Income Declaration Scheme, 2016 – Effective Rate of Tax?

Introduction

1. The Government has introduced Income Declaration Scheme, 2016 which has come into force from 1st June, 2016. The scheme provides an opportunity to persons who have not paid full taxes in the past to come forward and declare the undisclosed income and pay tax, surcharge and penalty totaling in all to 45% of such undisclosed income declared. Further, as per scheme, declaration of undisclosed income in the form of assets is to be made at Fair Market Value of such assets as on 1st June, 2016.

It is felt everywhere that the total impact of tax in case of declaration of undisclosed income under the scheme is quite high and, therefore, the initial response of the taxpayers regarding the scheme is not encouraging one.

Clarifications issued by CBDT

2. The CBDT has issued three sets of Frequently Asked Questions (FAQs) containing 36 clarifications relating to various controversial aspects clarifying doubts regarding the operation of the scheme. One clarification has been issued by the CBDT by way of Circular No. 25/2016, dated 30th June, 2016 addressing question no. 5 which is reproduced as under:—

No disallowance u/s 40(a)(ia) when taxpayer is claiming exemption under sec. 11

The issue before the ITAT was

Whether the provisions of section 40(a)(ia) are applicable when income is computed under sections 11, 12 and 13?

The ITAT held as under:

1) Sections 11, 12 and 13 deal with income from property held for charitable or religious purposes and the mode of computation of income subject to certain conditions. Accordingly, income of any charitable trust or society is exempt from tax if such conditions are fulfilled. Section 40(a)(ia) falls under chapter IV-D which deals with computation of profits and gains from business or profession.

2) Therefore, the provisions of section 40(a)(ia) are relevant if income is computed under the head 'profits and gains of business or profession". The concept of computation of income under section 11 is real income concept which is computed on the principles of real income generated from property held under trust and not notional income under other provisions of the Act.