Income Declaration Scheme, 2016

The Income Declaration Scheme, 2016 (referred to here as ‘the Scheme’) is contained in the Finance Act, 2016, which received the assent of the President on 14th of May 2016.The Scheme provides an opportunity to persons to declare their undisclosed income and pay tax thereon at the rate of 30% of such undisclosed income, surcharge at the rate of 25% of such tax and penalty at the rate of 25% of such tax, totaling in all to 45% of such undisclosed income. The aforesaid payment of taxes, surcharge and penalty shall not be refundable under any circumstances. It has been clarified vide CBDT Circular No. 24/2016 dated 27^th June 2016, that in case of part payment, the entire declaration made under the aforesaid scheme shall be invalid.

The Scheme has been brought into effect from 1^st June 2016 and is available to every person, whether resident or non-resident. The Scheme is applicable in respect of undisclosed income of any financial year upto FY 2015-16.

Meaning of Undisclosed Income: Undisclosed income means any income or income in the form of investment in any asset located in India and acquired from income chargeable to tax in India under the Income-tax Act, 1961 (the Act), for which the declarant had either failed to furnish a return under section 139 of the Act or failed to disclose such income in its return or such income had escaped assessment. Where the undisclosed income is in the form of investment in any asset located in India, the fair market value (FMV) of such asset as computed in accordance with Rule 3(1) of Income Declaration Scheme Rules, 2016 (Rules) shall be deemed to be the undisclosed income. Where the investment in any asset is partly from an income which has been assessed to tax prior to AY 2017-18, the FMV of the asset, determined in accordance with Rule 3(2) of the Income Declaration Scheme Rules, 2016, shall be reduced by an amount which bears to the value of the asset as on 1^st June 2016, the same proportion as the assessed income bears to the total cost of the asset (i.e., FMV as on 1.6.2016 X Assessed Income / Total cost of asset)

Time limit for declaration and making payment:

• The scheme shall remain in force for a period of 4 months from 01.06.2016 to 30.09.2016 for filing of declarations. CBDT has, in this regard, clarified vide circular no. 27/2016 dated 14^th July 2016 that a revised declaration can also be filed on or before 30.9.2016 provided the undisclosed income in the revised declaration is not less than the undisclosed income declared originally.

• Payment towards taxes, surcharge and penalty must be made latest by 30.11.2016.

• A declaration under the Scheme shall be made in Form 1 and shall be furnished either (a) electronically under digital signature or (b) electronically under electronic verification or (c) manually in print form to the concerned Principal CIT/ CIT. After such declaration has been furnished, the jurisdictional principal CIT/ CIT will issue an acknowledgement in Form 2 to the declarant within 15 days from the end of the month in which the declaration under Form 1 is made. The declarant shall not be liable for any adverse consequences under the Scheme in respect of any income which has been duly declared but has been found ineligible for declaration. However, such information may be used under the provisions of the Act. The declarant shall furnish proof of payment made in respect of tax, surcharge and penalty to the jurisdictional Principal CIT/CIT in Form 3 after which the said authority shall issue a certificate in Form 4 within 15 days of submission of proof of payment by the declarant.

Declaration is not eligible in the following cases:

• For those assessment years in respect of which notices have been issued under section 142(1) or 143(2) or 148 or 153A or 153C of the Act and served on the declarant on or before 31^st May 2016, or
• Where a search or survey has been conducted and the time for issuance of notice under the relevant provisions of the Act has not expired. However, he can make a declaration in respect of undisclosed income of any other previous year, or
• For those assessment years for which the proceeding is pending with the Settlement Commission
• Cases covered under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, or
• Persons notified under Special Court Act, 1992, or
• Cases covered under Indian Penal Code, the Narcotic Drugs and Psychotropic Substances Act, 1985, the Unlawful Activities (Prevention) Act, 1967 and the Prevention of Corruption Act, 1988

Consequences/ Effect of valid declaration as per clarifications by CBDT:

• The amount of undisclosed income declared by the declarant shall not be included in his total income under the Income-tax Act for any assessment year. Further, the value of the asset declared by the declarant shall not be chargeable to Wealth-tax for any assessment year or years.
• The contents of the declaration shall not be admissible in evidence against the declarant in any penalty or prosecution proceedings under the Act and the Wealth Tax Act, 1957.
• Immunity from Benami Transactions (Prohibition) Act, 1988 shall be available in respect of the assets disclosed in the declarations subject to the condition that benamidar shall transfer to the declarant or his legal representative the asset in respect of which the declaration of undisclosed income is made on or before 30^th September, 2017.
• Declaration of undisclosed income will not affect the finality of completed assessments.
• Under normal circumstances, the capital gain is computed by deducting cost of acquisition from sale price. However, when the asset which is disclosed under the scheme is sold, since the asset will be taxed at its fair market value, the cost of acquisition for the purpose of capital gains shall be the fair market value as on 01.06.2016 and the period of holding shall start from the said date (i.e. the date of determination of fair market value for the purpose of the scheme).
• It has been clarified by the CBDT that it is not mandatory to file the valuation report, along with the declaration, of the undisclosed income represented in the form of investment in asset. However, while filing the declaration on the e-filing website, a facility for uploading the document will be available.
• In case of amalgamation or conversion of a company to LLP, the declaration is to be made in the name of the amalgamated company or LLP, as the case may be, for the year in which the amalgamation or conversion takes place.
• The CBDT, vide circular no. 25/2016 dated 30.6.2016, has clarified that the department will not make any enquiry in respect of the source of income, payment of tax, surcharge and penalty. However, this created a doubt as to whether the payment of tax, surcharge and penalty can be made out of the undisclosed income, thereby bringing down the effective rate of tax, surcharge and penalty to around 31%. The CBDT, vide circular no. 27/2016 dated 14.7.2016, has clarified that if a person declares Rs. 100 Lakhs as undisclosed income and pays tax, surcharge, penalty of Rs. 45 Lakhs out of his other undisclosed income, he will not get immunity under the Scheme in respect of undisclosed income of Rs. 45 Lakhs which has been utilized towards payment of tax, surcharge and penalty. Immunity will be granted if the person declares the entire Rs. 145 Lakhs as undisclosed income and pays tax, surcharge and penalty @ 45% amounting to Rs. 62.25 Lakhs.

Deeming provisions under the Scheme

Section 197(c) of the Scheme provides that

A careful reading of the same would show that the aforesaid provision of the Scheme goes beyond the provisions of section 149 of the Act. At present a notice for re-assessment cannot be issued beyond 6 years of the end of any assessment year. By virtue of this deeming fiction any income of any preceding previous year shall deemed be to the income of the year in which a notice under the aforesaid sections is issued. For eg. if the undisclosed income pertains to financial year 2001-02 for which no declaration is filed under this Scheme and particulars of such income become available to the tax department in financial year 2017-18. Under, the normal provisions of the Act, this undisclosed income would not be taxed but considering the wording of section 197(c) of the Scheme such undisclosed income can be taxed in any year in which a notice is sent.

Whether, this provision of the Scheme would stand the test of judicial scrutiny or not is a question but the reason for such a provision in the Scheme is clearly to give a message to all persons who have undisclosed income to take benefit of this Scheme.