Law of Limitation – Kept Intact

Section 197(C) of the Finance Act 2016 provided for assessment of undisclosed income relating to any period prior to Income Disclosure Scheme, 2016 (IDS) is proposed to repealed in the Budget 2017 presented by Hon’ble Finance Minister Mr. Arun Jaitley on 1 st February 2017.

As far as history of the said section is concerned, the Finance Act, 2016, in its Chapter IX has enacted the IDS to enable any person to make a declaration of his undisclosed income or asset that was chargeable to tax in any assessment year prior to A.Y 2017-18.

The issue was that whether the Scheme covers the declaration of undisclosed income for the assessment years which are beyond the time limit provided in the Income Tax Act to initiate assessment proceedings.

Section 149 of the Income Tax Act prescribes the time limits within which an Assessing Officer can issue a notice to assess/reassess undisclosed income of earlier years.The time limits are a maximum of six or sixteen years from the end of the relevant assessment year, depending upon the location of such income/asset is in India or abroad.

This issue about the reachability of the IDS has clarified by clause (c) of Section 197 of the Finance Act, 2016 which ironically was enacted for the removal of doubts in the IDS; it reads as under:

“Removal of doubts.

197. For the removal of doubts, it is hereby declared that—

(a) …………
(b) …………
(c) where any income has accrued, arisen or received or any asset has been acquired out of such income prior to commencement of this Scheme, and no declaration in respect of such income is made under this Scheme, —

(i) such income shall be deemed to have accrued, arisen or received, as the case may be; or
(ii) the value of the asset acquired out of such income shall be deemed to have been acquired or made, in the year in which a notice under section 142, sub-section (2) of section 143 or section 148 or section 153A or section 153C of the Income-tax Act is issued by the Assessing Officer, and the provisions of the Income-tax Act shall apply accordingly.”

The CBDT has further clarified this issue in two of its five sets of Frequently Asked Questions on IDS. The CBDT dealt with it in answer to question no. 2 of its circular no. 27 dated 14-07-2016 as under:

“Question No. 2: If an undisclosed income represented in the form of an asset or otherwise pertains to a year falling beyond the time limit allowed under section 149 of the Income-tax Act, 1961 and the said undisclosed income is not declared under the Scheme, then as per the provisions of section 197(c) of the Finance Act, 2016, the said undisclosed income shall be treated as the income of the year in which a notice under section 148 of the Income-tax Act has been issued. The said provision is inconsistent with the existing time lines provided under the Income-tax Act for reopening a case. Please clarify?

Answer : Question No. 4 of Circular No. 24 of 2016 may be referred where the tax treatment of such income has been clarified. Since the Scheme contained in Chapter IX of the Finance Act, 2016 is a later law in time the provisions of the Scheme shall prevail over the provisions of earlier laws.”

Question no. 4 of circular no. 24 of 2016 was read as under:
“Question No.4: If undisclosed income relating to an assessment year prior to A.Y. 2016-17, say A.Y. 2001-02 is detected after the closure of the Scheme, then what shall be the treatment of undisclosed income so detected?

Answer: As per the provisions of section 197(c) of the Finance Act, 2016, such income of A.Y. 2001-02 shall be assessed in the year in which the notice under section 148 or 153A or 153C, as the case may be, of the Income-tax Act is issued by the Assessing Officer. Further, if such undisclosed income is detected in the form of investment in any asset then value of such asset shall be as if the asset has been acquired or made in the year in which the notice under section 148/153A/153C is issued and the value shall be determined in accordance with rule 3 of the Rules.”

The logical, intended or unintended, outcome of the provisions of Section 197(c), of the Finance Act, 2016, on the law and procedure relating to undisclosed income for any assessment year prior to A.Y. 2017-18, is as under:

1. The provisions of Section 149 of the Income Tax Act became ineffectual after 30-09-2016, that is, after the end of the declaratory period under the Scheme, for any assessment year prior to A.Y. 2017-18. It amounts to abolishing law of limitation as income of any year can be assessed if not declared in IDS.

2. Sections 147 to 153 of the IT Act which deal with the law and procedure for taxing escaped income are interlinked, and would also become unnecessary after 30-09-2016 for past years;

3. The escaped income of the periods relevant up to A.Y. 2016-17 will be deemed to be the income chargeable in the year in which a notice under Sections 142 or 143(2) or 148 or 153A or 153C is issued by the AO; and

4. In view of the deeming provisions of Section 197(c) of the Finance Act, 2016, the Assessing officer will not be required to record reasons in terms of Section 147, or issue any notice under Section 148, or obtain approvals from his superior under section 151 for taxing escaped income up to A.Y. 2016-17.

The deeming provisions of Section 197(c) of the Finance Act, 2016 and their consequential effects, discussed above, give a very long reach to the Income Tax Department to assess the income of years which were otherwise time barred.

In view of the above stated issues and chaos, various re-presentations from business houses and stakeholders were made to ministry for repealing this section.

Now, as the window for the disclosure of income in IDS has already been closed and to remove the litigations which can challenge the viability of provisions of IDS, the Government in Budget 2017 proposed to repeal the provisions of section 197(c).

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