Written in : December 1998

There have been some eleventh hour clarifications about the Kar Vivad Samadhan Scheme and since the Scheme is expected to end on December 31, here they are in case they apply to you.

As I had said in an earlier article on KVSS, the Delhi High Court has held that the Scheme should be made applicable also in cases where the department has preferred an appeal against an appellate order favourable to you. The department said it has accepted the judgment and promised to come out with clarifications about how it would be actually implemented.

You have the option to file declarations either in respect of arrears in dispute in your appeal or of taxes involved in the department's appeal, or for both. The choice is entirely yours and you are not required to necessarily make declarations with respect to both appeals.

When the department appeal is pending, there would be no outstanding taxes since on issues contested by the department, a modification order (consequent to the appellate order favourable to you) would have reduced your assessed income and outstanding taxes.

How then would you compute 'disputed income'?

The clarifications say that the entire income under dispute in various grounds of appeal of the department would constitute 'disputed income' on which the sum payable can be determined.

In such cases, there are no outstanding taxes and hence the process of working out "disputed income" from outstanding taxes is not involved. The entire income under dispute in various grounds of appeal may constitute "disputed income" on which the sum payable can be determined. In respect of departmental appeals, the declaration has to be for the entire income disputed in such appeals.

This method of computation of disputed income is not contemplated by the Scheme. And such a clarification is extra-legal.

If you recall, where you are in appeal the disputed income is to be computed based on disputed taxes, not based on what you have disputed. Thus, taxes paid by you already will go to reduce tax arrears.

However, not where departmental appeals are concerned. Here, according to the clarifications, the disputed income as per the grounds of appeal are to be considered disputed income. And you are required to pay a percent of that amount as taxes under KVSS.

Thus, you are required to pay taxes under the Scheme even where the department is in appeal and you wish to settle the disputes. If that is so, why should you want to settle such disputes? Perhaps because you consider that the appeal may eventually go against you or that there are penal proceedings pending which may have substantial impact and you'd rather pay taxes on the issues on which you have got favourable order.

The clarifications also say that you can settle the department's appeal only where you seek settlement of amounts covered by all grounds of appeal raised by the department, not some.

For declarations relating to departmental appeals also the existing Form No. 1A can be used.

Where the declaration in respect of departmental appeals are accepted by the department, the appeals will be withdrawn by the department.

In an earlier article, I had also explained how there were anomalies about partnership firms with regard to KVSS for years prior to 1993-94. The CBDT has come out with late clarifications about these issues.

If you recap, the problem arises because the Scheme now expects payment of taxes at 35% in case of firms on the ground that firms pay taxes at 35% on their current income as well. However, the Scheme forgot that upto assessment year 1992-93, firms paid concessional rate of tax starting from 4% and going up to 24% and partners paid taxes separately. In all such cases, if the firm made declarations the partners would not get covered automatically, and they will have to offer the share incomes again and pay 35% thereon again. This was grossly unfair to such firms and gave no incentive at all for them to come under the Scheme.

Now the department has made changes in the operation of the Scheme by way of fresh clarifications which will allow such firms and the partners to also come for Samadhan.

Essentially, the clarifications envisage that the firms' and partners' tax arrears will be clubbed and the aggregate tax arrears will be considered for Samadhan. On such aggregate arrears, the firm and partners may pay taxes at 35% and not more to settle. The partners would not then be required to pay any further tax on their share income from the firm. However, the partners' declarations are required to be filed along with that of the firm.

If the partners are otherwise eligible for Kar Vivad Samadhan Scheme in respect of their other 'disputed income', they may also file declaration for such income along with that of the firm. They will have to pay taxes separately at 30% of such other disputed income.

The clarifications also say that if declarations are filed of partners, they may be revised now in view of these clarifications.

There was another interesting news item about a judgment of the Allahabad High Court. According to the judgment, if taxes are coercively recovered, they shall not be considered to reduce the arrears. That is not only interesting, but also can make the Scheme very attractive for many people. As of writing this, I have been unable to get more details of the judgment nor have I the department's stand about it. In any case, if there has been any such recoveries, you may want to reduce them from your arrears and pay lower taxes under the Scheme. You may then file declarations ignoring the recoveries. Another interesting issue is whether the judgment should apply only to forcible recoveries or also to automatic adjustment of refunds for earlier years or others in the same group. We shall have to wait for the judgment and reasoning of the judges to understand this.