Written in : January 1999

In my last article I had indicated about an Allahabad High Court judgment on the Kar Vivad Samadhan Scheme which led to interesting results. Now that I have some details, it is worth discussing.

If you recall, the Scheme applies only when you have tax arrears outstanding against you as on the date of making the declaration. The Scheme says that if any tax is paid by you against the arrears, it would reduce the arrears and you would be eligible to settle only the balance arrears outstanding. If any payment is made which eliminates outstanding arrears from you, you are out of the Scheme. This applied equally to taxes paid under protest, coercively recovered or refunds adjusted. No doubt, it placed those who paid their taxes at a disadvantage as compared to those who did not. We thought that was the way of the government.

Interestingly, such a matter was taken up to the Allahabad High Court in a writ petition by a government company.

This company, UP Mineral Development Corporation Limited, is a wholly government owned company 'which now seems to be in the red and is facing closure'. It had, for several years, filed appeals before the Tribunal and Commissioner(Appeals) with regard to disputes in tax matters. It had outstanding arrears of over Rs.3 crores. It appears that there were no stay petitions filed before the Tribunal while the company claimed that a stay petition was filed before the Commissioner which was not disposed of and remained pending.

The income tax department recovered amounts from the bank account of the company which resulted in the entire tax arrears being wiped off. This made the company ineligible to settle its disputes under the Scheme.

The company filed a writ petition before the Court asking for two items of relief: refund of coercively collected taxes and declaring it eligible to file a declaration under the Kar Vivad Samadhan Scheme.

The court rejected the first request. It said that the department was within its rights to collect outstanding taxes and nothing could be done about it.

So far as the second request is concerned, the court made interesting observations.

The court accepted the argument of the company that the company 'had neither voluntarily paid the amount nor had paid the amount under protest nor he had deposited the amount pending any appeal nor this amount was paid in pursuance of a court's order'. In view of this, the court held that the company should be treated as one in arrears of tax for purposes of the Scheme and should be entitled to avail the benefit of the Scheme.

To understand this better, let us refer back to the Scheme.

According to the Scheme, if you have paid any amount either voluntarily or under protest any amount of tax before making the declaration or have deposited any amount pending any appeal or in pursuance of a court order in relation to such demands, then such payment shall be not be considered as tax unpaid for purposes of determining tax arrears under the Scheme. In other words, if amounts are paid by you in any of the following modes, it will reduce your tax arrears:

• voluntary payments;
• payments under protest;
• depositing payments pending appeals, or
• in pursuance of court orders.

The court found that payments forcibly collected from bank accounts did not fall into any of the above categories. As such, it cannot reduce the tax arrears held the court. That was an interesting gap in the Scheme utilised by the company which the court has now upheld.

The reasoning adopted by the court is that if a payment is made which does not fall within the above categories, then it cannot be said to reduce the arrears.

Are there other types of 'payments' which can be covered by this reasoning? Adjustment of refunds comes to mind immediately. The department has been frequently adjusting refunds of other years against tax demands. This would reduce the arrears or eliminate them resulting in either reduced or no benefits under the Scheme. If we apply the reasoning of the court, such adjustments should not reduce the tax arrears and you can take advantage of the Scheme.

Talking of adjustment of refunds, we need to know that such adjustment is possible in law when there are arrears of one year and refunds in another year. In such a case, the refund could be adjusted against the arrears. However, such a refund can be done only after an intimation is given to you about the proposed adjustment. Note two requirements: an intimation of such adjustment is required; and such intimation should be given before the adjustment. If an intimation is not given, or is given after the adjustment then the adjustment is not entirely legal and can be said not to reduce the arrears.

The department also is known to adjust refunds of one taxpayer against arrears of another taxpayer when both are related. Firm and partners are a common set of taxpayers in whom such adjustment is done. Such adjustments cannot be done in law without the concurrence of both parties.

Now, if you are a taxpayer who desires to settle the disputes under the Scheme and have felt thrown out because of coercive recoveries by the department or adjustment of refunds, look at the reasoning of the Allahabad High Court. It just might be of help to you. Not merely that, it might be of help in reducing the amount payable by you under the Scheme.

The Scheme has been extended to January 31. The difference is that you can make a declaration by January 31, but the time given to the Commissioners has been reduced from 60 days to 30 for making the preliminary order determining the tax payable by you. You then pay taxes within 30 days of the order. This will then have to be before March 31. Effectively, the time available for paying taxes from the date of declaration has come down from upto 90 days to 60 days.