Wednesday, January 16, 2013

Mere payment of advance tax isn’t sufficient to avoid additions for ‘undisclosed income’ if ROI isn’t filed by due date

On assessee's failure to file IT return by the due date under section 139, payment of advance tax per se cannot indicate his intention to disclose income so as to exclude the applicability of Chapter XIV-B provisions i.e. "Special Provisions for assessment of search cases"

In the instant case, the issue that came for consideration before the Supreme Court was as under:

“Whether payment of advance tax by an assessee would by itself tantamount to disclosure of income for the relevant assessment year and it couldn’t be treated as undisclosed income for the purpose of application of Chapter XIV-B of the Act”?

The Supreme Court held in favour of revenue as under:

1) Chapter XIV-B, find application only in the event of discovery of "undisclosed income" of an assessee. The legislature has defined "undisclosed income" without providing any definition of "disclosure" of income. The only way of disclosing income, on the part of an assessee, is through the filing of a return, as stipulated in the Act;

2) The legislature has clearly carved out two scenarios for income to be deemed as undisclosed: (i) where the income has clearly not been disclosed and (ii) where the income would not have been disclosed. If a situation is covered by any one of the two, income would be undisclosed in the eyes of the Act and hence, subject to the machinery provisions of Chapter XIVB;

3) If the search is conducted after the expiry of the due date for filing return (as in the instant case), payment of advance tax is irrelevant in construing the intention of the assessee to disclose income. Such a situation would find place within the first category carved out by section 158B of the Act i.e. where income has not been disclosed;

4) Payment of advance tax may be a relevant factor in construing intention to disclose income or filing return as long as the assessee continues to have the opportunity to file return of Income;

5) The disclosure of total income by the filing of a return under section 139 of the Act is mandatory even after the payment of advance tax by an assessee, since the "current income" which forms the basis of the advance tax is a mere estimation and not the final total income for the relevant assessment year liable to be assessed; and

6) On failure to file return of income by the due date under section 139 of the Act, payment of advance tax per se cannot indicate the intention of an assessee to disclose his income. As the assessee had not filed its return of income by the due date, the AO was correct in assuming that the assessee had not disclosed its total income and applied provisions of chapter XIV-B – ACIT v. A.R. Enterprises [2013] 29 50 (SC)