Case Note & Summary
The dispute arose from the rejection of declarations filed by Pragati Pre Fab India Pvt. Ltd. under the Direct Tax Vivad Se Vishwas Act, 2020 for Assessment Years 2010-2011 and 2011-2012. The Principal Commissioner of Income Tax rejected the declarations on the ground that prosecution under Section 276C(2) of the Income Tax Act, 1961 had been filed against the assessee before the Additional Chief Metropolitan Magistrate, Mumbai. The rejection was based on a clarification issued by the Central Board of Direct Taxes in Circular No.21/2020 dated 4 December 2020, specifically the answer to Question No.73, which stated that any prosecution, whether or not relating to tax arrear, would disentitle a taxpayer from applying under the DTVSV Act. The petitioner challenged both the rejection and the clarification before the Bombay High Court, contending that the clarification was ultra vires and contrary to the DTVSV Act and Rules, beyond the power under Section 11, arbitrary, and violative of Article 14 of the Constitution. The petitioner had filed its returns of income for the two assessment years, which were processed under Section 143(1) and later reopened under Section 147. Re-assessment orders were passed under Section 144 read with Section 147 on 28 March 2016, assessing substantial additional income and raising demands exceeding Rs.6.85 crore. The petitioner appealed to the CIT(A), which dismissed the appeals, and the appeal before the ITAT remained pending. Simultaneously, penalty proceedings under Section 271(1)(c) were initiated and kept in abeyance. Show cause notices dated 7 December 2017 alleged a prima facie case of willful attempt to evade payment of taxes, leading to prosecution under Section 276C(2) read with Section 278B. The petitioner filed declarations under the newly notified DTVSV Act on 21 March 2020, but they were rejected. The petitioner then approached the High Court seeking writs of certiorari and mandamus to quash the clarification and the rejection, and to direct acceptance of the declarations. In the proceedings, the petitioner's counsel argued that Section 9(a)(ii) of the DTVSV Act bars eligibility only when prosecution relates to 'tax arrear' as defined in Section 2(1)(o), which includes disputed tax, interest, penalty, or fee. The prosecution under Section 276C(2) was for willful attempt to evade payment of taxes, not for the tax arrear itself. The petitioner further argued that the clarification in the circular was beyond the power conferred by Section 11 and could not expand the statutory bar. The respondent, through its affidavit, initially supported the rejection, but during the hearing, the respondent's counsel fairly conceded that the answer to Question No.73 was an improvement over the answer to Question No.22 and was not in alignment with the legislative intent as held in Macrotech Developers Ltd. v. Principal Commissioner of Income Tax. The court recorded this concession and proceeded on the basis that the law laid down in Macrotech held the field. The final operative order was not included in the provided text, but the court's analysis focused on the narrow interpretation of the prosecution bar, emphasizing that the bar applies only to tax arrear-related prosecution.
Headnote
A) Tax Law - Direct Tax Vivad Se Vishwas Act - Eligibility Bar - Direct Tax Vivad Se Vishwas Act, 2020, Sections 9(a)(ii), 2(1)(o) - The bar on filing declaration under the DTVSV Act applies only when prosecution has been instituted in respect of the tax arrear as defined under Section 2(1)(o); it does not bar a taxpayer against whom prosecution has been initiated for an offence not relating to tax arrear - The court examined the combined reading of Section 9(a)(ii) and Section 2(1)(o) and noted that the statutory language restricts the bar to prosecution relating to tax arrear, not any prosecution per se for the assessment year - Held that the petitioner's prosecution under Section 276C(2) for willful attempt to evade payment of taxes did not relate to tax arrear as defined, and therefore the rejection based on such prosecution was erroneous (Paras 3, 12-13). B) Constitutional Law - Delegated Legislation - Validity of CBDT Circular - Direct Tax Vivad Se Vishwas Act, 2020, Section 11; Constitution of India, Article 14 - A clarification issued by CBDT under Section 11 cannot expand the scope of the statutory bar beyond the legislative intent - The petitioner challenged the clarification to Question No.73 of Circular No.21/2020 as ultra vires, beyond powers under Section 11, arbitrary, and violative of Article 14 - The respondent's counsel conceded that the clarification was not in alignment with the legislative intent as held in Macrotech Developers Ltd. v. Principal Commissioner of Income Tax, and the court recorded this concession (Paras 3, 12-13). C) Income Tax - Prosecution - Effect on DTVSV Eligibility - Income Tax Act, 1961, Section 276C(2); Direct Tax Vivad Se Vishwas Act, 2020, Section 9(a)(ii) - A pending prosecution for an offence under Section 276C(2) that does not relate to tax arrear does not disentitle a declarant from settling pending tax disputes under the DTVSV Act - The assessing officer rejected the declaration on the ground that prosecution had been launched, but the statutory bar requires a nexus between prosecution and tax arrear - The court considered that if the intent were to bar any prosecution, the provision would not have been limited to a particular assessment year's tax arrear (Paras 2, 9, 12). D) Tax Law - Direct Tax Vivad Se Vishwas Act - Object and Purpose - Direct Tax Vivad Se Vishwas Act, 2020, Section 3 - The DTVSV Act provides a framework for settling pending disputes through a cost-effective, timely, and non-adversarial mechanism - The petitioner argued that the bar under Section 9(a)(ii) cannot be interpreted to defeat the object of the scheme by excluding disputes where prosecution does not relate to tax arrear - The court noted the legislative framework and the narrow construction of the eligibility bar (Paras 12).
Issue of Consideration
Whether the rejection of declarations filed under the Direct Tax Vivad Se Vishwas Act, 2020 for Assessment Years 2010-2011 and 2011-2012 due to pending prosecution under Section 276C(2) of the Income Tax Act, 1961 was invalid; whether the clarification in Circular No.21/2020 dated 04.12.2020 to Question No.73 was ultra vires the DTVSV Act and violative of Article 14 of the Constitution of India.
Law Points
- Interpretation of Section 9(a)(ii) of DTVSV Act
- tax arrear definition under Section 2(1)(o)
- eligibility bar only when prosecution relates to tax arrear
- validity of CBDT Circular No.21/2020 clarification
- Section 11 DTVSV Act rule-making power
- Article 14 Constitution of India
