In a significant ruling concerning the interpretation of the Income Declaration Scheme (IDS), 2016, the Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that undisclosed income declared under the IDS cannot be taxed in the original assessment year merely because the declarant failed to pay the prescribed tax within the stipulated timeline.
The tribunal, while deciding the appeal of Daffodils Pharmaceuticals Ltd., deleted an addition of ₹2.03 crore made by the Assessing Officer (AO) for Assessment Year (AY) 2013-14. The Bench clarified that the statutory provisions of the IDS-2016 specifically require such income to be taxed in the year in which the declaration was made and not in the original assessment year to which the income pertains.
This ruling is expected to have wider implications for taxpayers and tax authorities dealing with disputes arising out of failed or incomplete declarations under the IDS-2016 framework.
Background of the Case
The dispute arose after the assessee, Daffodils Pharmaceuticals Ltd., had disclosed certain undisclosed income amounting to ₹2.03 crore under the Income Declaration Scheme, 2016. However, the company failed to deposit the required tax, surcharge, and penalty within the prescribed time as mandated under the scheme.
Subsequently, the Assessing Officer reopened the assessment for AY 2013-14 and added the said amount back to the taxable income of the assessee for that year. According to the AO, since the tax under IDS was not paid within the stipulated time, the benefit of the scheme became unavailable, thereby permitting the department to tax the amount in the original assessment year.
The assessee challenged this reassessment before the appellate authorities, arguing that the action of the AO was contrary to the specific provisions of the IDS-2016.
Tribunal’s Analysis
The matter came up before the Delhi Bench of the ITAT comprising S. Rifaur Rahman and Sudhir Kumar.
The tribunal carefully examined the provisions of Section 197(b) of the Income Declaration Scheme, 2016. The Bench observed that the statute itself provides a clear mechanism for dealing with situations where a declarant fails to pay the requisite tax within the prescribed period.
As per Section 197(b), where the tax, surcharge, and penalty payable under IDS are not paid on or before the notified date, the declaration is deemed never to have been made. However, the law simultaneously stipulates that the undisclosed income shall then be chargeable to tax under the Income-tax Act in the previous year in which the declaration was made.
The tribunal emphasized that the language of the provision is explicit and leaves no room for taxing such income in the original assessment year to which the income may relate.
AO’s Action Held Legally Unsustainable
The ITAT held that the Assessing Officer committed a legal error by bringing the income to tax in AY 2013-14. According to the tribunal, the AO ignored the statutory mandate contained in Section 197(b) and proceeded on an incorrect interpretation of law.
The Bench categorically stated that once the law prescribes the year in which such income is to be taxed, the department cannot arbitrarily reopen the original assessment year and make additions there.
Accordingly, the reassessment proceedings and the consequent addition of ₹2.03 crore were declared unsustainable in law.
Reliance on Earlier Departmental Orders
An important aspect of the ruling was the assessee’s reliance on similar departmental orders in comparable cases. The company pointed out that in other instances involving failure to pay IDS dues, the department itself had treated the undisclosed income as taxable in the year of declaration rather than in the original assessment year.
The tribunal took note of this inconsistency and observed that the department cannot adopt contradictory positions in identical situations. Such inconsistent application of statutory provisions would create uncertainty and unnecessary litigation.
This observation further strengthened the assessee’s case and supported the tribunal’s conclusion that the addition made for AY 2013-14 was invalid.
Significance of the Ruling
The judgment is particularly important for taxpayers who had participated in the Income Declaration Scheme, 2016 but could not complete payment obligations within the prescribed timeline.
The ruling reinforces the principle that tax authorities must strictly adhere to the statutory framework and cannot impose tax liability in a manner contrary to the express provisions of law.
It also highlights the importance of consistency in departmental actions. Where the law clearly specifies the consequences of non-payment under IDS, the department cannot selectively interpret the provisions to reopen earlier assessment years.
From a broader legal perspective, the decision reiterates that reassessment powers cannot be exercised arbitrarily or beyond the scope permitted by statute.
Conclusion
The Delhi ITAT’s ruling in the case of Daffodils Pharmaceuticals Ltd. provides valuable clarity on the tax treatment of failed declarations under the Income Declaration Scheme, 2016.
By deleting the ₹2.03 crore addition made in AY 2013-14, the tribunal reaffirmed that income disclosed under IDS, where taxes remain unpaid, can only be taxed in the year of declaration as specifically mandated under Section 197(b) of the scheme.
The decision serves as a crucial precedent for similar disputes and underscores the necessity for tax authorities to follow the precise language of the law while framing reassessment proceedings.