2012 (6) TMI 208 - HC - Income Tax

High Court sets aside Tribunal's order, ruling KVSS settlement final. Revenue's appeal exclusion not held against assessee.

Dr. S. Jagatrakshagan Versus The Deputy Commissioner of Income Tax

Dr. S. Jagatrakshagan Versus The Deputy Commissioner of Income Tax - TMI 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.