Introduction
In the case of Rose Wood Buildwell (P.) Ltd. v. Pr. Commissioner of Income Tax-7[i], the Hon’ble High Court of Delhi addressed a vital question concerning the Direct Tax Vivad se Vishwas Act, 2020 (‘DTVSV Act’): whether an assessee can confine the settlement of disputes to the subject matter of their appeal while excluding disputes forming part of the Revenue’s appeal.
Ruling in favour of the assessee, the Court emphasized that the express language of the DTVSV Act allows taxpayers to limit the settlement to specific issues pending in appellate forums. Therefore, the Court held that when an assessee submits a declaration under the Vivad Se Vishwas Scheme (‘Scheme’) addressing only disallowed losses from derivative trading, they cannot be compelled to settle unrelated disputes not included in their declaration.
Brief Facts
The assessee company engaged in real estate filed its income tax return for the assessment year (‘AY’) 2008-09. The return was scrutinized, and the Assessing Officer (‘AO’) passed an assessment order adding Rs. 4,05,51,837/- to the declared income of Rs. 12,34,270/-. The additions were based on three grounds: (i) stamp duty payment of Rs. 5,39,500/-, (ii) rejection of derivative trading losses amounting to Rs. 50,12,337/-, and (iii) unexplained cash credit of Rs. 3,50,00,000/- under s. 68 of the Income-tax Act, 1961 (‘Act’).
The assessee appealed to the Commissioner of Income Tax (Appeals) (‘CIT(A)’), who deleted the addition related to stamp duty as reflected in the sale deed and bank statements and upheld the addition under s. 68 and further confirmed the rejection of derivative trading losses.
On further appeal, the Income Tax Appellate Tribunal (Delhi) (‘ITAT’) found that while the assessee had submitted documents to substantiate derivative trading losses, these transactions were unverified due to the broker’s lack of activity during the relevant period, as confirmed by the National Commodity & Derivatives Exchange Ltd. (NCDEX). The ITAT, thus, remanded the derivative trading losses issue to the AO for further investigation and rejected the Revenue’s appeal regarding the addition under s. 68.
The Revenue filed a consolidated appeal under s. 260A of the Act before the High Court challenging ITAT’s order. Meanwhile, the Parliament enacted the DTVSV Act, and the assessee submitted a declaration under s. 3 of the DTVSV Act to settle only the dispute relating to trading loss disallowance.
The designated authority in this case, i.e., the CIT(A), issued a certificate under s. 5(1) of the DTVSV Act, modifying the assessee’s declaration by including issues unrelated to derivative trading losses. The CIT held that all disputes for the same AY must be settled under the DTVSV Act, including those not covered in the assessee’s appeal. Aggrieved by this, the assessee challenged this certificate modification before the High Court.
Held
The Court ruled in favour of the assessee, directing CIT to issue a revised certificate under s. 5(1) of the DTVSV Act, limited to the disputes declared by the assessee. It was observed that the assessee was entitled to benefits under the DTVSV Act but was limited to the scope of disputes included in its appeal before the ITAT.
The Court analyzed s. 3 of the DTVSV Act emphasizes that it does not mandate the settlement of all disputes by taxpayers. Further, discussing relevant terms under the DTVSV Act, the Court held that the term ‘declarant’ under s. 2(1)(c) refers to anyone who files a declaration under s. 4; ‘tax arrears,’ as defined in s. 2(1)(o) encompasses both disputed tax amounts and associated interest; and ‘disputed tax,’ defined in s. 2(1)(j)(A) refers to amounts arising if an appeal or writ petition were decided against the assessee.
The Court clarified that ‘appellant’ refers to any party filing an appeal, whether by the taxpayer or Revenue. It was noted that a thorough reading of ss. 2(1)(j)(A) and 2(1)(a)(i) indicated that disputed tax is eligible for settlement under the DTVSV Act, depending on the specific issues pending before appellate forums.
The Court also explained that under s. 4(1), filing a declaration under s. 3 of the DTVSV Act results in the withdrawal of appeals once the designated authority issues a certificate under s. 5(1). It was noted that the Revenue’s consolidated appeal involved separate and unrelated disputes, such as unexplained cash credits under s. 68 could not be compelled as part of the assessee’s settlement limited to derivative trading losses. Thus, the Court concluded that the modification by the CIT in the certificate under s. 5(1) was beyond the scope of the assessee’s declaration under the DTVSV Act.
Our Analysis
This judgment highlights the autonomy granted to taxpayers under the DTVSV Act, allowing them to settle specific disputes without encompassing unrelated issues. By reaffirming that settlement units are defined by the subject matter of pending appeals, the Court has clarified the scope of the DTVSV Act and the Revenue’s inability to compel unrelated issues to be settled.
The legislative intent behind the DTVSV Act was to settle the appeals so that the pendency of such cases is reduced and the judiciary is not overburdened with these matters. Had the court interpreted this issue in favour of the Revenue, the legislative intent of the Scheme would have been lost. Therefore, this is a welcome decision. The decision brings out a clear distinction between disputes pursued by the taxpayer and those pursued by the Revenue, ensuring that taxpayers are not compelled to concede disputes beyond their chosen scope.
Overall, this judgment serves as a significant precedent promoting a more taxpayer-friendly approach in tax dispute resolutions while ensuring legislative provisions are interpreted respectfully towards individual taxpayer rights. It reiterates the principle that legislative intent must be interpreted to encourage voluntary compliance without imposing undue restrictions on taxpayers.
End Note
[i] [2024] 169 taxmann.com 414 (Delhi).
Authored by Shivangi Bhardwaj, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.