Killick Nixson Ltd. vs Deputy Commissioner of Income Tax

S.H. Kapadia, J.—The short question which arises for consideration by this Court in this writ petition is : Whether the Assessing Officer was authorised and empowered to proceed u/s 142(1) of the income tax Act, 1961 (''the Act'') in respect of assessment year 1992-93 after the designated authority passed an order on 19-1-1999 under the Kar Vivad Samadhan Scheme (''KVSS'') introduced by the Finance (No. 2) Act, 1998, determining the total income of the assessee-petitioner at Rs. 33,65,298? In short, in this petition, we are required to consider the scope of KVSS. The facts giving rise to this petition, briefly, are as follows.

On 26-2-1993, the petitioner-assessee filed its return of income. During the pendency of the assessment proceedings, the petitioner filed a revised return. The assessment order was passed u/s 143(3) on 27-3-1995. Briefly, it may be mentioned that the petitioner had claimed deductions in respect of payment of premium, in respect of bad debts, depreciation and interest. They had also claimed that receipt of rent/compensation be treated as income from business and not income from house property. Their contentions were rejected by the Assessing Officer. Being aggrieved, the petitioner preferred an appeal to the Commissioner (Appeals). By order dated 25-9-1998, the appellate authority found on the question of taxing the income of Rs. 27,93,977 under the head ''Income from house property'' that the issue was pending on the file of the Assessing Officer for the earlier assessment year and since proper opportunity was not given to the assessee, the first appellate authority directed the Assessing Officer to decide the above issue afresh after giving opportunity to the assessee. As regards the claim of bad debt to the extent of Rs. 68,02,046, the issue was also remanded back for fresh determination by the Assessing Officer after giving reasonable opportunity to the assessee. The Assessing Officer, in his impugned order, had disallowed interest payment made by the assessee to the extent of Rs. 70,50,000. The first appellate authority, however, modified the assessment order and restricted the disallowance of interest to Rs. 27,14,000 against which the assessee went in appeal to the Tribunal. Similarly, the assessee had claimed deduction in respect of staff welfare expenses which the Assessing Officer restricted by invoking rule 6D of the income tax Rules, 1962. He disallowed Rs. 31,963 out of staff welfare expenses. The first appellate authority directed the Assessing Officer to decide that issue afresh. Briefly, it may be mentioned that under the order of the first appellate authority dated 25-9-1998, the Commissioner (Appeals) confirmed the order of the Assessing Officer in respect of the following heads/Items:

(a) Premium amount of Rs. 3,57,153.

(b) Depreciation to the extent of Rs. 2,13,000.

(c) Interest of Rs. 27,14,000.

On the other hand, the following four items/heads were remitted back to the Assessing Officer:

(a) Whether receipt of Rs. 27,93,977 represented income from house property or whether it represented business income.

(b) Claim for bad debt of Rs. 68,02,046.

(c) Determination of capital gains to the extent of Rs. 4,00,000.

(d) Disallowance under rule 6D to the extent of Rs. 31,963.

Being aggrieved by the decision of the first appellate authority in respect of the first three heads referred to above, the assessee filed its appeal before the Tribunal. The above three heads in respect of which the assessee preferred an appeal in respect of premium, depreciation and interest, represented Rs. 33,65,298 whereas the remaining four heads remitted back to the Assessing Officer covered an amount of more than Rs. 99 lakhs. On 20-11-1998, the petitioner filed its declaration u/s 89 in respect of KVSS. As per the declaration, the amount payable by the petitioner was worked out at Rs. 26,27,545. In the declaration, the petitioner declared that on 4-6-1998, it had filed an appeal before the Tribunal against the order of the commissioner which was pending as on the date of the declaration, i.e., 19-11-1998. At this stage, it is important to note that till today, the Assessing Officer has not adjudicated upon the four heads of income/items which were remanded to him by the Commissioner. In other words, on the date of filing of the declaration by the assessee, the declaration was only confined to the three heads which were the subject-matter of appeal before the Tribunal and which covered an amount of Rs. 33,65,298. The remaining four heads remitted to the Assessing Officer which covered Rs. 99 lakhs (approximately) were not the subject-matter of the petition. Be that as it may, the designated authority disposed of the declaration on 19-1-1999 u/s 90(1) under the Finance (No. 2) Act, 1998. By the said order, the designated authority determined the assessed income of the petitioner at Rs. 33,65,298. The designated authority, accordingly, computed tax arrears at Rs. 13,83,778. Similarly, in view of the fact that the assessee had paid TDS of Rs. 3.57 lakhs, the designated authority arrived at the disputed income of Rs. 6,91,331. Accordingly, the designated authority arrived at the disputed income of Rs. 26,73,967 and, thereafter, applying the rate of 35 percent under KVSS, he arrived at the amount payable by the petitioner at Rs. 9,35,888. The above figures clearly indicate that the designated authority has arrived at the assessed income only for the purpose of KVSS. The designated authority could not have taken into account the four heads of income on which determination was not made by the Assessing Officer. It is important to bear in mind that the said four heads cover an amount of more than Rs. 99 lakhs. It is for this reason that the department had issued the impugned notice. Being aggrieved by the impugned notice, the present petition has been filed.

Before appreciating the arguments of the learned counsels on both sides, the following sections of KVSS are required to be quoted:

Definitions. -In this Scheme, unless the context otherwise requires,-

(a) to (d) ****

(e) ''disputed income'', in relation to an assessment year, means the whole or so much of the total income as is relatable to the disputed tax;

(f) ''disputed tax'' means the total tax determined and payable, in respect of an assessment year under any direct tax enactment but which remains unpaid as on the date of making the declaration u/s 88;

(g) to (l) ****

(m) ''tax arrear'' means,-

(i) in relation to direct tax enactment, the amount of tax, penalty or interest determined on or before the 31st day of March, 1998 under that enactment in respect of an assessment year as modified in consequence of giving effect to an appellate order but remaining unpaid on the date of declaration;

Settlement of tax payable. -Subject to the provisions of this Scheme, where any person makes, on or after the 1st day of September, 1998, but on or before the 31st day of December, 1998, a declaration to the designated authority in accordance with the provisions of section 89 in respect of tax arrear, then, notwithstanding anything contained in any direct tax enactment or indirect tax enactment or any other provision of any law for the time being in force, the amount payable under the Scheme by the declarant shall be determined at the rates specified hereunder, namely:-

(a) where the tax arrear is payable under the income tax Act, 1961 (43 of 1961),-

(i) in the case of a declarant, being a company or a firm, at the rate of thirty-five percent of the disputed income;

Time and manner of payment of tax arrear. -(1) Within sixty days from the date of receipt of the declaration u/s 88, the designated authority shall, by order, determine the amount payable by the declarant in accordance with the provisions of this Scheme and grant a certificate in such form as may be prescribed to the declarant setting forth therein the particulars of the tax arrear and the sum payable after such determination towards full and final settlement of tax arrears:

Removal of doubts. -For the removal of the doubts, it is hereby declared that, save as otherwise expressly provided in sub-section (3) of section 90, nothing contained in this Scheme shall be construed as conferring any benefit, concession or immunity on the declarant in any assessment or proceedings other than those in relation to which the declaration has been made.

Relying upon the above quoted sections, Mr. Dastur, the learned senior counsel appearing on behalf of the petitioner, contended that u/s 88, two conditions are required to be satisfied in regard to maintainability of the declaration, viz., that there should be some outstanding tax payable and secondly, that there should be a pending appeal/reference. In this connection, he also relied upon definition of the words ''tax arrears'' in section 87(m) which refers to tax arrears in relation to the amount of tax determined on or before 31-3-1998, but remaining unpaid on the date of the declaration. He has also relied upon section 95(i) (c) in support of his contention that the declaration would not be maintainable unless there was an appeal or a reference pending before the appellate authority. He contended that both these conditions were satisfied in this case when the petitioner filed their declaration under KVSS. Mr. Dastur further contended that section 88 contemplates two distinct stages, viz., the preliminary stage at which point of the time the assessee/applicant is required to show that some tax was outstanding and that there was a pending appeal/reference. That, at the second stage, the designated authority has merely to mathematically work out the figures. That, the second stage has nothing to do with the determination of tax. That, at the second stage, there is no question of applying the income tax Act. That, at the second stage, the only function which the designated authority is required to perform is to arrive at the right figure of the amount payable under KVSS and once that figure is arrived at, it would constitute a settlement of the total income of the year and, consequently, the assessment for the entire year gets settled. He further contended that once the assessment for the entire year gets settled, then the order of the designated authority is conclusive on all the items that go into arriving at the total income of the assessee and that it is not confined only to the heads of income in respect of which appeal/reference is pending. In support of his argument, the learned counsel for the petitioner has relied upon section 88(a) (i). He has contended that after crossing the initial stage, when the designated authority arrives at the figure of the disputed tax, he has just to perform a mathematical function to arrive at the figure of disputed income from the disputed tax and then, in the case of a company, the designated authority is required to calculate 35 percent of the disputed income as the amount payable by the assessee-applicant. He contended that under the Scheme, the designated authority is required to calculate the disputed income, that this disputed income is a derived figure. That, it is derived from the disputed tax. In this connection, Mr. Dastur has placed reliance on section 87(f) which defines the expression ''disputed tax'' to mean total tax determined and payable in respect of an assessment year, but which remained outstanding on the date of the declaration u/s 88. In this connection, Mr. Dastur invited our attention to the working made by the assessee which is broadly accepted by the designated authority. This is only by way of illustration. The said working is at page 88 of the Paper Book. The working shows that the assessed income is Rs. 33,65,298. The tax payable on the assessed income at Rs. 51.75 percent which is the rate which was applicable at the relevant time comes to Rs. 17,41,542. This constitutes disputed tax. We have not gone into deductions on account of TDS. It is from this disputed tax that the disputed income is arrived at by applying the following formula:

Disputed Tax x 100 ______________ Tax Rate

The same formula is applied by the designated authority. Applying that formula, the designated authority has arrived at the disputed income of Rs. 26,73,967 and 35 percent of the said disputed income, viz., Rs. 9,35,888 which constituted the amount payable by the petitioner. This amount has been paid. He contended that u/s 87(e) of the Scheme, the expression ''disputed income'' is defined to mean the whole or so much of the total income as is relatable to the disputed tax. Therefore, he contended that disputed income is derived from disputed tax. Accordingly, once the designated authority has arrived at the assessed income of Rs. 33,65,298, then that figure is final and the entire dispute including the heads on which there is no adjudication by the Assessing Officer gets settled and that decision becomes final and conclusive u/s 90 of the Scheme and once that conclusion is arrived at, there is no scope for application of the income tax Act. Hence, he contended that the impugned notice is without jurisdiction because the entire matter got settled when the declaration filed by the petitioner was accepted by the designated authority. Finally, Mr. Dastur contended that equity has no role to play in this case. He further contended that the Scheme offers a package deal to the taxpayer. He contended that every package contemplates give and take. Hence, merely because certain heads of income remain pending when the designated authority computes the amount payable, cannot be the basis for interpreting the Scheme in favour of the revenue. He contended that in the appeal filed by the assessee before the Tribunal, there were issues which the Tribunal would have decided in favour of the assessee. That the assessee was bound to succeed on those issues in view of certain judgments of the Supreme Court. However, the assessee chose to go for the KVSS. That, to that extent, even the assessee has suffered. Therefore, loss to the revenue cannot be the ground for interpreting the Scheme in favour of the department. He further contended that if the department''s contention is accepted, it would make KVSS totally unworkable. For example, he contended that in the present matter, the designated authority came to the conclusion that the total income under KVSS was Rs. 33,65,298 whereas if the Assessing Officer is permitted to proceed to now adjudicate upon the remaining four heads and if, for example, the claim for bad debts is disallowed, then the total revised income would come to Rs. 1,01,67,344. In other words, he contended that an anomalous position would result because there would be two different total incomes for the same assessment year which would lead to absurdity.

Mr. Chatterjee, the learned counsel appearing on behalf of the department, on the other hand, contended by referring to the various provisions of the KVSS and by reference to the orders passed by the Assessing Officer that u/s 88, the amount payable by the declarant shall be determined by the designated authority at the rate of 35 percent of the disputed income. Mr. Chatterjee pointed out the provisions of section 87(e) and (f). He submitted that reading of the above section shows that disputed income means the whole or so much of the total income as is relatable to the disputed tax. The word ''disputed tax'' is also defined u/s 87(f) to mean total tax determined and payable but which remains unpaid as on the date of making of the declaration u/s 88. Mr. Chatterjee emphasized the words ''determined and payable'' in section 87(f). Mr. Chatterjee pointed out that, in the present case, the Effect Order passed by the Commissioner (Appeals) was not fully worked out by the Assessing Officer. He contended that incomes under the following heads have not been decided, viz., disallowance of bad debts to the extent of Rs. 68,02,046, income from house property to the extent of Rs. 27,93,977, dispute regarding capital gains to the extent of Rs. 4,00,000 and disallowance under rule 6D amounting to Rs. 31,963. In all the claim in dispute which has not been determined is in the vicinity of Rs. 99 lacs (approx.). Mr. Chatterjee pointed out that there were three items which were subject-matter of appeal before the Tribunal viz. disallowance of by the department of Rs. 27,14,000, disallowance of depreciation of Rs. 2,13,000 and disallowance in respect of premium paid of Rs. 3,57,153. He contended that on the basis of the above three items, notice of demand came to be issued against the assessee for payment of taxes to the tune of Rs. 33,65,298. It is this amount which is brought under KVSS. It is on this amount of Rs. 33,65,298 that the petitioner has paid only Rs. 9,35,888 as tax in full and final settlement. In other words, the petitioner escapes payment of tax on the income of Rs. 99,00,000 (approx.) which figure represents the disputed claim of the petitioner in respect of bad debts, income from house property, capital gains and disallowance under rule 6D. Mr. Chatterjee points out that these claims are yet to be determined by the Assessing Officer. He, therefore, contends that u/s 87(f) of the KVSS, disputed tax would mean total tax determined and payable from which disputed income is derived and since, in the present matter, total tax has not been determined in respect of the above four items, the Assessing Officer was entitled to proceed with determination of disputes under the above four items for which the impugned notice had been issued. Mr. Chatterjee further points out that even the order passed by the designated authority shows that he has assessed the income of the petitioner at Rs. 33,65,298 only for the purposes of KVSS. The caption itself indicates that he has done the working only for the purposes of KVSS. That the designated authority, in this case, on facts, has not worked out the total income. That, he could not have worked out the total income as the Assessing Officer had not determined the claim of the petitioner in respect of the above four items/heads. Mr. Chatterjee further points out that under the KVSS, there should be a determination followed by a dispute. He contended that, in the present case, the notice of demand issued for Rs. 33,65,298 only related to items in dispute in appeal before the Tribunal. That, these were the items which were determined. That, these were the items on which the appeal was pending. He contended that if the argument of the petitioner is accepted, it would lead to an escapement of tax as the assessee would not be required to pay any tax in relation to the heads of income regarding which there is no determination nor dispute pending. He, accordingly, submits that the petition deserves to be rejected.

We find merit in the contentions advanced on behalf of the department At the outset, it may be mentioned that KVSS is essentially introduced to recover the taxes at the earliest point of time. It is essentially recovery based scheme. The predominant object is to recover the taxes as early as possible. This Scheme is primarily enacted because of the increasing burden of fiscal deficit in the budget and to unlock large amounts locked up in litigation. Section 88 of the Scheme deals with settlement of tax payable. Section 88 is in two parts. Firstly, the designated authority is required to ascertain the maintainability of a declaration. Having satisfied the conditions of maintainability, only then the designated authority is required to enter the second stage of calculating the disputed income on which the amount payable under the Scheme shall be determined. Therefore, two conditions are required to be satisfied before a declaration is said to be maintainable viz. that there shall be outstanding determined tax amount for which a declaration is required to be made. The outstanding amount of tax should have been determined on or before 31-3-1998. This is clear from the definition of the word ''tax arrear'' in section 87(m). Under the first part of section 88, the declaration is required to be made in respect of the tax arrears. These tax arrears are required to be determined on or before 31-3-1998. The second condition of maintainability of the declaration is provided in section 95(i) (c), viz., that the outstanding tax should be subject-matter of pending Appeal or Reference. On satisfaction of the said two conditions, the declaration could be said to be maintainable. If these two conditions are not satisfied, then the designated authority is not required to ascertain the disputed income from the disputed tax. However, if the above two conditions are satisfied and if the declaration is found to be maintainable, then the designated authority shall deduce disputed income from disputed tax. In this connection, it is important to bear in mind the provisions of section 87(f) which defines disputed tax to mean total tax determined and payable but which remains unpaid on the date of the declaration. Reading section 87(e) which defines ''disputed income'' to mean whole or so much of the total income as is relatable to the disputed tax as defined u/s 87(f), it is clear that disputed income is required to be deduced from disputed tax. In this connection, the definition of the words ''disputed tax'' is also important as it indicates that disputed tax means total tax determined and payable. The last two words ''determined'' and ''payable'' are very important. Similarly, the words ''so much of the total income'' in section 87(e) are important. These words indicate determination of the assessed income. Ultimately, it is important to note that the Scheme contemplates determination of disputed income from disputed tax which, in turn, is based on the income assessed under the income tax Act. The words ''tax arrears'' in section 87(m) are important in the first stage of section 88 whereas the words ''disputed income'' and ''disputed tax'' are important in the second stage of section 88. Now, in the present case, there is no dispute regarding the formula to be applied to compute the disputed income, viz. : Disputed tax x 100 _________________ Tax Rate

However, the assessee contends that, in the present case, the Effect Order passed by the Assessing Officer has calculated the assessed income at Rs. 33,65,298 (which is calculated without taking into account the above four heads of income representing more than Rs. 99 lakhs). On the other hand, the department contends that the amount payable under KVSS, as computed by the designated authority, has a limited scope in view of the fact that the above four heads have not been taken into account for the purposes of calculating the assessed income. For example, it was submitted that if the assessed income was to include the above four heads, then in that event, the assessed income would have exceeded Rs. 99 lakhs on which the designated authority would have calculated the disputed tax from which he could have computed the disputed income. Therefore, the essential dispute in the present case is not on principle but on application. Under the Scheme, the designated authority is first required to ascertain the assessed income on which he calculates the disputed tax payable by the assessee at the rate prescribed under the income tax Act at the relevant time. For example, if the assesed income is Rs. 33,65,298, then the tax payable at 51.75 percent (being the rate applicable at the relevant time including surcharge) would come to Rs. 17,41,542. After taking into account, the taxes paid by the assessee (TDS), the designated authority arrives at the figure of net disputed tax which, let us say, comes to Rs. 12,80,140. Thereafter, the designated authority computes the disputed income by applying the above formula, viz.,

Rs. 12,80,140 x 100 _______________ 51.75

which would give us the figure of Rs. 24,73,700. On this figure, at the rate prescribed under KVSS [section 88(a) (i)] at 35 per cent, the tax payable on the disputed income would be around Rs. 8,65,795. Therefore, the only short point is whether the assessed income should be taken at Rs. 33,65,298 which, as stated herein above, is the figure arrived at by the Assessing Officer in the income tax proceeding without taking into account the above four heads which remain unadjudicated upon till today. However, the Scheme indicates that disputed income is related to whole or part of the total income as determined under the income tax Act. Therefore, if, in a given case, the income is determined by taking into account all the heads, then the determination of the assessed income would cover all the heads, but if, as in the present case, the Assessing Officer has not adjudicated upon by the cut-off date on all the heads of the income and tax has been demanded only on part determination, then the Kar Vivad Samadhan Scheme contemplates payment of tax on part of the total assessed income. This is also indicated by the words ''determined'' and ''payable'' in section 87(f) of the Scheme. In the present matter, the department had given notice to the assessee for payment of tax of Rs. 33,65,298 which covered disallowance of interest expenditure, disallowance of depreciation and disallowance of premium paid. The assessee''s appeal was also restricted to the aforesaid three items. These three items were determined by the department. The dispute was in respect of the three items. There could not have been a dispute in respect of the assessee''s claim in respect of bad debts, income from house property, disallowance under rule 6D and capital gains amounting to Rs. 99,00,000 (approx) as the Assessing Officer is yet to determine on remand the dispute regarding the said four heads. In the circumstances, the total tax determined and payable u/s 87(f) for the purposes of KVSS was based on the total income of Rs. 33,65,298. That, there was no determination regarding the remaining four heads. That the disputed tax on the date of the declaration was based on the total income of Rs. 33,65,298 on which the petitioner has paid tax of Rs. 9,35,888. In the present matter, acceptance of the contention of the petitioner would mean that the petitioner would pay the tax only on income which has been determined to the extent of Rs. 33,65,298 leaving out the heads of the income which are yet to be determined. We do not find any merit in the contention advanced on behalf of the assessee that there would be two separate orders if the department''s contention is upheld, viz., order of the designated authority determining the assessee''s income at Rs. 33,65,298 and a separate assessment order passed by the Assessing Officer after issuance of the Certificate. It was urged that the Scheme would become totally unworkable if the department''s contention is accepted. It was contended that under the provisions of KVSS, that the Certificate given by the designated authority was conclusive. In this connection, reliance was placed on section 90 of the Act. It was contended that this would amount to reopening orders passed by the designated authority under KVSS. We do not find any merit in the said contention. The order issued by the designated authority clearly shows, on facts of this case, that he has assessed the income at Rs. 33,65,298. That, the said assessed income is determined only for KVSS purposes. That, the designated authority was fully aware of the fact that there were certain heads of income on which there was no determination. That, the petitioner was also aware that on certain heads of income there was no determination by the Assessing Officer. In the circumstances, we do not find any merit in the contention advanced on behalf of the petitioner. Since none of the cited judgments deals with the controversy at hand, we have not discussed the said judgments.

For the above reasons, we do not see any merit in this writ petition. Accordingly, rule is discharged with no order as to costs.