Under Income Declaration Scheme every person, (Individual, Partnership Company, Trust, etc.) can declare undisclosed income pertains to AY 1962-63 onwards and pay tax @ 45% and be assured of secrecy and immunity form penalty and prosecution.

What happens if assessee fails to disclose Income under the scheme of year before Assessment Year 2014-15 – Previous Year 2013-14?

As per Income Tax Act the Income of the previous year is assessed in the assessment year.  The assessing officer can reopen assessment for last 4 or 6 years subject to certain conditions. If any income is escaped assessment and time limit for issuing notice is expired that income cannot be brought to tax by the assessing officer. So in order to address the issue the Finance Bill has made a provision under Section 197 (c) of the Scheme which says the undisclosed income which has not been declared shall be deemed to be income of the year in which assessing officer issues notice of assessment.

The Section 197 (c) says

“where any income has accrued, arisen or received or any asset has been acquired out of such income prior to commencement of this Scheme, and no declaration in respect of such income is made under this Scheme,—

(i) Such income shall be deemed to have accrued, arisen or received, as the case may be; or

(ii) The value of the asset acquired out of such income shall be deemed to have been acquired or made,

In the year in which a notice under section 142, sub-section (2) of section 143 or section 148 or section 153A or section 153C of the Income-tax Act is issued by the Assessing Officer, and the provisions of the Income-tax Act shall apply accordingly.”

So by this provision even if the income has escaped assessment in previous years say last 50 years, from FY 1961-62 ending, the same can be considered as income in the year in which assessing officer issue notice. The Department in the Circular No. 24 of 2016 has specifically clarified in FAQ giving an example which is produce below.

Question

If undisclosed income relating to an assessment year prior to A.Y. 2016-17, say A.Y. 2001-02 is detected after the closure of the Scheme, then what shall be the treatment of undisclosed income so detected?

Answer

As per the provisions of section 197(c) of the Finance Act, 2016, such income of A.Y. 2001-02 shall be assessed in the year in which the notice under section 148 or 153A or 153C, as the case may be, of the Income-tax Act is issued by the Assessing Officer. Further, if such undisclosed income is detected in the form of investment in any asset then value of such asset shall be as if the asset has been acquired or made in the year in which the notice under section 148/153A/153C is issued and the value shall be determined in accordance with rule 3 of the Rules

Further Department has also clarified Circular No. 27 of 2016 the provision will over ride Income Tax Act and will prevail

Question

If an undisclosed income represented in the form of an asset or otherwise pertains to a year falling beyond the time limit allowed under section 149 of the Income tax Act, 1961 and the said undisclosed income is not declared under the Scheme, then as per the provisions of section 197(c) of the Finance Act, 2016, the said undisclosed income shall be treated as the income of the year in which a notice under section 148 of the Income tax Act has been issued. The said provision is inconsistent with the existing time lines provided under the Income tax Act for reopening a case. Please clarify?

Answer

Question No. 4 of Circular No. 24 of 2016 may be referred where the tax treatment of such income has been clarified. Since the Scheme contained in Chapter IX of the Finance Act, 2016 is a later law in time the provisions of the Scheme shall prevail over the provisions of earlier laws.

The intention behind creating a provision under section 197 (c) is clearly giving power to assessing officer for bringing to tax untaxed income of past 50 years from financial year 1961-62 for which notice cannot be served due to law of limitation. However, it does not seems to be so easy for assessing officer to open assessment for previous years for which time limit has already expired under Income Tax Act and there are chance of litigation for applicability of the provision which is against provision of Income Tax Act. Further there might not be enough evidence to support assessment, i.e proper documentation and records for previous years, which can be hindrance in assessment procedure.

Only time will able to say how far the provision is utilized and how court interprets the section and its impact. However, it seems it gives power to tax your undisclosed income of past 50 years.

For any query you can write to Chirag@cachauhan.in. Before making any decisions do consult your Professional / tax advisor.  Author does not take any responsibility for misrepresentation or interpretation of act or rules. Neither the author nor the firm accepts any liability for the loss or damage of any kind arising out of information in this document or for any action taken in reliance there on.

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CA Chirag Chauhan

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Chartered Accountant, CA Chauhan



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    I hope by reading this article you got enlighten on ,How failure to disclose your undisclosed income under Income Declaration Scheme may give power to AO to reopen assessment of last 50 years u/s 197(c) further to mention before taken any financial decision based on this content it is prefered to take an expert opinion as matter can be subjective.