Introduction
The Hon'ble Union Finance Minister Nirmala Sitharaman has presented the Union Budget 2021 of India on the 1st of February, 2021. Budget 2021 is aimed at reviving an economy that plunged into deepest recorded slump amid the COVID-19 pandemic. In her speech, Hon'ble Madam Sitharaman announced that India's fiscal deficit is set to jump to 9.5 percent of Gross Domestic Product in 2020-21 as per Revised Estimates. This is sharply higher than 3.5 percent of GDP that was projected in the Budget Estimates. A slump in government revenues amid the Covid-19 pandemic has led to a sharp rise in deficit and market borrowing. This was Sitharaman's third budget under the National Democratic Alliance (NDA) government led by Prime Minister Narendra Modi. In a significant departure from the tradition, this year's Budget was not printed and was only made available in a digital format.
Click here to download Finance Bill 2021
In, significant changes to the taxation process, among other tax measures, the FM recommended a paradigm change to the provisions relating to “Assessment in case of search or requisition viz. Section 153A to 153D” and Income Tax Settlement Commission.
Proposed Changes relating to Income Tax Search and Seizure and Income Tax Settlement Commission
(i) Changes relating to Income Tax Search and Seizure Assessments:-
(a) Existing Legal Framework before 01-02-2021
Section 153A of the Income Tax Act'1961- Assessment in case of search or requisition (forming part of Chapter XIV of the Income Tax Act'1961- Procedure for Assessment) provides for assessment in the case of a person in whose case a search is initiated under section 132 of the Act or documents or assets are requisitioned under section 132A of the Act after May 31st, 2003. In such a case the Assessing Officer was obligated to issue notice u/s 153A in respect of 6 preceding years and relevant assessment year(s), immediately preceding the year in which search has been initiated. Thereafter he has to assess or reassess the total income of these six years. It is obligatory on the part of the Assessing Officer to assess or reassess total income of the six years and relevant assessment year(s) as provided in section 153A(1)(b) and reiterated in the 1st proviso to this section. The second proviso states that the assessment or reassessment pending on the date of initiation of the search or requisition shall abate.
At the outset it will be relevant to mention that under the existing search assessment procedure as contained under sections 153A to 153D concerning the assessment in a case where search under section 132 or requisition under section 132A is initiated were brought on the statute only w.e.f. 1-6-2003. Qua the search assessments earlier applicable procedure was contained in Chapter XIV-B (sections 158B to 158BI) wherein only undisclosed income mentioned in the seized documents, etc., relatable to the block of ten years was liable to be brought to tax and for the regular income Assessing Officer had to frame the normal assessments.
Section 153C of the act contains the procedure for assessment of income of persons other than that of the person searched which are covered u/s 153A of the act. Section 153C is a replacement to erstwhile “Section 153BD: Undisclosed income of any other person” contained in Chapter XIV-B which was made inoperative for searches initiated u/s 132 of the act after the 31st day of May'2003. Section 153C of the act comes into play when the books of accounts, documents , assets seized in a search action from one person actually belongs to/pertains to/relates to some other person who has not been subjected to such a search action.
(b) Proposed changes recommended in Finance Bill 2021
The Finance Bill 2021 proposes a completely new procedure of assessment in cases of initiation of search on or after 1st April'2021.
The salient features of new procedure are asunder:-
- The provisions of section 153A and section 153C, of the Act are proposed to be made applicable to only search initiated under section 132 of the Act or books of accounts, other documents or any assets requisitioned under section 132A of the Act, on or before 31st March2021.
- Assessments or reassessments or in re-computation in cases where search is initiated under section 132 or requisition is made under 132A, after 31st March 2021, shall be under the newprocedure.
- Section 147 proposes to allow the Assessing Officer to assess or reassess or re-compute any income escaping assessment for any assessment year (called relevant assessment year).
- Further, in search, survey or requisition cases initiated or made or conducted, on or after 1st April, 2021, it shall be deemed that the Assessing officer has information which suggests that the income chargeable to tax has escaped assessment in the case of the assessee for the three assessment years immediately preceding the assessment year relevant to the previous year in which the search is initiated or requisition is made or any material is seized or requisitioned or survey isconducted.
- New Section 148A of the Act proposes that before issuance of notice the Assessing Officer shall conduct enquiries, if required, and provide an opportunity of being heard to the assessee. After considering his reply, the Assessing Office shall decide, by passing an order, whether it is a fit case for issue of notice under section 148 and serve a copy of such order along with such notice on the assessee. The Assessing Officer shall before conducting any such enquiries or providing opportunity to the assessee or passing such order obtain the approval of specified authority. However, this procedure of enquiry, providing opportunity and passing order, before issuing notice under section 148 of the Act, shall not be applicable in search or requisitioncases.
- Years covered under Assessment : In normal cases, no notice shall be issued if three years have elapsed from the end of the relevant assessment year. Notice beyond the periodof three years from the end of the relevant assessment year can be taken only in a few specific cases where the Assessing Officer has in his possession evidence which reveal that the income escaping assessment, represented in the form of asset, amounts to or is likely to amount to fifty lakh rupees or more, notice can be issued beyond the period of three year but not beyond the period of ten years from the end of the relevant assessment year.
These amendments will take effect from 1st April, 2021.
[Refer Clauses 35 to 40 and 42 to 43 of the Finance Bill'2021]
Analysis
The Hon'ble Finance Minister made a significant change to the well existing scheme of the Income Tax Assessments pursuant to a search and seizure action. In nutshell, the provisions of Section 153A and 153C shall not apply to search or requisition cases initiated or made or conducted, on or after 1st April, 2021.
While doing so, the reasons advanced in the memorandum explaining the provisions of Finance Bill'2021 are that the existing search assessment framework ( like the erstwhile block assessment procedure under Chapter XIV-B of the Act) has failed to in its objective of early resolution of search assessments and were proving to be highly litigation-prone. The Bill proposed a completely new procedure of assessment of such cases. It is expected that the new system would result in less litigation and would provide ease of doing business to taxpayers as there is a reduction in time limit by which a notice for assessment or reassessment or re-computation can be issued.
For searches conducted on or after 1st April'2021, then forth, assessments shall be framed under Section 147 read with section 148, 148A, 149,151 of the Income Tax Act'1961.
The mandatory assessment of 6 years immediately preceding the year of search has been done away with and now only past 3 assessment years shall be covered under assessment unless the Assessing Officer has in his possession evidence which reveal that the income escaping assessment, represented in the form of asset, amounts to or is likely to amount to fifty lakh rupees or more, notice can be issued beyond the period of three year but not beyond the period of ten years from the end of the relevant assessment year.
Prima Facie, the cumbersome processes and administrative procedure of recording of satisfaction u/s 153C of the act has not been taken away. W.e.f. 01st April'2021, the satisfaction has to be recorded with the prior approval of Principal Commissioner or Commissioner that any money , bullion, jewellery or other valuable article or things so seized or requisitioned belongs and books of accounts or documents so seized or requisitioned pertain or pertains to any other person other than the person searched.
Interestingly, the concept of dual assessment(s) seems to be revived again as the pending assessments now on the date of search shall not abate. Furthermore, in the erstwhile scheme, by virtue of Section 153B, the assessments were bound to be completed within a period of twelve months from the end of financial year in which the last of the authorization for search under section 132 or for requisition under section 132A was executed. With the introduction of new search assessment procedure by the Finance Bill 2021 pending the passage of the bill and presidential assent, it is apparent that the limitation shall now be governed by Section 153 of the act and shall be dependent on financial year in which the notice u/s 148 was served.
(ii) Changes relating to Income Tax Settlement Commission
(a) Existing Legal Framework before 01-02-2021
Chapter XIX - A of Income Tax Act, 1961 provides for settlement of cases. Income Tax Settlement Commission was set up in the year 1976 on the recommendation of Direct Tax Enquiry Committee headed by former Chief Justice of India, Shri K. N. Wanchoo. Chapter XIX – A of Income Tax Act, 1961 comprises of Section 245A to 245M. Section 245C of the Act empowers the assessee to move an application at any stage of a case relating to him and thereby to make a full and true disclosure of income, which has not been disclosed before the Assessing Officer subject to rider contained in section 245C of the Act. The Settlement Commission may allow or reject the application, but in any case in view of provision contained in section 245C of the Act, the application moved under sub-section (1) of the said section, cannot be allowed to be withdrawn by the applicant. The application so moved under section 245C of the Act should be processed by the Settlement Commission in view of procedure prescribed in section 245D of the Act within the specified period provided therein. The provision contained in section 245D provides that the Settlement Commission shall give opportunity to the applicant and to the Settlement Commission, which includes personal hearing or hearing through representative and then pass such order as it thinks fit on the matters covered by the application, which includes any other matter relating to case not covered by the application but referred to in the report of Commissioner, Income-tax.
(b) Proposed changes recommended in Finance Bill 2021
The Finance Bill 2021 proposed the discontinuation of Income Tax Settlement Commission with immediate effect i.e. 1st February'2021. It is proposed to discontinue Income-tax Settlement Commission (ITSC) and to constitute Interim Board of settlement for pending cases.
The various amendments proposed are as under
- ITSC shall cease to operate on or after 1st February,2021
- No application under section 245C of the Act for settlement of cases shall be made on or after 1st February,2021;
- All applications that were filed under section 245C of the Act and not declared invalid under sub-section (2C) of section 245D of the Act and in respect of which no order under section 245D(4) of the Act was issued on or before the 31st January, 2021 shall be treated as pendingapplications.
- Where in respect of an application, an order, which was required to be passed by the ITSC under section 245(2C) of the Act on or before the 31st day of January, 2021 to declare an application invalid but such order has not been passed on or before 31st January, 2021, such application shall be deemed to be valid and treated as pendingapplication.
- The Central Government shall constitute one or more Interim Board for Settlement (hereinafter referred to as the Interim Board), as may be necessary, for settlement of pending applications. Every Interim Board shall consist of three members, each being an officer of the rank of Chief Commissioner, as may be nominated by the Board. If the Members of the Interim Board differ in opinion on any point, the point shall be decided according to the opinion ofmajority.
- On and from 1st February, 2021, the provisions related to exercise of powers or performance of functions by the ITSC viz. provisional attachment, exclusive jurisdiction over the case, inspection of reports and power to grant immunity shall apply mutatis mutandi to the Interim Board for the purposes of disposal of pending applications and in respect of functions like rectification of orders for all orders passed under sub-section (4) of section 245D of the Act. However, where the time-limit for amending any order or filing of rectification application under section 245(6B) of the Act expires on or after 1st February, 2021, in computing the period of limitation, the period commencing from 1st February, 2021 and ending on the end of the month in which the Interim Board is constituted shall be excluded and the remaining period shall be extended to sixty days, if less than sixtydays.
- With respect to a pending application, the assessee who had filed such application may, at his option, withdraw such application within a period of three months from the date of commencement of the Finance Act, 2021 and intimate the Assessing Officer, in the prescribed manner, about such withdrawal.
- Where the option for withdrawal of application is not exercised by the assessee within the time allowed, the pending application shall be deemed to have been received by the Interim Board on the date on which such application is allotted or transferred to the InterimBoard.
- The Board may, by an order, allot any pending application to any Interim Board and may also transfer, by an order, any pending application from one Interim Board to another InterimBoard.
- Where the pending application is allotted to an Interim Board or transferred to another Interim Board subsequently, all the records, documents or evidences, with whatever name called, with the ITSC shall be transferred to such Interim Board and shall be deemed to be the records before it for allpurposes.
- Where the assessee exercises the option to withdraw his application, the proceedings with respect to the application shall abate on the date on which such application is withdrawn and the Assessing Officer, or, as the case may be, any other income-tax authority before whom the proceeding at the time of makingtheapplicationwaspending,shalldisposeofthecaseinaccordance with the provisions of this Act as if no application under section 245C of the Act had been made. However, for the purposes of the time-limit under sections 149, 153, 153B, 154 and 155 and for the purposes of payment of interest under section 243 or 244 or, as the case may be, section 244A, for making the assessment or reassessment, the period commencing on and from the date of the application to the ITSC under section 245C of the Act and ending with the date on which application is withdrawn shall be excluded. Further, the income-tax authority shall not be entitled to use the material and other information produced by the assessee before the ITSC or the results of the inquiry held or evidence recorded by the ITSC in the course of proceeding before it. However, this restriction shall not apply in relation to the material and other information collected, or results of the inquiry held or evidence recorded by the Assessing Officer, or, as the case may be, other income-tax authority during the course of any other proceeding under this Act irrespective of whether such material or other information or results of the inquiry or evidence was also produced by the assessee or the Assessing officer before theITSC.
- The Central Government may make a scheme, by notification in the Official Gazette, for the purposes of settlement in respect of pending applications by the Interim Board, so as to impart greater efficiency, transparency and accountability by eliminating the interface between the Interim Board and the assessee in the course of proceedings to the extent technologically feasible; optimising utilisation of the resources through economies of scale and functional specialisation; and introducing a mechanism with dynamic jurisdiction. The Central Government may, for the purposes of giving effect to the said scheme, by notification in the Official Gazette, direct that any of the provisions of this Act shall not apply or shall apply with such exceptions, modifications and adaptations as may be specified in the notification. However, no such direction shall be issued after the 31st March, 2023. Every such notification issued shall, as soon as may be after the notification is issued, be laid before each House ofParliament.
These amendments will take effect from 1st February, 2021.
[Refer Clauses 54 to 65 of the Finance Bill' 2021]
Analysis
The Hon'ble Finance Minister made a significant change to the well existing scheme of Settlement of Cases. The Finance Bill 2021 proposed the discontinuation of Income Tax Settlement Commission with immediate effect i.e. 1st February'2021. It is proposed to discontinue Income-tax Settlement Commission (ITSC) and to constitute Interim Board of settlement for pending cases.
The Income Tax Settlement Commission (ITSC) was a quasi-judicial body set up under the Income Tax Act. The objective of setting up of ITSC was to settle the tax liabilities in complicated cases, avoiding endless and prolonged litigation. The taxpayer could approach the ITSC during the pendency of assessment proceedings, subject to certain prescribed conditions. For making an application before the ITSC, the tax and interest on additional income disclosed before the ITSC has to be paid. The order passed by the ITSC is conclusive and no appeal to any authority can be made against the order.
Income Tax Settlement Commission was set up in the year 1976 on the recommendation of Direct Tax Enquiry Committee headed by former Chief Justice of India, Shri K. N. Wanchoo. The purpose, intent and necessity of Settlement Commission is revealed by recommendation in para 2.32 to 2.34 of Chapter of the report:
“2.32 This, however, does not mean that the door for compromise with the errant tax payer should forever remain closed. In the administration of fiscal laws, whose primary objective is to raise revenue, there has to be room for compromise and settlement. A rigid attitude would not only inhibit a onetime tax evader or an un intending defaulter from making a clear breast of his affairs, but would also unnecessarily strain the investigational resources of the department in cases of doubtful benefit to revenue, while needlessly proliferating litigation and holding up collections. We would, therefore, suggest that there should be a provision in the law for a settlement with the taxpayer at any stage of the proceedings. In the United Kingdom, the confession method has been in vogue since 1923. In the U. S. law also, there is a provision for compromise with the taxpayer as to his tax liabilities. A provision of this type facilitating settlement in individual cases will have this advantage over general disclosure scheme that misuse thereof will be difficult and the disclosure will not normally breed further tax evasion. Each individual case can be considered on its merits and full disclosures not only of the income but of the modus operandi of its build up can be insisted on thus sealing off chances of continued evasion through similar practice.
2.33 To ensure that the Settlement is fair, prompt and independent, we would suggest that there should be a high level machinery for administering the provisions, which would also incidentally relieve the field officer of an onerous responsibility and risk of having to face adverse criticism which, we are told, has been responsible for the slow rate of disposal of disclosure petitions."
The Settlement Commission was aquasi judicial body and is a premier Alternative Dispute Resolution (ADR) body in India.The application for settlement can be made only during the pendency of the assessment proceedings and once during the lifetime. It is an institution, though within the Tax Department, but independent of the same to settle tax liability to give quietus to a dispute. In other words, the commission functions independently of the Department. It settles disputes relating to tax liability totally and finally. The biggest advantage of approaching ITSC was that it is empowered to grant immunity from prosecution for any offence and also to grant immunity from imposition of any penalty under the laws relating to Income Tax and Wealth Tax.The orders of the ITSC are final and not appealable. The orders are only subject to judicial review in terms of Articles 136 and 226 of the Constitution of India. Thus, time consuming litigation in regular appellate procedure is avoided by Department and assessee as well.
With the advent of Finance Bill'2021 , w.e.f. 01St February'2021, the assessee's subjected to a search and seizure action cannot resort to the route of Settlement for prompt settlement of its cases as the commission itself has been discontinued. The search and seizure cases have also been kept out of the purview of newly introduced Dispute Resolution Committee by the Finance Bill'2021. The reason for the same appears to be obvious that the government wants to create utmost deterrence on tax evasion and it appears that the intent is that there shouldnot be any room for any compromise and/or tax settlement in such cases
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