Written in : October 1998

In an earlier article we saw that you can settle outstanding tax arrears under the Kar Vivad Samadhan Scheme by paying a part of the arrears and getting exemption from the balance and immunity from interest, penalty and prosecution.

Let us recap what disputed tax means. When tax is outstanding (with or without interest or penalty), tax arrears means the net tax outstanding on the date you file the declaration, for any year, excluding interest and penalty. Thus, all payments made by you before or after the tax was determined, refunds adjusted by the department etc go to reduce the tax arrears. It is only the net amount outstanding that is considered to be disputed tax.

When interest or penalty are outstanding, disputed tax includes the net interest or penalty outstanding after all payments are adjusted.

You are required to pay tax based on disputed income. Disputed income is defined under the Scheme as income relatable to the disputed tax. Disputed income is, therefore, a function of disputed tax. Disputed income is not the total of additions made to your income. It is not derived from your assessment order. It is to be arrived at only from disputed tax.

The Scheme does not give any manner of finding out the disputed income. How then do we calculate disputed income?

If you are an entity to which a flat rate of tax applies, computing disputed income is simple. For example, you are a company or a firm for which tax at 40% applies for a given year (assuming, no surcharge). If so, your disputed income will be calculated by multiplying the disputed tax by 100/40.

Assume that your disputed tax is Rs.1,00,000, the tax rate applicable to you being 40%. The disputed tax then would be 1,00,000 x 100 ¸ 40 which will be Rs.2,50,000. You have to pay 35% of this amount (Rs.87,500) to settle the case.

The problem in computing disputed income arises when we calculate it for individuals, HUFs etc for which a flat rate does not apply but a progressive rate applies and that too after a basic exemption. No simple formula like the above will apply. The most appealing solution offered requires some reverse calculations. Have you seen tax tables? These are available in Ready Reckoners and allow you to find out the tax payable on any income. The reverse calculations I am talking about will be easy with such tables. The procedure suggested is this:

1. Note down the total income.
2. Calculate the disputed tax as discussed by us earlier.
3. Find out the income on such disputed tax. To do this, in a Ready Reckoner look in the tax columns, go to the disputed tax figure and find out the income for such tax. In other words, we have to find out what should be the income if you were to pay the amount of disputed tax.
4. Deduct the income on disputed tax from the total income. The difference will be the disputed income.

This procedure will take care of basic exemption and progressive rates of taxation adequately.

However, the government ought to have come up with a straight forward manner of computing disputed income. I believe the department should soon come up with a method of computing it. If it does, we shall revert to this again.

One issue which is bothersome is when Additional Tax is levied in an intimation (under section 143(1)(a)) by an officer. If you recall, in a summary assessment the officer may make some prima facie adjustments to your returned income. If such adjustments are made, the officer would levy an Additional Tax at 20% of the tax. This is a sort of penalty for making obviously false claims in the returns. You may also dispute the adjustments made by filing an appeal against the intimation.

KVSS does not discuss how such arrears would be dealt with. To a specific query, the department has answered that Additional Tax is like any other tax and not any different. It should also get added to the disputed income and consequently increase the tax payable by you.

I believe this is a wrong interpretation by the department. One should expect it to come up with a clarification treating it otherwise.

The tax payable under KVSS depends on whether yours is a search and seizure case or not.

In a non-search case, the tax payable under KVSS will be:

• 35% of disputed income in case of companies and firms;
• 30% of disputed income in other cases.

In a search case, the tax payable under KVSS will be:

• 45% of disputed income in case of companies and firms;
• 40% of disputed income in other cases.

When it is interest or penalty alone that is disputed, you pay 50% of the disputed tax to settle it under KVSS.

Remember, the amount payable is a percentage of disputed income, net of interest and penalty. This is important, since once you pay the tax, the interest and penalty outstanding get waived.

To a question whether all types of interest are covered by such waiver, the department has given a clarification that only such interest and penalty will be waived which are directly related to assessed income or arrears of taxes. These are interests charged under sections 234A, 234B, 234C, 139(8), 215, 216, 217, 158BFA, 220(2) etc and penalties under sections 271(1)(c), 221, 148BFA, 273 etc.

It means, penalties like those under section 271B (for failure to get tax audit done) etc do not get waiver.

However, interest and penalties levied which are not directly related to assessed income or arrears of tax will not get waived and will get settled only on payment of 50%.

I suspect this is not a correct interpretation of the law. If you are going for settlement of tax disputes and also have some interest or penalty which the department does not consider covered by waiver, you should look at the legal position more closely and find out alternative remedies.