question 2 – circular number 24) that in case of an amalgamation or conversion of company into LLP, since the erstwhile company is no longer into existence, the amalgamated company or the LLP can file the declaration in respect of undisclosed income of the erstwhile company by showing it as the income or the asset of the year in which the conversion takes place. This is in consonance with the provision of Chapter XV of the Income Tax Act, 1961 (Liability in special cases) which has been made applicable to the present scheme by section 195. Similar analogy can be drawn in respect of a deceased person. In respect of deceased person, the legal representative can file the declaration in respect of the undisclosed income of the deceased. Even section 159 of the Income tax Act, 1961, provides that the income of the deceased can be assessed in the hands of the legal representative and that he shall be deemed to be an assessee.

Subject matter and computation

In my article dated 20 June 2016, an issue was discussed as to where the undisclosed income is in the form of an asset, the asset should be disclosed or the underlying income, since if the asset is disclosed, it will be valued at its fair market value as on 1 June 2016. The Board has clarified, in reply to question 10 of Circular number 25, that where a person earns undisclosed income of Rs. 90 lakh of which Rs. 50 lakh is invested in a property (fair market value being Rs. 80 lakh as on 1 June 2016), Rs. 20 lakh is expended and balance is still cash in hand, the person should disclose Rs. 80 lakh being the fair market value of the asset, Rs. 20 lakh being cash in hand and Rs. 20 lakh being undisclosed income of the earlier year (question 10 – circular number 25). This view of the Board, in my opinion, is not in consonance with the strict interpretation of the scheme, especially section 183(2) of the Finance Act, 2016. The said section says that where income chargeable to tax is declared in the form of investment in any asset, then the fair market value as on the date of commencement of scheme shall be deemed to be the undisclosed income. Thus, section does not compel the declarant to disclose assets only, it merely says that where the income is disclosed in the form of an asset, fair market value is to be taken. Thus, in my view, the Circular runs contrary to the provision of the Act and therefore, should not be applied. In any case, Circular gives the interpretation of the Scheme by the Department which is not emanating from the Finance Act, 2016 and therefore, one can argue that the said Circular is not binding on the assessee [see Keshavji Ravji & Co. vs. CIT – [TS-5047-SC-1990-O]]

In reply to a specific query (question 9 – circular number 24), wherein land purchased was disclosed but the cost of construction of building on such land was not disclosed, the Board has clarified that fair market value of land and building in such a case shall be computed in accordance with Rule 3(2) by allowing proportionate deduction in respect of asset acquired from assessed income. This seems to be incorrect in the sense that building on the land and land itself are two different assets. While land being an asset which was disclosed, a declarant should only disclose the fair market value of the building constructed and therefore, there arises no question of getting into the mechanism of Rule 3(2) and allowing proportionate deduction.

The Board has also clarified that the declarant is liable to declare the fair market value as per Rule 3 even though the same may be less than the stamp duty value of the property (question 3 – circular number 25). They clarified that even in case if the value of the property is evidenced by registered deed that will only show the cost of the property which is only one of the element in finding out the value as per Rule 3. Thus, the declarant will have to carry out the valuation of the property to determine its fair market value as on 1 June 2016 and then the higher of the two would be taken as the value for the purpose of Rule 3 (question 7 – circular number 25).

Deeming provision

CBDT has, with the help of an example, clarified the draconian provisions of section 197(c) of the Finance Act, 2016 (question 4 – circular number 24). They have, in no uncertain terms, clarified that if undisclosed income prior to AY 2016-17 for example of AY 2001-02 is not declared, then such income would be deemed to be the income of the year in which notice u/s 148 or 153A or 153C is issued by the Assessing Officer. Further, if it is in the form of an investment in any asset, then value of such asset in the year in which notice is issued as computed in accordance with the provision of Rule 3, will be deemed to be the income of the assessee. So, the CBDT has clarified that if asset is detected as being undisclosed, then the value of the asset shall be taxed and not the underlying income. As already discussed above, this seems to be the interpretation of the Department, which is not binding on the assessee.

Forms

CBDT has clarified that it is mandatory to furnish PAN in Form-1 so as to claim the benefits and immunities available under the scheme (question 7 – circular number 24). The scheme clearly specifies that benefits shall not be available to any person other than the declarant and in order to confer benefits and immunities it is necessary to identify them through their PAN.

In so far as the valuation report is concerned, the CBDT has reiterated that they are not supposed to be attached to the declaration in Form-1 even though such form requires one to attach valuation report. They have clarified that it is mandatory to obtain such report and the jurisdictional Pr. CIT/ CIT may require such valuation report to be filed in order to ascertain the correctness of the value before issuing the acknowledgment in Form – 2 (question 6 – circular number 24). 

While explaining information to be supplied in the last column of table at point (I) relating to nature of undisclosed income in Annexure to Form-1, the Board has clarified that a declarant has to disclose the form of undisclosed income like moveable asset, immovable asset, gold, jewellery or cash and one need not specify the source of income in the said column. They also specified that by writing the nature of income the declarant would be able to establish the link between the income declared under the scheme and the claim, if any, made in respect of such undisclosed income in the return of income filed subsequently or during any assessment proceedings (question 6 – circular number 25).

Immunity

The Board has specifically clarified that information contained in the declaration will not be shared with any other enforcement agencies. Even they have specified that the said information will not be shared with the Income Tax Department for any investigation as to the validity of the declaration (question 1 - – circular number 25). Further, in reply to question 2 of circular 25, they have 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. It is worthwhile to notice 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. Thus, the Circular is impliedly making the application of section 138 to the scheme redundant, as the Board has the option to furnish information which will not be exercised in view of the clarification.

The Board has highlighted the benefits of making declaration under the scheme as compared to disclosing the same as income of the AY 2017-18. The have clarified that disclosure of past income as income of current year amounts to false verification and may lead to prosecution. Further, they specified that if the undisclosed income of past is disclosed as the income of AY 2017-18, the declarant would be required to disclose the source of such income and substantiate the manner of earning the income, which is not the case when the same is disclosed under the present scheme. It was also specified that declaration of past undisclosed income in the current year cannot explain assets acquired in the past or provide any immunity in respect of the same. Further, they say that the Department due to varied sources, would be in the know of the year to which the income pertains (question 9 – circular number 25). The Board, in clarifying the above things, have lost sight of section 197(c), which clearly specify that in case where the assets or income are not declared under the scheme, then they shall be deemed to be the income of the year in which notice u/s 142/ 143(2)/ 148/ 153A or 153C is issued. Thus, the section deems the income to be of the year in which the notice is issued, and as also discussed in the Article of 20 June 2016, the person can show such asset/ income as the income of the year in which notice is issued and pay rightful tax and avoid penalty and prosecution. Once the income is deemed to be of any year, there is no question of delving into the source of such income.

Impact on Income tax assessments

The Board has clarified that no enquiry whatsoever will be made as to the source of income (question 5 – circular number 25). They have even clarified that in case of disclosure of investment in an asset, no inquiry would be conducted against the seller of such asset (question 8 – circular number 25).

CBDT dealt with the fate of the notices served u/s 142/ 143(2) or 148 after 31 May 2016 and where declaration was made by the assessee under the scheme (question 11 – circular number 24). The CBDT replied that, as clarified by Circular number 17 dated 20 May 2016, that in case of such notices served after 31 May 2016, the assessee would be eligible to declare the assets and income under the scheme in respect of the said assessment year. Further, such declaration shall be valid if it has not been made by suppression of facts or misrepresentation and the amount payable under the scheme has been duly paid within the specified time. However, they further went on to clarify that on furnishing of the certificate issued by the Pr.CIT/ CIT in Form-4 to the Assessing Officer, the proceedings initiated vide notice under section 142, 143(2) or 148 shall be deemed to have been closed. Thus, they are specifying in the Circular, that when a declaration is made in respect of any asset or income in respect of an assessment year and a notice u/s 142, 143(2) or 148 in respect of the same year is served after 31 May 2016, then proceedings initiated vide such notices shall be deemed to have been closed. It seems, that the intention of the Board is that, once the assets or income are disclosed in the scheme, then there shall be no inquiry or assessment qua such disclosure in the scheme. However, it should not be interpreted that the entire proceedings initiated vide notice u/s 143(2) or 148 will be closed as there is no corresponding provision either in the Income Tax Act, 1961 or in the Finance Act, 2016. Otherwise, one can adopt a device by disclosing an asset or income of AY 2014-15 and accordingly, argue that proceedings initiated vide notice u/s 143(2) would be deemed to be closed. This view also derives support from the judgment of the Hon’ble Supreme Court in case of CCE vs. Ratan Melting & Wire Industries [TS-5038-SC-2008-O], wherein the Court has held that a circular which is contrary to the statutory provisions has really no existence in law.

In a peculiar query, where a person has one disclosed house property and one undisclosed house property, the Board has clarified that notional income on such undisclosed house property would not be brought to tax if the property is disclosed in the scheme. Though, they specified that where the property was actually let, the declarant should also disclose the undisclosed rent earned on the same as the income (question 11 – circular number 25).

Payment of tax and penalty

In my article dated 20 June 2016, I had raised an issue that if there is any error in making the declaration, there being no provision to revise the declaration and no provision for refund of excess tax paid under the scheme, if lesser amount of tax is paid as relatable to the proper disclosure made, then probably 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. Now, in reply to question 1 in the circular number 24, CBDT has confirmed the said position that in case of part payment, the entire declaration made under the scheme shall be invalid.

Surprisingly, the Board has clarified that the declarant can claim credit of tax deducted at source in respect of any income declared under the scheme, provided it pertains to the income under consideration and no credit of such tax has been claimed (question 4 – circular number 25). However, one has to see as to how can one claim the credit of tax paid, there being no provision in Form-3 (intimation of payment) to disclose the details of tax deducted at source. Is one required to attach the Form 26AS of the relevant year or Form 16/16A along with the acknowledgment of Return of Income to prove that tax credit has not been claimed. Or before issuing certificate of declaration in Form-4, whether jurisdictional Pr. CIT/ CIT would call for clarification? Further, this clarification is diagonally opposite to the view taken by the Board in respect of disclosure scheme under the Black Money Law, where the credit of foreign taxes were denied to the declarant.

Issue of two circulars within a week, clarifying 22 queries, shows that the Board is proactive in so far as the present scheme is concerned. Further, the manner in which the CBDT officials, Government personnel, Ministers are constantly reminding about the scheme and the declaration to be filed, clearly shows the intention of the Government to tackle the problem of black money, however, as also specified in the write-up of 20 June 2016, is this piece of legislation the real solution to the problem?