Decoding Finance Bill 2012


Manoj Purohit, Client Service Director, Walker, Chandiok & Co
Reassessment for 16 years – will it impact cases other than black money?

In the current Budget 2012, the Hon’ble Finance Minister has initiated various measures to unearth black money. In order to curb tax avoidance and enforce the concept of substance over form, the Indian revenue policy makers have proposed various tax reforms. Amendment in the provisions of Section 9 of the Income-tax Act, 1961 (Act), introduction of General Anti- Avoidance Rules (GAAR) and et care the steps to curb the tax avoidance practices. Amongst the other measures to unearth the black money the Hon’ble Finance Minister has also proposed an amendment in provisions of section 147 and section 149 of the Act.
 
Presently the provisions of section 149 are as under:
 
S. 149. (1) No notice under section 148 shall be issued for the relevant assessment year,—
(a) if four years have elapsed from the end of the relevant assessment year, unless the case falls under clause (b);
(b) if four years, but not more than six years, have elapsed from the end of the relevant assessment year unless the income chargeable to tax which has escaped assessment amounts to or is likely to amount to one lakh rupees or more for that year.
Explanation — In determining income chargeable to tax which has escaped assessment for the purposes of this sub-section, the provisions of Explanation 2 of section 147 shall apply as they apply for the purposes of that section.
(2) The provisions of sub-section (1) as to the issue of notice shall be subject to the provisions of section 151.
(3) If the person on whom a notice under section 148 is to be served is a person treated as the agent of a non-resident under section 163 and the assessment, reassessment or recomputation to be made in pursuance of the notice is to be made on him as the agent of such non-resident, the notice shall not be issued after the expiry of a period of two years from the end of the relevant assessment year.
 
Section 148 specifies the time limit for the issue of notice where income has escaped assessment. Thus under the existing provisions of the Act, the time limit for issue of notice for reopening an assessment towards income escaping assessment is six years.
 
Proposed Amendment
 
In the present Finance Bill 2012, it is proposed to amend the provisions of section 149 of the Act so as to increase the time limit for issue of notice for reopening an assessment to 16 years, where the income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment.
 
Following proviso is proposed to be inserted in section 147 of the Act:
“provided further that nothing contained in the first proviso shall apply in a case where any income in relation to any asset including financial interest in any entity located outside India chargeable to tax, has escaped  assessment for any assessment year”
 
Section 149 shall be amended to include as under:
“ if four years , but not more than sixteen years , have elapsed from the end of the relevant assessment year unless the income in relation to any asset ( including financial interest in any entity) located outside India, chargeable to tax has escaped assessment’
 
It is proposed to amend the provision of section 149 of the Act so as to increase the time limit for issue of notice for reopening an assessment to sixteen years, where the income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment. It is stated in the explanatory memorandum that the time limit of 6 years is not sufficient in cases where assets are located outside India because gathering information regarding such assets takes much more time on account of additional procedures and laws of foreign jurisdiction. Thus, the prime intention of the amendment as envisaged in the explanatory memorandum to section 149 is to unearth the black money parked in foreign jurisdiction in various forms and to charge to tax income in relation to any asset (including financial interest in any entity) located outside India.
 
It seems that the Finance minister had been focusing too much in the present budget to overcome the recent Supreme Court Ruling in the case of Vodafone International Holding BV. v. Union Of India [2012] 204 Taxman 408 and in doing so he has ignored the other implication of the proposed amendment to section 149 of the Act.
 
The proposed amendment to section 149 will have far reaching implications and may not be restricted only to the purpose for which the section is proposed to be enacted. The amended section states that the provisions of section 149 of the Act would be invoked ‘…to charge any income in relation to any asset (including financial interest in any entity) located outside India”. The provisions of section 149 of the Act would be invoked to tax any income from any asset located outside India. Thus in a scenario wherein a non-resident owns shares in a company registered in a foreign country provisions of section 149 ought to be invoked as owning of shares in a company registered in a foreign country will be treated as financial interest and thus subject to provisions of section 149 of the Act. The words ‘financial interest’ is neither defined in the Explanation to section 149 or under section 2 of the Act and therefore the litigation on the interpretation of section 149 would increase with the passage of time
 
The provisions of the section would be invoked in respect of any asset located outside India and therefore the officer may go beyond territorial jurisdiction to form reason for reopening the assessment. The information is purported to be gathered from other jurisdictions and therefore more likely than not the government of other jurisdiction would play a major role in gathering the information. In a scenario wherein the reason recorded for reopening is challenged by the taxpayer and presuming that the case is adjudicated in favour of the taxpayer, the entire judicial system would be doubted, the world over.
 
The time limit for reopening of assessment in the specified scenarios is proposed to be extended to sixteen years. The implication of the said amendment would be the taxpayer ought to maintain the books of account for sixteen years henceforth. The necessity to maintain the books of account would be substantiated with the fact that there are many judicial pronouncements in favour and against the taxpayer on the proposition of whether the assessing officer can redo the entire assessment?  Thus by virtue of introduction of the new amendment, if taxpayers are required to maintain their books for a period of 16 years, it could prove to be cumbersome and unreasonable exercise. Further, while the taxpayer may start maintaining books of account henceforth , but due to retrospective amendment, in case the Revenue authorities re-opens the assessment for any year prior to the last 7 years, it would be difficult for the taxpayer to furnish books of account to substantiate its claim.
 
Thus the amendment in section 147 to section 149 in respect of reopening of assessment would have a far reaching effect and would not be restricted to unearth black money. Amendment to the reassessment provisions might cause hardship to genuine taxpayers and burden taxpayer to maintain books of accounts for 16 years!!!
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