PAYMENT OF ADVANCE TAX IS NOT INDICATIVE OF INTENTION TO DISCLOSE

[Mr. M. GOVINDARAJAN]

Section 207 of the Income Tax Act, 1961 (‘Act’ for short) lays down the liability for payment of advance tax.   The said section provides that the tax shall be payable in advance during any financial year, in accordance with the provisions of Section 208 to 219 in respect of the total income of the assessee which would be chargeable to tax for the assessment year immediately following that financial year, such income referred to as ‘current income’. Sec. 207 is not applicable to an individual resident India who does not have any income chargeable under the head   ‘Profits and Gains of Business or Profession’ and the assessee is the age of 60 years or at any time during the previous year.

Sec. 208 of the Act provides that advance tax shall be payable during a financial year in every case where the amount of such tax payable by the assessee during that year, as computed in accordance with the provisions of this Chapter is Rs.10,000/- or more.

According to Section 209 of the Act the assessee is to first estimate his ‘current income’ and thereafter pay income tax calculated on his estimated income on the rates in force in the relevant financial year. This income is an estimation that is made by the assessee and may not be the exact income, which may be ultimately declared in the return filed under Section 139 of the Act and assessed under Section 143 of the Act. The payment of advance tax does not absolve an assessee from an obligation to file return disclosing total income for the relevant assessment year.   The disclosure of total income by filing return is mandatory even after the payment of advance tax by the assessee.

Advance tax is adjustable towards the tax due and payable. By its very nature, advance tax is pre-assessment collection of taxes either by deduction of tax source or by payment of advance tax which has to be adjusted towards income tax levied on the total income.

In ‘B. Noorsingh V. Union of India’ –1998 (11) TMI 8 - MADRAS High Court it was held that the payment of advance tax by itself does not establish an intent to disclose the income.   The disclosure is to be made by filing the return. Even in search cases where the time for filing the return under Section 139(1) has not expired, income disclosed in the books of accounts is not treated as undisclosed income.

In ‘Assistant Commissioner of Income Tax V. A.R. Enterprises’ –2013 (1) TMI 345 - SUPREME COURT a search was conducted by the Department under Section 132 of the Income Tax Act, 1961at the premises of M/s A.R. Mercantile Private Limited in which certain books and documents relating to the assessee i.e., M/s A.R. Enterprises were seized.   On scrutiny the Assessing Officer found that though the assessee had taxable income for the assessment year 1995-96 no return had been filed till the date of search.   Based on the material seized the Assessing Officer was satisfied that the assessee had not disclosed their income pertaining to the assessment year 1995-96. He initiated action under Section 158BD of the Act requiring the assessee to file their return of income.

The assessee, after filing the returns for the period from 1993-94 to 1995-96 pointed out that they had already filed returns for the assessment years 1993-94 and 1994-95. They objected to action initiated under Chapter XIV-B of the Act on the ground that in relation to the assessment year 1995-96, advance tax had already been paid in three installments and, therefore, income for that period could not be deemed to be undisclosed. The assessing officer rejected the contention of the assessee and he proceeded to compute the total undisclosed income for the block period from 1993 – 94 to 1995 – 96 treating the income returned by the assessee for the period is NIL as stipulated in Section 158BB(1)(C) of the Act.

The assessee filed an appeal before the Tribunal. The Tribunal allowed the appeal.   The Tribunal held that having paid the advance tax, the assessee had disclosed his income for the relevant assessment year and set aside the assessment order of the Assessing Officer. The Revenue filed appeal against the order of the Tribunal before the High Court. The High Court held that in any case although there is a difference between the regular assessment and the block assessment, unless the provisions of the block assessment specifically bar the assessing authority from taking into consideration the income disclosed by the assessee on payment of the advance tax to be taken into consideration, the income disclosed by the assessee on payment of advance tax would be an income disclosed to the Revenue and cannot be treated as an income undisclosed for the relevant assessment year.

The Revenue, being aggrieved by the order of the High Court approached the Supreme Court. The question considered by the Supreme Court is whether payment of advance tax by an assessee would by itself tantamount to disclosure of income for the relevant assessment year and whether such income can be treated as undisclosed income for the purpose of application of Chapter XIV-B of the Act.

The assessee contended that the Revenue did not have jurisdiction to invoke Chapter XIV-B of the Act, against the assessee. Before initiating proceedings under Section 158 BD, the Assessing Officer had not recorded his satisfaction that any undisclosed income belonged to the assessee or that the assessee did not have the intention to disclose their income.   The assessee prayed that the block assessment proceedings should be quashed.

The Supreme Court held that Section 158BD permits the application of the provisions of Chapter XIV-B only on the satisfaction of the Assessing Officer that the seized documents show undisclosed of a person other than the person with respect to whom the search was conducted or a requisition was made.  The High Court did not accept the contention of the assessee since the said submission has not been raised before the High Court and the Tribunal. The Supreme Court was of the view that the only way of disclosing the income, on the part of the assessee is through filing of a return, as stipulated in the Act, and therefore, an ‘undisclosed income’ signifies income not stated in the return filed.   Keeping that in mind, it seems that the Legislature has clearly carved out two scenarios for income to be deemed to be undisclosed:

• Where the income has clearly not been disclosed; and
• Where the income would not have been disclosed.

If a situation is covered by any one of the two, income would be undisclosed in the eyes of the Act, and hence, subject to the machinery provisions of Chapter XIV-B. The second category viz., where income would not have been disclosed, contemplates the likelihood of disclosure; it is a presumption of the intention of the assessee since in concluding that an assessee would or would not have disclosed income, one is ipso facto making a statement with respect to whether or not the assessee possessed the intention to do the same.   To gauge this, however, reliance must be placed on the surrounding facts and circumstances of the case.

The Supreme Court further held that regarding advance payment of tax, the degree of its material significance depends on the time at which the search is conducted in relation to the due date for filing return. If the search is conducted after the expiry of the due date for filing the returns, payment of advance tax is irrelevant in construing the intention of the assessee to disclose income.   Such a situation would find place within the first category carved out by section 158B of the Act, i.e., where income has clearly not been disclosed. The possibility of the intention to disclose does not arise since the opportunity of disclosure has lapsed.   If on the other hand, search is conducted prior to the due date for filing return, the opportunity to disclose income, to file return and disclose income still persists.   In which case payment of advance tax may be a material fact for construing whether an assessee intended to disclose.   An assessee is entitled to make the legitimate claim that even though the search or the documents recovered show an income earned by him, he has paid advance tax for the relevant assessment year and has an opportunity to declare the total income, in the return of income. Hence the fulcrum of such a decision is the due date for filing of return of income vis-à-vis date of search. Therefore the Supreme Court held that whether payment of advance tax by an assessee per se is tantamount of disclosure of total income, for the relevant assessment year, must be answered in the negative.

The Supreme Court further held that payment of advance tax and filing of returns are functions of completely different notions of income, i.e., estimated income and total income respectively. The payment of advance tax is based on estimation of the total income that is chargeable to tax and on the total income itself.