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TMI Blog1998 (11) TMI 113X X X X Extracts X X X X X X X X Extracts X X X X ..... enge to its constitutional validity. The Kar Vivad Samadhan Scheme, 1998 (hereinafter the Scheme, for short), is contained in sections 86 to 98 of the Finance (No. 2) Act, 1998. The object of the scheme as explained by the Finance Minister in his speech is: Litigation has been the bane of both direct and indirect taxes. A lot of energy of the Revenue Department is being frittered in pursuing a large number of litigations pending at different levels for long periods of time. Considerable revenue also gets locked up in such disputes. Declogging the system will not only incentivise honest taxpayers, enable Government to realise its reasonable dues much earlier but coupled with administrative measures, would also make the system more user-friendly. I, therefore, propose to introduce a new scheme called 'Samadhan'. We will shortly notice the grounds of challenge. At the outset, we may set out briefly the contents of the scheme and extract and reproduce the relevant parts of the scheme to the extent necessary to appreciate and adjudicate upon the grounds of challenge. Section 86 specifies that the Scheme may be called the Kar Vivad Samadhan Scheme, 1998. It shall co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er this sub-clause ; (n) all other words and expressions used and not defined in this Scheme but defined in any direct tax enactment or indirect tax enactment shall have the meanings respectively assigned to them in those enactments. Sections 89 and 90 deal with the manner in which declaration has to be made and the manner in which the payment of tax arrears is to be made. Section 91 provides that the designated authority shall, subject to the conditions provided in section 90, grant immunity from instituting any proceeding for prosecution for any offence under any direct tax enactment or indirect tax enactment, or from the imposition of penalty under any of such enactments, in respect of matters covered in the declaration under section 88. The provisions of section 94 make explicitly clear that any benefit, concession or immunity to the declarant shall be available only for the year in which the declaration has been made. Further, section 95 specifies certain circumstances, cases, situations in which the benefit of the scheme shall not be available. Sections 90 to 94 are of relevance and hence are extracted and reproduced as under : 90. Time and manner of payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter withdrawal of such writ petition, appeal or reference with the leave of the court, furnish proof of such with drawal along with the intimation referred to in sub-section (2). 91. Immunity from prosecution and imposition of penalty in certain cases.---The designated authority shall, subject to the conditions provided in section 90, grant immunity from instituting any proceeding for prosecution for any offence under any direct tax enactment or indirect tax enactment, or from the imposition of penalty under any of such enactments, in respect of matters covered in the declaration under section 88. 92. Appellate authority not to proceed in certain cases.---No appellate authority shall proceed to decide any issue relating to the disputed chargeable expenditure, disputed chargeable interest, disputed income, disputed wealth, disputed value of gift or tax arrear specified in the declaration and in respect of which an order had been made under section 90 by the designated authority or the payment of the sum determined under that section : Provided that in case an appeal is filed by a Department of the Central Government in respect of such issue relating to the disputed chargea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he tax arrears include wealth-tax or interest and penalty levied in addition to wealth-tax. Where tax arrear is only interest payable or penalty levied, 50% of such amount is to be paid. Where the tax arrears are determined on the basis of search and seizure proceedings under section 37A or 37B of Wealth-tax Act, the tax payable shall be @ 2% of the disputed wealth. (vi) In respect of tax arrears payable under the Gift-tax Act the amount payable shall be 30% of the disputed value of the gift where the tax arrears include gift-tax or interest payable and penalty levied in addition to gift-tax. Where tax arrear is only interest payable or penalty levied, 50% of such amount shall be paid. (vii) In respect of tax arrears payable under the Expenditure-tax Act, the amount payable shall be 10% of the disputed chargeable expenditure where the tax arrear is expenditure-tax or includes interest payable and penalty, in addition. Where the arrear is only in respect of interest or penalty, only 50% of the arrear shall be payable. (viii) In respect of tax arrears payable under the Interest-tax Act, the amount payable shall be at 2% of the disputed chargeable interest where tax arrear in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cution has been launched under any indirect tax enactment ; (ii) in a case where show-cause notice or notice of demand under Customs Act or the Central Excise Act has not been issued. (c) In respect of a person against whom prosecution for any offence punishable under Chapter IX and Chapter XVII of the Indian Penal Code, the Narcotics Drugs and Psychotrophic Substances Act, 1985, the Terrorist and Disruptive Activities (Prevention) Act, 1987, or the Prevention of Corruption Act, 1988, has been instituted. (d) In respect of a person against whom an order of detention has been made under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974. (e) In respect of a person notified under sub-section (2) of section 3 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992. Where the declarant has filed an appeal or reference or reply to the show-cause notice against any order or notice giving rise to tax arrear before any authority or tribunal, such appeal or reference or reply shall be deemed to have been withdrawn. No appellate authority or court shall try in a suit or issue relating to arrear tax specified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 40 40 - - - 40 Artificially Although whole disputed) --------------------------------------------------------------------------------------------------------------------------------------------------- Learned counsel submitted that there is no intelligible differentia to distinguish the cases of A, B and C. They all fall under the scheme but the impact of the scheme on the assessees falling in each of the three categories is different. Though each of the assessees is liable to pay the tax of ₹ 40 each, the incidence of tax is eliminated at different rates solely by reference to the factum of the tax having been actually paid or not on or after March 31, 1998. This is violative of entry 82 abovesaid. The assessees falling under category D are deprived of the benefit of the scheme merely because they have been honest and candid enough to pay the tax in its entirety though after March 31, 1998. Out of the assessees who have incurred the same amount of liability to pay the tax, a distinction cannot be drawn amongst themselves by formulating classes solely by finding out whether the tax has been paid or not paid and if paid then to what extent. Such a classification ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st be equal to all of them. Imposition of taxes on income under entry 82 of the Constitution does not permit inequality of any kind in this respect. No taxation law can be held to be constitutional unless it fulfils this test. (v) The inequality is glaring and obvious in as much is an assessee who succeeded before the Income-tax Appellate Tribunal or a High Court on a certain question of law relating to the assessment year being 1995-96 having a certain tax impact of Y, but has to lose finally on the basis of law laid down by the Supreme Court---the Department having carried forward the dispute till the end---shall have to pay the tax X, whereas another assessee who has failed till today on the question of imposition of X amount of tax in respect of the same assessment year 1995-96 and is bound to fail till the end to which the dispute is taken---can escape with the lesser burden of tax at 30 per cent. of the disputed income. This is unequal imposition of tax on the two assessees falling in the same class. (vi) The object of the scheme is to reduce tax arrears. For writing off tax arrears for any class of assessees no legislation is necessary. But here the writing off is cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ----------------------------------------------------------------------------------------------------- Total number of cases pending 1,35,000 in adjudication at various stages Tax arrears involved in disputes Realisation A. Direct Taxes ₹ 42,947 crores ₹ 38,000 crores (1997) B. Indirect Taxes ₹ 12,000 crores ---------------------------------------------------------------------------------------------------------------------------------------------------- (It was pointed out by the learned ASG that the sources of the abovesaid statistics are the CAG's report, and report of the Departmental Committee). The learned Additional Solicitor General submitted that the Scheme is neither discriminatory nor violative of fundamental rights. The scheme seeks to address the twin problem of large number of tax disputes and mounting tax arrears defying realisation. The Scheme is open to such assessees who have disputes pending as well as tax arrears linked to those disputes. This is a well defined category and a reasonable classification tailored to achieve the twin objective of the scheme. The learned Additional Solicitor General further submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ravened and the arbitrariness allegedly flowing into the scheme by reference thereto, it was submitted by the learned ASG that the incidence of the tax on the assessees shown as categories A, B, C and D in the illustration given by learned senior counsel for the petitioner remains the same ; what is altered is the extent of realisation guided by the factor of the tax having not been realised inspite of the lapse of time and the need for collection felt by the State. It was submitted that Parliament is well within its rights granting relief to certain assessees from recovering the tax by enacting a formula which would tempt or incentivise the defaulters into clearing of the arrears. This has nothing to do with the aspect of taxability of income. Before proceeding further, we may place on record that looking at the wide implications which the scheme has and the consequences which are likely to flow on the public exchequer depending on the challenge being upheld or turned down, Mr. M. S. Syali and Mr. J. R. Goel, the two learned advocates practising on taxation side sought leave of the court for addressing it which was allowed. The contentions raised by Mr. Syali deserve appropriat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Income-tax Act in which cases the free will or voluntary act of the assessee does not come into play at all. Such a situation suffers from the vice of unjustness or unfairness and irrationality. Before we may deal with the merits of the contentions advanced, we would like to refer to the Constitutional Bench decision in R. K. Garg v. Union of India [1982] 133 ITR 239, the leading authority on the subject, which has been referred to invariably in subsequent cases raising similar issues. Challenge was laid to the constitutional validity of the Special Bearer Bonds (Immunities and Exemptions) Ordinance, 1981, later on repealed by an Act of identical description. The test of classification by reference to article 14 was laid down as under: The classification must not be arbitrary but must be rational, that is to say, it must not only be based on some qualities or characteristics which are to be found in all the persons grouped together and not in others who are left out but those qualities or characteristics must have a reasonable relation to the object of the legislation. In order to pass the test, two conditions must be fulfilled, namely, (1) that the classification must be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith greater latitude than laws touching civil rights such as freedom of speech, religion, etc. It has been said by no less a person than Holmes J., that the Legislature should be allowed some play in the joints, because it has to deal with complex problems which do not admit of solution through any doctrinaire or straitjacket formula and this is particularly true in the case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the Legislature. The court should feel more inclined to give judicial deference to legislative judgment in the field of economic regulation than in other areas where fundamental human rights are involved. A few other decisions which were relied on by the learned ASG may also be noticed. In Shankarlal v. ITO [1998] 230 ITR 536 (AP), and United Credit and Investments v. Director of I. T. (Investigation) [1998] 231 ITR 660 (Kar), the vires of the Voluntary Disclosure of Income Scheme introduced by section 64 of the Finance Act, 1997, were challenged. The object of the scheme was to give concessional rate of tax and immunity in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omponent of the concept of tax and hence the validity of a tax legislation would not be decided by keeping in view the realisability of tax. In J. K Cotton Spinning and Weaving Mills Ltd. v. Union of India, AIR 1988 SC 191 ; [1987] 32 ELT 234, their Lordships have said (vide pr. 10) there is a distinction between levy and collection of duty. In Federation of Hotel and Restaurant Association of India v. Union of India [1989] 178 ITR 97 (SC), it has been held that the subject of a tax is different from the measure of levy. The measure of the tax is not determinative of its essential character or of the competence of the Legislature. Flexibility in the modes of effectuating a tax in view of innate complexities in the fiscal adjustment of diverse economic factors inherent in the formulation of a policy of taxation and variety of policy options open to the State is permissible. Merely because the scheme permits waiver of recovery of tax partially, and by adopting a certain formula which in its application will result in different quantum of relief being allowed to different litigants in different percentage depending on the quantum of arrears of tax that does not render the scheme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o condemn the legislation as arbitrary or irrational and hence violative of article 14. The validity of classification has to be decided and judged in the light of the object sought to be achieved. The objective is twofold. While judging the validity of the classification we have to keep both the limbs of the object in view. The learned Additional Solicitor-General has very rightly pointed out that allowing the benefit of the scheme to such litigating assessees from whom the Revenue has succeeded in effecting recovery even by adopting coercive methods or by making adjustments would have been destructive of the very objective sought to be achieved. It is immaterial whether the tax was paid voluntarily by the assessee or realised involuntarily by the Department resorting to coercive means of recovery or by making adjustment ; the fact remains that the assessee ceases to be in arrears. By giving the benefit of the scheme to such class of assessees the Revenue does not stand to gain anything rather it stands to lose inasmuch as what has been realised shall have to be refunded. In our opinion, the basis of classification adopted by the scheme to this extent is guided by the objective ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee-A who in spite of having succeeded at one stage of the litigation is still prepared to give up his fight though by way of defence and is prepared to accept his liability to pay the tax which was quantified at one stage. The learned ASG submitted that even here the distinction is well defined and intelligible. As against B, his having lost in the tax litigation, the amount of tax levied on income would be treated to be in arrears by the Revenue so long as it is not realised. In the case of A, he having succeeded in appeal before the Commissioner, the tax ceases to be in arrears and it would assume the character of arrears only on the appeal by the Tribunal being decided favourably to the Revenue. Therefore, where the Department is the appellant, an assessee though litigating cannot be treated to be in arrears. We find it difficult to agree. The abovesaid submission puts a narrow and too rigid a meaning on arrears which does not fit in the context. The term arrears means an amount or quantity which still needs to be paid. It refers to money that is owed. Wharton's Law Lexicon (Fourteenth edition) defines arrears to mean---'money unpaid at the due time : as spen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional relation to the object sought to be achieved by the Act. The twin test laid down in R.K. Garg's case [1982] 133 ITR 239 (SC), would fail. On the other hand, keeping them in one class would enable the twin objectives of the legislation being achieved---(i) the reduction of litigation, and (ii) the realisation of revenue. In the view we have taken hereinabove we are fortified by the principle laid down by the Supreme Court in the case of Shashikant Laxman Kale v. Union of India [1990] 185 ITR 104. Their Lordships have held : In order to see whether classification in a particular taxing provision is valid, the court must look beyond the ostensible classification and to the purpose of the law and apply the test of 'palpable arbitrariness' in the context of the felt needs of the times and societal exigencies informed by experience to determine the reasonableness of the classification. Where the plain literal interpretation of a statutory provision creates a manifestly unjust result, which could never have been intended by the Legislature, the court might modify the language used by the Legislature, so as to achieve the intention of the Legislature and produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars is ₹ 6,000 only and that his availing of the scheme to the extent of ₹ 6,000 would result in excluding his right to have the issue decided to the extent of the entire ₹ 10,000. Keeping this factor in view he may opt for the scheme or he may not. Nobody compels him to do so. He is the master of his own discretion. In our opinion, the learned ASG is right. There is yet another way of looking at the riddle. In the fact situation as demonstrated hereinabove section 92 can be so read as to hold that the issue though common to ₹ 6,000 and ₹ 4,000 both, would not be available for decision to the extent of ₹ 6,000 covered by the scheme and shall not be decided or deemed to have been decided to that extent. But it would not have any effect by virtue of section 92 on the amount of tax to the extent of ₹ 4,000. We do not propose to express any final opinion on this plea in this judgment and leave the same to be determined in an appropriate and concrete case. This we say for two reasons. Firstly, we do not have a specific case before us. Secondly, the plea has been raised not in the petition but only by way of intervention of the hearing. For th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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