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* IN THE HIGH COURT OF DELHI AT NEW DELHI
R-32
+ W.P.(C) 1597/1999
B.P. JAIN AND ASSOC AND ANOTHER ..... Petitioners
Through Mr V.P. Gupta, Advocate with
Mr Anunav Kumar, Advocate.
versus
COMMISSIONER OF INCOME TAX ..... Respondent
Through Mr Dileep Shivpuri, Senior Standing
Counsel and Mr Zoheb Hossain, Junior Standing
Counsel.
CORAM:
JUSTICE S.MURALIDHAR
JUSTICE VIBHU BAKHRU
ORDER
% 01.02.2016
Dr. S. Muralidhar, J.:
1. The controversy in the present writ petition is regarding the calculation of
the disputed income for the purposes of determination of the tax to be paid
by the Assessee in terms of the Kar Vivad Samadhan Scheme 1998 (KVSS).
2. Petitioner No. 1 Assessee was a registered partnership firm of which
Petitioner No. 2 was an erstwhile partner. Petitioner No. 1 filed its return of
income for Assessment Year (AY) 1994-95 on 30th November, 1994
disclosing nil income. The Assessing Officer (AO) completed the
assessment of the Petitioner No.1 on 18th March, 1997. The dissolution of
Petitioner No. 1 took place during the AY. On dissolution, the assets of
Petitioner No. 1 in the form of land was transferred to one of the partners at
W.P.C) 1597/1999 Page 1 of 7
the book value of Rs. 59,84,802/-. The AO noticed that the market value of
the said land was Rs. 5,68,00,000. Accordingly, the taxable income of
Petitioner No. 1 was computed by the AO at Rs. 5,08,15,200/- being the
difference in the market value and that at which the land was transferred. An
order was passed on 18th March, 1997 raising a demand of tax of Rs.
4,91,73,350. Subsequently it was rectified on 26th June, 1997 to Rs.
2,74,34,521/-. This comprised the tax payable on the income of Rs.
4,58,70,994/- on account of long term capital gains. The rate of tax on
capital gains was 33.6%. The tax payable worked out to Rs. 1,54,12,652/-
and the interest chargeable under Sections 234A and 234B of the Act
worked out to Rs. 1,20,21,869/-. It is stated that Petitioner No. 1 made an
aggregate payment of Rs. 72,54,260/- in the year 1998 towards the
aforementioned tax demand.
3. The Petitioners decided to avail the KVSS which was introduced for the
purposes of quick and easy settlement of tax dues. Under Section 87 (e) and
(f) of the Finance Act, 1998, the terms `disputed income' and `disputed tax'
were defined as under:
"87.(e) `disputed income', in relation to an assessment year
means the whole or so much of the total income as is
relatable to the disputed tax"
87 (f) 'disputed tax' means the total tax determined and
payable, in respect of an assessment year under any direct
tax enactment but which remains unpaid as on the date of
making the declaration under Section 88."
4. Section 88 of the Finance Act 1998 provided that the rate of tax payable
by a firm would be 35% of the disputed income notwithstanding anything
W.P.C) 1597/1999 Page 2 of 7
contained in any direct tax enactment. Under Section 96 (1) of the Finance
Act, 1998, the Central Government had the powers to issue directions,
instructions and directions to the authorities for the proper administration of
the KVSS. Under Section 96 (2) the Central Government was empowered to
issue general special orders or instructions as to the principles or procedures
to be followed by authorities in the work relating to the KVSS.
5. It is stated that pursuant thereto the Ministry of Finance, Government of
India, issued circulars by way of clarifying the KVSS 1998 in the form of
questions and answers. Question No. 18 of the instructions dated 7th
October, 1998 provided the basis of calculating disputed income. Question
No. 18 and the answer thereto read as under:
"Question No.18: Section 90(1) of the Scheme refers to the
sum payable that may be determined by the designated
authority. How is the sum payable to be worked out?
Answer: The sum payable is to be determined with
reference to disputed income as defined in Section 87(e) to
mean the whole or so much of the total income as is
relatable to the disputed tax. The term, "disputed income"
as used in the Scheme does not refer to the income in
dispute by way of appeal, etc., but it refers to the income
which is relatable to the disputed tax. The term "disputed
tax" has been defined to mean the tax determined and
payable but remaining unpaid on the date of declaration.
The designated authority will work out the disputed
income relatable to disputed tax by applying the marginal
rate applicable for the relevant assessment year for that
assessee and thereafter determine the sum payable in
accordance with Section 88 of the Scheme."
W.P.C) 1597/1999 Page 3 of 7
6. A further clarification was issued on 6th November, 1998 by the Ministry
of Finance. Petitioner No.1 through Petitioner No.2 filed a declaration under
the KVSS Scheme with the designated authority on 24 th December, 1998.
The Petitioner computed the tax payable in terms of the KVSS as Rs.
63,73,743/-, calculated at 35% of the disputed income. The said calculation
reads as under:
"Calculation of Disputed Tax under the Scheme and the Sum
Payable
Income on account of long term capital Rs.4,58,70,994
gain
Rate of Tax on long term capital gain 33.6%
applicable to petitioner (35% + 12%
surcharges)
Tax payable 1,54,12,652
Less: Tax Paid
- Upto 31.3.98 30,04,261
- After 31.3.98 42,50,000
________
72,54,261
Tax Unpaid 81,58,391
`Disputed Tax' in terms of sec. 87 (f)
of the Finance Act 81,58,392
`Disputed Income' in terms of section
87 (e) of the Finance Act determined
by applying the marginal rate
applicable to Petitioner No.1 of 44.8 1,82,10,694
per cent
Amount payable under the scheme as
per section 88 of the Finance Act @ 35
per cent 63,73,743
7. However, Respondent No.1 determined the amount payable by the
Petitioner No.1 as Rs. 1,03,87,456. Respondent No.1 applied the marginal
rate of 44.8% (40+10% surcharge) on the tax paid till the date of declaration,
W.P.C) 1597/1999 Page 4 of 7
whereas the Petitioners had calculated it on the basis of the unpaid tax i.e. at
Rs. 81,58,391/-. As a result while the Petitioners determined the rate payable
under KVSS as 63,73,743, Respondent No.1 computed it as Rs. 1,03,87,456.
The Petitioner is before this Court seeking a declaration that the computation
by the Petitioners of the amount payable in terms of the KVSS is the correct
one.
8. There is an obvious mistake in the clarification issued by the
Respondents. Instead of clarifying that the disputed income has to be
calculated with reference to the `unpaid tax', it states that the disputed
income is to be calculated with reference to the paid tax. In any event,
instructions issued by the Ministry of Finance cannot modify a scheme
which is statutory in character. The KVSS was introduced by the Finance
Act, 1998. Sections 88 and 89 thereof specifically dealt with the KVSS. As
explained by the Supreme Court in Kerala Financial Corporation v.
Commissioner of Income Tax [1994] 210 ITR 129 (SC), an order,
instruction or direction that may be issued under Section 119 of the Act
cannot take away or modify a benefit provided under a statutory notification.
The Court noted that "the same would really amount to giving power to a
delegated authority to even amend the provision of law enacted by
Parliament."
9. As regards the instructions issued, there are two aspects - one regarding
the calculation of the disputed income with reference to the unpaid tax. The
other is in relation to the application of the marginal rate. At the outset it
requires to be noticed that the Finance Act, 1998 does not talk of any
W.P.C) 1597/1999 Page 5 of 7
marginal rate to be applied. Also, it appears to the Court that the marginal
rate was premised on an Assessee having to pay tax at different slab rates
depending on the level of income. However, where the tax is on capital
gains, there is only a single rate of tax i.e. 33.6%. In such event, the adoption
of a `marginal rate' is not apposite for determining the disputed income. In
other words, the impugned instructions of the Ministry of Finance regarding
applicability of a marginal rate to the unpaid tax for determining the
disputed income cannot apply where the taxable income arises only from
capital gains and to which a uniform rate of 33.6% applies.
10. It is sought to be contended by Mr Gupta, learned counsel for the
Petitioners, that since the instructions require a marginal rate to be applied to
the unpaid tax, the disputed income should be determined in that manner
notwithstanding that the taxable income arises from capital gains.
11. For the reasons already explained, the Court is of the view that the
instructions issued are not consistent with the provisions of the Finance Act
1998 which does not talk of a marginal rate, particularly when it comes to
computing the disputed income arising out of the capital gains. All that the
Finance Act does is to stipulate what should be the rate of tax where the tax
is in arrears as in the present case. As far as the Petitioner No. 1 firm is
concerned that rate is 35% of the disputed income.
12. Consequently, as far as the present case is concerned, the correct way to
determine the disputed income would be to determine in the first instance
the unpaid tax which undisputedly is Rs. 81,58,392. The next step is to
W.P.C) 1597/1999 Page 6 of 7
determine the disputed income in relation to the unpaid tax by applying the
rate of 33.6%. Thirdly, the tax payable will be calculated at 35% of the
disputed income so computed.
13. In that view of the matter, the writ petition is disposed of by directing the
Respondents to re-compute the disputed income and thereafter calculate the
tax payable by the Petitioners in terms of the KVSS in the above manner.
The exercise of computing the disputed income, the tax payable and issuing
a certificate of refund if any to the Petitioner be completed within a period
of four weeks from today.
14. The petition is disposed of in the above terms.
S.MURALIDHAR, J
VIBHU BAKHRU, J
FEBRUARY 01, 2016
pkv
W.P.C) 1597/1999 Page 7 of 7
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