INCOME BY ILLEGAL MEANS LIKE FABRICATION OF TDS CERTIFICATES IS TAXABLE INCOME.

[C.A. DEV KUMAR KOTHARI]

TDS certificates and credit for tax paid:

Tax is deducted  at the time of payment or credit of income to the  recipient of income. The tax deductor is required to deduct tax, deposit the same, file periodical returns of TDS and  issue TDS certificates to the persons from whose income tax was deducted.

The credit is allowed on the basis of TDS certificates produced in original by the recipient of income on satisfaction of the A.O. that excess tax has been paid or deemed to be paid on his behalf. In practice we find that many times credit for TDS is not allowed on ground of some minor technical defects. It has been experienced that in some cases even after production of challan for deposit of TDS  credit was not allowed. In many cases  credit was denied on ground that TDS relates to some other year. However, the department hardly make  any attempt to allow credit in respective year, as a consequence of disallowing credit in one of the year. Even applications and efforts of assessee may fail to get credit for genuine TDS.  In case of small TDS claims, the assessee may also prefer to avoid to claim refund or to make efforts to get refund.

Dispensing of TDS certificates:

Dispensing of  filing TDS certificates is  yet to take effect, Even though TDS certificates are not required to be filed with E-return, but to get refund, assessee is forced to file TDS certificates. Otherwise, credit may not be allowed , even in respect of credit shown on the website of department under OLTAS.

Credit against forged TDS certificates:

In the scenario of practical difficulties faced in getting credit of  genuine TDS, as discussed in earlier paragraph, allowing credit of TDS against bogus or forged TDS certificates can be considered as a miracle. Author is afraid to say that such miracles can happen only in a collusive efforts by the refund claimant and officials and staff of the Revenue involved in granting such credit. Therefore, income earned by claiming refunds against bogus or forged TDS certificates cannot be income of claimant only.

A recent case before Madras high Court:

In CIT v K. Thangamani (T. C. (A) Nos. 391 & 392 of 2004) decided by Madras high Court on  December 5, 2008 issue about taxability of income earned by claiming bogus TDS came for consideration. The facts and decisions on the issue were as follows:

a.        The assessee, by filing bogus TDS certificates got refund of the amount from the income tax department as clearly found and  recorded by the Assessing Authority as well as CIT (Appeals).

b.       The same factual position was also the admitted by the assessee before the income tax department as well as before the Central Bureau of Investigation during the course of investigation into the offence that he had indulged in the act of fabricating TDS certificates and collecting refund from the income tax department.

c.        On such admitted facts the Assessing Officer assessed the income received by the assessee, by getting refund from the income tax department which was confirmed by the CIT(A).

d.       The Tribunal without any basis set aside the order of the Assessing Authority as well as Commissioner (Appeals).

e.        When matter came before the high Court, in appeal filed  on behalf of the revenue court held that "we are of the considered view that the Tribunal committed a serious error by holding that the booty received by the assessee can under no circumstances be the income of the assessee".

The court considered this aspect on the following legal lines:

The Income Tax Act is to bring the income of various kinds into the tax net and  authorities acting under this Act  are not concerned about the manner, means, legality or illegality of acquiring income. If income is earned in any manner, it will be taxable. Taking some examples in consideration the court observed that income generated by engaging in liquor trade, generally called as res extra commercium, otherwise known as trade in crime, or income earned by way of selling Khadhi products, are one and the same for the tax authorities.

Use of unethical means to acquire income or wealth  or by resorting to acts forbidden by law, cannot be ground  that the State cannot be a party to such sharing of ill-gotten wealth. In case of allowing such income to escape the tax net would be nothing but a premium or reward to a person for doing an illegal trade. In the event of taxing the income of only those who acquired the same through legal manner, the tendency of those who acquired income by illegal means would increase.

Income tax authorities cannot act like police authorities:

The income tax authorities cannot  act like police to prevent the commission of unlawful acts but it is possible for them to tax such income which is earned by illegal means. During such process strict rules of evidence are not applicable to the income tax authorities. Those pieces of evidence which are not sufficient in ordinary legal proceedings to prove a particular fact (of crime) would be sufficient for the tax officials to assess the income of an individual.

There is nothing like an illegal income so far as the Tax Collector is concerned. For tax collector and in view of tax laws  it is income  which can be taxed. Even if the assessee was prosecuted by Law Enforcing authorities for commission of offence, the income earned by the offender still would be an income liable for assessment. It is not a defence in such cases that the State is also becoming a party to the illegal act by sharing the booty by collecting tax on illegally earned income.

In view of the facts and legal position and purposes of the income Tax Act, the court did  not find any ground to sustain the order of the Income Tax Appellate Tribunal. Therefore,  Accordingly the order dated 25.10.2002 of the Tribunal was  set aside and both the tax cases were allowed in favor of the revenue by answering  questions   in favor of the revenue.

Conclusion:

Legally earned income may be exempt or have concessional rate of tax as per law.

Illegally earned income  will always be income and it cannot even enjoy any exemption or concession though for determination of taxable income expenses incurred to earn such income may be allowed, if they are incurred in legal manner and for the purpose of earning such income. Illegally expenses for earning of illegal income may not be allowed as being against public policy. For example, cost of material used or services used in course of illegal business may be allowed, but illegal payments like bribes may not be allowed.

Suggestion-  tax  gross illegal collection at higher than maximum rate to clean all sins and guilt:

Illegally earned receipts and  income, like bribes, extortion money, etc. should be taxed at maximum rate of tax without allowing any  deduction. We find few cases of bribes coming into lime light and those cases are also buried under technicalities and due to undue influences the income earner had on tax machinery. In fact the factum of crime is also buried. A crime in such cases gives crime to many other cases- further bribe and mishandling of cases in consideration of bribes. Therefore, admitting the existence of corruption a scheme of 'clean all sins by paying 55% tax" should be brought and all persons who have accumulated ill gotten wealth, by corrupt and illegal means may be permitted to clean all sins and guilt by paying 55% tax without asking any question and without impairing goodwill of such persons and keeping secrecy and assuring status quo in service of such persons.