Bombay H.C : Whether the AO was authorised and empowered to proceed under s. 142(1) of the IT Act in respect of asst. yr. 1992-93 after the Designated Authority passed an order on 19th Jan., 1999, under the Kar Vivad Samadhan Scheme (hereinafter, for the sake of brevity, referred to as “KVSS”) introduced by Finance (No. 2) Act, 1998 determining the total income of the assessee-petitioner at Rs. 33,65,298.00 ?

High Court Of Bombay

Killick Nixson Ltd. vs. DCIT & Anr.

Sections 142(1), FA1998 (No. 2) 87(e), FA1998 (No. 2)

87(f), FA1998 (No. 2) 87(m), FA1998 (No. 2) 88,  FA1998 (No. 2), 90(1), FA1998 (No. 2) 94

Asst. Year 1992-93

S.H. Kapadia & V.C. Daga, JJ.

Writ Petn. No. 546 of 2000

4th December, 2000

Counsel Appeared

S.E. Dastur with R. Muralidharan, for the Petitioners : B.M. Chatterjee with Mrs. D. Nag, for the Respondent

JUDGMENT

S.H. KAPADIA, J. :

The short question which arises for consideration by this Court in this writ petition is : Whether the AO was authorised and empowered to proceed under s. 142(1) of the IT Act in respect of asst. yr. 1992-93 after the Designated Authority passed an order on 19th Jan., 1999, under the Kar Vivad Samadhan Scheme (hereinafter, for the sake of brevity, referred to as “KVSS”) introduced by Finance (No. 2) Act, 1998 determining the total income of the assessee-petitioner at Rs. 33,65,298.00 ? In short, in this petition we are required to consider the scope of KVSS. The facts giving rise to this petition, briefly, are as follows. On 26th Feb., 1993, the petitioner-assessee filed its return of income. During the pendency of the assessment proceedings, the petitioner filed a revised return. The assessment order was passed under s. 143(3) on 27th March, 1995. Briefly, it may be mentioned that the petitioner had claimed deductions in respect of payment of premium, in respect of bad debts, depreciation and interest. They had also claimed that receipt of rent/compensation be treated as income from business and not income from house property. Their contentions were rejected by the AO. Being aggrieved, the petitioner preferred an appeal to the CIT(A). By order dt. 25th Sept., 1998, the appellate authority found on the question of taxing the income of Rs. 27,93,977 under the head “Income from house property”, that the issue was pending on the file of the AO for the earlier assessment year and since proper opportunity was not given to the assessee, the first appellate authority directed the AO to decide the above issue afresh, after giving opportunity to the assessee. As regards the claim of bad debt to the extent of Rs. 68,02,046, the issue was also remanded back for fresh determination by the AO after giving reasonable opportunity to the assessee. The AO, in his impugned order, had disallowed interest payment made by the assessee to the extent of Rs. 70,50,000. The first appellate authority, however, modified the assessment order and restricted the disallowance of interest to Rs. 27,14,000 against which the assessee went in appeal to the Tribunal. Similarly, the assessee had claimed deduction in respect of staff welfare expenses which the AO restricted by invoking r. 6D of the IT Rules. He disallowed Rs. 31,963 out of staff welfare expenses. The first appellate authority directed the AO to decide that issue afresh. Briefly, it may be mentioned that under the order of the first appellate authority, dt. 25th Sept., 1998, the CIT(A) confirmed the order of AO in respect of the following heads/items : (a) Premium amount of Rs. 3,57,153. (b) Depreciation to the extent of Rs. 2,13,000. (c) Interest of Rs. 27,14,000. On the other hand, the following four items/heads were remitted back to the AO.(a) Whether receipt of Rs. 27,93,977 represented income from house property or whether it represented business income. (b) Claim for bad debt of Rs. 68,02,046. (c) Determination of capital gains to the extent of Rs. 4,00,000. (d) Disallowance under r. 6D to the extent of Rs. 31,963.

Being aggrieved by the decision of the first appellate authority in respect of the first three heads referred to above, the assessee filed its appeal before the Tribunal. The above three heads in respect of which the assessee preferred the appeal in respect of premium, depreciation and interest, represented Rs. 33,65,298 whereas the remaining four heads remitted back to the AO covered an amount of more than Rs. 99 lakhs. On 20th Nov., 1998, the petitioner filed its declaration under s. 89 in respect of KVSS. As per the declaration, the amount payable by the petitioner was worked out at Rs. 26,27,545. In the declaration, the petitioner declared that on 4th June, 1998, it had filed an appeal before the Tribunal against the order of CIT which was pending as on the date of the declaration i.e., 19th Nov., 1998. At this stage, it is important to note that till today the AO has not adjudicated upon the four heads of income/items which were remanded to him by the CIT. In other words, on the date of filing of the declaration by the assessee, the declaration was only confined to the three heads which were the subject-matter of appeal before the Tribunal and which covered an amount of Rs. 33,65,298. The remaining four heads remitted to the AO which covered Rs. 99 lakhs (approximately) was not the subject-matter of the petition. Be that as it may, the Designated Authority disposed of the declaration on 19th Jan., 1999, under s. 90(1) under the Finance (No. 2) Act, 1998. By the said order, the Designated Authority determined the assessed income of the petitioner at Rs. 33,65,298. The Designated Authority, accordingly, computed tax arrears at Rs. 13,83,778. Similarly, in view of the fact that the assessee had paid TDS of Rs. 3.57 lakhs, the Designated Authority arrived at the disputed income of Rs. 6,91,331. Accordingly, the Designated Authority arrived at the disputed income of Rs. 26,73,967 and, thereafter, applying the rate of 35 per cent under KVSS, he arrived at the amount payable by the petitioner at Rs. 9,35,888. The above figures clearly indicate that the Designated Authority has arrived at the assessed income only for the purpose of KVSS. The Designated Authority could not have taken into account the four heads of income on which determination was not made by the AO. It is important to bear in mind that the said four heads covers an amount of more than Rs. 99 lakhs. It is for this reason that the Department had issued the impugned notice. Being aggrieved by the impugned notice, the present petition has been filed.

4. Before appreciating the arguments of the learned counsel on both sides, the following sections of KVSS are required to be quoted. Sec. 87. “87. In this scheme, unless the context otherwise requires, : (a)…….. (b)……. (c)……. (d)…… (e) “disputed income”, in relation to an assessment year, means the whole or so much of the total income as is relatable to the disputed tax; (f) “disputed tax” means the total tax determined and payable in respect of an assessment year under any direct tax enactment but which remains unpaid as on the date of making the declaration under s. 88 : (g)…….. (h)……. (i)…….. (j)…….. (k)……. (l)…….. (m) “tax arrear” means : (i) in relation to direct tax enactment, the amount of tax, penalty or interest determined on or before the 31st day of March, 1998 under that enactment in respect of an assessment year as modified in consequence of giving effect to an appellate order but remaining unpaid on the date of declaration”: Sec. 88. “88. Subject to the provisions of this scheme, where any person makes, on or after the 1st day of September, 1998, but on or before the 31st day of December, 1998, a declaration to the Designated Authority in accordance with the provisions of s. 89 in respect of tax arrear, then, notwithstanding anything contained in any direct tax enactment or indirect tax enactment or any other provision of any law for the time being in force, the amount payable under the scheme by the declarant shall be determined at the rates specified hereunder, namely : (a) where the tax arrear is payable under the IT Act, 1961 (43 of 1961)— (i) in the case of a declarant being a company or a firm, at the rate of thirty-five per cent of the disputed income;” Sec. 90. “90. (1) Within sixty days from the date of receipt of the declaration under s. 89, the Designated Authority shall, by order, determine the amount payable by the declarant in accordance with the provisions of this scheme and grant a certificate in such form as may be prescribed to the declarant setting forth therein the particulars of the tax arrear and the sum payable after such determination towards full and final settlement of tax arrears;” Sec. 94 “94. For the removal of doubts, it is hereby declared that, save as otherwise expressly provided in sub-s. (3) of s. 90, nothing contained in this scheme shall be construed as conferring any benefit, concession or immunity on the declarant in any assessment or proceedings other than those in relation to which the declaration has been made.”

5. Relying upon the above quoted sections, Mr. Dastur, learned senior counsel appearing on behalf of the petitioner contended that under s. 88, two conditions are required to be satisfied in regard to maintainability of the declaration viz., that there should be some outstanding tax payable and secondly, that there should be a pending appeal/reference. In this connection, he also relied upon definition of the words “tax arrears” in s. 87(m) which refers to tax arrears in relation to the amount of tax determined on or before 31st March, 1998, but remaining unpaid on the date of the declaration. He has also relied upon s. 95(i)(c) in support of his contention that the declaration would not be maintainable unless there was an appeal or a reference pending before the appellate authority. He contended that both these conditions were satisfied in this case when the petitioner filed their declaration under KVSS. Mr. Dastur further contended that s. 88 contemplates two distinct stages viz. the preliminary stage at which point of time the assessee/applicant is required to show that some tax was outstanding and that there was a pending appeal/reference. That, at the second stage, the Designated Authority has merely to mathematically work out the figures. That, the second stage has nothing to do with the determination of tax. That, at the second stage, there is no question of applying the IT Act. That, at the second stage, the only function which the Designated Authority is required to perform is to arrive at the right figure of the amount payable under KVSS and once that figure is arrived at, it would constitute a settlement of the total income of the year and consequently, the assessment for the entire year gets settled. He further contended that once the assessment for the entire year gets settled, then the order of the Designated Authority is conclusive on all the items that go into arriving at the total income of the assessee and that it is not confined only to the heads of income in respect of which appeal/reference is pending. In support of his argument, learned counsel for the petitioner has relied upon s. 88(a)(i). He has contended that after crossing the initial stage, when the Designated Authority arrives at the figure of disputed tax, he has just to perform a mathematical function to arrive at the figure of disputed income from the disputed tax and then, in the case of a company, the Designated Authority is required to calculate 35 per cent of the disputed income as the amount payable by the assessee-applicant. He contended that under the scheme, the Designated Authority is required to calculate the disputed income. That, this disputed income is a derived figure. That, it is derived from the disputed tax. In this connection, Mr. Dastur has placed reliance on s. 87(f) which defines the expression “disputed tax” to mean total tax determined and payable in respect of an assessment year, but which remained outstanding on the date of the declaration under s. 88. In this connection, Mr. Dastur invited our attention to the working made by the assessee which is broadly accepted by the Designated Authority. This is only by way of illustration. The said working is at p. 88 of the paper book. The working shows that the assessed income is Rs. 33,65,298. The tax payable on the assessed income at 51.75 per cent which is the rate which was applicable at the relevant time, comes to Rs. 17,41,542. This constitutes disputed tax. We have not gone into deductions on account of TDS. It is from this disputed tax that the disputed income is arrived at by applying the following formula : Disputed tax x 100 Tax rate

The same formula is applied by the Designated Authority. Applying that formula, the Designated Authority has arrived at the disputed income of Rs. 26,73,967 and 35 per cent of the said disputed income, viz. Rs. 9,35,888 which constituted the amount payable by the petitioner. This amount has been paid. He contended that under s. 87(e) of the scheme, the expression “disputed income” is defined to mean the whole or so much of the total income as is relatable to the disputed tax. Therefore, he contended that disputed income is derived from disputed tax. Accordingly, once the Designated Authority has arrived at the assessed income of Rs. 33,65,298 then that figure is final and the entire dispute including the heads on which there is no adjudication by the AO, gets settled and that decision becomes final and conclusive under s. 90 of the scheme and once that conclusion is arrived at, there is no scope for application of the IT Act. Hence he contended that the impugned notice is withoutjurisdiction because the entire matter got settled when the declaration filed by the petitioner was accepted by the Designated Authority. Finally, Mr. Dastur contended that equity has no role to play in this case. He further contended that the Scheme offers a package deal to the taxpayer. He contended that every packet contemplates give and take. Hence, merely because certain heads of income remain pending when the Designated Authority computes the amount payable, cannot be the basis for interpreting the scheme in favour of the Revenue. He contended that in the appeal filed by the assessee before the Tribunal, there were issues which the Tribunal would have decided in favour of the assessee. That the assessee was bound to succeed on those issues in view of certain judgments of the Supreme Court. However, the assessee chose to go for the KVSS. That, to that extent, even the assessee has suffered. Therefore, loss to the Revenue cannot be the ground for interpreting the scheme in favour of the Department. He further contended that if the Department’s contention is accepted, it would make KVSS totally unworkable. For example, he contended that in the present matter, the Designated Authority came to the conclusion that the total income under KVSS was Rs. 33,65,298 whereas if the AO is permitted to proceed to now adjudicate upon the remaining four heads and if, for example, the claim for bad debts is disallowed, then the total revised income would come to Rs. 1,01,67,344. In other words, he contended that an anomalous position would result because there would be two different total incomes for the same assessment year which would lead to absurdity.

6. Mr. Chatterjee, learned counsel appearing on behalf of the Department, on the other hand, contended by referring to the various provisions of the KVSS and by reference to the orders passed by the AO that under s. 88, the amount payable by the declarant shall be determined by the Designated Authority at the rate of 35 per cent of the disputed income. Mr. Chatterjee pointed out the provisions of s. 87(e) and (f). He submitted that reading of the above definition section shows that disputed income means the whole or so much of the total income as isrelatable to the disputed tax. The word “disputed tax” is also defined under s. 87(f) to mean total tax determined andpayable but which remains unpaid as on the date of making of the declaration under s. 88. Mr. Chatterjee emphasized the words “determined and payable” in s. 87(f). Mr. Chatterjee pointed out that, in the present case, the Effect Order passed by CIT(A) was not fully worked out by the AO. He contended that income under the following heads have not been decided viz. disallowance of bad debts to the extent of Rs. 68,02,046, income from house property to the extent of Rs. 27,93,977, dispute regarding capital gains to the extent of Rs. 4,00,000 and disallowance under r. 6D amounting to Rs. 31,963. In all the claim in dispute which has not been determined is in the vicinity of Rs. 99 lacs (approximately). Mr. Chatterjee pointed out that there were three items which were subject-matter of appeal before the Tribunal viz. disallowance of interest by the Department of Rs. 27,14,000, disallowance of depreciation of Rs. 2,13,000 and disallowance in respect of premium paid of Rs. 3,57,153. He contended that on the basis of the above three items notice of demand came to be issued against the assessee for payment of taxes to the tune of Rs. 33,65,298. It is this amount which is brought under KVSS. It is on this amount of Rs. 33,65,298 that the petitioner has paid only Rs. 9,35,888 as tax in full and final settlement. In other words, the petitioner escapes payment of tax on the income of Rs. 99,00,000 (approximately) which figure represents the disputed claim of the petitioner in respect of bad debts, income from house property, capital gains and disallowance under r. 6D. Mr. Chatterjee points out that these claims are yet to be determined by the AO. He, therefore, contends that under s. 87(f) of the KVSS, disputed tax would mean total tax determined and payable from which disputed income is derived and since, in the present matter, total tax has not been determined in respect of the above four items, the AO was entitled to proceed with determination of disputes under the above four items for which the impugned notice had been issued. Mr. Chatterjee further points out that even the order passed by the Designated Authority shows that he has assessed the income of the petitioner at Rs. 33,65,298 only for the purposes of KVSS. The caption itself indicates that he has done the working only for the purposes of KVSS. That, the Designated Authority, in this case, on facts, has not worked out the total income. That, he could not have worked out the total income as the AO had not determined the claim of the petitioner in respect of the above four items/heads. Mr. Chatterjee further points out that under the KVSS, there should be a determination followed by a dispute. He contended that, in the present case, the notice of demand issued for Rs. 33,65,298 only related to items in dispute in appeal before the Tribunal. That, these were the items which were determined. That, these were the items on which the appeal was pending. He contended that if the argument of the petitioner is accepted, it would lead to an escapement of tax as the assessee would not be required to pay any tax in relation to the heads of income regarding which there is no determination nor dispute pending. He accordingly submits that the petition deserves to be rejected.

7. We find merit in the contentions advanced on behalf of the Department. At the outset, it may be mentioned that KVSS is essentially introduced to recover the taxes at the earliest point of time. It is essentially recovery based scheme. The predominant object is to recover the taxes as early as possible. This scheme is primarily enacted because of the increasing burden of fiscal deficit in the budget and to unlock large amounts locked up in litigation. Sec. 88 of the scheme deals with settlement of tax payable. Sec. 88 is in two parts. Firstly, the Designated Authority is required to ascertain the maintainability of a declaration. Having satisfied the conditions of maintainability, only then the Designated Authority is required to enter the second stage of calculating the disputed income on which the amount payable under the scheme shall be determined. Therefore, two conditions are required to be satisfied before a declaration is said to be maintainable viz. that there shall be outstanding determined tax amount for which a declaration is required to be made. The outstanding amount of tax should have been determined on or before 31st March, 1998. This is clear from the definition of the word “tax arrear” in s. 87(m). Under the first part of s. 88, the declaration is required to be made in respect of the tax arrears. These tax arrears are required to be determined on or before 31st March, 1998. The second condition of maintainability of the declaration is provided in s. 95(i)(c) viz. that the outstanding tax should be subject-matter of pending appeal or reference. On satisfaction of the said two conditions, the declaration could be said to be maintainable. If these two conditions are not satisfied, then the Designated Authority is not required to ascertain the disputed income from the disputed tax. However, if the above two conditions are satisfied and if the declaration is found to be maintainable, then the Designated Authority shall deduce disputed income from disputed tax. In this connection, it is important to bear in mind, the provisions of s. 87(f) which defines disputed tax to mean total tax determined and payable but which remains unpaid on the date of the declaration. Reading s. 87(e) which defines “disputed income” to mean whole or so much of the total income as is relatable to the disputed tax as defined under s. 87(f) it is clear that disputed income is required to be deduced from disputed tax. In this connection, the definition of the words “disputed tax” is also important as it indicates that disputed tax means total tax determined and payable.

The last two words “determined” and “payable” are very important. Similarly, the words “so much of the total income” in s. 87(e) are important. These words indicate determination of the assessed income. Ultimately, it is important to note that the scheme contemplates determination of disputed income from disputed tax which, in turn, is based on the income assessed under the IT Act. The words “tax arrears” in s. 87(m) are important in the first stage of s. 88 whereas the words “disputed income” and “disputed tax” are important in the second stage of s. 88. Now, in the present case, there is no dispute regarding the formula to be applied to compute the disputed income viz.: Disputed tax x 100 Tax rate However, the assessee contends that in the present case, the Effect Order, passed by the AO, has calculated the assessed income at Rs. 33,65,298 (which is calculated without taking into account the above four heads of income representing more than Rs. 99 lakhs). On the other hand, the Department contends that the amount payable under KVSS, as computed by the Designated Authority has a limited scope in view of the fact that the above four heads have not been taken into account for the purposes of calculating the assessed income. For example, it was submitted that if the assessed income was to include the above four heads, then in that event, the assessed income would have exceeded Rs. 99 lakhs on which the Designated Authority would have calculated the disputed tax from which he could have computed the disputed income. Therefore, the essential dispute in the present case is not on principle but on application. Under the scheme, the Designated Authority is first required to ascertain the assessed income on which he calculates the disputed tax payable by the assessee at the rate prescribed under the IT Act at the relevant time. For example, if the assessed income is Rs. 33,65,298, then the tax payable at 51.75 per cent (being the rate applicable at the relevant time including surcharge) would come to Rs. 17,41,542. After taking into account the taxes paid by the assessee (TDS), the Designated Authority arrives at the figure of net disputed tax which, let us say, comes to Rs. 12,80,140. Thereafter, the Designated Authority computes the disputed income by applying the above formula viz. Rs. 12,80,140 x 100 51.75 which would give us the figure of Rs. 24,73,700. On this figure, at the rate prescribed under KVSS [s. 88(a)(i)] at 35 per cent, the tax payable on the disputed income would be around Rs. 8,65,795. Therefore, the only short point is whether the assessed income should be taken at Rs. 33,65,298 which, as stated hereinabove, is the figure arrived at by the AO in the IT proceedings without taking into account the above four heads which remain unadjudicated upon till today. However, the scheme indicates that disputed income is related to whole or part of the total income as determined under the IT Act. Therefore, if, in a given case, the income is determined by taking into account all the heads then the determination of the assessed income would cover all the heads, but if, as in the present case, the AO has not adjudicated upon by the cut-off date on all the heads of income and tax has been demanded only on part determination, then the Kar Vivad Scheme contemplates payment of tax on part of the total assessed income. This is also indicated by the words “determined” and “payable” in s. 87(f) of the scheme. In the present matter, the Department had given notice to the assessee for payment of tax of Rs. 33,65,298 which covered disallowance of interest expenditure, disallowance of depreciation and disallowance on premium paid. The assessee’s appeal was also restricted to the aforestated three items. These three items were determined by the Department. The dispute was in respect of the three items. There could not have been a dispute in respect of the assessee’s claim in respect of bad debts, income from house property, disallowance under r. 6D and capital gains amounting to Rs. 99,00,000 (approximately) as the AO is yet to determine on remand the dispute regarding the said four heads. In the circumstances, the total tax determined and payable under s. 87(f) for the purposes of KVSS was based on the total income of Rs. 33,65,298. That, there was no determination regarding the remaining four heads. That the disputed tax on the date of the declaration was based on the total income of 33,65,298 on which the petitioner has paid tax of Rs. 9,35,888. In the present matter, acceptance of the contention of the petitioner would mean that the petitioner would pay the tax only on income which has been determined to the extent of Rs. 33,65,298 leaving out the heads of income which are yet to be determined. We do not find any merit in the contention advanced on behalf of the assessee that there would be two separate orders if the Department’s contention is upheld viz. order of the Designated Authority determining the assessee’s income at Rs. 33,65,298 and a separate assessment order passed by the AO after issuance of the certificate. It was urged that the scheme would become totally unworkable if the Department’s contention is accepted. It was contended that under the provisions of KVSS the certificate given by the Designated Authority was conclusive. In this connection, reliance was placed on s. 90 of the Act. It was contended that this would amount to reopening orders passed by the Designated Authority under KVSS. We do not find any merit in the said contention. The order issued by the Designated Authority clearly shows, on facts of this case, that he has assessed the income at Rs. 33,65,298. That, the said assessed income is determined only for KVSS purposes. That, the Designated Authority was fully aware of the fact that there were certain heads of income on which there was no determination. That, the petitioner was also aware that on certain heads of income there was no determination by the AO. In the circumstances, we do not find any merit in the contention advanced on behalf of the petitioner. Since none of the cited judgments deal with the controversy in hand, we have not discussed the said judgments.

8. For the above reasons, we do not see any merit in this writ petition. Accordingly, rule is discharged with no order as to costs.

[Citation : 248 ITR 17]

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