Shri. K. C. Singhal, former Vice President of the ITAT, has conducted an expert analysis of the Pradhan Mantri Garib Kalyan Yojna 2016, inserted by the Taxation Laws (Second Amendment) Act 2016, to provide amnesty to persons offering their undisclosed cash holdings to tax. The analysis covers all the important aspects of the Scheme and provides succinct answers to frequently asked questions by taxpayers and tax professionals
After demonetization of high denomination notes, the Central Govt. has introduced a fresh Amnesty Scheme whereby any person, having undisclosed income in the form of cash or deposits with specified entity, can declare the same before the specified authority within the specified time subject to fulfillment of the conditions specified in the provisions of Sections 199A to 199R of Finance Act 2016. Before analyzing the aforesaid relevant provisions, it would be appropriate to refer to the salient features of the scheme.
1. The scheme shall be called as “ Pradhan Mantri Garib Kalyan Yojna 2016” , in short “PMGKY ”.
2. It comes into force effective from 17th December and shall be operative upto 31st March 2017.
3. Any person (other than the persons specified u/s 199-O of Finance Act 2016) can declare his/her/its undisclosed income in the form of cash or any deposit in an account maintained by such person with a specified entity i.e. RBI or any bank or co-op bank to which Banking Regulation Act 1949 applies (including any bank or banking institution referred to in section 51 of this Act) or Post office or sub post office or any other entity which may be specified. The amount declared in accordance with the provisions of the scheme shall never form part of the total income of the declarant for any assessment year.
4. Such declaration is subject to the conditions namely—(i) that declarant pays the tax @ 30% of undisclosed income + surcharge @ 33% of such tax (ii) pays the penalty @ 10% of undisclosed income (iii) makes interest free deposit for a locking period of 4 yrs equal to 25% of undisclosed income in PMGKY. All these 3 conditions must be fulfilled before making the declaration. Such declaration has to be verified by the person competent to verify the return of income u/s 140 of the Income Tax act 1961 and the same shall be made before the specified authority i.e. jurisdictional Pr. CIT/CIT along with the proof of payment of tax, surcharge and penalty as well as deposit in PMGKY.
5. Any payment of tax, surcharge and penalty under the scheme is non refundable.
6. However, this scheme is not applicable to—
(i) in relation to any person in respect to whom an order of detention has been made under the Conservation of Foreign Exchange and Prevention of Smuggling Act 1974
(ii) in relation to prosecution for any offence punishable under Chapter IX or Chapter XII of Indian Penal Code; the Narcotic Drugs and Psychotropic Substances Act 1985; the Unlawful Activities (Prevention) Act 1967; the Prevention of Corruption Act 1988; the Prohibition of Benami Property Act 1988 and the Prevention of Money Laundering Act 2002
(iii) any person notified under section 3 of Special Court (Trial of Offences Relating to Transactions in Securities) Act 1992
(iv) in relation to any undisclosed foreign income and asset which is chargeable to tax under the Black Money ( Undisclosed Foreign Income and Asset) and Imposition of Tax Act 2015.
7. No deduction in respect of any expenditure or allowance or set off of any loss shall be allowed against the income in respect of which a declaration is made under the scheme.
8. Anything contained in the declaration shall not be admissible in evidence against the declarant for the purpose of any proceedings under any Acts mentioned in para 6 above.
9. Another important aspect is that such declaration would be void and shall be deemed never to have been made under this scheme where declaration has been made —
(a) by misrepresentation or suppression of facts; or
(b) without payment of tax and surcharge or penalty under the scheme; or
(c) without depositing the amount in PMGKY
There are various issues which need to be deliberated. In my view, it would be appropriate to discuss the same in the form of questions and answers to the best of my understanding.
Q. 1-What is the subject matter of declaration?
Answer: Unlike IDS, it is restricted to undisclosed income in the form of cash or deposit in an account maintained by the declarant with a specified entity. In other words, this scheme is not applicable to undisclosed income in other forms like investment in moveable or immoveable properties. Cash, literally, will include demonetised as well as new notes. The expression “specified entity” has been defined in the Explanation to S.199C of Finance Act 2016 which has already been mentioned earlier under the head “salient features”. Thus deposit in an account maintained with a bank in foreign country will be outside the scheme.
Q. 2-What is meant by the expression “undisclosed income”?
Answer: The expression “undisclosed income” has not been defined in this scheme or section 2 of the Income Tax Act 1961 (hereafter referred to as I.T. Act). In my opinion, it would include —
(a) Income chargeable to tax under I.T. Act but not declared in the return of income for any assessment year filed by the declarant so far e.g. unaccounted sale proceeds of any asset or stock in trade etc;
(b)Income of the current year received over and above the value of transactions declared in the books of account e.g. sale proceeds of immoveable property over and above the consideration declared in the sale deed or stock in trade etc;
(c) Income which was chargeable to income tax under the I.T. Act but no return was filed.
However, it would not include the money in form of cash or deposit which-(a) cannot be considered as income e.g. capital receipt not chargeable to income tax; (b) are savings over the years in the hands of ladies (c) is relatable to any income which is either exempt or not chargeable to tax under the I.T. Act e.g agricultural income since section 199C of Finance Act 2016 clearly provides that such cash or deposit must be chargeable to tax under such Act. Hence, one need not avail this scheme in such cases.
Q.3 whether cash in form of new notes can be declared under this scheme?
Answer: As such, there is no bar since the word ‘cash’ would include new notes too but the intent of the legislation is that the scheme is meant for deposit of demonetised notes which is apparent from the statement of objects and reasons. The question is who will declare such notes and why? Admittedly and without doubt, such new notes are acquired in the current period of demonetization. Such acquisition may be through legal as well as illegal means. If it is through legal means, one need not declare under this scheme since such income can be disclosed in the current year’s income i.e. for AY 2017-18. If it is acquired by illegal means, it may be hit by the provisions of various enactments mentioned in section 199-O and consequently not covered by the scheme.
Q.4 What kinds of deposits are covered by the scheme?
Answer-Any deposit with a specified entity would qualify for such scheme. The expression “specified entity” has been defined in the Explanation appended to S.199C of Finance Act 2016. It includes deposits with-(a) Reserve Bank of India; (b) any bank or co-op bank governed by Banking Regulation Act 1949 (including any bank or banking institution referred to in S. 51 that Act); (c) any post office and (d) any other entity as may be notified by the central government. However, it must be kept in mind that such account must have been maintained by the declarant.
Q.5 whether cash seized in the course of search u/s 132 of I.T. Act or requisitioned u/s 132A can be declared under the scheme?
Answer: When cash is seized in the course of search u/s 132 or requisitioned u/s 132A, it is required to be deposited in a specified account maintained by a senior designated income tax authority which remains in the custody of the deptt. and the same is required to be dealt with in accordance with the provisions of section 132B. Such cash is no more available to the person searched or in respect of whom requisition is made and the account in which such cash is deposited cannot be said to be maintained by the searched person. Hence, in my opinion, the answer is in negative.
Q.6 whether search party or the requisitioning authority, can allow the person concerned to avail the scheme?
Answer: In my opinion, the authorized officer, considering the intent of the legislature, should allow such person to avail the scheme in appropriate cases. The seizure u/s 132 is not mandatory though, in practice, is generally seized. The intention of the legislature is to allow the undisclosed income to be dealt with in accordance with the scheme by 31.3.2017. The seizure of cash would rather defeat the intent of the legislature since the person searched could avail the scheme but for the search/requisition. In fact, the CBDT should issue a circular in order achieve the object of the scheme.
The anticipated problem can be illustrated. For example, a person having undisclosed income in the form of demonetised notes intends to avail the scheme. There is nothing in the scheme to make his intention clear in advance as the declaration before the prescribed authority is to be filed only after depositing the tax, surcharge, penalty and the requisite amount in the PMGKY. In such a situation, he carries the cash in a vehicle for making such deposit. While going to bank, he is intercepted by police who in turn informs the income tax authorities. If such authority makes a requisition u/s 132 and does not allow him to avail the scheme then certainly it would be an attempt on the part of such authority to defeat the intent of the legislature. For the similar reason searches during the period of operation of the scheme would defeat the spirit of the scheme if searched person is not permitted to avail the scheme in genuine cases.
However, such authorities may find materials to indicate that the concerned person is involved in the activity of money laundering or other activities mentioned in section 199-0 as found in various cases of searches carried out by the deptt. during the period of demonetization. In such cases, the deptt need not allow the concerned person any opportunity to avail the scheme since the income in relation to such activities is outside the purview of the scheme.
Q. Who can avail this scheme?
Answer-Any person having undisclosed income in form of cash or deposits with a specified entity can avail this scheme. In other words, no person is permitted to declare undisclosed income belonging to other person. Section 199C clearly provides that declaration can be made in respect of the income in the form of cash or deposit must be chargeable to tax under the Income Tax Act. Thus, for example, partner cannot declare undisclosed income of the firm. If declared, it will be deemed to be void in terms of S.199M. Whether the declaration has been made by a person of his undisclosed income or not will depend on the basis of material or evidence on record collected or gathered by the department. In my opinion, the provisions of S.199M cannot be invoked on mere suspicion.
Q. Who and what are not covered under this scheme?
Answer: Section 199-O describes the situations where persons cannot avail such scheme. First part refers to persons who cannot avail this scheme as referred to in clause (a) & (c) while second part refers to income related to various offences mentioned in clauses (b) & (d) of this section. Clause (a) refers to persons in respect of whom an order of detention has been made which remains unrevoked or set aside by any court of competent jurisdiction. Clause (c) refers to persons who are notified under section 3 of Special court (Trial of offences Relating to Transactions in Securities) Act 1992. Clause (b) refers to money in relation to prosecution punishable under (i) Chapters IX or XII of Indian Penal Code; (ii) Narcotic Drugs and Psychotropic Substance Act 1985; (iii) Unlawful activities (Prevention) Act 1967; (iv) Prevention of Corruption Act 1988; (v) Prohibition of Benami Property Transactions Act 1988; and (vi) Prevention of Money Lending Act 2002. Clause (d) refers to undisclosed foreign income.
Q. what is the legal consequence of declaration under this scheme?
Answer: Firstly, the amount declared under the scheme shall not be included in the total income of the declarant of any assessment year under the Income tax Act as per section 199-I of Finance Act 2016. Secondly, any expenditure, allowance or set off of any loss shall not be allowed against the declared amount as per section 199C(2). This appears to be a precautionary step only. Since declared amount is not to be included in total income, the question of any allowance, deduction or set off does not arise even otherwise. Thirdly, the declarant will not be entitled to claim any relief in any appeal or reference or other proceeding in respect of any assessment or reassessment. For example, if any deposit with a bank is declared under this scheme, he cannot claim that addition made by AO in respect of such deposit should be deleted. In other words, if any addition has already been made by AO in respect of any deposit in earlier years, the assessee will not be entitled to get any benefit by availing the scheme. Fourthly, since the amount declared is not to be included in the total income, the provisions of penalty and prosecution under the I.T. Act would not apply. Fifthly, that tax or surcharge or penalty paid under the scheme shall not be refundable under any circumstances. For example, if the declaration is considered to be void in terms of section 199M of the Finance Act 2016. Sixthly, nothing contained in the declaration shall be admissible in evidence against the declarant for the purpose of any proceedings under any Act except the Acts mentioned in section 199M of the Finance Act 2016. That means that other deptts like Vat, Excise, custom etc. cannot take any advantage of such declaration. However, contents of the declaration can be used against the declaration in any proceedings arising under the Acts mentioned in section 199M Finance Act 2016. Lastly, any benefit or immunity arising under this scheme will be restricted to the declarant only. For example, if declaration has been made by a person in his individual capacity then the firm in which he is partner or the company of which he is managing director cannot take any advantage of declaration made by such person.
When & under what circumstances, the declaration can be considered as void?
Answer: Apparently, there is no provision which confers any power on any authority under the Income Tax Act to declare any declaration as void but section 199-M of Finance Act is a deeming provision to the effect that a declaration under the scheme shall be deemed to be void if such declaration has been made by misrepresentation or suppression of facts or without payment of tax and surcharge u/s 199D or penalty u/s 199E or without depositing the amount in the scheme u/s 199F of Finance Act.
In my opinion, section 199-M has not been properly drafted for the reasons-firstly under the scheme, the declaration has to be filed in terms of section 199H which provides that declaration can be filed only after the payment of tax, surcharge, penalty as well as deposit under PMGKY and such declaration is accompanied by the proof of such payment and deposit. Hence, question of application of later part of section 199-M does not arise; secondly, there is no provision which directs the declarant to disclose any particular fact except the fact of payment of tax, surcharge, penalty as well as deposit under PMGKY. The proof of payment and deposit are required to be enclosed with the declaration. Hence, question of misrepresentation or suppression of facts mentioned in first part of section 199-M does not arise.
However, the intention of the legislature appears to be that declaration must be in accordance with the object of the scheme i.e. declaration must be made of his own income from legal source and not from the activities referred to in section 199-O of Finance Act 2016. Hence, if subsequent to the filing of declaration, it is found on the basis of some evidences to the effect that scheme was availed in violation of the provisions of section 199-O then, the declaration can be treated as void and never to have been filed. Such interpretation, in my opinion, would be in accordance with the rule of purposive interpretation.
Q. What is the procedure for availing the scheme?
Answer: Firstly, the declarant will have to deposit 25% of the amount to be declared in the PMGKY Deposit scheme 2016 in any branch of RBI or any bank regulated by Banking Regulation Act 1949 or any post office. The declarant is required to make an application in Form II clearly indicating the amount, full name, Permanent Account Number (PAN) along with his address. If the declarant does not have (PAN) then he is required apply for a PAN and provide the details of such PAN application along with acknowledgement number. In lieu of such deposit, the concerned bank shall issue the acknowledgement receipt.
Secondly, he is required to pay income tax, surcharge and penalty totaling in all to 49.9 % of declared amount.
Thirdly, having completed such formalities, he has to file a declaration in form I prescribed under the Rules along with the proof of the aforesaid deposit and payment of income tax, surcharge and penalty at any time upto 31.3.2017.
Such declaration can be filed (i) electronically under digital signature with CIT(CPC) Bengaluru or jurisdictional Principal CIT/CIT notified under section 120 of the Income Tax Act 1961 or (ii) electronically through Electronic Verification Code (EVC) or (iii) in print form with jurisdictional Principal CIT/CIT.
The above write up has been prepared as per my understanding of the statutory provisions. Hopefully, it will benefit the readers. If something is left, the readers may modify the same.
K C Singhal
(former V.P. ITAT)
Dated: 6th December 2017
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