Monday, July 11, 2016

Halfhearted approach in proposing the Income Declaration Scheme, 2016

The Finance Minister in his Budget Speech on 29th February, 2016 surprised all by introducing the Income Declaration Scheme, 2016 which is proposed to come into effect from 1st June, 2016. For persons who have not paid full taxes in the past, the Scheme provides a one-time window to come forward and declare the undisclosed income of any financial year upto 2015-16 and pay tax, surcharge and penalty aggregating to 45% of such undisclosed income declared. The FM has indicated in his Budget Speech that the window will be open from 1st June till 30th September, 2016 with an option to pay amount due within two months of declaration. Post Budget the FM has mentioned that the four-month compliance window for domestic black money holders is not a VDIS (Voluntary Disclosure of Income Scheme) and it is not an amnesty scheme. Interestingly the FM has used the phrase 'past trangressions' recognising the past wrongdoings of tax evaders and offer them an exit door on payment of 45% of undisclosed income. Such persons would further enjoy immunity from prosecution under Income Tax Act, Wealth Tax Act, and Benami Transaction (Prohibition) Act, 1988. As per our FM, the Government is fully committed to remove black money from the economy. The Scheme as mentioned in clauses 178 to 196 of the Finance Bill, 2016 (in short referred as the 'Bill') is analysed hereunder:
1. Backdrop and comparison of present Scheme with some aspects of VDIS, 1997:
It would be relevant to mention that the prime reason for accumulation of black money has been the fact that our country had the maximum tax rate of 97.75% (tax @ 85% plus surcharge @ 15%) in seventies. That means a person declaring income of Rs. 10 Lakhs in those years was required to pay tax of almost Rs. 9,77,500/- only (if we ignore the initial exemption limit). In addition to that one was required to pay wealth tax. Now the maximum rate of tax is 30% plus education cess of 3% plus surcharge in some cases which is much reasonable to the tax rates in 1970's. The present Income Disclosure Scheme, 2016 announced in Budget, 2016 has some positive aspects as well as some not so positive aspects if we compare with the Voluntary Disclosure of Income Scheme, 1997 (VDIS) declared for Indian tax payers. The rate of tax payable under the present scheme is 45 per cent (tax @ 30% plus surcharge 7.5% plus penalty 7.5%) which is 1.5 times of the tax payable under VDIS, 1997. It may be noted there was no penalty in case of VDIS.

Capital gain on sale of property situated in Sri Lanka is taxable only in Sri Lanka

a) The case of assessee was selected for scrutiny by revenue under CASS. She had earned capital gains on sale of property situated in Sri Lanka.
b) Assessee submitted that such capital gains were taxable only in Sri Lanka as per Article 13 of India-Sri Lanka DTAA.
c) The AO and the CIT(A) rejected the contentions of assessee and taxed such long-term capital gains. The aggrieved-assessee filed the instant appeal.
The Tribunal held as under:
1) As per Article 13(1) read with Article 13(6) of the India-Sri Lanka DTAA, the capital gain arisen to the assessee from sale of immovable property situated in Sri-Lanka is taxable in Sri-Lanka as the Government of Sri-Lanka has right to tax the same because the immovable property is situated in Sri-Lanka. The Government of India cannot brought the same to tax under the provisions of the Act as the provisions of DTAA will prevail being beneficial to the assessee over the provisions of the Act.
2) Even though the word ‘may be taxed’ is used in Article 13(1) of DTAA between India and Sri- Lanka as the same is to be read in a manner that it takes away the power of the other Contracting State to tax the same income, of which power to tax is vested by virtue of DTAA in the Contracting State in which the immovable property is situated.

Cash deposits in bank can't be held as undisclosed income without verifying source of deposits


1) The assessee was found to be maintaining a savings bank account in which it had made cash deposits. He did not file any return of income.
2) To verify the source of the said cash deposit, an inquiry letter was written to the assessee by the AO. However, as there was no response to the inquiry letter, the AO formed the belief that income of the assessee had escaped assessment.
3) The AO completed assessment by making additions on account of undisclosed cash deposit in the bank account of the assessee and also addition on account of undisclosed interest income. The CIT(A) confirmed addition. Aggrieved-assessee filed the instant appeal.
The Tribunal held in favour of assessee as under: