The Hindu Business Line : Rigour of the new regime

THE Finance Act, 1995, introduced a new block assessment scheme for assessments in search cases w.e.f. July 1, 1995, by inserting a new Chapter XIV-B in the Income Tax Act, 1961. In his Budget speech on March, 15, 1995, the then Finance Minister, Dr Manmohan Singh, stated thus:

"... I am proposing a new scheme under which undisclosed income detected as a result of search shall be assessed separately at a flat rate of 60 per cent."

Withdrawal of block scheme

Deficiencies noticed consequent to the implementation of the new provisions were rectified from time-to-time and last major amendments were made by the Finance Act, 2002. By trial and error and by judicial interpretation, the system was improved considerably, and both taxpayers and the Department began to get used to the system.

But all of a sudden, the block assessment scheme has been discarded by the Finance Act, 2003 with effect from June 1, 2003. The discontinuance of the block assessment scheme shows serious malfunctioning in the Government.

The problems mentioned in the `notes on clauses' are not of taxpayers' making. The two-assessments scheme was the brainchild of the Finance Ministry. The definition of `undisclosed income' in Section 158B is not a choice of the assessee. The same was also amended by the Finance Act, 2002 retrospectively. To say that "even where the facts are clear, litigation or procedural matters continue to persist" is to find some excuse for doing away with the `block' procedure and introduce the new law.

The grounds given are not convincing and the fact remains that the earlier provisions were rushed through the Finance Act, 1995 without adequate preparatory work at the Ministry level and without any discussion with taxpayers, tax consultants or trade associations.

The same is going to be the case with regard to new Sections 153A, 153B and 153C. These, too, have been hurriedly conceived, legislated and put into operation through the Finance Act, 2003. These provisions will also create a number of problems and their implementation is going to be more oppressive for taxpayers.

Examining the provisions

Section 153A starts with a non-obstante clause, which gives overriding effect to the provisions of the I-T Act mentioned in the section and makes these non-operative. This section starts with the words "notwithstanding anything contained in Sections 139, 147, 148, 149, 151 and 153 in the case of a person, where a search is initiated under Section 132 or books of account, other documents or any assets are requisitioned under Section 132A after May 31, 2003, the assessment shall be made as per the scheme mentioned in the section."

Thus, anything contrary to Section 153A contained in these sections shall not apply to search/requisition cases.

The second proviso to clause (b) of Section 153A provides that assessment or reassessment, if any, relating to any assessment year falling within the period of six assessment years mentioned in Section 153A shall abate.

Section 153A can cause considerable hardship to taxpayers and for that reason are, prima facie, draconian. What follows are some of the likely hardships:

Clause (a) of Section 1533A does not mention any time limit for issue of notice by the AO.

In case notice is issued at the end of the limitation period, it can place tremendous pressure on taxpayers to furnish six years' returns.

The time within which the return for six years is required to be filed has been left to the AO's discretion. The AO may provide very little time for filing returns. No power has been given to the AO to extend the time once given. Section 139, with regard to time for filing revised returns, and so on, is overridden by this section. Is it fair?

Why has some time limit not been prescribed?

What is the sanctity of six years in the context of Section 153A? The search may show that the concealment or inaccurate furnishing of particulars relate only to one or two years. Why then should the returns be filed for six years — even for the years for which assessments have already been completed and no concealment, and so on, is relatable to those years?

Will this not generate infructuous work both for the assesses and the Department? Prior to the insertion of the block assessment scheme, the concealed incomes, and so on, were assessed in the years to which these belonged. Why the same situation cannot be brought about after discarding block scheme?

Sections 147, 148 and 151 contain inbuilt safeguards in the matter of reopening of the completed assessments, such as the existence of `reason to believe', recording of reasons before issue of notice under Section 148 and sanction for re-opening by a senior functionary in the Department (such as the Chief Commissioner of Income-Tax).

All these safeguards are thrown to the winds merely because a search has been made, which may ultimately be found to have no basis and with nothing undisclosed. Yet the taxpayer will have to go through the rigour of filing returns and making compliance for six years (including for those years for which assessments have already been completed). Is it fair? Why cannot the Department analyse the searched material and then decide regarding the years for which returns should be filed? Why should there be a wild goose chase at taxpayer's cost?

The block scheme was conceived to solve the issue of allocation of concealed income to different years. No solution has been found to this problem under the new scheme. Take a situation where a person completes a commercial complex out of undisclosed income detected during search in four years, two of which fall outside the period of six years. In which year the total undisclosed investment should be assessed could be the moot point.

The second proviso to Section 153A mentions about the abatement of pending assessments or reassessments falling within the six-year period. Since the returns are to be filed for six years, the presumption has to be that completed assessments for these years will also abate and will have to be re-made. The fate of appellate proceedings completed or pending is unclear.

Section 153C penalises persons other than those searched merely because their valuables are found at the place of the person searched without there being any indication of these being undisclosed. This is contrary to Section 1588A which provided for making assets, books, documents, and so on, available to the jurisdictional AO only where the AO having jurisdiction over the assessee searched "is satisfied that any undisclosed income belongs to any person".

The position now would be that if a person keeps his explained valuables, and so on, with an other person even for safe custody, he would be subjected to the rigour of Section 153A even when there is no satisfaction about the same being undisclosed. This is extremely unfair and will have a cascading effect leading to considerable hardship and infructuous work.

An irritant in the past provisions has been counting of the limitation period for making assessment in search cases "from the end of the financial year in which the last of the authorisation for search under Section 132 was executed." Such a provision gives ample scope for dragging the search operation by keeping one or two authorisations unexecuted.

A time limit should be fixed within which the search operations must be concluded, say, within months from the date of the search. This can certainly be done considering the powers available to search parties and will, besides giving considerable relief to the taxpayers, expedite completion of assessments in search cases.

Apparently, the new scheme is another instance of hurried legislation through the Finance Act without adequate discussion and consultation with assessees, tax advisors, and so on. The impact of the same will be faced by the taxpayers in the time to come. The rollover is contrary to the concepts of stability and continuity in tax laws emphasised by the Finance Ministry in para 146 of the Budget speech for 2003. The new procedure is going to be considerably burdensome because of the failure of the Department to do its homework well before enacting the three sections.

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