The Hindu : Business : Does amnesty for voluntary disclosure continue?

Online edition of India's National Newspaper
Monday, Oct 04, 2004

Business

Business

Does amnesty for voluntary disclosure continue?

QUESTION: It has been stated in The Hindu dated June 14 and 21, 2004, that it is not necessary for a taxpayer to disclose a source of income as long as he discloses such income under the head `Other sources'.

(Refer Tax Forum of September 27 for the full question.)

ANSWER: The above is the summary of a rejoinder by a Commissioner of Income-tax, who feels strongly that mere disclosure of income without disclosing the source is not permissible and that such disclosure is vulnerable for penalty.

All that the present law requires is that, where there is a credit in the books or investment or expenditure, the assessee has to prove the nature of source of such outlay and if it is not so done, it will be treated as undisclosed income ordinarily under the head other sources.

But such treatment is reserved, where the income for the source claimed is unaccounted.

As pointed out in the query of the reader in response to which, the answer was given in The Hindu dated June 14 and 21, 2004, there are many activities for which the assessee is unable to disclose the details either because the activity is illegal or would bring the assessee to disrepute or would expose others. The Income-tax law taxes illegal income as well.

It is true that where an assessee discloses an income without disclosing the source, such income is not verifiable. But then every assessee is bound to disclose his income, while there is no compelling provision in the present law for disclosing the source as long as he discloses the income.

As for vulnerability, both persons, who disclose the source of income and those, who return the income without disclosing the source, are bound to account for their investment and expenditure if the disclosed income is not commensurate with an increase in wealth and expenses during the year.

The assessing officer can always adopt a higher income, if he can prove it with reference to investment and outlay in excess of accounted income. But there is no reason, when an assessee voluntarily report an income and pays tax thereon, why he should be subjected to penalty as inferred in the query.

As for the citation given by the reader in K. C. Trunk and Bucket Factory, the full facts are that the assessee firm filed a return. While it was being subjected to scrutiny during the course of assessment, it was discovered that there was a bank deposit of Rs. 25,000 during the financial year in the name of wife of a partner of the assessee firm attributed to be out of `some business transaction' of the firm and offered for assessment by a revised return.

Penalty, which was sustained, was in respect of concealment in the original return. The assessee could not also prove that the source of additional sum of Rs. 25,000 offered as from legitimate business, which was bona fide omitted to be shown in the original return.

It was found that penalty was exigible, since even the amount shown in the revised return as business income was from `some business' as contended and that if it were business income, the particulars of the same were concealed. The question, therefore, was primarily for lack of explanation for source of income not offered in the original return, so that this could not nullify the law that a taxpayer, who discloses his income, cannot be penalised for lack of particulars of disclosed income, because concealment contemplated under Sec. 271(1)(c) is concealment of income even as indicated in title to Sec. 271(1). Particulars of income referred in Sec. 271(1)(c) relates to particulars of income not reported and not what is admitted.

While penalty may not be levied routinely even in the case of omission to report an income, if convincing explanation is offered, the law does not contemplate penalty for an income which is reported and offered for assessment. The yardstick for taxation of quantum of penalty is the tax sought to be evaded being the difference in tax between reported and assessed income, so that penalty base itself is absent in respect of reported income from whatever source.

As pointed out in an earlier answer, when the law required the source to be indicated, it has specifically provided so in respect of settlement cases under Sec. 245H of the Act.

The argument that those who disclose the source are worse off in disclosing particulars are best met by the administration by avoiding cause for complaint from them.

Penalty cannot be levied merely for non-disclosure of the source of income disclosed. Similarly, disclosure of income even for past years, if admitted prior to detection, is entitled to waiver under Sec. 273A of the Act. It is in this sense that one need not wait for amnesty under another Voluntary Disclosure Scheme.

On the other hand, failure to disclose income may render the defaulter liable for tax and interest and possible prosecution if discovered. The Income-tax Department itself should publicise this position of law for better compliance.

The authorities should encourage the taxpayers to come out with disclosures of their income instead of scaring them with threat of penalty.

One may, however, point out that in the case of persons covered by Prevention of Corruption Act, 1988, or Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976, or Prevention of Money Laundering Act, 2002, it may be necessary for them to explain their source of wealth, but that is because of the requirement of such special law, which do not apply for all. But the fact, that some persons coming within the purview of such laws may have to disclose their source, makes no difference even for them for income-tax purposes in the administration of income-tax law.

S. Rajaratnam

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