2002 (2) TMI 40 - HC - Income Tax

Kar Vivad Samadhan Scheme Part Payments - the only question that arises for consideration is whether the computation under the KVS Scheme by the appellant is correct or whether the computation made by the respondent is correct. This involves resolution of the following issue - Whether any amount paid towards the tax arrears (which includes the income-tax and interest payable) should be taken as payment towards tax or towards interest for the purpose of the KVS Scheme. - To find an answer to the issue detailed reference to the relevant provisions of the KVS Scheme contained in the Finance Act as also the clarification given by the Central Board of Direct Taxes (the CBDT ) will be necessary. - The normal rule that payments will first be adjusted towards interest and then towards principal (income-tax) based on the Explanation to section 140A(1) of the Income-tax Act and general law will be inapplicable to matters covered by the KVS Scheme. The learned single judge has lost sight of the above aspects and has wrongly proceeded as if the Explanation to section 140A(1) of the Income-tax Act is applicable to the KVS Scheme.

Summary

Issues involved:
1. Correct computation under the Kar Vivad Samadhan Scheme (KVS Scheme).
2. Appropriation of payments towards tax or interest under the KVS Scheme.

Detailed Analysis:

1. Correct computation under the Kar Vivad Samadhan Scheme (KVS Scheme):

The petitioner, an assessee under the Income-tax Act, 1961, filed a declaration under the KVS Scheme for the assessment year 1995-96, showing a computation of tax payable as Rs.8,886. The respondent, however, issued a certificate indicating that Rs.65,592 was payable. The appellant challenged this computation, leading to a dispute over the correct amount payable under the KVS Scheme.

The court examined the relevant provisions of the KVS Scheme as contained in the Finance (No. 2) Act, 1998. Section 88(a)(iii) of the Finance Act specifies that the amount payable by a declarant (other than companies and firms) under the KVS Scheme shall be 30% of the disputed income where tax arrears include income-tax and interest or penalty. The "disputed income" is defined in section 87(e) as the portion of total income relatable to the disputed tax, and "disputed tax" is the total tax determined and payable but remains unpaid as of the declaration date.

The court concluded that the appellant correctly calculated the amount payable under the KVS Scheme. The total income determined was Rs.2,59,600, and the aggregate of all taxes paid before the declaration was Rs.66,993. The disputed tax was Rs.11,847, and the corresponding disputed income was Rs.29,620. Therefore, the tax payable under the scheme was 30% of Rs.29,620, amounting to Rs.8,886.

2. Appropriation of payments towards tax or interest under the KVS Scheme:

The Department contended that the sum of Rs.60,000 paid by the appellant towards tax arrears should be adjusted towards interest due under sections 234A, 234B, and 234C of the Income-tax Act, as per the Explanation to section 140A(1). This would result in a higher amount payable under the KVS Scheme.

The court, however, held that the provisions of section 88 of the Finance (No. 2) Act, 1998, prevail over section 140A of the Income-tax Act. Payments made towards tax arrears during the pendency of litigation should be considered as part payment towards tax for the purposes of the KVS Scheme. The court referred to the clarifications issued by the Central Board of Direct Taxes (CBDT), which stated that part payments are appropriated first towards tax and then towards interest.

The court emphasized that the KVS Scheme aimed to resolve tax disputes and provide waiver of interest and penalty on payment of a portion of the disputed income. Therefore, the normal rule of adjusting payments first towards interest does not apply under the KVS Scheme.

Conclusion:

The court allowed the appeal, setting aside the order of the learned single judge and quashing the certificate of intimation issued by the respondent. The respondent was directed to issue a fresh certificate of intimation, accepting the appellant's declaration under the KVS Scheme. The appellant was also entitled to costs of the writ petition and the appeal.