2014 (9) TMI 886 - HC - Income Tax

Interpretation of Karvivad Samadhan Scheme - Levy of 35% amount on the component of interest and penalty Tax in arrears - Whether the transaction fits into Clause (a)(iii), or Clause (a)(iv) of Section 88 of the Act Held that - An analysis of Clauses (a)(iii) and (a)(iv) of Section 88 of the Act would present some extraordinary features - A person, who is in arrears of tax, is exposed to higher obligation, whereas the one, who is in arrears of tax, interest and penalty, is relieved of a substantial obligation - That, however was the intention of the Parliament and the Courts or for that matter, the respondents cannot look into the reasons - The clarification issued by the Board, in a way adds some more dimensions and angles to the Scheme - the Board can neither expand nor restrict the scope of the Act, but can only issue instructions and clarifications, for effective implementation - the view expressed by the authorities under the Act, vis-a-vis the claim of the petitioner that benefit under the Scheme cannot be sustained in law the assessee has already paid the amount in accordance with Clause (a)(iii) of Section 88 of the Act, it is declared that he is not in arrears of any tax nor he is under obligation to pay any further amount, with reference to the assessment year 1996-97 Decided in favour of assessee.

Issues Involved:
1. Interpretation of the Karvivad Samadhan Scheme, 1998.
2. Applicability of Clause (a)(iii) vs. Clause (a)(iv) of Section 88 of the Finance Act, 1998.
3. Clarification issued by the Central Board of Direct Taxes (CBDT).
4. Calculation of the disputed income and tax arrears.
5. Application of statutory interpretation principles.

Issue-wise Detailed Analysis:

1. Interpretation of the Karvivad Samadhan Scheme, 1998:
The petitioner, an individual assessee engaged in construction work for Indian Railways, submitted income tax returns for the year 1996-97. The Income Tax Officer assessed a taxable income of Rs. 7,70,200, which was marginally reduced to Rs. 7,43,650 by the Commissioner (Appeals). The petitioner appealed to the Income Tax Appellate Tribunal. During the pendency of this appeal, the Karvivad Samadhan Scheme, 1998, came into operation. The petitioner applied for benefits under this Scheme, offering to pay 30% of the disputed tax. However, the competent authority required the petitioner to pay a sum of Rs. 3,04,483, leading to the present writ petition challenging this order.

2. Applicability of Clause (a)(iii) vs. Clause (a)(iv) of Section 88 of the Finance Act, 1998:
The core issue was whether the petitioner's case fell under Clause (a)(iii) or Clause (a)(iv) of Section 88 of the Finance Act, 1998. Clause (a)(iii) applies when tax arrears include income tax, interest, and penalty, requiring payment of 30% of the disputed income for individual assessees. Clause (a)(iv) applies when tax arrears comprise only interest and penalty, requiring payment of 50% of the tax arrear. The petitioner argued that his case fell under Clause (a)(iii) since his tax arrears included all three components. The respondent, guided by a CBDT clarification, treated the case under Clause (a)(iv), demanding 50% of the tax arrear.

3. Clarification issued by the Central Board of Direct Taxes (CBDT):
The CBDT clarification distinguished between penalties and interest directly related to assessed income or arrears of tax, which are eligible for full waiver, and those not directly related, which are eligible for only a 50% waiver. The 1st respondent relied on this clarification to justify the demand. However, the court found this approach incorrect, emphasizing that the Board cannot expand or restrict the scope of the Act but can only issue instructions for effective implementation.

4. Calculation of the disputed income and tax arrears:
The petitioner declared tax arrears as follows: Tax - Rs. 1,05,977, Interest - Rs. 53,593, and Penalty - Rs. 4,50,000. He deposited 30% of the disputed income, Rs. 79,483. The court clarified that the disputed income should be calculated based on the disputed tax. Multiplying the disputed tax (Rs. 1,05,977) by 100/40 gives a disputed income of Rs. 2,64,940. The court concluded that the petitioner's case fell under Clause (a)(iii), requiring payment of 30% of the disputed income.

5. Application of statutory interpretation principles:
The court applied principles of statutory interpretation, emphasizing that provisions should not lead to absurd results. Citing precedents, the court noted that a grammatical reading leading to absurdity should be modified to reflect the legislature's true intention. The court referenced cases like Grey v. Pearson and Adler v. George to illustrate the application of these principles. The court concluded that the authorities' interpretation was unsustainable in law.

Judgment:
The court allowed the writ petition, setting aside the impugned order. It declared that the petitioner, having paid the amount in accordance with Clause (a)(iii) of Section 88, was not in arrears of any tax for the assessment year 1996-97 and was under no obligation to pay any further amount. The court left it open for the 1st respondent to pass any consequential orders. The miscellaneous petition filed in this writ petition was also disposed of, with no order as to costs.

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