JUDGMENT
By the Court Petitioner is an assessee under the Income Tax Act, 1961 (hereinafter referred to as "the Act"). For the assessment year 1995-96 (accounting period ended 31-3-1995), the appellant filed his return on 26-3-1997, declaring a total income of Rs. 2,59,030. His return was processed under section 143(1)(a) on 27-9-1997. As it was a survey case, a notice under section 143(2) was issued and after hearing, an order under section 143(3) was passed on 8-1-1998. Under the said order, the total income was determined as Rs. 2,59,600. Income-tax thereon was calculated as Rs. 78,840 and after deducting Rs. 1,193 as rebate under section 88, the tax payable was arrived at Rs. 77,647. A sum of Rs. 77,181 was added as interest under sections 234A, 234B and 234C. Thus, total amount payable was shown as Rs. 1,54,828. Feeling aggrieved by the said order of assessment, petitioner filed a revision petition under section 264 of the Act on 23-4-1998.
2. The Kar Vivad Samadhan Scheme, 1998 (hereinafter referred to as the 'KVS Scheme' , was brought into force on 1-9-1998, as per Chapter IV of Finance (No. 2) Act, 1998 (hereinafter referred to as 'The Finance Act' ). The appellant filed a declaration under the said scheme, under section 89 of the said Act in Form No. 1A. In the said declaration filed on 27-1-1999, he showed the computation of tax payable under the said scheme was follows :
Total income 2,59,600 Tax thereon 78,840 Less : Rebate under section 88 1,193 Tax payable 77,647 Advance tax paid 5,800 Tax paid 60,000 65,800 Tax arrears 11,847 Income relatable to tax paid (Rs. 66,993) (Rs. 65,800 + rebate of Rs. 1,193) = 2,29,980 Disputed income (2,59,600-2,29,980) = 29,620 Amount payable under KVS Scheme (30 per cent of Rs. 29,620) = 8,886 Thus, as per the appellants, he was liable to pay only Rs. 8,886 under the scheme.
3. First respondent did not accept the computation made by the appellant. He issued a certificate of intimation dated 19-2-1999, under section 90(1) of the Finance Act, in regard to the declaration filed by the appellant. In the said certificate, the first respondent showed the tax arrear for the assessment year 1995-96 as Rs. 89,028 and the amount payable by the appellant as Rs. 65,592. The first respondent did not, however, dive the mode of calculation adopted to arrive at the said amount.
4. The appellant through his chartered accountant, sent a representation, dated 6-4-1999, reiterating that the amount payable was only Rs. 8,886 and requested the first respondent to rectify the certificate, dated 19-2-1999. First respondent, by letter, dated 15-4-1999, rejected the said representation stating that there was no error in the certificate. Feeling aggrieved, appellant approached this court by filing W.P. No. 19182/1999 for the following reliefs :
(a) for quashing the certificate (Form 2A), dated 19-2-1999, and the endorsement dated 15-4-1999.
(b) for a direction to respondent No. 2, not to take any initiate proceeding for recovery as per assessment, order, dated 8-1-1998, and certificate dated 19-2-1999; and
(c) a direction to first respondent to grant relief as per sections 87 and 88 (a)(iii) of Kar Vivad Samadhan Scheme, as claimed in his declaration, dated 27-1-1999.
The learned Single Judge who heard the matter, by order, dated 28-6-1999, dismissed the petition. The appellant has filed this appeal, challenging the said order and for grant of the reliefs prayed in the writ petition.
5. Even though the first respondent had not disclosed in the certificate (Form No. 2A), dated 19-2-1999, the basis for holding that Rs. 65,962 was payable, learned standing counsel for the department gave the following calculations to show how the sum of Rs. 65,592 was arrived at :
Total income declared 2,59,030 Advance tax paid 5,800 Tax on total income 77,419 Interest under :
section 234ARs. 24,344 section 234BRs. 42,960 section 234CRs. 3,945 71,249 Total Tax + interest payable under section 140A as per return 1,48,668 Advance tax paid 5,800 Balance payable 1,42,868 Working regarding KVS Scheme Taxes paid Nil Rebate 1,193 Undisputed income 40,960 Disputed income 2,18,640 Tax payable at 30 per cent on Rs. 2,18,640 65,592 The respondent also contend that the calculation by appellant is erroneous an d, therefore, the learned Single Judge was justified in dismissing the writ petition.
6. In view of the rival contentions, the only question that arises for consideration is whether the computation under KVS Scheme by the appellant is correct or whether the computation made by the respondent is correct. This involves resolution of the following issue :
"Whether any amount paid towards the tax arrears (which includes the income-tax and interest payable) should be taken as payment towards tax or towards interest, for the purpose of the KVS Scheme."
7. To find an answer to the issue, detailed reference to the relevant provisions of the KVS Scheme contained in the Finance Act, as also the clarification given by the Central Board of Direct Taxes will be necessary.
7.1. The relevant portion of section 88 of the Finance (No. 2) Act, relating to statement of tax payable, which read as follows :
"88. Subject to the provisions of this Scheme, where any person makes, on or after the 1-9-1998 but on or before the 31-12-1998, a declaration to the designated authority in accordance with the provisions of section 89 in respect of tax arrear, then, not withstanding anything contained in any direct tax enactment or indirect tax enactment or any other provision of any law for the time being in force, the amount payable under this Scheme by the declarant shall be determined at the rates specified hereunder, namely :
(a) Where the tax arrear is payable under the Income Tax Act, 1961 (43 of 1961),
(i) in the case of a declarant, being a company or a firm, at the rate of thirty-five per cent of the disputed income;
(ii) in the case of a declarant, being a person other than a company or a firm, at the rate of thirty per cent of the disputed income;
(iii) in the case where tax arrear includes income-tax, interest payable or penalty levied, at the rate of thirty-five per cent of the disputed income for the persons referred to in clause (i) or thirty per cent of the disputed income for the persons referred to in clause (ii);
(iv) in the case where tax arrear comprises only interest payable or penalty levied, at the rate of fifty per cent of the tax arrear;
It may be mentioned that the last date for making a declaration was extended from 31-12-1998, to 31-1-1999. The effect of section 88(a)(iii) of Finance Act is that notwithstanding anything contained in the Income Tax Act, the amount payable under the KVS Scheme by a declarant (other than companies and firms), who files declaration between 1-9-1998, and 31-1-1999, shall be 30 per cent of disputed income, in case where the tax arrears includes income-tax as also interest or penalty. Thus, we have to find what is the 'disputed income'.
7.2. "Disputed income" in relation to an assessment year, is defined in clause (e) of section 87 of Finance Act as "whole or so much of the total income as is relatable to the disputed tax." "Disputed tax" is defined by clause (f) of section 87, as 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."
8. A combined reading of section 88(a)(iii) and section 87(e) and (f), indicates that the disputed income will have to be calculated in the following manner :
(a) Total income determined by the assessing authority has to be noted. (In this case, it is Rs. 2,59,6001);
(b) The aggregate of all taxes paid on or before the date of filing of the declaration in the form of TDS, advance tax, self-assessed tax, refund adjustments and post-assessment payments towards the tax should be determined. (In this case, the appellant has paid Rs. 5,800 as advance tax and Rs. 60,000 towards tax after the date of assessment and before the date of declaration. He is also entitled to tax rebate of Rs. 1,193 under section 88 of the Income Tax Act. Thus, the aggregate of the tax paid would Rs. 66,993.
(c) The disputed tax will be the unpaid tax that is the difference between the 'total tax determined' and the aggregate of the tax paid (In this case it would be Rs. 78,840 less Rs. 66,993, that is Rs. 11,847).
(d) The income corresponding to the aggregate of tax paid and the disputed tax will have to be next determined. In this case the tax and corresponding income will be as follows :
Tax Corresponding income Total tax determined 78,840 2,59,600 Total paid towards arrears 66,993 2,29,980 Tax remaining unpaid 11,847 29,620
(e) The disputed income will have to be arrived at by deducting the income corresponding to the aggregate of prepaid taxes from the total income assessed by the assessing officer (in this case, the disputed income will, therefore, be Rs. 2,59,600 minus 2,29,980 = Rs. 29,620. The tax payable under the scheme by the assessee would be 30 per cent of Rs. 29,620 or Rs. 8,886).
We, therefore, find that the appellant-assessee has correctly calculated the amount payable under the KVS Scheme.
9. The department contends that what can be taken as aggregate prepaid tax is only Rs. 6,993 (that is, tax rebate of Rs. 1,193 and the advance tax of Rs. 5,800). It is contended that the sum of Rs. 60,000 paid towards tax arrears after the date of assessment and before the date of declaration, cannot be reckoned as payment towards tax as the said sum of Rs. 60,000 will have to be deemed to have adjusted towards interest due under sections 234A, 234B and 234C of Income Tax Act which forms part of tax arrears, having regard to the Explanation to sub-section (1) of section 140A of Income Tax Act, which reads thus :
"Where the amount paid by the assessee under this sub-section falls short of the aggregate of the tax and interest as aforesaid, the amount so paid shall first be adjusted towards the interest payable as aforesaid and the balance, if any, shall be adjusted towards the tax payable."
The department contends that the order of assessment was passed on 8-1-1998, showing the tax due as Rs. 77,647 and the interest due as Rs. 77,181; and that in view of fact that Rs. 77,181 was already due by way of interest under the said order, the payments aggregating to Rs. 60,000 made by the assessee in March and April, 1998, stood adjusted towards the interest and not towards tax and, therefore, as on the date of declaration 'what was due was Rs. 71,847 towards tax (that is Rs. 78,840 less advance tax of Rs. 5,800 and rebate of Rs. 1,193) and Rs. 17,181 towards interest (that is Rs. 77,181 payable under sections 234A, 234B and 234C minus Rs. 60,000, paid by the assessee and adjusted towards interest, having regard to the Explanation to section 140A of Income Tax Act). Consequently, it is contended, that the aggregate of tax paid for the purpose of calculating the corresponding income in this case is only Rs. 6,993 and not Rs. 66,993. According to the department income corresponding to Rs. 6,993 is Rs. 40,960 and, therefore, the disputed income is Rs. 2,18,640 and 30 per cent of which will be Rs. 65,592.
10. It is no doubt true that if the issue is examined with reference to the Explanation to section 140A(1) of Income Tax Act, the contention of the department would be correct. But the issue will have to be examined not with reference to section 140A of the Income Tax Act, but with reference to the provisions of KVS Scheme, as contained in Chapter IV of Finance (No, 2) Act, 1998. The Explanation to section 140A(1) of Income Tax Act will not apply for the following two reasons :
(i) The provisions of section 88 of Finance (No. 2) Act, 1998, prevail over the provisions of section 140A of Income Tax Act. Section 88 specifically state that "notwithstanding anything contained in any direct tax enactment", the amount payable under the KVS Scheme will be as stated in the Scheme.
(ii) In view of the pendency of the revision, any payment made by the assessee towards tax arrears will be on account and without prejudice subject to the final decision in the revision.
11. The object and intention of KVS Scheme has been stated by the Finance Minister in his Budget speech 1998-99, as follows :
"Litigation has been the bane of both direct and indirect taxes. A lot of energy of the revenue department is being frittered in pursuing large number of litigations pending at different levels for long periods of time. Considerable revenue also gets locked up in such disputes. Declogging the system will not only incentivise honest taxpayers, enable Government to realize its reasonable dues much earlier but coupled with administrative measures, would also make the system more user friendly. I, therefore, propose to introduce a new scheme more called 'Samadhan'. The scheme would apply to both direct taxes and indirect taxes and offer waiver of interest, penalty and immunity from prosecution on payment of arrears of direct tax at the current rates. "
(Emphasis, here italicised in print, supplied) It is evident therefrom that the scheme offered waiver of interest and penalty on payment of arrears of direct tax in case where a limitation has been pending. The crux of the scheme is reference to pending litigation. It is evident from the provisions of the scheme (Section 95 of Finance (No. 2) Act, 1998) that the benefit of the scheme would apply only where an appeal or, reference or writ petition is admitted and pending before an appellate authority or High Court or Supreme Court, on the date of filing of declaration or an application for revision is pending before the Commissioner on the date of filing of declaration. Where no such litigation is pending, obviously, the scheme would not apply. If a litigation is pending, it would mean that the amount determined as income-tax and the amount determined as interest by the assessing authority has not attained finality and is subject to the decision in the pending litigation.
12. In this case, admittedly a revision was pending. If the KVS Scheme had not been brought into force, and if the revision had been taken to it logical conclusion, there were two possibilities : (a) if the appellant succeeded in the revision, his liability to tax should stand reduced and consequently payment of interest would also be reduced or wiped out; or (b) if the revision were dismissed, the liability of the assessee to pay tax and interest as per the order of the assessing authority would have stood undisturbed. Thus, the claim interest as also the claim in regard to tax were amount in dispute as on the date of declaration. They were not admitted or undisputed tax arrears. It is to avoid the uncertainties connected with the litigation, and to put an end to the litigation and to realise the tax arrears locked up in litigation the scheme was conceived and put into effect. The effect of the scheme is that if 30 per cent of the disputed income is paid, that would be accepted in full and final settlement resulting in waiver of payment of tax on the remaining portion of the disputed income and waiver of interest as also the penalty, if any.
13. If any amount paid towards arrears during the pendency of the litigation (by way of appeal, revision, etc.) is to be irreversibly adjusted against the interest under section 140A, that would render infructuous the pending litigation (in this case pending revision petition). Surely that cannot be and in fact is not the intention. As noticed above, if the appellant had succeeded in the revision petition, his liability towards interest would have been deleted/reduced and obviously the sum of Rs. 60,000 that has been paid by him towards tax arrears would have adjusted either against the tax or would have been refunded. Therefore, the Explanation to sub-section (1) of section 140A of the Income Tax Act applies only where the liability has attained finality. This is clarified by the department itself. The Government of India, Ministry of Finance (Department of Revenue) Central Board of Direct Taxes issued certain clarifications by Circular No. F 149/145/98/DPL, dated 3-9-1998, under section 96 of the Finance (No. 2) Act, 1998. The said section 96 enables the Central Government to issue from time-to-time, such orders, instructions and directions to the authorities as it may deem fit, for the proper administration of the KVS Scheme and the authorities concerned with execution of the scheme are required to observe and follow such orders and instructions. The relevant portions of the clarification (questions 4 and 7 and their answers) is extracted below :
"Q-4 : Where the tax arrear comprises tax and interest, how, will the part payment be first appropriate to wards tax or interest ?
Ans. : The part payments are appropriated first towards tax and then towards interest.
Q.7 : The Scheme offer full waiver of interest and penalty where the tax arrear includes such interest or penalty along with tax. What kind of interest and penalty would be open for such waiver?
Ans. : All interest and penalties that are directly related to assessed income or arrears of taxes will be open for full waiver, if the taxes are outstanding on the specified dates e.g., interest under sections 234A, 234B, 234C, 139(8), 215, 216, 217, 158BFA, 220(2) or penalties under section 271(1)(c), 221, 158BFA, 273, etc., (Emphasis, here italicised in print, supplied)
14. The above clarifications issued by the Central Government, binding on the respondents, are a complete answer to the contentions raised by the department. Any payment made towards tax arrears after the date of assessment and before the date of declaration filed under the KVS Scheme, will, therefore, have to be taken as part-payment towards tax in regard to declarations validly falling under the KVS Scheme. The normal rule that payments will first be adjusted towards interest and then towards principal (income-tax), based on the Explanation to section 140A(1) of Income Tax Act and general law, will be inapplicable to matters covered by the KVS Scheme. The learned Single Judge has lost sight of the above aspects and has wrongly proceeded as if the Explanation to section 140A(1) of Income Tax Act is applicable to KVS Scheme.
15. In view of above, we allow this appeal as follows :
(i) We set aside the order, dated 28-6-1999, passed by the learned Single Judge in W.P. No. 19182 of 1999.
(ii) We allow W.P. No. 19182/1999 and quash the certificate of intimation in Form 2A, dated 19-2-1999, under section 90(1) of the Finance (No. 2) Act, 1998, issued by the first respondent and direct the first respondent to issue a fresh certificate of intimation in the light of our decision, accepting the declaration.
(iii) The appellant will be entitled to costs of the writ petition and this appeal.