Vivad se Vishwas Scheme – Objective of scheme – Beneficial nature – Search case – Circulars are to remove difficulties and to tone down the rigour of law and cannot be adverse to the assessee

Vivad se Vishwas Scheme – Objective of scheme – Beneficial nature – Search case – Circulars are to remove difficulties and to tone down the rigour of law and cannot be adverse to the assessee

The petitioner was an individual; his assessment for A.Y. 2015-16 was completed vide an order dated 27th December, 2017 u/s 143(3), wherein one addition of Rs. 84,25,075 was made u/s 68 and another addition of Rs. 11,75,901 u/s 69C. The additions were made by the A.O. on the basis that the petitioner had booked artificial long-term capital gains of Rs. 5,73,23,123 and claimed exemption u/s 10(38) thereon by selling shares of M/s Lifeline Drugs and Pharma Limited for a total consideration of Rs. 5,87,95,055. The case of the A.O. was that the price of this share was artificially rigged by certain operators; the details of this were divulged in the course of a search u/s 132 carried out by the Kolkata Investigation Wing of the Income-tax Department during which some statements were recorded u/s 132(4), and in the course of a survey action u/s 133A on the premises of M/s Gateway Financial Service Limited and Korp Securities Limited where also statements of directors were recorded. By an order dated 18th February, 2019 u/s 154, the addition u/s 68 was revised to Rs. 5,87,95,055. Aggrieved by both the aforesaid orders, the petitioner filed appeals to the Commissioner (Appeals).

While the aforesaid appeals were pending, the Direct Tax Vivad se Vishwas Act, 2020 (‘DTVSV Act’) was passed, giving an option to taxpayers to settle their income tax disputes by making a declaration to the designated authority and paying varying percentages of the disputed tax as specified u/s 3 of the new Act.

On 22nd April, 2020, the Central Board of Direct Taxes issued Circular No. 9 of 2020 and on 4th December, 2020 another Circular, No. 21, making further clarifications in the form of Questions and Answers. While the petition was pending, the CBDT issued yet another Circular, No. 4/2021 dated 23rd March, 2021, further clarifying the answer to Q. No. 70.

The petitioner filed a declaration in Form No. 1 u/s 4(1) of the DTVSV Act read with Rule 3(1) of the DTVSV Rules on 16th December, 2020. The disputed income was declared to be Rs. 5,98,90,960 and the disputed tax thereon Rs. 2,02,69,581. The petitioner submitted that the gross amount payable by it was 100% of the disputed tax, i.e., Rs. 2,02,69,581, out of which a sum of Rs. 69,31,892 was declared to have been paid and the balance of Rs. 1,33,37,689 was declared to be payable by the petitioner.

By an order dated 26th January, 2021, the Designated Authority passed an order in Form No. 3 u/s 5(1) of the DTVSV Act read with Rule 4 of the DTVSV Rules, determining the tax payable by the petitioner to be Rs. 2,57,67,714, being 125% of the disputed tax as against Rs. 2,02,69,581 being 100% of the disputed tax declared by the petitioner.

Being aggrieved by the aforesaid order, the petitioner challenged it before the High Court by way of a Writ Petition including the Circular No. 21.

The petitioner submitted that for A.Y. 2015-16 the assessment was not made on the basis of any search but the addition was made only on the basis of certain information obtained in the course of a search conducted on the premises of other entities. The petitioner contended that he has not been subjected to any search action. As per section 3 of the DTVSV Act, sub-clause (a) is applicable to its case as the tax arrear is the aggregate amount of disputed tax, interest chargeable or charged on such disputed tax, and penalty leviable or levied on such disputed tax and, therefore, the amount payable by the petitioner would be the amount of the disputed tax. Only in a case as contained in sub-clause (b) of section 3, where the tax arrears include tax, interest or penalty determined in any assessment on the basis of a search u/s 132 or section 132A of the Income-tax Act, only then would the amount payable under the DTVSV Act be 125% of the disputed tax and in no other case.

It was submitted that the Circular has been issued under sections 10 and 11. Sub-section (1) of section 11 states that an order can be passed by the Central Government to remove difficulties; however, the same cannot be inconsistent with the provisions of the Act. Although section 3 of the DTVSV Act states in unequivocal terms that 125% of the disputed tax is payable only in those cases where an assessment is made on the basis of a search, the impugned order based on the Circular would make it contrary to the provisions of the Income-tax Act and also to several judgments of the Supreme Court; to that extent, the Circular is liable to be quashed. In any event, in interpreting the scope of a provision of a statute, the Courts are not bound by the Circulars issued by the CBDT.

The petitioner further relied on Circular No. 4/2021 dated 23rd March, 2021 with respect to the clarifications issued by the CBDT with reference to FAQ No. 70 of Circular No. 21/2020. It was submitted that to remove any uncertainty it is clarified that a search case means an assessment or reassessment made u/s 143(3)/144/147/153A/153C/158BC in the case of a person referred to in sections 153A, 153C, 158BC or 158BD on the basis of a search initiated u/s 132, or a requisition made u/s 132A, modifying FAQ No. 70 of Circular 21/2020 to that extent. It was submitted that the petitioner is not a person referred to in section 153A or 153C.

For their part, the respondents submitted that since the assessment order was framed based on search / survey inquiries conducted by the Directorate of Income Tax (Investigation), Kolkata on 2nd July, 2013, the designated authority has rightly computed the petitioner’s liability under the Vivad se Vishwas Act by adopting the rate of 125% of disputed tax applicable to a search case in accordance with section 3 of the DTVSV Act. The assessment order passed u/s 143(3) is on the basis of the search and seizure action and the statement recorded u/s 132(4), coupled with post-search inquiries, and as the petitioner had failed to demonstrate the genuineness of the transactions, the addition was made.

In other words, the Department submitted that as per the DTVSV Act, 2020 it is not material that a ‘search case’ essentially should be a case wherein a warrant is executed u/s 132. To emphasise this, it relied on FAQ No. 70 and stated that it was identical to section 153C wherein cases are considered as ‘search case’ even though a warrant is not executed but transaction or information is found from the person subjected to search action u/s 132.

The Court referred to the statement of objects and reasons of the DTVSV Act and observed that this Act is meant to provide a resolution for pending tax disputes which have been locked up in litigation. Taxpayers can put an end to tax litigation by opting for the scheme and also obtain immunity from penalty and prosecution by paying percentages of tax as specified therein. This would bring peace of mind, certainty, saving of time and resources for the taxpayers and also generate timely revenue for the Government.

Referring to the answer to Q. No. 70, it was observed that the said question and its answer in Circular No. 21 was clarified vide Circular No. 4/2021 dated 23rd March, 2021 that a ‘search case’ means an assessment or reassessment made u/s 143(3)/144/147/153A/153C/158BC in the case of a person referred to in section 153A, section 153C, section 158BC or section 158BD on the basis of a search initiated u/s 132, or a requisition made u/s 132A. Thus, the answer to FAQ No. 70 of Circular No. 21/2020 has been replaced by the above meaning.

The Court observed that to be considered a search case, the assessment / reassessment should be:
(i) under sections 143(3)/144/147/153A/153C/153BC; and
(ii) be in respect of a person referred to in section 153A, section 153C, section 158BC or section 158BD; and
(iii) should be on the basis of a search initiated u/s 132, or a requisition made u/s 132A.

If all the three elements / criteria as above are satisfied, the case is a search case.

The Court held that it is not the case of the Revenue that action pursuant to sections 153A or 153C had been initiated in the case of the petitioner. These facts are not disputed. Therefore, criterion No. (ii) necessary for a case to be a search case is not satisfied. Admittedly, no search has been initiated in the case of the petitioner. The assessment order dated 22nd December, 2017 also suggests that the case of the petitioner was selected for scrutiny under ‘CASS’ selection and notices under the Act were issued to the petitioner not pursuant to any search u/s 132 or requisition u/s 132A. Assessment refers only to section 143(3) and is not read with any provision of search and seizure contained in Chapter XIV-B of the Income-tax Act where the special procedure for assessment of a search case is prescribed. The name of the petitioner figures nowhere in any of the statements u/s 132(4) of the searches referred to in the assessment order, nor in the statements pursuant to the survey action of persons under search or survey.

In view of Circular No. 4/2021 modifying / replacing the answer to FAQ No. 70 in Circular No. 21, the case of the petitioner would not be a search case. The Court further observed that these Circulars are to remove difficulties and to tone down the rigour of the law and cannot be adverse to the assessee, especially keeping in mind the beneficial nature of the legislation carrying a lot of weight. Since the petitioner’s case cannot be regarded as a search case, consequently the order dated 26th January, 2021 in Form No. 3, passed by the Designated Authority, would be unsustainable. The Writ Petition filed by the assessee was accordingly allowed.