1999 (6) TMI 1 - HC - Income Tax

Summary

Issues Involved:
1. Constitutionality of Section 64(2)(ii) of the Finance Act, 1997.
2. Interpretation of the phrase "or in respect of earlier previous year" in Section 64(2)(ii).
3. Reasonableness of denying VDIS benefits to those searched after July 1, 1997.

Detailed Analysis:

Constitutionality of Section 64(2)(ii) of the Finance Act, 1997
The appellants challenged the constitutionality of Section 64(2)(ii) on the grounds that it discriminates against individuals who have been searched under Section 132 of the Income-tax Act. They argued that this differentiation is arbitrary and lacks a rational nexus to the objectives of the Voluntary Disclosure of Income Scheme (VDIS), which aims to mobilize resources and encourage tax evaders to declare undisclosed income.

The court referred to the Supreme Court's judgment in State of A.P. v. McDowell and Co., which held that a statute could only be struck down on grounds of legislative incompetence or violation of fundamental rights. The court also cited R.K. Garg v. Union of India, emphasizing that fiscal laws should be viewed with greater latitude and that legislative judgment in economic regulations should be given more deference.

The court concluded that Section 64(2)(ii) is neither arbitrary nor discriminatory. It held that the classification of individuals who have been searched as distinct from those who have not been searched is logical and has a rational nexus to the objective of maintaining the deterrent effect of Sections 132, 132A, and 133A of the Income-tax Act.

Interpretation of the Phrase "or in respect of earlier previous year" in Section 64(2)(ii)
The appellants contended that the phrase "or in respect of earlier previous year" should only apply to surveys under Section 133A and not to searches under Section 132 or requisitions under Section 132A. They argued that this interpretation would align with the objective of the VDIS.

The court noted that the Central Board of Direct Taxes (CBDT) had issued circulars clarifying the application of Section 64(2)(ii). According to these circulars, the phrase "or in respect of earlier previous year" applies to all three categories: searches under Section 132, requisitions under Section 132A, and surveys under Section 133A.

The court held that the CBDT's clarifications were binding and that the phrase "or in respect of earlier previous year" applies uniformly to all three categories. It rejected the appellants' interpretation as inconsistent with the statutory language and the CBDT's clarifications.

Reasonableness of Denying VDIS Benefits to Those Searched After July 1, 1997
The appellants argued that denying the benefits of the VDIS to individuals searched after July 1, 1997, is unreasonable and arbitrary. They contended that the VDIS was in force until December 31, 1997, and that searches conducted during this period should not disqualify them from availing of the scheme's benefits.

The court rejected this argument, stating that the operation of the Income-tax Act's provisions, including those related to search and seizure, was not suspended by the VDIS. It held that if Parliament had intended to suspend these provisions, it would have explicitly done so in the VDIS. The court emphasized that individuals had the opportunity to make disclosures under the VDIS immediately after July 1, 1997, to avoid the consequences of a search.

Conclusion
The court upheld the validity of Section 64(2)(ii) of the Finance Act, 1997, and dismissed the appeals. It noted that the appellants had made voluntary disclosures and paid taxes based on an interim order. The court directed the concerned authority to determine whether the appellants were entitled to the benefits of Section 64(1) or barred under Section 64(2)(ii). If barred, the amounts paid could be adjusted against any tax liability of the respective appellants.