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    Act RulesIncome Tax
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    Penalty on undisclosed income: fixed levy on withholding-tax liability, with exemption for timely disclosure and payment.
    A discretionary penalty applies where assessed income includes categories of unexplained or undisclosed receipts imported by reference to existing provisions; it is levied as a percentage of the tax payable under the withholding-tax provision, is additional to that tax, is not imposed if the income was included in the return and the withholding tax paid within the relevant year, and cannot be duplicated by another penalty for the same income. The enacted text omits an explicit cross-application of existing procedural penalty machinery, creating procedural uncertainty.
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    Penalty for under-reporting: statutory regime imposing enhanced sanctions for deliberate misreporting and rules for computing tax on additions.
    Clause 439 creates a penalty regime for under reporting and aggravated misreporting during tax proceedings by defining deemed under reporting events, prescribing formulae to compute under reported income (including interactions with deemed total income rules), allocating additions across years to prevent double counting, listing exceptions where penalties will not apply, enumerating aggravating misreporting acts that attract higher sanctions, and requiring that penalty be imposed by written order of the Competent Authority.
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    Set-off of tax refunds: authorities may offset or temporarily withhold refunds subject to written intimation and procedural safeguards.
    Section 438 authorises the Assessing Officer and senior Commissioners to set off refunds due against outstanding tax liabilities and to withhold refunds where assessment or reassessment proceedings are pending. Set off must follow written intimation to the taxpayer. Withholding a refund while proceedings are pending is limited in time and requires reasons recorded in writing plus prior approval of the Principal Commissioner or Commissioner.
    Act RulesIncome Tax
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    Interest on refunds: entitlement to monthly simple interest and additional annual interest where orders trigger refunds.
    Interest on refunds is payable as simple interest at a monthly rate from specified starting dates determined by refund source (tax collected at source/advance tax/treatment as paid; tax paid under specified provisions; excess payments under demand notices), with an additional annual interest where refunds follow certain appellate or rectification orders. Periods attributable to the assessee/deductor are excluded; immaterial refunds below a threshold do not attract interest for defined categories; interest is adjusted if subsequent orders change the underlying amount and assessing officers may demand excess interest.
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    Two-tier fee for late tax return filing: fixed higher fee for higher-income filers and capped fee for others.
    A statutory two tier fee applies where a person required to furnish a return within the prescribed time fails to do so. Both enacted and bill texts impose a fixed higher fee for taxpayers above the income threshold and a lower fee capped for taxpayers at or below that threshold. The enacted drafting places the capped lower fee first, preserving discretion up to the cap for lower income filers; both texts operate without prejudice to other provisions of the Act and cross reference the filing time provision. Procedural and enforcement details are not stated.
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    Daily fee for delayed tax statements requires prepayment before filing and is capped at the tax collectible amount.
    A mandatory daily fee applies where a person fails to deliver a prescribed statement of tax deducted or collected at source within the time prescribed in a cross referenced subsection; the fee accrues each day until compliance, is capped so it does not exceed the amount of tax deductible or collectible for the period, and must be paid before delivering the delayed statement, without prejudice to other liabilities under the Act.
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    Advance tax interest rules require instalment-specific payments; shortfalls attract staged interest and safe harbour thresholds for compliance relief.
    Section 425 imposes interest where advance tax instalments fall short of prescribed percentages by due dates, tying liability to tax due on the returned income. It prescribes staged instalment percentages and graduated interest on interim versus final shortfalls, provides two early safe harbour minima that eliminate interest if met, treats certain classes (profits declared under specified entries) with a distinct simple interest rule for the final instalment, and exempts shortfalls from interest for specified late arising incomes if taxed by later instalments or by 31 March.
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    Interest for defaults in payment of advance tax triggers monthly simple interest where advance payments fall short of assessed tax.
    The provision charges simple interest where a taxpayer fails to pay advance tax or pays less than the safe harbour proportion of assessed tax, starting from 1 April following the tax year until determination of total income or completion of regular assessment. Interest is computed on assessed tax or the shortfall, with the assessed tax base reduced by specified items such as tax deducted/collected at source, reliefs and eligible tax credits; reassessment or recomputation increases or reduces interest accordingly and payments already made reduce liability.
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    Interest for defaults in furnishing return may accrue from differing start dates, altering the interest period and liabilities.
    Section 423 charges simple interest for defaults in furnishing returns by applying a formula based on a tax base "A" and a period "T", with a Table linking specific filing or non-filing scenarios to starting and ending events for the interest period, reductions of the tax base by a prescribed definition of "tax paid", and provisions for adjustment (notice of demand or refund) where post-assessment orders change the tax on which interest is calculated.
    Act RulesIncome Tax
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    Stay of recovery: mandatory pause during granted payment time and while appeal-linked reductions remain pending.
    Section 415 requires the Tax Recovery Officer to grant time for payment and stay recovery during that period, and to stay recovery of any portion of a certificate corresponding to a reduced demand while related proceedings remain pending; where the order giving rise to the demand is modified and becomes final, the Officer must amend or cancel the certificate. The Act's enacted text links reductions specifically to modification of the order giving rise to the demand, narrowing the Bill's broader phrasing.
    Act RulesIncome Tax
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    Payment deadline for tax demands triggers monthly interest and potential acceleration on instalment default, while relief may be available.
    Clause 411 makes amounts in a notice of demand payable ordinarily within thirty days of service, permits the AO with Joint Commissioner approval to shorten that period, and charges simple monthly interest from the day after the due date until payment. The AO may extend time or allow instalments on timely application, but any instalment default accelerates the whole outstanding amount. Commissioners may reduce or waive interest for genuine hardship or circumstances beyond control, subject to cooperation and procedural safeguards. Where foreign law prevents remittance, the non remittable portion must not be treated as in default.
    Act RulesIncome Tax
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    Advance tax obligation: taxpayers must self estimate income and pay instalments, with permitted adjustments to remaining payments.
    Every person liable to pay advance tax must remit instalments based on the assessee's own estimate of current income (the specified sum) and the tax thereon, calculated by the prescribed method and paid at prescribed instalment percentages and due dates; taxpayers may increase or reduce amounts in remaining instalments to reflect revised estimates, and the clause itself defines specified sum but is silent on exceptions, enforcement, interest, penalties and procedural recordkeeping.
    Act RulesIncome Tax
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    Withholding definitions expanded to include both incorrect deduction and collection rates, increasing administrative scrutiny of statements.
    Section 402 provides the definitional framework for deduction and collection at source, specifying who is a person responsible for paying, buyer, seller and other categories, and defining transactional terms including rent, immovable property and digital-economy roles. The Act expands the concept of an "incorrect claim apparent from any information in the statement" to cover both incorrect rates of deduction and incorrect rates of collection, thereby enabling identification of filing errors from statements alone. Turnover thresholds and carve-outs determine when withholding obligations arise; several definitions rely on cross-references to external provisions.
    Act RulesIncome Tax
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    Deemed assessee in default for non-deduction or non-collection of tax exposes deductors/collectors to interest and asset charge.
    Failure to deduct, collect, or pay tax causes the person required to do so to be deemed an assessee in default, liable for interest on delayed deduction/collection and on delayed payment, and, where tax has been deducted or collected but not paid, the tax and interest form a statutory charge on all assets; a safe harbour exists if the recipient has filed a return, included the amount and paid tax and the deductor/collector produces the prescribed accountant's certificate, while penalty can be imposed only if the assessing officer is satisfied there were no good and sufficient reasons for the failure.
    Act RulesIncome Tax
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    TAN/PAN compliance tightens reporting and mandates higher withholding where PAN is not furnished, while shortening correction windows.
    Clause 397 mandates TAN application and mandatory TAN quoting by deductors/collectors, requires payees/payers to furnish a PAN (with enacted text adding a "valid" PAN requirement), prescribes higher withholding/collection rates where PAN is not furnished subject to enumerated exceptions, requires timely deposit of deducted/collected tax and filing of prescribed statements, provides a correction statement mechanism with a time limit, sets special reporting duties for payments to non residents and small interest payments by banks/co operatives/public companies, and preserves collector liability for unpaid but collectible tax.
    Act RulesIncome Tax
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    Certificates for lower tax withholding enable AO-issued rates or nil deduction and proportionate nonresident withholding relief.
    Clause creates an AO-issued certificate system permitting payees, buyers/licensees/lessees and payers to obtain prescribed-form certificates altering the rate (or, under the Act, rate or nil deduction) at which tax is deducted or collected; for non-salary payments to non-residents the payer may seek a proportionate determination of the taxable part; deductors/collectors must issue prescribed documentary certificates to deductees/collectees and the AO may cancel certificates after affording a reasonable opportunity, with detailed forms, validity and procedures left to rules.
    Act RulesIncome Tax
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    Collection of tax at source: TCS on specified receipts with exemptions, non cumulation and documentation duties.
    Clause 394 prescribes TCS on nine specified receipt types with collectors (sellers, authorised dealers, licensors/lessors) required to collect at prescribed rates at the earlier of debiting the buyer's account or receipt. Indian resident buyers may avoid collection by furnishing a prescribed declaration of end use; the enacted law imposes a delivery timeline for that declaration and adds an exemption for certain education loan funded remittances. The provision includes non cumulation rules to prevent duplicate collection and leaves procedural specifics to subordinate rules.
    Act RulesIncome Tax
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    Tax withholding obligations expanded to cover e-commerce and virtual asset transfers, with precedence rules to prevent multiple deductions.
    Section 393 prescribes a comprehensive TDS matrix covering payments to residents, non-residents and any person, listing payment categories, the person liable to deduct, rates or rates-in-force and monetary thresholds. Deduction is required at credit or payment, whichever is earlier, with specific precedence rules (notably for e-commerce) to prevent multiple deductions. The section contains carve-outs and nil-deduction declaration mechanisms subject to conditions and reporting; operational guidance emphasises mapping payments to entries, retaining declarations and ensuring tax on mixed cash and in-kind transactions before release.
    Act RulesIncome Tax
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    Deduction of tax at source on salaries: payer obligation to withhold at average rate and trustees to withhold on accumulations.
    Section 392 places primary TDS obligation on payers of salary to deduct tax at the time of payment at the average rate on estimated annual income; employers may opt to pay tax on non monetary perquisites. Trustees of recognised provident and superannuation funds must deduct tax where Schedule XI applies, with a specified 10% withholding rule for certain employees' provident fund accumulations. The enacted text tightens prescribed form and verification requirements, alters a cross reference to section 17, and expressly permits eligible start ups to "deduct or pay, as the case may be."
    Act RulesIncome Tax
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    Withholding tax and advance payments operate independently of assessment, securing provisional tax credits and rule making authority.
    Deduction or collection at source, advance payment, and specified payments under section 392(2)(a) operate independently of later assessment and are additional to other recovery measures; amounts remitted to the Central Government are treated as tax paid on behalf of the person from whose income tax was deducted, from whom tax was collected, or in respect of whose income tax was paid, and the Board may make rules for crediting such amounts and for attributing the tax year for credit.

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      Introduction of concept of mediation and Advance Ruling System for Residents to reduce tax litigation and more clarity

      15 September, 2020

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      2020 (9) TMI 496 - Supreme Court

      While decided an issue pertaining to AY 1976-77, honorable Supreme Court has wrote two postscript with the following note:

      We have been persuaded to write two postscripts on account of the backbreaking dockets which are ever increasing and as a move towards a trust between the Tax Department and the assessee, and we hope that both the aspects meet consideration at an appropriate level. [Para 21]

       

      Postscript 1:

      1. The Indian legal system is reeling under a docket explosion.

      The Government and public authorities are active contributories to this deluge. To top it, a number of litigations arise inter se the Government and its bodies and, thus, the only question, as stated in the beginning, is which pocket of the Government will be benefitted?

      2. The aforesaid position resulted in a judicial innovation with the Supreme Court passing orders in Oil and Natural Gas Commission & Anr. v. Collector of Central Excise [1991 (10) TMI 58 - Supreme Court] requiring that such cases must be referred to a Committee to be appointed by the Government to facilitate a resolution of such disputes and that no case should be filed without the approval of this Committee. This system was a failure as is apparent from the facts of the present case, where the SLP filed by the appellant-Corporation was initially dismissed with liberty to revive the same in case the High Powered Committee granted such a permission which was so granted in a meeting held on 14.08.2009. The said Committee discussed the legal ramifications, and in some way opined in favour of the appellant-Corporation, as is apparent from the discussion aforesaid. But the ball was again lobbed back into the Court to adjudicate the said issue rather than a resolution being reached. The result was only the revival of the appeal, and the consequent decision which has seen the light of the day only now.

      3. The aforesaid failure of the system resulted in the Supreme Court recalling its orders in the ONGC cases vide Electronics Corporation of India v. Union of India. [2011 (2) TMI 3 - Supreme Court].

      4. The Central Government and the State authorities have been repeatedly emphasising that they have evolved a litigation policy. Our experience is that it is observed more in breach. The approach is one of bringing everything to the highest level before this Court, so that there is no responsibility in the decision-making process – an unfortunate situation which creates unnecessary burden on the judicial system. This aspect has also been commented upon in a judgment of this Court in Union of India & Ors. v. Pirthwi Singh & Ors., [2018 (4) TMI 1586 - Supreme Court]   albeit between the Government and the private parties, where the question of law had been settled and yet the appeal was filed only to invite a dismissal. The object appears to be that a certificate for dismissal is obtained from the highest court so that a quietus could be put to the matter in the Government Departments. Undoubtedly, this is complete wastage of judicial time and in various orders of this Court it has been categorized as “certificate cases”, i.e., the purpose of which is only to obtain this certificate of dismissal.

      5. The 126th Law Commission of India Report titled ‘Government and Public Sector Undertaking Litigation Policy and Strategies’ debated the Government versus Government matters which weighed heavily on the time of the Courts as well as the public exchequer. This was as far back as in 1988. It was only in the year 2010 that the National Litigation Policy (for short ‘NLP’) was formulated with the aim of reducing litigation and making the Government an efficient and responsible litigant. Five (5) years later it reportedly saw a revision to increase its efficacy, but it has hardly made an impact. In the year 2018, the Central Government gave its approval towards strengthening the resolution of commercial disputes of Central Public Sector Enterprises (for short ‘CPSEs’)/ Port Trusts inter se, as well as between CPSEs and other Government Departments/Organisations. The aim was and is to put in place a mechanism within the Government for promoting a speedy resolution of disputes of this  kind, however it excluded disputes relating to Railways, Income Tax, Customs and Excise Departments. It has now been made applicable to all disputes other than those related to taxation matters. This was pursuant an order passed in The Commissioner of Income Tax (Exemptions) v. National Interest Exchange of India -SLP (C) Diary No. 35567 of 2019 [2020 (3) TMI 1250 - SC ORDER] by a bench of which one of us (Sanjay Kishan Kaul, J.) was a part.

      6. Insofar as non-taxation matters are concerned, the Administrative Mechanism for Resolution of CPSEs Disputes was conceptualised to replace the Permanent Machinery of Arbitration and to promote equity through collective efforts to resolve disputes. It has a two-tiered structure.

      7. At the first level, commercial disputes will be referred to the Committee comprising Secretaries of the Administrative Ministries/Departments to which the disputing parties belong and the Secretary, Department of Legal Affairs. In case the two disputing parties belong to the same Ministry/Department, the Committee will comprise Secretary of Administrative Ministry/Department concerned; the Secretary, Department of Legal Affairs and the Secretary, Department of Public Enterprises. If a dispute is between a CPSE and a State Government Department/Organisation, the Committee will comprise of the Secretary of the Ministry Department of the Union to which the CPSE belongs, the Secretary, Department of Legal Affairs and the Chief Secretary of the State concerned. Such disputes are ideally to be resolved at the first level itself within a time schedule of three (3) months, and in the eventuality of them remaining unresolved, the same may be referred to the Cabinet Secretary at the second level, whose decision will be final and binding on all concerned.

      8. We are of the opinion that one of the main impediments to such a resolution, plainly speaking, is that the bureaucrats are reluctant to accept responsibility of taking such decisions, apprehending that at some future date their decision may be called into question and they may face consequences post retirement. In order to make the system function effectively, it may be appropriate to have a Committee of legal experts presided by a retired Judge to give their imprimatur to  the settlement so that such apprehensions do not come in the way of arriving at a settlement. It is our pious hope that a serious thought would be given to the aspect of dispute resolution amicably, more so in the post-COVID period.

      9. In most countries, mediation has proved to be an efficacious remedy and here we are talking about mediation inter se the Government authorities or Government departments. India is now a signatory to the Singapore Convention on Mediation and we understand that a serious thought is being given to bring forth a comprehensive legislation to institutionalise mediation, in furtherance of this function to which India has committed itself.

      Postscript 2:

      10. We now turn to the issue of matters pertaining to CPSEs and Government authorities insofar as taxation matters are concerned,  because they are consistently sought to be carved out as a separate category of cases. One of the largest areas of litigation for the Government is taxation matters. The petition rate of the tax department before the Supreme Court is at 87%. - See ‘Economic Survey 2017-19 – Volume 1’ by the Department of Economic Affairs, Ministry of Finance, Government of India So, the question is can something be done about it?

      11. In our opinion, a vibrant system of Advance Ruling can go a long way in reducing taxation litigation. This is not only true of these kinds of disputes but even disputes between the taxation department and private persons, who are more than willing to comply with the law of the land but find some ambiguity. Instead of first filing a return and then facing consequences from the Department because of a different perception which the Department may have, an Advance Ruling System can facilitate not only such a resolution, but also avoid the tiers of litigation which such cases go through as in the present case. In fact, before further discussing this Advance Ruling System, we can unhesitatingly say that, at least, for CPSEs and Government authorities, there would be no question of taking this matter further once an Advance Ruling is delivered, and even in case of private persons, the scope of any further challenge is completely narrowed down.

      12. It is as far back as in 1971 that a report was submitted by the Direct Taxes Enquiry Committee under the Chairmanship of Dr. K.N. Wanchoo, recognising the need for providing Advance Ruling System, particularly in cases involving foreign collaboration. The aim was to give advance rulings to taxpayers or prospective taxpayers, which would then considerably reduce the Revenue’s workload and decrease the number of disputes. This finally resulted in a scheme of Advance Ruling being brought into effect in 1993, with the introduction of a new Chapter in the Income Tax Act, 1961 (hereinafter referred to as the ‘IT Act’). A quasi-judicial tribunal was established as the Authority for Advance Rulings (for short ‘AAR’) to provide certainty and avoid litigation related to taxation of transactions involving non- residents. The scope of the transactions on which an advance ruling can be sought from the AAR has gradually increased to now include both residents and non-residents, who can seek the same for issues having a substantial tax impact. Chapter XIX-B of the IT Act deals with advance rulings and it has been defined in Section 245N(a) of the  IT Act. These rulings are binding both on the Income Tax Department and the applicant, and while there is no statutory right to appeal, the Supreme Court has held in Columbia Sportswear Company v. Director of Income Tax Bangalore [2012 (8) TMI 105 - Supreme Court]  that a challenge an advance ruling first lies before the High Court, and subsequently before the Supreme Court. The advance ruling may be reversed in the event a substantial question of general public importance arises or a similar question is already pending before the Supreme Court for adjudication.

      13. The ground level situation is that this methodology has proved to be illusionary because there is an increasing number of applications pending before the AAR due to its low disposal rate and contrary to the expectation that a ruling would be given in six (6) months (as per Section 245R(6) of the IT Act), the average time taken is stated to be reaching around four (4) years!- See Deloitte Report on Advance Rulings in India: Delivering Greater Tax Certainty (Deloitte Tax Policy Paper 5, 2019)  There is obviously lack of adequate numbers of presiding officers to deal with the volume of cases. Interestingly, the primary reason for this is the large number of vacancies and delayed appointments of Members to the AAR. ibid In view of the time taken, the very purpose of AAR is defeated, resulting in the mechanism being used infrequently as is evident from the ever- increasing tax related litigation.

      14. We may notice a significant development in Section 245N of the IT Act. It was through Notification No.11456 dated 3.8.2000 that public sector companies were added to the definition of ‘applicant’, and in 2014, it was made applicable to a resident who had undertaken one or more transactions of the value of ₹ 100 crore or more.

      15. Insofar as a resident is concerned, the limit is so high that it cannot provide any solace to any individual, and we do believe that it is time to reconsider and reduce the ceiling limit, more so in terms of the recent announcement stated to be in furtherance of a tax friendly face-less regime!

      16. We may refer to the international scenario where there has been an incremental shift towards mature tax regimes adopting advance ruling mechanisms. The increase in global trade puts the rulings system at the centre-stage of a robust international tax cooperation regime. The Organisation for Economic Cooperation and Development (for short ‘OECD’) lists advance rulings as one of the indicators to assess trade facilitation policies, making it an aspirational international best practice standard. For example, Australia and New Zealand have a robust system of advance rulings wherein the decisions (which are public rulings affecting a large number of taxpayers) are given teeth by being made binding on the revenue authorities. New Zealand has gone a step further and innovated “status rulings” under which a taxpayer can apply to the Commissioner for a ruling on how a change in the law impacts an existing ruling.

      17. In the United States, there is a mechanism for the Treasury to authorise guidance in the form of revenue rulings, procedures and notices. The mechanism again, has been bolstered by subsequent practice and interpretations of the United States courts, where rulings have indicated that taxpayers may be penalised if they act inconsistently with legal interpretations set out in the revenue rulings, procedures or notices.

      18. Tax transparency has been a hallmark trait of the Swedish legal system. Swedish law requires public disclosure of ex ante tax administration such as advance rulings. Both the taxpayer as well as the Swedish Tax Agency can request an advance tax ruling, these rulings are published without information identifying the taxpayer that requested them. The Skatterättsnämnden, or the Council for Advance Tax Rulings is the Swedish Government agency which is vested with this power. The advance ruling system has played a crucial role in Sweden’s position as a country with one of the highest tax compliance rates in the world.

      19. The aim of any properly framed advance ruling system ought to be a dialogue between taxpayers and revenue authorities to fulfil the mutually beneficial purpose for taxpayers and revenue authorities of bolstering tax compliance and boosting tax morale. This mechanism should not become another stage in the litigation process.

      20. We, thus, consider it appropriate to recommend to the Central Government to consider the efficacy of the advance tax ruling system and make it more comprehensive as a tool for settlement of disputes rather than battling it through different tiers, whether private or public sectors are involved. A council for Advance Tax Ruling based on the Swedish model and the New Zealand system may be a possible way forward.

       


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      2020 (9) TMI 496 - Supreme Court

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