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    Act RulesIncome Tax
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    Charge of tax on firms: statutory source choice alters which central enactment prescribes the applicable rate for a year.
    Both texts charge tax on a firm's total income but differ in the statutory source for the applicable rate: the Bill points to the annual tax statute as the operative source, while the Act uses a broader reference to any Central Act for the relevant year, potentially expanding the range of enactments that may prescribe the rate and introducing additional interpretive and administrative considerations.
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    Director liability: personal joint and several responsibility for unrecoverable company tax, unless director disproves gross neglect or misfeasance.
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    Taxation of AOPs/BOIs: unknown member shares trigger top personal rates on aggregate income; known shares require apportioned taxation.
    Where members' shares in an AOP/BOI are indeterminate or unknown, the entity's total income is taxed at the maximum marginal rate or at any higher rate applicable to a member's total income; where shares are determinate, each member's other income is tested against the Finance Act's non taxable threshold and portions attributable to higher rate members are taxed at those rates while the balance is taxed at the maximum marginal rate, with a deeming rule treating indeterminacy at formation or thereafter as sufficient.
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    Oral trust taxation: trustee receipts are taxed at the maximum marginal rate, shifting compliance and liability to trustees.
    Tax on income connected to an oral trust is charged at the maximum marginal rate when a trustee receives or is entitled to receive income on behalf of or for the benefit of any person under an oral trust (per section 303(3)), irrespective of other provisions; the Bill had instead charged the income of the person appointed under an oral trust.
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    Tax on unallocated trust income risks top marginal taxation unless beneficiaries and shares are expressly stated and ascertainable.
    Representative assesses holding income for beneficiaries with unspecified or indeterminate shares are taxable at the maximum marginal rate unless a court order, trust instrument or wakf deed expressly identifies beneficiaries and their ascertainable shares on the relevant date; limited exceptions allow taxation at association of persons rates where beneficiaries lack other significant income, where the trust is a sole testamentary trust, where a bona fide historical non testamentary trust for dependants exists, or for bona fide employee benefit funds, and business profits are normally subject to the top rate unless the narrow will trust exception applies.
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    Representative assessee recovery rights secure retention via Assessing Officer certificate limiting recoverability at final settlement.
    A representative assessee who pays any sum under the Act may recover it from the principal or retain an equivalent amount in his representative capacity; a person who apprehends such assessment may retain estimated liability from monies payable to the principal; on dispute the Assessing Officer may issue a certificate authorising retention pending final settlement; recoverability is capped by the certificate amount, except where the representative holds additional assets of the principal, and the enacted text ties that cap to the time of final settlement.
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    Representative assessee liability: treated as beneficial owner for assessment, with revenue able to reach beneficiaries directly.
    Section 304 treats a representative assessee as if the income were beneficially his for duties, liabilities and assessment; it places assessment liability on the representative in his own name, contains an exclusivity rule preventing assessment of the same income under other provisions, preserves the Assessing Officer's power to assess or recover tax directly from the beneficial owner, prescribes a pro rata formula for beneficiaries' share of a chargeable trust income, and grants the revenue equivalent remedies against property under the representative's control.
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    Block period definition governs temporal scope for assessing undisclosed income, including virtual digital assets and documents.
    Clause 301 defines the block period as the six tax years preceding the tax year of a search or requisition plus the portion of that tax year to the date of the last authorisation, and deems the last authorisation executed on the conclusion recorded in the last panchnama for searches or on actual receipt for requisitions. It defines undisclosed income in two limbs: tangible and intangible items or entries representing undisclosed income (including virtual digital assets), and expenses/exemptions/deductions/allowances claimed under the Act that are found incorrect, and it lists books, documents and valuables as requisitioned or seized items.
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    Levy of interest and penalty in search cases: interest accrues and an administrative penalty may attach to undisclosed income when returns are not furnished.
    Where a return required by a search notice is not filed, the provision charges interest on tax determined in the search assessment for the period from the day after the notice deadline until assessment completion, and permits an administrative penalty measured by reference to the tax leviable on undisclosed income determined in that assessment. A conditional bar prevents penalty for the block period if the return is filed, tax is paid with evidence, and no appeal is filed against the returned portion; any undisclosed income in excess of declared amounts remains penalizable. Procedural safeguards include a hearing, higher level approval for large penalties, and specified limitation and exclusion rules.
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    Time-limit for completion of block assessment: statutory period anchored to quarter-end with specified exclusions and minimum remaining period.
    Time-limit for completion of block assessment fixes a statutory period for passing orders under the special search/block assessment procedure, anchors computation to a calendar endpoint, prescribes enumerated excluded periods (including custody of seized items, court stays, information exchange references, audit and valuation processes, references to valuation or appellate authorities, penalty and avoidance arrangement references, and Advance Rulings proceedings), provides a minimum remaining period protection after exclusions, and includes month end rounding; the enacted text shifts the anchor from month end to quarter end and refines exclusion wording and cross references.
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    Undisclosed income transfer to other person's AO triggers block assessment and fixes abatement reference to receipt date.
    When an Assessing Officer is satisfied that seized money, assets, books, documents or any information therein pertain to a person other than the person searched, those materials must be handed to the Assessing Officer having jurisdiction over that other person, who shall proceed under section 294 and apply the block assessment provisions; for abatement under section 292 the reference date for the other person is the date the receiving AO obtains the seized materials or information.
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    Block assessment procedure: time limited compelled return after search, limits revision rights and prescribes applicable procedural and penalty provisions.
    Section 294 compels a time limited special return of undisclosed income following a search or requisition, treats that return as within a specified return regime, precludes revised returns, prescribes which procedural and penalty provisions shall apply or be excluded, and requires prior approval by senior officers before issuing the notice.
    Act RulesIncome Tax
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    Total undisclosed income: rules for block-period computation, exclusions for short-period transfer-pricing transactions and loss restrictions.
    Computation of the total undisclosed income of the block period aggregates undisclosed income declared under the statutory declaration mechanism and undisclosed income determined by the Assessing Officer from seized material, survey or requisition results, and other material coming to the AO's notice; it prescribes temporal windows for book-based computation, excludes certain international and specified domestic transactions in the short inter-authorisation period from block computation to be assessed separately, and restricts set-off of brought-forward losses and unabsorbed depreciation against undisclosed block income while allowing carry-forward post-block period.
    Act RulesIncome Tax
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    Block assessment procedure centralises search-related assessments, abating parallel year-wise proceedings where initiated and enabling revival on annulment.
    Assessing Officers must assess or reassess the total undisclosed income of the block period under the Part, with those proceedings taking priority over ordinary year wise assessments; pending assessments for years in the block period abate (and may be deemed to have abated on the date certain notices were issued), non undisclosed income of the year of last authorisation is assessed separately, multiple searches are sequenced with timing extensions where needed, and abated proceedings may be revived if Part proceedings or specified orders are annulled.
    Act RulesIncome Tax
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    Intimation of loss: mandatory written notification to assessee when loss is established and eligible for carry forward and set-off.
    Section 291 requires the Assessing Officer to notify the assessee by an order in writing the amount of loss as computed by him when (a) a loss is established in assessment and (b) the assessee is entitled to carry forward and set off that loss for the purposes of the listed statutory provisions. The duty is mandatory and procedural, linking the notification obligation to both the establishment of loss in assessment and the assessee's statutory entitlement to carry forward and set-off.
    Act RulesIncome Tax
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    Recomputation of assessments tied to triggering events allows targeted amendments within specified limitation periods.
    Clause 288 permits an Assessing Officer to amend or recompute completed assessments in a limited set of scenarios triggered by downstream events-such as reassessment or recomputation orders, valuation or compensation revisions, patent revocation, settlement of foreign tax disputes, or validated transfer pricing determinations-with timelines generally governed by a four year limitation reckoned from the end of the relevant financial year or specified event, and subject to procedural safeguards and cross references to amendment and limitation provisions.
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    Rectification of mistake: tax authorities may amend orders and intimations, with notice and hearing before raising liability.
    Section 287 authorises specified income tax authorities to amend orders and intimations to rectify mistakes apparent from the record, excluding matters considered and decided in appeal or revision. Amendments that increase liability require notice of intention and a reasonable opportunity of being heard; reductions in liability require refund by the Assessing Officer and increases require service of a notice of demand. A four year outer limitation from the end of the financial year of the original order or intimation applies, subject to section 288, and taxpayer applications must be disposed within six months of the relevant month end.
    Act RulesIncome Tax
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    Time limits for tax assessments impose short limitation windows, with tolling for procedural delays and transfer pricing processes.
    Section 286 prescribes specific limitation periods for assessments, reassessments and recomputations linked to dates in a statutory table, generally imposing one year windows with limited shorter periods; it provides a 12 month extension where a Transfer Pricing Officer reference is made, enumerates discrete exclusion/tolling events (including hearings, stays, audit and valuation references, advance ruling applications, exchange of information references, declarations under anti avoidance provisions and search/requisition periods), and supplies minimum residual time and remedial extension rules to ensure Assessing Officers retain a baseline time to conclude proceedings.
    Act RulesIncome Tax
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    Mandatory cessation of reassessment proceedings when taxpayer demonstrates assessed amount meets correct liability, limiting assessing officer discretion.
    Section 285 fixes tax in section 279 proceedings at rates as if escaped income were included, conditions mandatory cessation of those proceedings on two cumulative showings by the assessee (assessment not lower than correct liability or properly made assessment/computation, and absence of any impugnment under specified challenge provisions), and renders final that cessation by barring reopening of matters concluded by listed orders; procedural modalities and evidentiary standards are not specified.
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    Assessment notices to implement appellate orders may be issued at any time, subject to existing time-bar exceptions.
    Clause 283 permits issuance of a section 280 notice at any time to make assessments, reassessments or recomputations to give effect to appellate orders or Approving Panel directions, but it does not apply where, at the time the triggering order or reference occurred, other statutory time-limiting provisions already precluded assessment for the tax year concerned; the enacted text narrows the express override language compared with the Bill, potentially limiting displacement of constraints within the omitted procedural provision.

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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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