CBDT has finally come out with the most awaited clarification and the most peculiar fact about this clarification is that it clarifies an earlier clarification issued by CBDT vide Circular No. 25 dated 30 June 2016.

The root of this issue goes to question 5 of the said circular which reads as follows:

“Where a valid declaration is made after making valuation as per the provisions of the Scheme read with IDS Rules and tax, surcharge & penalty as specified in the Scheme have been paid, whether the department will make any enquiry in respect of sources of income, payment of tax, surcharge and penalty?”

CBDT replied to the above question in negative.

The above reply of the Board has been interpreted by many quarters to mean that the rate of tax, surcharge and penalty under the scheme has in effect come down to 31% from 45%. This is on the ground that CBDT has clarified that once an undisclosed income has been declared and tax etc. has been paid, the Department shall not question not only the source of income but also the source of payment of tax, surcharge and penalty.

To elaborate the above issue let us take an example. Say, a person declares Rs.1 crore as undisclosed income, being the fair market value of undisclosed immovable property as on 1st June, 2016. He deposits cash in the bank out of his other undisclosed income which is not declared under the scheme and makes payment of tax, surcharge and penalty of Rs.45 lakh (30 lakh + 7.5 lakh + 7.5 lakh) therefrom. Now, as per the reply of CBDT, the Department will not make any inquiry as to the source of income and also as to the source of payment of tax etc. If that be the case then, in effect, Rs. 1.45 crore of undisclosed income (which includes Rs. 45 lakh of undeclared income) shall go scot free after making payment of tax etc. of only Rs. 45 lakh, which makes 31% effective rate of tax etc.

In fact, this was also the interpretation given by the Times of India and Economic Times in their front pages. This interpretation had become a subject matter of discussion at various forums and had garnered lot of eyeballs.

Such an interpretation which was clearly against the provisions of the Finance Act, 2016, made it inevitable for the Board to come out with a clarification to put the controversy at rest. In fact various organisations and forums like Bombay Chartered Accountants Soceity, etc. had also made representations in this regard. Accordingly, the Board has come out with a clarification vide Press release dated 14 July 2016.

CBDT has clarified that the intention of the reply to question 5 of Circular 25 which is the bone of all contention, was limited to conduct of enquiry by the Department. It was in no manner intended to reduce or alter the rate of tax etc. They have clarified that section 184 and 185 of the Finance Act, 2016, in no ambiguous terms, specify the rate of tax etc. to be 45%. With the help of an example which is given above, they have clarified that, declarant will not get any immunity under the scheme in respect of undisclosed income of 45 lakh utilized for payment of tax etc. To get immunity on the entire undisclosed income of Rs. 1.45 crore, the declarant would have to pay 45% tax etc. on the said amount which comes to Rs. 65.25 lakh. Thus, CBDT has junked the interpretation as to reduction of rate of tax etc. from 45% to 31%.

The above clarification of the CBDT falls in line with the provision of section 184 and 185 of the Finance Act, 2016, wherein the rate of tax etc. has been clearly specified to be 45% of the undisclosed income.

Further, it is also in consonance with the provision of section 188, which specifies that amount of undisclosed income declared under the scheme shall not be included in the total income of the declarant for any assessment year if the declarant makes payment of tax etc. in accordance with the provision of section 184 and 185. Thus, only that income which is declared under the scheme shall not be included in the total income of the declarant. In the above given example, since Rs. 1 crore has been declared, the same shall enjoy immunity u/s 188, whereas Rs. 45 lakh of undisclosed income used for payment of tax etc., since not declared, will not be eligible for the immunity granted by section 188.

The interpretation of the reply to question 5 of Circular 25 as to reduction of rate of tax to 31% from 45%, would have seriously prejudiced the honest taxpayers. Further, it would have become violative of the undertaking given by the Government of India to the Hon’ble Supreme Court in case of in the case of All India Federation of Tax Practitioners v. Union of India [TS-5092-SC-1997-O]. Also the explanation given by the CBDT as to the differences between the present scheme and all the earlier amnesty schemes, that the present scheme is giving an opportunity to the dishonest tax payer to come at par with the honest tax payers, would have fallen flat.