2012 (6) TMI 208 - HC - Income Tax

Denial of Benefit of declaration under the Kar Vivad Samadhan Scheme Expenditure incurred by way of interest not eligible to be deducted in computing the income liable to tax - Held that - Once determination is made under Section 90 towards full and final settlement of tax arrears, there is nothing to be treated as pending for final consideration before any authority which includes the Tribunal - As on the date of filing of its application under the Samadhan Scheme no notice was served on the assessee as regards the pending Revenue s appeal before the Tribunal - when once the amount payable by the declarant was determined by the CIT it amounts to the department having bestowed its attention to the entirety of the tax arrears to pass order under Section 90 - Even as per Section 90 of the Kar Vivad Samadhan Scheme only where the declaration furnished by the assessee is found to be false by the designated authority at any stage, all the proceedings against the declarant shall be deemed to have been revived but in the absence of any such situation arising herein, the Revenue cannot sustain its plea treating as one pending for further consideration at the hands of the Tribunal - the assessee s declaration that the amount payable was determined by the CIT in his proceedings dated 17.6.1999 and that the Revenue s appeal before the Tribunal was filed on 7.7.1999 by which time the Samadhan Certificate had already been made in favour of assessee.

Issues Involved:
1. Availability of the benefit under the Kar Vivad Samadhan Scheme (KVSS) for the appellant in respect of the departmental appeal.
2. Deductibility of the expenditure incurred by way of interest in computing taxable income.
3. Inclusion of Rs. 20,00,000/- as the appellant's income and the corresponding interest deduction.

Issue-wise Detailed Analysis:

1. Availability of the Benefit under the Kar Vivad Samadhan Scheme (KVSS):
The appellant argued that the benefit of the declaration under the KVSS should be available, thus nullifying the Revenue's appeal. The Tribunal rejected this contention, stating that the Revenue's appeal was pending and not covered by the declaration. The appellant relied on the Supreme Court decision in KILLICK NIXON LIMITED v. DEPUTY CIT (2002) 258 ITR 627, which held that once the tax amount determined under Section 90 is paid, immunity under Section 91 applies, preventing further proceedings on the Revenue's appeal. The Tribunal's decision was based on the fact that the Revenue's appeal was not included in the appellant's declaration under KVSS, thus allowing the appeal to proceed.

The High Court referred to the Delhi High Court's decision in ALL INDIA FEDERATION OF TAX PRACTITIONERS v. UNION OF INDIA (1999) 236 ITR 1, which struck down the proviso to Section 92 as ultra vires Article 14 of the Constitution, creating an artificial classification among assessees. The Court also noted the Central Government's acceptance of this decision and the subsequent clarification, indicating that the declaration should cover all disputed income, including those in the Revenue's appeal.

The Karnataka High Court's decision in BHAWARALAL (HUF) v. ASSTT. CIT (2008) 219 CTR 300 was also considered, which emphasized that the designated authority must consider all tax arrears, including those disputed by the Revenue, when determining the amount payable under KVSS.

The High Court concluded that once the designated authority determined the tax payable, the final settlement was conclusive, and the Revenue's failure to include its appeal in the determination could not be held against the assessee. Thus, the Tribunal's order was set aside, and the substantial question of law was answered in favor of the assessee.

2. Deductibility of the Expenditure Incurred by Way of Interest:
The appellant claimed a deduction for interest paid on a loan taken to invest in a company promoted by the appellant. The Assessing Officer disallowed this deduction, but the Commissioner of Income Tax (Appeals) allowed it, directing the officer to compute the actual interest paid and deduct it from the taxable income.

The Tribunal, however, did not allow this deduction, stating that the investment was in non-income earning assets. The High Court did not specifically address this issue in the judgment, focusing primarily on the implications of the KVSS declaration.

3. Inclusion of Rs. 20,00,000/- as the Appellant's Income and the Corresponding Interest Deduction:
The appellant received Rs. 20,00,000/- for services rendered in promoting a company, which was included as income. The appellant argued that the interest paid on the loan taken for investment in the company should be deducted from this income. The Commissioner of Income Tax (Appeals) agreed with this view, but the Tribunal did not.

The High Court's judgment primarily addressed the implications of the KVSS declaration, implying that the determination of tax arrears under KVSS was final and conclusive, thus affecting the treatment of the Rs. 20,00,000/- and the corresponding interest deduction.

Conclusion:
The High Court set aside the Tribunal's order, ruling in favor of the assessee. It held that once the designated authority determined the tax payable under KVSS, the final settlement was conclusive, and the Revenue's failure to include its appeal in the determination could not be held against the assessee. The substantial question of law was answered in favor of the assessee, and the connected TCMP was closed.

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