T N Pandey: Irregularities in tax assessment

TAXING MATTERS

of August 2 by Anindita Dey under the caption 'Tax jolt for Exporters' suggests that there had been irregularities and loss of revenue (of the order of Rs 3000-4000 crore) in the assessments in the cases of exporters and that the income tax department is proposing to re-open all such cases to retrieve the loss of revenue.

This is likely to be a wild goose chase and would generate considerable litigation and, in many cases, infructuous work for the income tax personnel at the cost of effective work in other revenue yielding cases.

The life of Section 80HHC is almost over as deduction permissible under this section would cease from 31st March, 2005. To wake up when the innings are almost over and take up corrective action on the basis of Supreme Court decision in the case of IPCA Laboratories Ltd. v DOT (2004) 135 Taxman 594 (SC), which has no application in regard to the issues, which are proposed to be taken up, needs serious re-thinking if what has been published is correct. The Supreme Court has merely said that benefit of section 80HHC can be taken when there is profit "" not in loss cases.

Briefly, Section 80HHC provides that deduction will be allowed to taxpayers, exporting goods or merchandise of a sum equal to the whole of the profits derived by it from their exports if the export sale proceeds are received/receivable in convertible foreign exchange.

To provide incentive to persons, exporting goods through or by any other person, being a recognized Export House or Trading House, the benefit provided by the section was extended to such exports also on fulfillment of the prescribed conditions.

To stop the misuse of benefit u/s 80HHC in respect of profits, which could not be considered s export profits, amendment was made to the section by inserting a new clause (bb) in the Explanation to section 80HHC by the Finance Act, 1990 by coining a definition of the term "turnover" to exclude certain receipts, which were in the nature of incentives to the exporters by way of Cash Compensatory Support (CCS), drawback of duty and import entitlement licenses.

Issues then arose whether such receipts are capital receipts or revenue receipts and this created judicial controversies. To put an end to litigation on this matter, new clause (iiia), (iiib) (iiic) were inserted in section 28 of the IT Act to provide that profits on sale of CCS, import entitlement licences and duty drawbacks shall be liable to tax under the head "Profits and gains of business or profession".

The definition of the term 'income' in clause (24) of section 2 was also modified to include these. Thus, such incomes cannot be treated as part of export profits for Section 80HHC benefit.

May be that many exporters might have duped the tax department by claiming deduction under Section 80HHC even in respect of such incentive also.

However, when nearly 98 per cent of the returns filed are to be accepted and the courts have taken the view that the claim of an assessee in respect of deduction claimed under Section 80HHC cannot be disallowed, u/s 143(1) (a) [see Murli Export House v. CIT (1999) 238 ITR 257 (Cal)], such a situation was inevitable and solution for this should have been thought of when the amendment was made.

Even subsequent to amendment, the annual reports of the C&AG on the working of this provision could have given clues regarding the misuse if these were analyzed properly. But nothing on these lines has been done.

Now to go through thousands of returns accepted u/s 143 (1) to find out who have misused the benefit would be an uphill rather an impossible task. It would involve too much of work. The exercise may not be commensurate also with the amount of revenue likely to be gained.

The same amount of efforts and time put in regard to cases, where there is substantial concealment, would yield much more revenue, improve the credibility of the IT Department and provide deterrence for the taxpayers, leading to improvement in voluntary compliance.

Hence, the proposal, to scrutinize the returns accepted u/s 143(1) (a) for finding out who has misused the benefit, would not be worthwhile.

As far as scrutiny assessments beyond a period of 4 years are concerned, no proceedings for reassessment can be initiated if the assessees have shown such receipts in the return of income, claimed these too as deduction and the claim was accepted by the Assessing Officer.

In such situations, the assessments cannot be re-opened for withdrawing the benefits availed of. Proviso to section 147 clearly stipulates that a notice u/s 148 can be issued after the expiry of 4 years from the end of the relevant assessment year only if there has been a failure on the part of the assessee to disclose fully and truly all materials facts necessary for his assessment.

Such situations cannot be dealt with in huff on case-to-case basis. When the position is that nearly 97 per cent to 98 per cent of the returns filed have to be accepted, a system needs to be developed to ensure that such malpractices are detected well in time.

For this, a suitable software can be developed and return forms can be checked after these have been received to find out if there had been mis-use of the incentive provisions. Certain information returns can also be prescribed for the taxpayers, who claim the tax benefits, to be filed with returns of income.

These returns can be in a perforated form and can be detached from the tax returns for checking at a central place, where irregular claims are found to have been made, the concerned returns can be taken up for scrutiny. To do follow-up action now in cases, where the returns have been accepted in the past, may not be a fruitful exercise.