The Income Declaration Scheme, 2016: Certain Aspects

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Customer Care No. 91-11-45562222
The Income Declaration Scheme, 2016 Certain
Aspects
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• Last year, it was a one-time compliance window
  under the Black Money (Undisclosed Foreign Income
  and Assets) and Imposition of Tax Act, 2015 ('the
  BM Act') to report the undisclosed offshore
  assets. Now it is an Income Declaration Scheme,
  2016 ('IDS, 2016') to declare undisclosed income
  from a domestic source. The former scheme
  received lukewarm response in terms of tax yield,
  given the high tax rate (60 incl. tax and
  penalty) and the concept of fair market value for
  valuing the asset for computing the tax
  liability. Similar doubts are being raised
  regarding the latter scheme as it has both these
  features, i.e., high tax rate (45 incl. tax,
  surcharge, and penalty) and the fair market value
  concept to value the asset if the undisclosed
  income is in the form of investment in any asset.
  A key argument is often presented that a
  voluntary disclosure scheme with more generous
  terms (such as lower tax rate, immunities from
  various laws) is needed to encourage delinquent
  taxpayers to pay their due taxes which can be
  utilised to improve the much-needed
  infrastructure in the country. In that case,
  presumably, the counter argument is that such a
  scheme would be discriminatory against the
  law-abiding taxpayer (in fact, the VDIS,
  1997 could have been struck down by the Supreme
  Court but for the Government assuring the Court
  that henceforth they would not come out with such
  schemes). Thus, the introduction of any such
  scheme often involves economic efficiency,
  morality, and constitutionality issues. This
  article, however, is restricted to certain issues
  arising from the IDS, 2016.

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• 2. Certain Aspects of IDS, 2016
• Broad framework
• 2.1 The IDS, 2016 is broadly framed on the lines
  of one-time compliance window provided under the
  BM Act (sections 59 to 72). Further, the current
  scheme has some similarities (discussed at
  appropriate places) with the earlier schemes
  (scheme of 1965, 1975 and 1997) and, therefore,
  the CBDT instructions / clarifications and the
  judicial pronouncements interpreting these
  schemes shall be useful.
• Declarant, Meaning of
• 2.2 The word "declarant" has been defined to mean
  a person making the declaration under section
  183(1) of the scheme. Since the word "person" is
  not defined in the scheme, as per section 182(c)
  of the scheme, reference should be made to the
  definition of the word "person" as contained in
  section 2(31) of the Income Tax Act, 1961 ('the
  IT Act'). Accordingly, it will cover Individual,
  HUF, Company, Firm, etc., irrespective of its
  residential status. Therefore, even a
  non-resident person is eligible under this
  scheme. Interestingly, while moving the Finance
  Bill, 2016 in the Lok Sabha, the Finance Minister
  said that IDS is open for domestic taxpayers.
  However, it is well-settled that when the
  language is plain, clear and unambiguous, the
  speech of the Finance Minister should not be
  looked into.

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• Phrase "Income chargeable to tax"
• 2.3 Under Section 183 of the scheme, a person may
  make a declaration in respect of any "income
  chargeable to tax" under the IT Act within the
  notified period. In the context of Voluntary
  Disclosure of Income and Wealth Ordinance, 1975,
  the Calcutta High Court in the case
  of CIT v.Sumati Kumar Sunil Kumar held that the
  concept of income chargeable to tax in the
  Voluntary Disclosure Scheme is the same as in the
  IT Act. Further, the phrase "Income chargeable to
  tax" was used in the VDIS, 1997. In this respect,
  it was reiterated by the CBDT that the
  computation of income chargeable to tax would be
  in accordance with the provisions of the IT Act.
  Under the IT Act, while computing the income, one
  is required to take into account all the eligible
  expenditures, deductions and set-off of allowable
  losses. However, section 183(4) of the Finance
  Act, 2016 impliedly overrides the income
  computation provisions given in the IT Act to
  provide that "No deduction in respect of any
  expenditure or allowance shall be allowed against
  the income in respect of which declaration under
  this section is made". Thus, it is evident that
  declarant shall not be allowed to claim any
  deduction of any expenditure in relation to
  income offered under this scheme. Interestingly,
  looking at the current language of section
  183(4), it appears that set-off of losses against
  undisclosed income shall be available. In this
  context, one may refer to section 5(1) of the BM
  Act which additionally puts a restriction on
  "set-off of any loss". The said section reads as
  follows in computing the total undisclosed
  foreign income and asset of any previous year of
  an assessee, (i) "no deduction in respect of any
  expenditure or allowance or set-off of any
  loss shall be allowed to the assessee, whether or
  not it is allowable in accordance with the
  provisions of the Income-tax Act"

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• Will disclosure made by the declarant be subject
  to examination?
• 2.4 Unlike Voluntary Disclosure of Income Scheme,
  1965, this scheme, on the lines of VDIS, 1997,
  does not expressly require the Principal
  Commissioner or the Commissioner to make any
  enquiry/verification while issuing
  acknowledgement and certificate of declaration.
  However, looking at Form 2, it seems that the
  Commissioner is supposed to decide the
  eligibility of undisclosed income declared by the
  assessee and provide the reason for rejection.
  Further, Form 4 states that "this is to
  acknowledge that a declaration under section 183
  of the Finance Act, 2016 has been accepted". Now
  the question arises as to whether the Principal
  Commissioner or the Commissioner while doing so,
  will ask any question, or request for any
  relevant documents, to certify the accuracy of
  the undisclosed income declared. Although the IDS
  Rules, 2016 are silent on this aspect, the CBDT
  has clarified that scope of enquiry shall be
  restricted to check whether any proceeding under
  section 142(1)/143(2)/148/153A/153C is pending
  for the assessment year for which declaration has
  been made. The next question arises as to whether
  there will be any further scrutiny by the
  Assessing Officer once the certificate has been
  issued by the Principal Commissioner or the
  Commissioner. The Finance Minister in his budget
  speech said that "there will be no scrutiny or
  enquiry regarding income declared in these
  declarations under the Income Tax Act or the
  Wealth Tax Act". However, this statement reflects
  only half the truth. The scheme puts the entire
  onus on the declarant to ensure that he does not
  come under the prohibited category. Thus, it is
  clear that in future years, if the assessee
  claims before the Assessing Officer that he had
  made certain disclosures under IDS, 2016 and to
  that extent he should not be subjected to double
  taxation, the Assessing Officer will primarily
  examine whether the assessee was eligible for
  filing the declaration?.

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