2026 (1) TMI 80 - HC - Income Tax

Income Declaration Scheme declarant's missed third instalment: self-assessment tax treated as scheme payment, Form-4 ordered issued

Where a declarant under the Income Declaration Scheme, 2016 failed to pay the third instalment and, by virtue of s.197(b) of the Finance Act, 2016, ... Inaction of the Respondents in not issuing Form No. 4 under the Income Declaration Scheme, 2016 despite the Petitioner having paid the due taxes, surcharge, and penalty - Petitioner seeks consequential reliefs, including the setting aside of the assessment order for Assessment Year (A.Y.) 2017-18, which taxes the very income declared under the Scheme, leading to double taxation -Whether the Self-Assessment Tax paid by the Petitioner can be considered as payment towards the liability under the Scheme? - HELD THAT:- The Petitioner’s liability to pay Self-Assessment Tax arose for one reason and one reason alone: the initial failure to pay the third instalment under the Scheme, which, by operation of law [Section 197(b) of the Finance Act, 2016], shifted the tax liability for the undisclosed income to the regular assessment under the IT Act. The payment of Rs. 45,00,000/- is, therefore, inextricably linked to or related to the undisclosed income of Rs. 3,51,10,300/-. When the Central Government, through the Finance (No. 2) Act, 2019, and the subsequent notification, provided a second opportunity to declarants, the intent was clearly to allow them to regularise their declarations and come clean. This was a beneficial provision aimed at resolving disputes and collecting revenue. The objective was not to penalise declarants with double taxation arising from procedural complexities. We find that the payment of Self-Assessment Tax was made only because the declaration under the Scheme was deemed to have been rejected. There was no other reason for the Petitioner to offer the undisclosed income to tax in the revised return of income for A.Y. 2017-18. Therefore, in a way, the payment of self-assessment tax can also be considered to arise on account of the deeming fiction created by Section 197(b) of the very same Scheme. Thus, such self-assessment tax is also, in a way, a payment of tax under the scheme or by virtue of a fiction created under the Scheme. Since this payment is directly linked to the undisclosed income, credit for the same ought to have been given when the Petitioner made the final payment under the revived Scheme. The refusal of the Respondents to acknowledge this payment and their failure to issue Form-4 is therefore arbitrary and unsustainable in law. We find support from the clarification issued by the CBDT in Circular No. 25/2016. In light of the above findings, the petition succeeds. We accordingly, pass the following order: a) Respondent No. 1 is directed to treat the payment of Rs. 45,00,000/- made as Self-Assessment Tax by the Petitioner on 27 March 2018, as a valid payment towards the third instalment liability under the Income Declaration Scheme, 2016. Respondents shall take all necessary steps in this regard, including a change in the head of payment in the challan as well as in their system, if so necessary. b) Respondent No. 1 shall issue Form-4 to the Petitioner, acknowledging the acceptance of the declaration filed on 26 September 2016. c) As a consequence of the issuance of Form-4, and in accordance with Section 188 of the Finance Act, 2016, undisclosed income of Rs. 3,51,10,300/- should be reduced from the total income of the Petitioner for A.Y. 2017-18. Respondent No. 2 shall pass necessary orders giving effect to this order in this regard and modify the assessment order dated 11th December 2019 for the A.Y. 2017-18. d) As a consequence, Respondent No. 2 shall revise the computation of income and notice of demand issued for A.Y. 2017-18, after reducing the total income by Rs. 3,51,10,300/- and by not granting credit of self-assessment tax of Rs. 45,00,000/- in A.Y. 2017-18. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether the Self-Assessment Tax payment made for the relevant assessment year, attributable solely to the declared undisclosed income becoming taxable under the regular law due to non-payment under the Income Declaration Scheme, 2016, must be treated as a valid payment towards the Scheme liability upon grant of the subsequent payment opportunity. (ii) Whether, upon such treatment and completion of payments, the authority is required to issue Form-4 acknowledging acceptance of the declaration, and whether consequential exclusion of the declared undisclosed income from the assessment year's total income and modification of the assessment computation and demand must follow. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Treatment of Self-Assessment Tax as payment towards the Scheme liability Legal framework (as considered by the Court): The Court examined the Scheme's consequence of non-payment whereby the declared undisclosed income becomes chargeable to tax under the regular law in the year of declaration, and the later statutory/notification-based 'second opportunity' permitting defaulting declarants to regularise payment. The Court also applied the constitutional requirement that tax collection must have authority of law (Article 265), and considered the CBDT clarification (Circular No. 25/2016) to the extent it was relied upon to allow credit of taxes related to income declared under the Scheme where not otherwise already claimed. Interpretation and reasoning: The Court found the case 'unique' because the Self-Assessment Tax liability arose 'for one reason and one reason alone': the prior failure to pay the Scheme's final instalment, which by operation of the Scheme shifted taxation of the same undisclosed income to regular assessment. The Self-Assessment Tax payment was therefore 'inextricably linked' to that undisclosed income. When the later beneficial relaxation provided a second opportunity to revive the declaration, the intent was to enable regularisation and revenue collection, not to create a situation of double taxation from procedural complexities. The Revenue's objection that no express provision permitted adjustment was held 'hyper-technical' and contrary to the 'substance of the transaction.' Requiring payment again under the Scheme while retaining the Self-Assessment Tax already paid for the same income was held unjust, inequitable, and contrary to Article 265. The Court further reasoned that the Self-Assessment Tax payment effectively arose from the Scheme's own deeming consequences, and thus could be considered a tax payment arising by virtue of the Scheme's legal fiction. Relying on the CBDT clarification that taxes related to declared income should be allowed under the Scheme (where not already claimed), the Court held that this rationale applied 'with more force' because the payment was made only due to non-acceptance at that stage and directly related to the declared undisclosed income. Conclusions: The Court conclusively held that the Self-Assessment Tax amount must be treated as a valid payment towards the Scheme's instalment liability, directed the authorities to take steps including changing the payment head in the challan/system if necessary, and held that refusal to recognise it and the consequential failure to issue Form-4 was arbitrary and unsustainable in law. Issue (ii): Mandatory issuance of Form-4 and consequential modification of assessment to avoid taxing the same income Legal framework (as considered by the Court): The Court applied the consequence provision requiring exclusion/reduction of the declared undisclosed income from total income once the declaration is accepted under the Scheme (as directed to be given effect to under Section 188 as referred to by the Court), and ordered consequential modification of the assessment, computation, and demand for the relevant assessment year. Interpretation and reasoning: Having concluded that the Scheme liability stood satisfied when the Self-Assessment Tax was treated as part of the instalment payment and the balance amounts (with interest) were paid within the extended window, the Court held that the declaration must be acknowledged through issuance of Form-4. The Court further reasoned that once Form-4 is issued and the declaration is accepted, the undisclosed income covered by the Scheme cannot simultaneously remain taxed in the regular assessment for the same year; otherwise it would perpetuate double taxation of the same income. Accordingly, the assessment order, computation, and demand required recalibration to reflect removal of the declared undisclosed income from the assessed total income, and to ensure the Self-Assessment Tax amount (now treated as Scheme payment) is not again granted as credit in the regular assessment computation. Conclusions: The Court directed issuance of Form-4; directed reduction of the declared undisclosed income from the total income for the assessment year and modification of the assessment order accordingly; and directed revision of the computation and demand after reducing total income by the declared amount and by not granting credit of the Self-Assessment Tax in that assessment year (since it was to be treated as Scheme payment). The Court treated the petitioner's alternative argument as academic and declined adjudication on it. A time-bound completion of the entire exercise within 60 days was ordered.