1. Last year, it was a one-time compliance
window under the Black Money (Undisclosed Foreign Income and Assets) and
Imposition of Tax Act, 2015 ('the
BM Act') to report the undisclosed offshore assets. Now it is an IncomeDeclaration Scheme, 2016 ('IDS, 2016') to declare undisclosed income from a
domestic source. The former scheme received lukewarm response in terms of tax
yield, given the high tax rate (60% incl. tax and penalty) and the concept of
fair market value for valuing the asset for computing the tax liability.
Similar doubts are being raised regarding the latter scheme as it has both
these features, i.e., high tax rate (45% incl. tax, surcharge, and penalty) and
the fair market value concept to value the asset if the undisclosed income is
in the form of investment in any asset. A key argument is often presented that
a voluntary disclosure scheme with more generous terms (such as lower tax rate,
immunities from various laws) is needed to encourage delinquent taxpayers to
pay their due taxes which can be utilised to improve the much-needed
infrastructure in the country. In that case, presumably, the counter argument
is that such a scheme would be discriminatory against the law-abiding taxpayer
(in fact, the VDIS, 1997 could
have been struck down by the Supreme Court but
for the Government assuring the Court that henceforth they would not come out
with such schemes). Thus, the introduction of any such scheme often involves
economic efficiency, morality, and constitutionality issues. This article,
however, is restricted to certain issues arising from the IDS, 2016.
2.
Certain Aspects of IDS, 2016
Broad
framework
2.1 The IDS, 2016 is broadly
framed on the lines of one-time compliance window provided under the BM Act
(sections 59 to 72). Further, the current scheme has some similarities
(discussed at appropriate places) with the earlier schemes (scheme of 1965,
1975 and 1997) and, therefore,
the CBDT instructions / clarifications and the judicial pronouncements
interpreting these schemes shall be useful.
Declarant,
Meaning of
2.2 The word "declarant" has been
defined to mean a person making the declaration under section 183(1) of the
scheme. Since the word "person" is not defined in the scheme, as per
section 182(c) of the scheme, reference should be made to the definition of the
word "person" as contained in section 2(31) of the Income Tax Act,
1961 ('the IT Act'). Accordingly, it will cover Individual, HUF, Company, Firm,
etc., irrespective of its residential status. Therefore, even a non-resident
person is eligible under this scheme. Interestingly, while moving the Finance
Bill, 2016 in the Lok Sabha, the Finance Minister said that IDS is open for domestic
taxpayers. However, it is well-settled that when the language is plain, clear
and unambiguous, the speech of the Finance Minister should not be looked into.
Phrase
— "Income chargeable to tax"
2.3 Under Section 183 of the scheme, a person
may make a declaration in respect of any "income chargeable to tax"
under the IT Act within the notified period. In the context of Voluntary
Disclosure of Income and Wealth Ordinance, 1975, the Calcutta High Court in the
case of CIT v.Sumati Kumar Sunil Kumar held that the concept of income
chargeable to tax in the Voluntary Disclosure Scheme is the same as in the IT
Act. Further, the phrase "Income chargeable to tax" was used in the
VDIS, 1997. In this respect, it was reiterated by the CBDT that the computation of
income chargeable to tax would be in accordance with the provisions of the IT
Act. Under the IT Act, while computing the income, one is required to take into
account all the eligible expenditures, deductions and set-off of allowable
losses. However, section 183(4) of the Finance Act, 2016 impliedly overrides
the income computation provisions given in the IT Act to provide that "No deduction in respect of any expenditure
or allowance shall be allowed against the income in respect of which
declaration under this section is made". Thus, it is evident that
declarant shall not be allowed to claim any deduction of any expenditure in
relation to income offered under this scheme. Interestingly, looking at the
current language of section 183(4), it appears that set-off of losses against
undisclosed income shall be available. In this context, one may refer to
section 5(1) of the BM Act which additionally puts a restriction on
"set-off of any loss". The said section reads as follows: [i]n
computing the total undisclosed foreign income and asset of any previous year
of an assessee, (i) "no deduction in respect of any expenditure or
allowance or set-off of any
loss shall be allowed to the
assessee, whether or not it is allowable in accordance with the provisions of
the Income-tax Act"
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