2015 (8) TMI 617 - HC - Income Tax

Voluntary disclosure of undisclosed income - VDIS - whether if a search has taken place under section 132 of the Act against an assessee, he is disabled from availing of the benefit under the Scheme in respect of any income referable to any earlier previous years? - Held that - The non obstante clause contained in Chapter IV of the Finance Act, 1997, is not that wide enough. The net result is that the amount which was the subject matter of search was liable to be dealt with under Chapter XIV-B of the Act notwithstanding the fact that it was mentioned in the declaration filed under the Scheme. The only difference would be that the respondents would be under obligation to pay the differential tax if any. Whenever the search proceedings take place, an assessee would be exposed not only to higher rate of tax but also to the incidence of levy of interest and penalty. In the instant case, a senior official of the Department i.e., the Commissioner, who operated the Scheme itself, was of the view that the amount covered by search can be the subject matter of the benefit under the Scheme. It is only on a close analysis of the relevant provisions of law and the judgment rendered by this court, that it has emerged that the proceedings initiated under Chapter XIV-B of the Act do not get affected by the proceedings under the Scheme. When this is the disparity or complexity as to the understanding of the provisions of those enactments, the respondents cannot be exposed to the obligation to pay penalty or interest. We, therefore, allow the appeals, setting aside the common order dated October 17, 2002, passed by the Tribunal and upholding the orders passed by the Assessing Officer. We, however, direct that the respondents shall not be exposed to the liability of penalty, interest or prosecution. This facility shall be available to them if only they pay the differential tax payable under Chapter XIV-B of the Act within two months from today. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the Voluntary Disclosure of Income Scheme (VDIS) 1997.
2. Applicability of VDIS to income discovered during a search under section 132 of the Income-tax Act.
3. Interpretation of section 64 of the Finance Act, 1997.
4. Tribunal's decision on block assessment orders.
5. Imposition of penalty and interest on the assessees.

Issue-wise Detailed Analysis:

1. Validity of the Voluntary Disclosure of Income Scheme (VDIS) 1997:
The respondents challenged certain provisions of the VDIS, 1997, arguing that it discriminated against income referable to previous years during which a search was conducted or notices were issued under sections 142 or 148 of the Income-tax Act, claiming it violated Article 14 of the Constitution of India. The Department contended that the Scheme provided a special facility, and Parliament's decision to exclude certain items from the Scheme was not discriminatory. The court upheld the provisions of the Scheme but issued directions, clarifying that income discovered during a search did not qualify for the Scheme's benefits.

2. Applicability of VDIS to Income Discovered During a Search under Section 132 of the Income-tax Act:
The respondents included undisclosed income, discovered during the search, in their declarations under the Scheme. The Commissioner issued certificates for the declared amounts after receiving the tax. However, the court held that income discovered during a search under section 132 did not qualify for the Scheme's benefits, as per the judgment in Shankarlal v. ITO [1998] 230 ITR 536 (AP). The Tribunal's decision to allow the appeals on this ground was overturned.

3. Interpretation of Section 64 of the Finance Act, 1997:
Section 64(2)(ii) of the Finance Act, 1997, explicitly excluded income discovered during a search from the Scheme's benefits. The court reiterated that income detected in a search under section 132 was ineligible for the Scheme. The judgment in Shankarlal's case clarified that the Scheme did not apply to such income, and any declaration including such income would not nullify the block assessment proceedings under Chapter XIV-B of the Income-tax Act.

4. Tribunal's Decision on Block Assessment Orders:
The Tribunal had allowed the respondents' appeals against the block assessment orders, relying on the judgment in Shankarlal's case. However, the court held that the Tribunal misinterpreted the judgment and the scope of the Scheme. The court confirmed that the amount discovered during the search was liable to be assessed under Chapter XIV-B, and the Tribunal's order was set aside.

5. Imposition of Penalty and Interest on the Assessees:
The court acknowledged the complexity and disparity in understanding the provisions of the VDIS and the Income-tax Act. Given that a senior official believed the amount discovered during the search could be declared under the Scheme, the respondents were not exposed to penalties, interest, or prosecution. However, they were required to pay the differential tax under Chapter XIV-B within two months to avail this relief.

Conclusion:
The appeals were allowed, the Tribunal's order was set aside, and the block assessment orders were upheld. The respondents were directed to pay the differential tax within two months to avoid penalties and interest. The court's detailed analysis clarified the inapplicability of the VDIS to income discovered during searches and reinforced the provisions of section 64 of the Finance Act, 1997.