The Hindu Business Line : Unsettling confusion in a settled confession

A longer tenure should be given to the Settlement Commission, say, till March 31, 2009, to complete all pending cases under the existing provisions. One can also argue that after this date the Commission could be wound up.

MR RAJ NARAIN, Director, Ernst & Young.

In All's Well That Ends Well, Bertram tells Helena, "Prepared I was not for such a business; therefore am I found so much unsettled... " Tax watchers appear to be similarly unsettled about what has befallen the Settlement Commission. "All's not well," they say, unprepared for the amendments proposed by the Finance Bill, 2007.

Chapter XIX-A of the Income-Tax Act, 1961 is about Settlement Commission. This came into being with effect from April 1, 1976, to enable quick settlement of cases and early collection of tax dues. "Not to provide a rescue shelter for big tax-dodgers, who indulge in criminal activities," clarified the apex court in the Bhattachargee case.

In the Anjum Ghaswala case, the court explained that the word `settlement' gives the Commission `sufficient power to arrive at a settlement which it deems fit' but `in accordance with the provisions of the I-T Act'. Yet, "Cases are known where assessees or `groups' of assessees have availed of the cyclic statutory disclosure schemes in a row as if they were having dips in the Ganges to wash off their sins after intermittent spells of tax evasion," as K. Srinivasan recounts in his column `Keeping pace with the law', in a recent issue of Corporate Law Adviser. "There were assessees who had paid substantial taxes after searches and yet had declared additional concealed income before the Settlement Commission subsequently in respect of the same `evasion-period'."

Not a happy situation. Which is what the Finance Minister, Mr P. Chidambaram, too conceded about a week at a post-Budget session organised by the Associated Chambers of Commerce and Industry of India (Assocham). The Minister's unhappiness, though, was with the delay. "If something lingers for 4-5 years... At the current rate of disposal, the Direct Tax Settlement Commission will take five years to dispose of a case. How does that help settlement and therefore the tightening of the procedure to require settlement to take place within a year," he wondered.

Settlement Commission is like a confession in a church, said Mr Chidambaram. "You go to the Settlement Commission and say, I have not disclosed this income. I have not disclosed the liability under Customs or excise law, so please settle my case."

An unsettling analogy, that may be, for many. As much as the hypothesis that Mecaenas puts forth in Antony and Cleopatra: "If beauty, wisdom, modesty, can settle the heart of Antony, Octavia is a blessed lottery to him."

While it may take some time for the dust to settle, Business Line contacted Mr Raj Narain, a director with Ernst & Young, who was earlier Member CBDT and also Member, Settlement Commission.

Is settlement unique to India?

No, several countries provide for monetary settlement of tax and waiver of criminal proceedings. In the US, the scope of monetary settlement has been widened to cover all types of frauds including tax frauds. The Internal Revenue Code, 1954, permits the IRS to enter into a written agreement for monetary settlement. Such agreement is final and conclusive unless there is fraud, malfeasance or misrepresentation of material fact.

How does a `confession' work here?

In India, the Act provides for monetary settlement in certain circumstances. For instance, Section 273A of the Act provides for waiver of penalty for concealment of income if a person voluntarily and in good faith makes a full and true disclosure of his income, cooperates in the inquiry and pays taxes on the disclosed income.

However, in practice, the tax department has not adopted a liberal stand. There is, however, no waiver of interest for delayed filing of return and for non-payment of advance tax. Further, there is no provision for immunity from prosecution.

What was the attraction of the Settlement Commission?

Aggrieved assessees had the option to go to the Settlement Commission which had a complex system but still allowed relief from interest, penalty and prosecution.

Even though the Supreme Court in the CIT vs Anjum M. H. Ghaswala case held that consequent to a change brought about by the Finance Act, 1987, the Settlement Commission does not have the powers to waive the statutory interest chargeable under Sections 234A, 234B and 234C of the Act for default in furnishing the tax return or default or deferment in relation to advance tax, the Settlement Commission continued to be an attractive mechanism for claiming immunity from penalty and prosecution.

Is `confidentiality' a matter of concern?

The confidentiality of disclosure of income and its basis, which was not disclosed to the income-tax department till the admission of the case and kept secret where the application was rejected, would be a thing of the past. Under the proposed provision the entire matter would be available to the tax department from day one even in cases which are either not admitted or sent back to the department because they could not be decided within the prescribed time!

What happens to the pending cases?

Surprisingly, the Bill stipulates that all pending cases, some of which may be eight to ten years old would be either decided by the Settlement Commission by March 31, 2008, or reverted to the authority where they were pending at the time the application was made.

Based on information available, it appears that the four Benches of the Settlement Commission have approximately 2,200 cases which have to be disposed by March 31, 2008, else these will revert to the tax department. Assuming an average disposal rate of around 400-500 cases per year, it is likely that a bulk of these cases will revert to the department. Further, given the proposed changes, it is possible that the Settlement Commission may now have to deal with less complex, small matters, pending before the assessing officers.

Thus, while simpler new cases will be presented before the Settlement Commission, the more complicated old cases will come back. This policy seems unjustified.

Is there an alternative?

Perhaps a longer tenure should be given to the Settlement Commission, say, till March 31, 2009, to complete all pending cases under the existing provisions. One can also argue that after this date the Commission could be wound up. To help the assessees, Section 273A could be strengthened with powers of waiver of penalty not only in instances of voluntary disclosure but also in other matters where the assessee is willing to cooperate and pays the monetary penalty. Such a system has been successful in the UK and the US and there is no reason why it cannot succeed in India.

Tailpiece

"A solemn air and the best comforter to an unsettled fancy cure thy brains, now useless, boil'd within thy skull!" (The Tempest, Act V, scene I)

There are changes to the system now.

The Finance Bill, 2007 proposes to simplify the entire procedure. At present, the Settlement Commission is predominantly burdened with search and seizure cases. It is proposed that these cases and assessment or reassessment proceedings under Section 147 will not be eligible for settlement with the Commission. Only those that are pending with the assessing officers can be placed before the Commission.

The complexity of the investigation involved will not be a criterion for admitting/rejecting an application. The threshold of additional amount payable to make a reference to the Settlement Commission has been increased from Rs 1 lakh to Rs 3 lakh. At present, tax is required to be paid only when the application is admitted. Now, the tax together with the interest on additional income is required to be paid before making the application.

Currently, there is no restriction on the number of times a taxpayer approaches the Settlement Commission. It is proposed that Settlement can be approached only once in a lifetime by the taxpayer. A habitual defaulter cannot approach the Settlement Commission for settlement.

It is also proposed that the Settlement Commission shall no longer be able to grant immunity from prosecution under any law other than Income-tax Act or Wealth-tax Act for application filed after May 31, 2007. At present, the Settlement Commission has power to grant immunity from prosecution under any central law and the Indian Penal Code.

The Settlement Commission has to within seven days of the submission of the application require the applicant to give reason as to why his application should be admitted, further within fourteen days of submission, the application is required to be accepted or rejected.

The final settlement order is to be passed within nine months after obtaining a report from the Commissioner of Income Tax.

http://Detaxification.blogspot.com

D. Murali

More Stories on : Interview | Courts/Legal Issues | Detaxfication | Income Tax | Economic Offences

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