2016 (2) TMI 306 - HC - Income Tax

Determination of the tax to be paid in terms of the Kar Vivad Samadhan Scheme 1998 (KVSS) - Held that - As regards the instructions issued, there are two aspects - one regarding the calculation of the disputed income with reference to the unpaid tax. The other is in relation to the application of the marginal rate. At the outset it requires to be noticed that the Finance Act, 1998 does not talk of any marginal rate to be applied. Also, it appears to the Court that the marginal rate was premised on an Assessee having to pay tax at different slab rates depending on the level of income. However, where the tax is on capital gains, there is only a single rate of tax i.e. 33.6%. In such event, the adoption of a marginal rate is not apposite for determining the disputed income. In other words, the impugned instructions of the Ministry of Finance regarding applicability of a marginal rate to the unpaid tax for determining the disputed income cannot apply where the taxable income arises only from capital gains and to which a uniform rate of 33.6% applies. For the reasons already explained, the Court is of the view that the instructions issued are not consistent with the provisions of the Finance Act 1998 which does not talk of a marginal rate, particularly when it comes to computing the disputed income arising out of the capital gains. All that the Finance Act does is to stipulate what should be the rate of tax where the tax is in arrears as in the present case. As far as the Petitioner No. 1 firm is concerned that rate is 35% of the disputed income. Consequently, as far as the present case is concerned, the correct way to determine the disputed income would be to determine in the first instance the unpaid tax which undisputedly is ₹ 81,58,392. The next step is to determine the disputed income in relation to the unpaid tax by applying the rate of 33.6%. Thirdly, the tax payable will be calculated at 35% of the disputed income so computed. In that view of the matter, the writ petition is disposed of by directing the Respondents to re-compute the disputed income and thereafter calculate the tax payable by the Petitioners in terms of the KVSS in the above manner.

Summary

Issues:
Calculation of disputed income for tax determination under Kar Vivad Samadhan Scheme 1998 (KVSS).

Analysis:
The case involved a dispute over the calculation of disputed income for tax purposes under the Kar Vivad Samadhan Scheme 1998 (KVSS). The petitioner, a partnership firm, had filed its return of income for the Assessment Year 1994-95, disclosing nil income. The controversy arose when the Assessing Officer (AO) computed the taxable income based on the market value of land transferred during the dissolution of the firm. The tax demand was initially raised at a substantial amount, which was later rectified to a lower sum. The petitioner decided to avail the KVSS for settling the tax dues quickly and easily.

The KVSS defined 'disputed income' and 'disputed tax' under Sections 87(e) and 87(f) of the Finance Act, 1998. The rate of tax payable by a firm under the KVSS was set at 35% of the disputed income. The Central Government was empowered to issue directions and instructions for the administration of the KVSS. The Ministry of Finance issued circulars clarifying the scheme, including the calculation of disputed income.

The dispute in this case arose when the Respondent calculated the amount payable by the petitioner differently from the petitioner's calculation under the KVSS. The Respondent applied a marginal rate higher than what the petitioner had calculated, leading to a variance in the amount payable. The Court noted an error in the clarification issued by the Respondents, emphasizing that disputed income should be calculated with reference to unpaid tax, not paid tax.

The Court held that the instructions issued by the Ministry of Finance were inconsistent with the provisions of the Finance Act, 1998, as they introduced a marginal rate not specified in the Act. The Act only mandated a 35% tax rate for the disputed income. The Court directed the Respondents to re-compute the disputed income and tax payable by the petitioner in line with the Act's provisions, completing the process within four weeks.

In conclusion, the judgment resolved the dispute by clarifying the correct method of determining disputed income and tax payable under the KVSS, emphasizing adherence to statutory provisions over conflicting instructions issued by authorities.