The errors and loopholes in the Direct Taxes Code Bill, 2010, point to a shoddy job of drafting
by NARINDAR SINGH
THE Direct Taxes Code Bill, 2010, presented in the Lok Sabha on August 30 last year, will replace the existing Income Tax Act, 1961, and the Wealth Tax Act, 1957, with effect from April 1, 2012. While there has been much discussion relating to conceptual changes that have been or should have been brought into it, there has been none on whether the actual provisions of the Direct Taxes Code (DTC) convey precisely what they are intended to convey and whether they have been properly drafted to be effective. Undoubtedly, the old tax laws which the DTC seeks to replace made for cumbersome reading and were very difficult to understand even for experts.
In contrast, the DTC is clothed in refreshingly simple language which is easy to understand even for a layman. But the alteration of the language of an entire statute which has been refined and settled over the years by making various amendments in the light of experience in the field as well as numerous court decisions interpreting its language is a laborious, exacting and perilous task and should have been undertaken in a most cautious and solemn manner. However, even a cursory glance at the DTC’s various sections reveals otherwise. As a result, the language is replete with ridiculous errors, pitfalls and loopholes which will not only result in huge loss of revenue and consequent gain for tax evaders but will also bring ridicule upon the Income Tax Department. It is shocking that such ridiculous and obvious defects were not noticed even by the officials in the Law Ministry.
One of the most important provisions is Section 230, which provides for penalty for understatement of income because it is this provision which deters the recalcitrant from evading the taxes. The most apparent and glaring defect in the language used in this section is that, if the assessee over-reports losses incurred by him, no penalty can be levied upon him under this section though the IT Act, 1961, clearly provided for it. Therefore, now those assesses who incur losses in any year can safely inflate their losses to evade taxes in subsequent years when there is income by carrying forward the inflated losses without any fear of this penalty.
Again, Section 230(5)(b) lays down that the aggregate amount of addition made by the Assessing Officer for the purpose of levying the penalty will be calculated by reducing the income disclosed in the return filed under Section 144 or 146 from the amount of income assessed by the AO. Returns filed under Section 144 or 146 include the revised returns filed by the assessee. This means that, in a scrutiny case, where the AO is able to catch a tax evader, he can simply avoid the penalty for under-reporting the income by filing a revised return and including in it the income detected by the AO. Under the IT Act, 1961, there was no such provision, with the result that the courts held that where the assessee filed the revised return after detection by the AO, the penalty could still be levied for under-reporting of income. This will not be possible now because of Section 230(5)(b) in cases where the assessee has time under the law to revise the return. This section suffers from many other defects, which are less obvious.
However, let me take up the glaring defects of another important Section under which most of the under-reported income is taxed – Section 58 of the DTC which relates to taxation under the head, “Income from residuary sources” and defines gross residuary income. Section 58(2)(o), (p) and (q) lay down that the gross residuary income shall include the value of unexplained investments, expenditure, money, bullion, jewellery and so on. Now, all these amounts are not the direct accruals or receipts of the assessee in the nature of income and therefore do not fall within the natural definition of income. As such, the courts will not uphold orders taxing these amounts as income. This is a classic case of criminal carelessness in drafting the Code. All these amounts are not directly income and therefore, in order to tax them, the DTC must “deem” them to be the income of the assessee as was done in the IT Act, 1961, in corresponding Sections 69, 69A, 69B and 69C. All these provisions are applicable mainly to those cases where search operations are carried out and all the effort to book the tax evaders and bring in legitimate revenue will go in vain simply because of the improper drafting.
Further, Section 58(2)(p) says that gross residuary income of the assessee shall include the value of unexplained money, bullion, jewellery or other valuable articles owned by him. However, clause (p) is silent about the year in which this money, bullion, jewellery and so on are to be taxed. In the absence of this, the onus would be on the AO to prove the year in which the assessee became the owner in order to tax these things. Experience shows that for the AO to prove the exact year of purchase of these things is well nigh impossible in almost all cases as no such evidence is discovered in the searches carried out and that was why, in the IT Act of 1961 it was provided in the corresponding Section 69A that the value of these things was to be taxed in the financial year in which the assessee was “found” to be the owner. A similar stipulation was required in the DTC. Therefore, despite this provision being there in the statute book, the AO will not be able to tax these things because of careless drafting and, again, all the effort of carrying out searches in order to collect proper revenue from tax evaders will come to naught.
The more you read the DTC Bill, the more you find such errors, pitfalls and loopholes. Some are obvious and literally stare you in the face as soon as you open the document and read a section, others are not so obvious. If so many are detectable at this stage, it is horrifying to think what will happen when clever assessees and their lawyers put their heads together to find holes in the DTC once it is put into operation. It needs extensive modification, failing which the Ministry of Finance should brace for a series of amendments before, as they say, even the ink is dry on it as well as for the cynicism of honest taxpayers and the ridicule of the dishonest ones. Meanwhile, there will be incalculable loss of revenue as well!
- with inputs by Nipun Jain
(Narindar Singh was a member of the CBDT, New Delhi)
by NARINDAR SINGH
THE Direct Taxes Code Bill, 2010, presented in the Lok Sabha on August 30 last year, will replace the existing Income Tax Act, 1961, and the Wealth Tax Act, 1957, with effect from April 1, 2012. While there has been much discussion relating to conceptual changes that have been or should have been brought into it, there has been none on whether the actual provisions of the Direct Taxes Code (DTC) convey precisely what they are intended to convey and whether they have been properly drafted to be effective. Undoubtedly, the old tax laws which the DTC seeks to replace made for cumbersome reading and were very difficult to understand even for experts.
In contrast, the DTC is clothed in refreshingly simple language which is easy to understand even for a layman. But the alteration of the language of an entire statute which has been refined and settled over the years by making various amendments in the light of experience in the field as well as numerous court decisions interpreting its language is a laborious, exacting and perilous task and should have been undertaken in a most cautious and solemn manner. However, even a cursory glance at the DTC’s various sections reveals otherwise. As a result, the language is replete with ridiculous errors, pitfalls and loopholes which will not only result in huge loss of revenue and consequent gain for tax evaders but will also bring ridicule upon the Income Tax Department. It is shocking that such ridiculous and obvious defects were not noticed even by the officials in the Law Ministry.
Assessees can now safely inflate their losses to evade taxes in subsequent years when there is income by carrying forward the inflated losses without any fear of this penalty.
One of the most important provisions is Section 230, which provides for penalty for understatement of income because it is this provision which deters the recalcitrant from evading the taxes. The most apparent and glaring defect in the language used in this section is that, if the assessee over-reports losses incurred by him, no penalty can be levied upon him under this section though the IT Act, 1961, clearly provided for it. Therefore, now those assesses who incur losses in any year can safely inflate their losses to evade taxes in subsequent years when there is income by carrying forward the inflated losses without any fear of this penalty.
Again, Section 230(5)(b) lays down that the aggregate amount of addition made by the Assessing Officer for the purpose of levying the penalty will be calculated by reducing the income disclosed in the return filed under Section 144 or 146 from the amount of income assessed by the AO. Returns filed under Section 144 or 146 include the revised returns filed by the assessee. This means that, in a scrutiny case, where the AO is able to catch a tax evader, he can simply avoid the penalty for under-reporting the income by filing a revised return and including in it the income detected by the AO. Under the IT Act, 1961, there was no such provision, with the result that the courts held that where the assessee filed the revised return after detection by the AO, the penalty could still be levied for under-reporting of income. This will not be possible now because of Section 230(5)(b) in cases where the assessee has time under the law to revise the return. This section suffers from many other defects, which are less obvious. However, let me take up the glaring defects of another important Section under which most of the under-reported income is taxed – Section 58 of the DTC which relates to taxation under the head, “Income from residuary sources” and defines gross residuary income. Section 58(2)(o), (p) and (q) lay down that the gross residuary income shall include the value of unexplained investments, expenditure, money, bullion, jewellery and so on. Now, all these amounts are not the direct accruals or receipts of the assessee in the nature of income and therefore do not fall within the natural definition of income. As such, the courts will not uphold orders taxing these amounts as income. This is a classic case of criminal carelessness in drafting the Code. All these amounts are not directly income and therefore, in order to tax them, the DTC must “deem” them to be the income of the assessee as was done in the IT Act, 1961, in corresponding Sections 69, 69A, 69B and 69C. All these provisions are applicable mainly to those cases where search operations are carried out and all the effort to book the tax evaders and bring in legitimate revenue will go in vain simply because of the improper drafting.
The Ministry should brace for the cynicism of honest taxpayers and the ridicule of the dishonest ones. Meanwhile, there will be incalculable loss of revenue as well.
Further, Section 58(2)(p) says that gross residuary income of the assessee shall include the value of unexplained money, bullion, jewellery or other valuable articles owned by him. However, clause (p) is silent about the year in which this money, bullion, jewellery and so on are to be taxed. In the absence of this, the onus would be on the AO to prove the year in which the assessee became the owner in order to tax these things. Experience shows that for the AO to prove the exact year of purchase of these things is well nigh impossible in almost all cases as no such evidence is discovered in the searches carried out and that was why, in the IT Act of 1961 it was provided in the corresponding Section 69A that the value of these things was to be taxed in the financial year in which the assessee was “found” to be the owner. A similar stipulation was required in the DTC. Therefore, despite this provision being there in the statute book, the AO will not be able to tax these things because of careless drafting and, again, all the effort of carrying out searches in order to collect proper revenue from tax evaders will come to naught.
The more you read the DTC Bill, the more you find such errors, pitfalls and loopholes. Some are obvious and literally stare you in the face as soon as you open the document and read a section, others are not so obvious. If so many are detectable at this stage, it is horrifying to think what will happen when clever assessees and their lawyers put their heads together to find holes in the DTC once it is put into operation. It needs extensive modification, failing which the Ministry of Finance should brace for a series of amendments before, as they say, even the ink is dry on it as well as for the cynicism of honest taxpayers and the ridicule of the dishonest ones. Meanwhile, there will be incalculable loss of revenue as well!
- with inputs by Nipun Jain
(Narindar Singh was a member of the CBDT, New Delhi)
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