Income Tax – Aureus Law Partners

IBC – Income Tax: Face off.

It is now settled by the Hon’ble Supreme Court that provisions of Insolvency and Bankruptcy Code (IBC) will prevail over provisions of Income Tax Act, 1961 (IT Act) to the extent inconsistent. Of the many interesting aspects emerging as the IBC law matures, a question that often arises is whether tax proceedings can continue during the period of moratorium when the corporate debtor (CD) is under resolution. This is in context of Section 14 of IBC which prescribes that on the insolvency commencement date, the Adjudicating Authority is required to declare moratorium for prohibiting, amongst others, the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority during the resolution period. The National Company Law Appellate Tribunal (NCLAT), in the matter of Mohan Lal Jain, In the capacity of Liquidator of Kaliber Associates Pvt. Ltd. Vs. Income Tax Officer, has fairly settled that there is no bar in making assessment during the period of moratorium. However, order cannot be enforced-meaning thereby that recovery of tax pursuant to the order cannot be made. The claim of the tax authorities will form part of the claim before the Resolution Professional. This position is logical considering that all parties are required to make their claim before the Resolution Professional as on the insolvency commencement date. Determination of tax claim would thus necessitate conclusion of tax proceedings during the resolution period.

Another interesting tax aspect is regarding applicability of Withholding Tax (WHT) on transfer of property of a CD in liquidation. Ordinarily, transfer of immoveable property entails TDS of 1% under Section 194IA of the IT Act. The NCLAT in case of Om Prakash Agrawal Liquidator-S.Kumars Nationwide Limited Vs. CCIT (TDS), has held that TDS under Section 194IA of IT Act, is an advance capital gain tax, recovered through transferee on priority over other creditors of the company. The priority of distribution of liquidation proceeds amongst the various stake holders is mandated under Section 53 of IBC which is a non-obstante provision overriding any other law enacted by the Parliament or any State Legislature. Hence, no TDS is warranted since it would run contrary to the waterfall mechanism provided under Section 53 of IBC. This principle will hold good for other Income tax deductions, as applicable during liquidation process.

Such developments reinforce the need for a holistic understating of inter-connected laws, oversight of which can have significant legal and financial implications.

Contributed by Yatin Sharma. Yatin can be reached at yatin.sharma@aureuslaw.com

From Yatin’s Desk: The Faceless Assessment – Principles of Natural Justice

Imbibe technology – this has been the mantra of the Governments for years now. In context of income tax laws, while the first chapter can be dedicated to use of technology for tax compliances, we have now ushered into the more delicate phase of transforming assessments, appeals and the likes to a faceless regime through use of technology. Whatever be the reason – whether for sake of transparency, ease of business, minimizing interaction with authorities, mapping accountability, or simply cleaning the system, there is no doubt that the change is desirable. However, if not implemented within the realms of Natural Justice, this will be a recipe of unwanted litigation. Also, in view of our system of laws and constitutional provisions, non-observance of principles of Natural Justice will spell failure of this novel system.

The scheme of Faceless Assessment

The legislature has enshrined a detailed procedure for conduct of faceless assessment under the provisions[1] of the Income Tax Act, 1961 (‘Act’). The National Faceless Assessment Centre (‘NFAC’), as the nodal wing of tax administration, acts as the fulcrum for the conduct of assessment, coordinating between the taxpayer and other wings comprising of assessment units, the review units and the technical units, each bestowed with specific functions.

As part of the procedure, faceless assessment requires the assessment unit to make in writing a draft assessment order, either accepting income returned by the taxpayer or making variation to the said income, providing therein details of penalty proceeding to be initiated, if any. The assessment unit is required to consider all the relevant material available on record while making the draft assessment order. A copy of such order is sent to the NFAC. The NFAC upon examining the draft assessment order may decide to:

Finalize the assessment in case no variation prejudicial to the interest of assessee is proposed as per the draft assessment order, serve such order and notice for initiating penalty proceedings, if any, to the taxpayer, along with the demand notice, or
Provide an opportunity to the taxpayer, in case any variation prejudicial to the interest of taxpayer is proposed, by serving a notice calling upon him to show-cause as to why the proposed variation should not be made; or
Assign the draft assessment order to a review unit for conducting review of such order.

Where the taxpayer has received the show-cause notice, he may furnish his response to the NFAC within the stipulated timelines which thereafter is required to be considered by the assessment unit. The assessment unit is required to make a revised draft assessment order and send it to NFAC after taking into account the response furnished by the taxpayer.

NFAC, upon receiving the revised draft assessment order would proceed to finalise the assessment as per the revised draft assessment order and serve a copy of such order and notice for initiating penalty proceedings, if any, to the taxpayer.

As is notable from the aforesaid procedure, the law requires issuance of a show-cause notice (‘SCN’) to the taxpayer where any variation is proposed to the income declared, prior to issuance of final assessment order.

What if procedure is not followed?

It is being witnessed that in many cases, the NFAC has proceeded to issue final assessment orders with variation without issuance of SCN. In some cases, where SCN has been issued and objections filed by the taxpayer, the taxpayer is still denied the opportunity of personal hearing even where requested by the taxpayer. The question that arises is how tenable is the action of the tax authorities and what legal remedy do the taxpayers have?

The classical approach will be to file an appeal with the first appellate level i.e. Commissioner (Appeals) and work through the prolonged spell of litigation over years. Even if one reconciles to this fate, an impediment to such approach is the requirement to pay 20% of the disputed tax upfront for grant of stay of balance tax demand as per the prevailing CBDT directions. This has material impact on the cash flows of taxpayers which are anyway squeezed given the prevailing conditions. Thus, for taxpayers willing to explore unconventional opportunity, it may be worthwhile to examine the writ jurisdiction of the High Courts under Article 226 of the Constitution.

Writ jurisdiction of High Court in tax matters

Article 226 of the Constitution confers wide powers to High Courts to issue writs. The remedy of writ is not absolute but discretionary in character. If the High Court is satisfied that the aggrieved party has an adequate or suitable relief elsewhere, it can refuse to exercise its jurisdiction.[2] The Court, in extraordinary circumstances, may exercise the power if it concludes that there has been a breach of principles of natural justice or procedure required for decision has not been adopted. Thus, the normal rule is that a writ petition under Article 226 of the Constitution ought not to be entertained if alternate statutory remedies are available, except in cases falling within the well-defined exceptions. In this regard, the Supreme Court in Commissioner of Income Tax and Others vs. Chhabil Dass Agarwal[3], observed as follows:

‘19. Thus, while it can be said that this Court has recognized some exceptions to the rule of alternative remedy, i.e., where the statutory authority has not acted in accordance with the provisions of the enactment in question, or in defiance of the fundamental principles of judicial procedure, or has resorted to invoke the provisions which are repealed, or when an order has been passed in total violation of the principles of natural justice, the proposition laid down in Thansingh Nathmal case, Titagarh Paper Mills case and other similar judgments that the High Court will not entertain a petition under Article 226 of the Constitution if an effective alternative remedy is available to the aggrieved person or the statute under which the action complained of has been taken itself contains a mechanism for redressal of grievance still holds the field. Therefore, when a statutory forum is created by law for redressal of grievances, a writ petition should not be entertained ignoring the statutory dispensation.’

Therefore, extraordinary circumstances meeting the prerequisite for exercise of writ jurisdiction of the High Court arise where statutory authorities have not acted in accordance with the provisions of the enactment, or in defiance of the judicial procedure, or when an order has been passed in total violation of the principles of natural justice.

In context of the faceless assessment scheme, provisions of the Act specifically require issuance of a SCN where any variation is proposed to the income declared. These provisions cannot be considered redundant or insignificant. These embody the basis right of fair hearing to the taxpayer and adherence to principle of natural justice. The basic principle of natural justice requires the authority to give the affected party reasonable notice. Such notice must specify the grounds on the basis of which an action is proposed to be taken so as to enable the noticee to defend himself. In this regard, it will be useful to take note of the observation of the Supreme Court in the case of UMC Technologies Private Limited versus Food Corporation of India and Anr.[4] as under:

“13. At the outset, it must be noted that it is the first principle of civilised jurisprudence that a person against whom any action is sought to be taken or whose right or interests are being affected should be given a reasonable opportunity to defend himself. The basic principle of natural justice is that before adjudication starts, the authority concerned should give to the affected party a notice of the case against him so that he can defend himself. Such notice should be adequate and the grounds necessitating action and the penalty/action proposed should be mentioned specifically and unambiguously. An order travelling beyond the bounds of notice is impermissible and without jurisdiction to that extent. This Court in Nasir Ahmad v. Assistant Custodian General, Evacuee Property, Lucknow and Anr.,1 has held that it is essential for the notice to specify the particular grounds on the basis of which an action is proposed to be taken so as to enable the noticee to answer the case against him. If these conditions are not satisfied, the person cannot be said to have been granted any reasonable opportunity of being heard.”

More specifically, the Supreme Court in the case of Gokak Patel Volkart Limited vs Collector Of Central Excise^[5], while examining the provision of section 11A of the Central Excises and Salt Act, 1944 containing specific provisions for issuance of SCN for recovery of duty of excise observed as under:

“The provisions of Section 11A (1) and (2) make it clear that the statutory scheme is that in the situations covered by the sub-section (1), a notice of show cause has to be issued and sub-section (2) requires that the cause shown by way of representation has to be considered by the prescribed authority and then only the mount has to be determined. The scheme is in consonance with the rules of natural justice. An opportunity to be heard is intended to be afforded to the person who is likely to be prejudiced when the order is made, before making the order thereof. Notice is thus a condition precedent to demand under sub-section (2). In the instant case, compliance with this statutory requirement has not been made, and, therefore, the demand is in contravention of the statutory provision.”

Thus, it appears that failure of NFAC to issue SCN, enabling the taxpayer to contest such action would clearly fall short of the threshold of natural justice. In the circumstances, it will be a strong case to contest that the statutory authority has not acted in accordance with the specific provisions of the Act. There in non-adherence to the judicial procedure and principles which are considered to be a bedrock of a common law based civilized society. There is thus, blatant infringement of the right of the taxpayer under the Act in so far as there is denial of the opportunity to contest the variations proposed before issuance of final order.

Persuasive jurisprudence

In somewhat comparable provisions prescribed in relation to matters^[6] which are subject to the jurisdiction of Dispute Resolution Panel (‘DRP’), section 144C of the Act require the Assessing Officer to issue a draft assessment order wherein variation is proposed which is prejudicial to the interest of the taxpayer. This is to enable the taxpayer file objection contesting the variation before the DRP, prior to issuance of final order.

In the past, there have been a number of instances wherein the Assessing Officers have proceeded to issue the final order, overlooking the specific requirement to issue a draft order. In such cases, the taxpayers have often exercised the writ jurisdiction of the courts challenging failure to adhere to the mandatory requirement of section 144C i.e. the obligation to first pass a draft assessment order to enable filing of objections before the DRP. In such cases, the courts have held that failure to follow mandatory procedures prescribed in statute could not be termed as mere procedural irregularity and thus cannot be cured. The orders thus passed are contrary to, and in violation of, the mandatory provisions of the Act, and would result in invalidation of the final assessment order, demand notice and penalty proceedings.

This position of law is now fairly established across jurisdictions, indicatively as held in the case of Zuari Cement Ltd[7], Vijay Television[8], Turner International[9], JCB India[10], etc.

Significantly, in a direct case relating to the faceless assessment scheme, a writ petition has been filed before the Delhi High Court in the case of K L Trading Corporation vs National E-Assessment Centre Delhi & Anr[11]. In the matter, the taxpayer has challenged the action of the tax authorities wherein a final order with variation has been issued without prior issuance of the SCN. The taxpayer has contested that there has been a breach of the principles of natural justice which stands engrafted in the faceless assessment scheme. The Court has found prima-facie merit in the petition and admitted the same for further hearing. On similar issues, a writ has been admitted by the Delhi High Court in the case of SAS Fininvest LLP v National E-Assessment Centre Income Tax Department, New Delhi[12]

In yet another matter, in Magick Woods Exports Private Limited v National e-Assessment Centre, Delhi.^[13], the Madras High Court in a recent writ petition set aside the order passed in violation of principles of natural justice. The impugned order was assailed on the ground that it was passed contrary to the principles of natural justice. In response to SCN issued upon the taxpayer accompanied by a draft assessment order, the petitioner has sought an adjournment on the ground that the petitioner is collating materials necessary to substantiate its stand. However, the impugned order of assessment was passed without taking note of the request of the petitioner for adjournment. The request for adjournment had also not been rejected. The court observed that there has been apparent violation of principles of natural justice. The court accordingly directed the tax authorities to enable the online portal to receive the objections, hear the petitioner and complete the assessment in accordance with law.

The way ahead

As we move toward completion of the annual tax assessment cycle, one can expect some misadventure from the tax authorities who may, consciously or ignorantly, err in finalizing tax assessment with income variation in haste, without providing opportunity in the manner prescribed. Taxpayers need to carefully weigh their options for challenging the assessment orders. Writ petition before jurisdictional High Court can be looked at as the preferable option where the principles of natural justice have been violated. Where successfully contested, in the best-case scenarios, invalidation of final assessment order, demand notice and consequential penalty proceedings would put an end to the rigours of lengthy litigation, or to the least a direction from the court to rehear the objections, limitation permitting.

Contributed by Yatin Sharma. Yatin can be reached at yatin.sharma@aureuslaw.com

[1] Sec 144B of the Act

[2] Constitution Benches of the Supreme Court in K.S. Rashid and Sons vs. Income Tax Investigation Commission, AIR 1954 SC 207

[3] 2014 (1) SCC 603

[4] Civil Appeal No. 3687 of 2020

[5] 1987 AIR 1161

^[6] Orders wherein variation arises consequence of Transfer Pricing orders and assessment of non-residents.

^[7] Zuari Cement Ltd. V. ACIT (decision dated 21st February 2013 in WP(C) No.5557/2012)

^[8] Vijay Television (P) Ltd. Vs. Dispute Resolution Panel & Ors. (2014) 369 ITR 0113 (Mad)

^[9] Turner International India (P) Ltd. Vs. Deputy Commissioner of Income Tax

^[10] Jcb India Ltd. Vs. Deputy Commissioner of Income Tax (2017) 298 CTR 0558 (Del)

^[11] W.P.(C) 4774/2021

[12] W.P.(C) 5087/2021, Order dated 04.05.2021

[13] W.P. No.10693/2021, Order dated 28.04.2021

From Yatin’s Desk: Income escaping assessment – A revamped law on reassessment proceedings

As the dust settles and the excitement subsides over Budget 2021 announcements, it is now an opportune time to examine the fine print of tax proposals. One such proposal which have drawn considerable attention and has the effect of substantially rewriting the law relates to the provision of Income Escaping Assessment i.e. Reassessment Proceedings.

A Look back at the extant provisions

The extant law relating to reassessment are codified under S. 147, to S. 153 of the Income Tax Act, 1961 (‘the Act’). The provisions enable the Assessing Officer (‘AO’) who has ‘reason to believe’ that an income has escaped assessment to reopen concluded assessment years to reassess the escaped income and any other income which comes to his notice subsequently in the course of such proceedings. However, where the assessee has been subject to scrutiny assessment in relation to a year, no reassessment can be made beyond a period of 4 years from the end of relevant assessment year (‘AY’) unless the assessee has failed to ‘disclose fully and truly all material facts necessary for his assessment’ for the year. Where the income likely to have escaped amounts to Rs. 1 lac or more, assessment can be reopened upto 6 years from the end of relevant AY[1]. Before making any reassessment, the AO is required to ‘record his reasons’ for reopening the assessment and serve a notice requiring the assessee to file a tax return. Re-opening of assessment beyond a period of 4 years requires sanction of the Principal Chief Commissioner/Chief Commissioner/Principal Commissioner/Commissioner.

Reopening of assessment – an evergreen controversy

Reassessment proceedings, often, have been challenged in writ proceedings before the High Courts on the ground that the notice for reassessment lacks legal validity on account of failure by the AO to follow due process of law enshrined in the provisions and established under common law. Rather than the merits of concealment, courts are overwhelmed with cases to decide upon the sustainability of the core issue of initiation of reassessment i.e. whether the AO had ‘reasons to believe’, did he ‘record his reasons’ appropriately, did the assessee fail to ‘disclose fully and truly all material facts necessary for his assessment’, was proper ‘sanction’ of the appropriate authorities taken, etc.

The Hon’ble Supreme Court in the case of GKN Driveshafts (India) Ltd. vs. ITO & Ors. has laid that when a notice for reopening of assessment u/s 148 of the Act is issued, the proper course of action for the assessee is to file the return and, if he so desires, to seek reasons for issuing the notices. The AO is bound to furnish reasons within a reasonable time. On receipt of reasons, the assessee is entitled to file objections to issuance of notice and the AO is bound to dispose the same by passing a speaking order.

Recently the Hon’ble Supreme Court in the case of New Delhi Television Limited v DCIT (Civil Appeal No. 1008 Of 2020), in the context of disclosure of ‘fully and truly all material facts necessary for his assessment’ has held that the obligation of the assessee is to disclose all primary facts before the AO and he is not required to give any further assistance to the AO by disclosure of other facts. It is for the AO at this stage to decide what inference should be drawn from the facts of the case. The court went on to hold that non-disclosure of other facts which may be termed as secondary facts is not necessary.

Further, numerous court decisions have repeatedly stated that while the AO has to record reasons for reopening, there should be proper application of mind and it should not just be a mechanical process.

As the reality stands, proper reopening in the manner provided under law has remained wanting. The courts have over and again expressed anguish over the mechanical approach of reopening assessment without adherence to the provisions which have resulted, more often than not, reassessment proceedings being quashed on the issue of proper exercise of jurisdiction itself.

Budget proposal 2021 – revamp of reassessment procedure

The Finance Minister brought smiles by announcing in her budget speech the proposal to reduce time-limit for reopening of assessment to 3 years from the present 6 years, and in serious cases where there is evidence of concealment of income in a year of Rs. 50 lakh or more, upto 10 years. However, on examining the details, one can observe that far-reaching changes have been proposed to the entire scheme of reassessment.

The proposals substitute the exiting provisions of S. 147 with a new section which pari materia contain similar provisions to the extent enabling the AO to assess the escaped income and any other income which comes to his notice subsequently in the course of proceedings. The new substituted S. 148 however makes a significant departure from the existing provisions which put the onus upon the AO to form a belief that an income has escaped assessment. The new provisions propose to provide a monitored criterion, having application across jurisdiction and assesses, to establish when the AO would be considered to have information which suggests that the ‘income chargeable to tax has escaped assessment’.

Defined meaning of expression ‘income chargeable to tax has escaped assessment’

The expression, forming the basis for triggering reassessment proceedings has now been defined in a restrictive manner to mean –

(i) any information flagged in the case of the assessee for the relevant assessment year in accordance with the risk management strategy formulated by the Central Board of Direct Taxes (CBDT) from time to time. Such flagging would largely be done by the computer based system;

(ii) any final objection raised by the Comptroller and Auditor General of India to the effect that the assessment in the case of the assessee for the relevant assessment year has not been made in accordance with the provisions of this Act.

In case of Search & Seizure (S. 132), Survey (S. 133A), Requisition of books of accounts, etc relating to the assessee (S. 132A) or where money, bullion, jewellery or other valuables articles are sized in case of another person but belong to the assessee or books of accounts or documents seized or requisitioned in case of another person pertain to the assessee or contain information related to the assessee, the AO is ‘deemed to have information suggesting escapement of income’ chargeable to tax for 3 AY preceding the AY relevant to the year in which the aforesaid proceedings is conducted (i.e. 4 preceding financial years). These provisions principally seek to simplify and align the special procedure presently applicable to matters relating to search & seizure etc., with the new procedure for reassessment.

It is pertinent to note that the information flagged in accordance with the risk management strategy should necessarily pertain to ‘the assessee’ and thus it appears that information flagged in the case of thirds party, even if implicating the assessee cannot be made a basis of issuance of notice. Perhaps it may have to be seen whether the mechanism to be formulated by the CBDT ensures checks and balances to identify such delinquent taxpayers also.

Procedure to be followed before issuing notice for reassessment

The new provisions further codify the procedure to be followed by the AO before issuing a notice for reassessment. The provisions required the AO to:

Conduct any enquiry, if required, with prior sanction of the specified authority, with respect to the information suggesting escapement of income;
Provide the assessee an opportunity of being heard by serving a notice to show cause within such time (being not less than 7 days and not exceeding 30 days) as to why a notice under section 148 should not be issued on the basis of information suggesting escapement of chargeable income and results of enquiry conducted, if any;
Consider the reply of assessee, if any, furnished and basis the material including reply of the assessee, decide whether a notice is to be issued by passing an order, with the prior approval of specified authority, within 1 month from the end of the month in which the reply referred to in received/ time allowed to furnish a reply expires.

The aforesaid procedure is not required to be followed in cases relating to search and seizure, or where books of account, other documents or any assets are requisitioned under section 132A, etc. (i.e. situations where AO is deemed to have information suggesting escapement of assessment.)

Time limit for issuance of reassessment notice

The new provisions reduce the time-limit for re-opening of assessment to 3 years from the end of relevant AY. For instance, in relation FY 2017-18 corresponding to AY 2018-2019, the reassessment proceedings can be opened only upto 31 March 2022 (being 3 years from the end of relevant AY). FY 2016-17 and prior years will henceforth be barred by limitation if a notice is issued after 31 March 2021 (as against FY 2013-14 and prior years under existing law). In case where the AO has in his possession books of accounts or other documents or evidence which reveal that the income chargeable to tax, ‘represented in the form of assets’, which has escaped assessment amounts to Rs. 50 lacs or more, the assessment can be re-opened upto 10 years.

Grandfathering period of limitation for AY 2021-22 and prior years

The new reassessment provisions are applicable from April 1, 2021. The provisions grandfather issuance of notice for reopening of assessment for financial years (FY) ending till 31 March 2021 upto the end of 6 assessment years relevant to such assessment year (for which notice is issued) as prescribed under the existing provisions. This would imply that if a notice for reassessment was to be issued in FY 2021-22, notice for reassessment can be issued only for FY 2017-18 and subsequent years (i.e. 3 years limitation under new provisions). Further, if it is a case where the quantum of income escaped is Rs.50 lacs or more, notice for reassessment can be issued only for FY 2015-16 and subsequent years on account of grandfathering provisions. The extended period of 10 years would not apply in such case.

Analysing the changes

The proposals, in all fairness are in the right direction. Reduction of period of limitation from 6 to 3 years would provide much desired certainty and closure to a large section of taxpayers. Further restricting reopening based on risk management strategy of CBDT and objections raised by CAG will bring an end to the often-abused powers of reopening exercised by AO, typically at the fag end of the limitation period. By providing a clear mechanism of inquiry, issuance of notice and its timeframe, the proposal will, to a major extent, aid in streamlining the procedure. The unpleasant surprise of receiving reassessment notice on the last day of the financial year will now be a thing of the past given that the new provisions require a detailed procedure to be followed and opportunity to be granted to the assessee to provide his reply before issuance of notice.

The proposal for extended 10 years limitation where the alleged income, ‘represented in the form for assets’, has escaped assessment exceeds ‘Rs. 50 lacs or more’, principally seem reasonable. Prima-facie, it appears that since the revelation of escaped income has to be ascertained from ‘the books of accounts or other documents or evidence in possession of the AO’, this may typically apply to cases of search and seizure, survey, requisition of books, etc. However there seems to be some ambiguity which could have far reaching implications.

The new provision in so far as relate to matters of search & seizure, requisition of books etc. prescribe that where the aforesaid proceeding are initiated, the AO shall be deemed to have information suggesting escapement of chargeable income for 3 AY immediately preceding AY relevant to the FY in which such proceedings are undertaken. Thus, for instance, if search proceedings are initiated against an assessee in FY 2021-22 (relevant AY being 2022-23), income will be deemed to have been concealed for 3 immediately preceding AY i.e. AY 2019-20, AY 2020-21& AY 2021-22, (corresponding to FY 2018-19, FY 2019-2020 & FY 2020-21). Thus, notice would be issued for all the 3 years. Consider this in light of the operative provision which prescribes that where income chargeable to tax has escaped assessment for any assessment year, the AO shall reassess such income for such assessment year. The combined reading of law appears to suggest that in case of aforesaid matters, reassessment proceedings can be undertaken only for 3 years prior to the year in which search proceedings are initiated. If this was to hold good, the question arises whether the extended period of 10 year is really redundant for search & seizure/survey/requisition of books, etc. matters?

This leads to the next pertinent question – in which situations will the 10-year limitation period apply?

The limitation period beyond 3 year and upto 10 year is applicable where the AO ‘is in possession’ of books of accounts or other documents or other evidence which reveal escapement of income chargeable to tax and represented in the form of assets. Ordinarily, AO obtains possession of bocks of accounts/other documents/evidence in proceedings relating to search & seizure/survey/requisition of books, etc. matters. As discussed above, given the provisions as presently stated, one possible reading is that reassessment proceedings can only be undertaken for 3 years prior to the year in which search proceedings, etc are initiated. Would this imply that the extended period of 10 years would apply to matters other than search & seizure/survey/requisition of books, etc.?

In light of the aforesaid, the expression “Assessing Officer has in his possession books of accounts or other documents or evidence which reveal that…”, a necessary condition for exercising extended limitation of 10-year, merits consideration. Would it therefore mean that the documents gathered during regular assessment proceedings may well be regarded as relevant ‘documents or evidence’ being in the possession of the AO. ‘Books of accounts’ are typically not given in possession during assessment proceedings, and therefore how it fits into the scheme of things remains a grey area. Further, would the information mined and provided under the ‘risk mitigating strategy’ of CBDT also be regarded as ‘evidence’ in possession of the AO.

While this may still be debatable, any such inference would be a huge damper as it would now enable reopening assessment for 10 years (subject to Rs. 50 lacs threshold) as against 4 year under the existing law even where the assessee has made full and true disclosure of material facts during the course of prior assessment. Take for instance a case where risk management strategy of CBDT flags substantial increase in loans and advances or investments as a data point for triggering reassessment. The same would logically have been disclosed in the balance sheet. In such a situation, inspite of such disclosure, there could perhaps be possibility to reopen reassessment proceedings upto 10 year (subject to monetary threshold), effectively giving the CBDT a 10-year timeframe to refine its data intelligence and risk-based criterion. This would certainly be an area of concern.

Overall, it is encouraging to note a transformational change in the provisions relating to reassessment proceedings. There is a fundamental shift from an obscure and discretionary regime to systematic and risk-based criterion applicable uniformly across jurisdictions and taxpayers, without bias and subjectivity. It will however be interesting to see how the authorities go about enforcing the extended period of limitation given the ambiguity involved. One can hope the same is not enforced against the interest of taxpayer, specifically taking a liberal interpretation of 10 years extended limitation period, which otherwise will be a huge disappointment.

[1] Extended period of 16 years is prescribed in case of escaped income in relation to an asset located outside India.

Yatin can be reached at yatin.sharma@aureuslaw.com. Views are personal.

COVID 2019: Relaxation from Statutory and Regulatory compliances

From Yatin Sharma‘s desk with Astha Srivastava and Sayli Petiwale

These unprecedented times call for unprecedented measures. As one of the first steps taken by the Government of India (“GoI”) to counter the impact of COVID -19 on the economy, the Union Finance & Corporate Affairs Minister on March 24, 2020 announced certain relief measures with respect to statutory and regulatory compliance matters across various sectors. Further, relief in the area of taxation — both direct and indirect have also been announced. This note provides a short summary of the various measures.

Corporate Affairs

Under the Companies Act, 2013 (“CA, 2013”)

A moratorium period has been introduced from April 1, 2020 to September 30, 2020, whereby an additional fee would not be levied on late filing of any document, return, statement, etc. required to be filed with the Ministry of Corporate Affairs (“MCA”) registry. This will reduce the compliance burden on companies/ Limited Liability Partnerships (“LLPs”) and also help in reduction of financial cost involved in adherence to these compliance for the prescribed time period.
The requirement for holding a board meeting within the prescribed time period (i.e. 120 days) as per section of 173 of the CA, 2013 has been relaxed by 60 days, which would be applicable for the next two quarters i.e. till September 30, 2020. Therefore, the gap between two consecutive meetings of the board may extend to 180 days for the next two quarters.
The Companies Auditors’ Report Order, 2020 would be applicable from Financial Year (“FY”) 2020-2021. A notification bearing F. No. 17la5l2015-CL-V Part I dated March 25, 2020 (“Notification”) has been issued by the MCA in this regard.[1]
No violation of law shall be considered if the independent directors are unable to hold even a single meeting as per Schedule lV of the CA, 2013, for the FY 2019-2020.
The time period for filing a declaration within 6 months of incorporation of a company regarding commencement of business in Form 20A, has been extended by additional 6 months. This will reduce the compliance burden on newly incorporated companies as the commencement of business may pose certain challenges in these testing times.
No violation of law shall be considered if a director is unable to comply with minimum residency requirement of 182 days as per section 149 of CA, 2013. This would be relevant considering the travel restrictions imposed by the countries across the globe as well as lockdown in India.
The requirement of creation of reserve for 20 percent of all the deposits maturing in the next FY before April 30, 2020 has been deferred till June 30, 2020.
The requirement of investing 15 percent of the amount of maturing debentures during a year by April 30, 2020 as per section 173 of CA, 2013 read with Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014, has been deferred up to June 30, 2020.

Please note that MCA has issued a circular bearing No. 11/2020 dated March 25, 2020 (“Circular”) with respect to the above.[2] These relaxations would help easing compliance burden upon the companies/ LLPs.

Insolvency and Bankruptcy Code, 2016 (“IBC”)

Following critical measures have been introduced under the IBC:

The minimum threshold for filing a petition under IBC has been increased from INR 1 Lakh to INR 1 Crore with immediate effect. This will provide immediate relief to Micro, Small and Medium Enterprises, which will bear direct and adverse effect of COVID-19 on a large scale. It is important to note here that the notification bearing F. No. 30/9/2020-Insolvency dated March 24, 2020 (“IBC Notification”) issued by the MCA does not prescribe any time limit for increase in the threshold.[3] Therefore, it appears that the increase in threshold has not been notified for a certain time period.
In the event the situation in relation to COVID-19 persists beyond April 30, 2020, the operation of Sections 7, 9 and 10 under IBC may be considered for a 6 month suspension. Section 7 of the IBC relates to initiation of corporate insolvency resolution by a financial creditor, while Section 9 and 10 talk about initiation of corporate insolvency resolution by operational creditor and corporate applicant. As a result, initiation of insolvency resolution proceedings against defaulting corporates will be suspended for a limited time period once the measure is introduced. This will provide some relief to the small and medium-sized businesses which may be pushed to the brink of bankruptcy due to this black swan event.

Income Tax Act, 1961

The following measures have been announced in relation to the Income Tax Act, 1961 (“IT Act 1961”):

In relation to FY 2018-19, the last date for filing of belated income tax returns has been extended to June 30, 2020 from March 31, 2020.
In relation to delayed payments of advanced tax, self-assessment tax, regular tax, TDS, TCS, equalization levy, STT, CTT made between March 20, 2020 and June 30, 2020, an interest at a reduced rate of 9 percent (as opposed to 12 percent or 18 percent per annum) would be charged. Hence, on a monthly basis, a rate of 0.75 percent would be charged (instead of 1 percent or 1.5 percent). Further, there would be no late fees or penalty chargeable on delay in relation to this period. This is a welcome step as it would ease up the financial burden on the assessee.
The last date for Aadhaar-PAN linking has been extended to June 30, 2020.
Certain waivers have been offered in relation to payments under the Direct Tax Vivaad Se Vishwas Act, 2020. This legislation was introduced with an objective of resolving direct tax disputes. Under this Act, tax payers availing this scheme and making payment of amount of tax under dispute on or after April 1, 2020 were required to pay additional 10 percent of the determined tax amount. However, payments made by March 31, 2020 did not attract such charge. Vide the measures announced by, no additional payment of 10 percent would be required for payments made till June 30, 2020. This would enable the relevant assessee to take benefit of this legal amnesty scheme without incurring any additional cost.
The due dates in relation to the following, which are due for expiration between the period of March 20, 2020 and June 29, 2020 shall be extended till June 30, 2020:
- issuance of notice, intimation, notification;
- passing of approval order and sanction order;
- filing of appeal;
- furnishing of return, statements, applications, reports and any other documents;
- time limit for completion of proceedings by the authority; and
- any compliance by the taxpayer including investment in saving instruments or investments for roll over benefit of capital gains under various laws including IT Act 1961, Prohibition of Benami Property Transaction Act, 1988, The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, STT law, CTT Law, Equalization Levy law, Direct Tax Vivad se Vishwas Act, 2020.

It may be noted that necessary circulars and legislative amendments in this regard would be issued by the relevant Ministry / Department in the due course.

Goods and Service Tax

The following measures have been announced in relation to Central Goods and Service Tax Act, 2017 and the Indirect Taxes:

The due date for filing of Form GSTR-3B which is due in March, April and May, 2020, for companies having aggregate annual turnover less than INR 5 Crores, has been extended to the last week of June, 2020. Further, no interest, late fee, and penalty shall be chargeable in this regard. This is carried out to ease the compliance burden on the small and medium scale enterprises.
In relation to companies having aggregate annual turnover of more than INR 5 Crores, for filing of Form GSRT-3B which is due in March, April and May, 2020, the same has been extended till last week of June, 2020. However, if the return is filed after fifteen (15) days from the due date, a rate of interest at 9 percent per annum (instead of 18 percent per annum) would be chargeable. In this regard, no late fee and penalty would be charged if compliance is done prior to June 30, 2020.
The date for opting for composition scheme has been extended till June, 2020. Additionally, the last date for making payments for the quarter ending March, 2020 and for filing returns for FY 2019-20 by composition dealers would be extended till the last week of June, 2020.
The date for filing of GST annual returns of FY 2018-19, has been extended to the last week of June, 2020 from March 31, 2020.
The due dates in relation to the following compliances under the GST regime, wherein the time limit is due for expiration between March 20, 2020 to June 29, 2020 has been extended to June 30, 2020:
- issuance of notice, notification;
- approval order, sanction order;
- filing of appeal;
- furnishing of return, statements, applications, reports and any other documents;
- time limit for any compliance under the GST laws.

It may be noted that the necessary legal circulars and legislative amendments in this regard shall follow with the approval of GST Council.

Payment date under the Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 shall be extended to June 30, 2020 and no interest for this period shall be charged if the payments are made by June 30, 2020.

Customs

The following decisions have been taken with respect to compliances under Customs Act, 1962 (“Act of 1962”):

Customs clearance has been categorized as an essential service, which shall be available 24×7 till June 30, 2020.
The time limit for issuance of notice, notification, approval order, sanction order, filing of appeal, furnishing applications, reports, any other documents, etc., time limit for any compliance under the Act of 1962 and other allied laws where the time limit is expiring between March 20, 2020 to June 29, 2020, has been extended till June 30, 2020.

Financial Services

The following measures have been introduced in relation to financial services:

A waiver on additional charges for cash withdrawals via debit-cards of a particular bank from an ATM of other banks would be granted for 3-months. This would entail charge free cash withdrawal, as it would be difficult to access an ATM with which an individual holds a bank account, during the lockdown period.
The requirement for minimum balance fee for bank accounts would be waived for a period of 3-months.
The bank charges would be reduced for digital trade transactions for all trade finance consumers. This step has been taken to ensure that people prefer digital transactions over traditional modes due to easy access.

Department of Commerce

In relation to the commerce sector, the GoI has announced that there would be an extension of timelines in relation to compliances and procedures. The detailed notification in this regard would be released by the Ministry of Commerce.

Conclusion

The COVID-19 pandemic and resultant preventive measures have affected the business sector and given rise to various complications. With a view to reduce the reeling effects of this pandemic, the GoI through the Ministry of Finance has introduced a slew of measures to relax the statutory and regulatory compliances for businesses. These relaxations have been introduced for ease of day-to-day functioning and compliances. Further, these measures would also sustain in management of the financial and operational burdens vis-à-vis statutory and regulatory related compliances. Small and medium scale businesses have been affected the most due to the outbreak of COVID-19, and these measures would go a long way in easing their financial burdens. From an individual perspective, certain relaxations have been introduced in the financial services sector to reduce bank charged for digital transactions. In addition to the above, the due date of ongoing proceedings (regulatory, quasi-judicial and judicial) under the tax regime (direct and indirect) has been extended. This is a much-needed relief for the hour, as given the circumstances, the courts and tribunals across the nation are not functioning or hearing selective matters, and hence taking a legal recourse in this regard would pose a challenge. The formal circular / notification in this regard from the relevant Ministry / Department is expected soon.

[1] The Notification could be accessed here.

[2] The Circular could be accessed here.

[3] The IBC Notification could be accessed here.

From Yatin’s Desk: Delhi High Court favorably rules on alternate Writ remedy against DRP directions

The Delhi High Court (HC), in a recent ruling in the case of P.D.R SOLUTIONS FZC has allowed the Writ petition filed by the petitioner and set aside the order of the Dispute Resolution Panel (DRP) holding that the DRP erred in not taking into consideration all the material and contentions furnished by the petitioner before the DRP. The matter was remanded back to the DRP for considering the objections raised by the petitioner in detail and for passing a fresh order on merits by giving reasons and findings. To put in perspective, the petitioner was a UAE tax resident company engaged in the business of selling domain names, providing web hosting services & server space to clients. The petitioner had claimed a non-taxable position under India-UAE DTAA , which was one of the objection raised before the DRP. The DRP however, without examining the objection, passed an adverse direction following the decision of the Income Tax Appellate Tribunal (ITAT) in case of GoDaddy.com, taxability in which case was determined only under the domestic tax laws.

As a norm, Writ remedies are generally not entertained when there is alternate appellate remedy available to the taxpayer. However, in this case the HC observed that since no assessment order had yet been passed by the Assessing officer (AO), the alternate remedy was not available as yet. Further, the DRP did not adjudicate petitioner’s categorical objections on the taxability under the India-UAE DTAA which violated the principles of natural justice, there was a fundamental error relating to the exercise of jurisdiction and the approach of the DRP rendered the entire process of the dispute resolution as per the scheme of law farcical.

In the ordinary course, a taxpayer would be required to go through the tedious process of litigation – filing appeal before the next level appellate forum (ITAT) against the final order once issued by the AO (based on DRP direction). In a matter like this where the DRP has not examined the technical merits of the case, generally the ITAT would remand the matter back to AO/DRP for consideration on merits. Procedurally, this may take substantial time, perhaps years, before appeal is considered by the ITAT. Given the favourable consideration by HC at the draft order stage (where only DRP direction has been passed), there may now be another opportunity for tax payer to perhaps explore the Writ option and expedite their litigation where there is a blatant non considerations of the objection raised before the DRP. Having said that, one needs to take note (as observed by the HC) that not every order, where there is a non-application of mind, would become open to challenge under Writ jurisdiction, but only fundamental error which are glaring and noticeable.

The HC has made a fine balance in all fairness and brings forth an alternate remedy where the taxpayer is aggrieved against DRP direction, albeit which may be considered judiciously in exceptional circumstances.

From Yatin’s Desk: Government clarifies on proposed residency rule for Indian Citizens

The Finance Bill (FB) 2020 has proposed a significant change by regarding an Indian citizen (who otherwise is not resident in India under the basis stay rule of 182/120 days or more) as ‘deemed resident’ if the individual is ‘not liable to tax in any other country’ by reason of his domicile or residence or other criteria of similar nature. Memorandum to the FB 2020 explains the intent by stating that the change is proposed to address the practice by individuals to arrange affairs in a fashion such that he is not liable to tax in any country or jurisdiction during a year. Such arrangements are typically employed by high net worth individuals to avoid paying taxes to any country/ jurisdiction on income they earn. The change, at first sight, is bound to give jitters to certain category of citizens who are genuinely employed in tax free countries, for instance UAE which does not have personal income tax.

It will be interesting to take note of the text proposing the change which states as follows – “an individual, being a citizen of India, shall be deemed to be resident in India in any previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.”;

The use of the expression “by reason of his domicile or residence” is intriguing given the effect could have perhaps been achieved simply by specifying that ‘a citizen of India shall be deemed to be resident in India if he is not liable to tax in any other country’. One wonders whether the use of expression “by reason of his domicile or residence” gives some scope for argument that the deeming residency rule may not apply to citizens where non-taxability is on account of general exclusion of ‘Individual’ from taxation and not on account of lack of meeting threshold of domicile/residence? The debate may have just begun and will certainly open another area of protracted litigation.

While the analysis continues, one way to wriggle out of this conundrum is to take shelter of ties breaker rule under tax treaties, which is again a complex exercise involving interpretations. It will further be pertinent to take note that individuals qualifying as “resident but not ordinarily resident” (RNOR) are not taxable in relation to income which accrues or arises outside India unless it is derived from a business controlled or a profession setup in India. As further proposed in FB 2020, a person will qualify as “RNOR” in India in any previous year, if he has been a non-resident in India in 7 out of 10 previous years preceding that year. Thus, even if an individual is regarded as a “deemed resident” under the new framework from FY 2020-2021, he may still qualify as “RNOR“ thereby safeguarding income accruing outside India from India taxation during the years “RNOR” status is maintained. The 7/10 rule for RNOR status while provides some comfort to citizens who have been settled overseas for over 7 years, this will have far reaching implications for recent emigrants.

The government is ceased of the issue and to its credit has issued a press release clarifying that in case of an Indian citizen who becomes ‘deemed resident’ of India under this proposed provision, income earned outside India by him shall not be taxed in India unless it is derived from an Indian business or profession. Further clarification is expected to be incorporated in the relevant provision of law. Hope the government also ensures there is no associated filing/reporting burden cast on the overseas citizens.

Whether it is at all worthwhile to change the status quo only for targeting a few HNI’s misusing the law..perhaps not!

From Yatin’s Desk: Non-resident taxpayers get partial breather from filing Indian tax returns

Filing of Indian income tax return by non-residents earning passive income in the nature of royalty, fee for technical services (FTS) and interest, subjected to WHT in India, has been a sore point for non-resident tax payers. Such taxpayers either being oblivious of the requirement or otherwise regarding such compliance as an unnecessary burden, in many instances have not been filing the tax return in India. The Government over the last 2-3 years has been focusing on ensuring compliance, even going to the extent of issuing notices for reassessment and making penal provisions stringent to enforce compliance by delinquent tax payers. In a reversal, the Finance Bill (FB) 2020 now proposes to exempts non-residents from tax filing obligation, though with limitations.

Under the extant provisions, non-resident tax payers earning interest and dividend income are exempted from filing tax returns provided appropriate WHT has been deducted [at rate applicable under Double Tax Avoidance Agreement (DTAA) or domestic tax law – as beneficial]. Tax payers earning FTS & royalty income are mandatorily required to file tax return, even if income has been subject to WHT. FB 2020 proposes to materially change this requirement by providing the non-residents an exemption from tax filing in relation to FY 2019-2020 and subsequent years. The exemption will be available where the income is in the nature of royalty/FTS (taxable on gross basis), interest and dividend and WHT has been deducted at the rate prescribed under the domestic tax law (Act), if higher than the rate applicable under DTAA.

For instance, WHT rate for Royalty/FTS in most DTAA is 10% vis-à-vis 10.92% (for foreign companies) under the Act. The exemption from filing will be applicable if WHT has been made at 10.92%. While difference is not stark with respect to Royalty/FTS and non-residents may perhaps consider WHT deduction at higher rate to avail the benefit, adopting the same approach for interest and dividend income will have its limitation. General rate of WHT applicable on interest/dividend income is 21.84% (peak rate for foreign companies) as against 10%/15% applicable under most DTAA [certain categories of interest income is subject to lower WHT of 5% under Act e.g. interest on foreign currency loan, rupee denominated bonds, etc.]. Significant difference in WHT rates would be a dampener leaving non-resident tax payers with limited scope of benefiting from the proposed non-filing regime.

The budget proposal has made a cross-over perhaps benefiting non-resident tax payers earning FTS/royalty income (given lower arbitrage between domestic and DTAA WHT rates) while obligating those earning interest/dividend income to file tax return if they wish to take benefit of lower rates under DTAA. The provisions also leave another area unaddressed i.e. with regard to undertaking transfer pricing compliance even where there is no filing obligation (in absence of specific carve out). Non compliance has significant penal implications.

The Government has apparently taken back, to an extent, what it proposed to give by way of relief to non-resident taxpayers. It may not be ease of compliance yet !

From Yatin’s Desk: Income Tax Settlement Scheme – An opportunity to close tax litigation

Update: 22.02.2020 – The tax settlement scheme which was initially proposed to cover litigation pending before Commissioner (appeals), Tax Tribunal, High Court, Supreme Court and international arbitration as on 31 January 2020 is expected to also cover matters under review by Dispute Resolution Panel (DRP), Revision applications before Commissioner and orders for which timeline for filing appeal has not expired as on 31 January 2020. The Government is going all guns blazing to make this scheme a success. A great opportunity for litigants.

——————————————————

The Finance Minister, in her budget speech introducing the Finance Bill 2020 had announced bringing a direct tax settlement scheme with the intent of reducing over 4.8 lacs direct tax cases pending before various appellate authorities. In furtherance of the announcement, “The Direct Tax Vivad Se Vishwas Bill, 2020” has been introduced in the Parliament for consideration. The same will become effective from the date to be notified post approval by the parliament and presidential assent.

The scheme provides an opportunity to settle arrears of tax against appeals pending as on 31 January 2020 before the appellate forums [Commissioner (Appeal), Income Tax Appellate Tribunal, High Court and Supreme Court]. Where the arrears relates to disputed tax and interest & penalty on such disputed tax, there is a complete waiver of interest and penalty on payment of disputed tax by 31 March 2020. Payment beyond 31 March 2020 but within the last date (to be notified), will require additional payments of 10% of the disputed tax. Further where the tax arrears relates to disputed interest, penalty or fee, there will be a waiver of 75% of such amount if paid by 31 March 2020 and 70% where payment made beyond 31st March 2020 till the last date to be specified. The scheme further provided for immunity from prosecution.

The scheme requires the taxpayer to file a declaration before the designated Commissioner of Income tax who will within a period of 15 days from the date of receipt grant a certificate containing particular of tax arrears and the amount of tax to be paid. The taxpayer will thereafter be required to pay the tax determined within 15 days from the date of receipt of the certificate and intimate the payment thereof to the authorities. On issue of certificate, pending appeal before the Commissioner (Appeal) and Income tax Appellate Tribunal will be deemed to be withdrawn. With regard to appeals before High Court/Supreme Court or where proceedings for arbitration, conciliation or mediation have been initiated, the taxpayer will be required to withdraw the appeals. Rules and forms in relation to the scheme are yet to be notified.

The scheme leaves some open questions such as eligibility of tax payers who are yet to file appeal as on 31 January 2020 (within the timeline prescribed), impact on appeals deemed to be withdrawn before the appellate authorities upon issue of certificate where the taxpayer is unable to pay the liability with the 15 day timeline, adjustment of past pre-deposits, etc. Hopefully some FAQ’s will clarify on such aspect. Further, given the 15 days payment timeline, this may be a challenge for foreign companies not having operative bank account in India to facilitate money transfer. The Government may consider a mechanism to facilitate this.

Overall the tax settlement scheme is a welcome move by the government to reduce pending litigation. Tax payers should critically review their litigation exposure and avail the opportunity to get closure specifically where exposure of interest (due to long pending disputes), penalty and prosecution is high.

From Yatin’s Desk: MAT credit dilemma under 25% corporate tax rate option

In light of last week’s historical reduction in the corporate tax rates applicable during FY 2019-20, existing domestic companies (not availing tax exemptions/specified deductions) have the option to avail reduced corporate tax rate of ≈25%. Such companies have also been exempted from applicability of Minimum Alternate Tax (MAT). Companies not opting for such scheme will continue to be taxed at the current rate (≈29%/35%) and subject to MAT, albeit at the reduced rate of ≈ 17.5% vis-a-vis 21.5%.

In absence of MAT application to such companies or any change in MAT credit provisions specifically permitting set-off of MAT credit against 25% liability, the debate will continue for the next few days on the entitlement to set of unutilized MAT credit. However, if the view emerges against the set-off, it will be vital for companies to consider their MAT credit position before jumping into the perceptibly lucrative 25% tax regime. As a big picture, so long the companies have sufficient MAT credit, the liability can be restricted to 17.5% (MAT liability) by setting off excess liability computed (at general rate of 29%/35%) against MAT credit entitlement. Accordingly, it may be beneficial for companies to continue with the existing regime till the MAT credit is completely absorbed. There is always the option to exercise the 25% regime in future.

While the taxpayers do their math, it will be worthy if the government clarifies its position.

From Yatin’s Desk: Withholding tax (TDS) default, no more business as usual

Indian tax laws mandate payers to withhold taxes at source on payments to residents (in case of specified payments) and also non-residents (where their income is taxable in India). Non-compliance has penal consequences. While failure to withhold tax has interest and penalty implications (i.e. financial costs), consequences are severe in case of non-deposit or late deposit of tax collected leading to additional prosecution implications (financial+ criminal implications). Given the humongous amount of data collated by the Revenue Authorities and use of data analytic, it is not unusual to find show cause notices being issued to defaulter now days. However what should raise alarm for the defaulters is the fact that where the default relates to non/delayed deposit of taxes leading to prosecution proceedings, the Magistrate Courts are taking a serious view on the matter with defaulters being sentenced to imprisonment.

One recent case before the Ballard Pier Magistrate Court (Mumbai), related to a delayed payments of approx. INR 850K, which was paid with interest and also penalty. The Magistrate Court disregarded the plea of financial constraint and proceeded to convict the defaulter sentencing to 3 months imprisonment. Though, the decision is appealable before higher Appellate Courts, one needs to take note that such proceedings are highly complex, time consuming and financially expensive. Take for instance this specific matter – it related to withholding default in financial year 2009-10, criminal complaint before Magistrate Court was filed in 2004 and after almost 30 odd hearings/adjournments before the Magistrate Court, the proceedings concluded in April 2019; a 10 year saga, which will further continue for years before higher Courts.

It is also relevant to take note that where the defaulter is a Company, the direct impact is on the directors, who generally are proceeded against leaving it for them to defend their innocence. A clear message – by no means delay or fail to deposit taxes deducted if you want to be on the right side of law, else don’t complain of government action!!