With the Sabka Vishwas Scheme proving to be successful in bringing collections north of Rs. 38,000 crores[1] under the Indirect Tax regime, the Central Government has introduced The Direct Tax Vivad Se Vishwas Act, 2020 (‘VSV Act’) with a view to reduce the 4.83 lakh direct tax litigations that are currently pending in various appellate forums locking up a revenue of Rs. 9.41 lakh crores. The scheme has been made applicable to all litigation matters which are pending as on 31.01.2020 or for which time limit for filing appeals has not lapsed as on the said date and offers complete waiver of interest and penalty if the taxpayer agrees to pay the ‘disputed tax’ by 30.06.2020[2].
The scheme inter aliacovers disputes relating to reduction of tax credit under Section 115JAA or section 115D of the Income Tax Act or any loss or unabsorbed depreciation[3]. Further, Rules 9 and 10 provide for the manner of calculating ‘disputed tax’ in cases where loss or unabsorbed depreciation is reduced and Minimum Alternate Tax (MAT) credit is reduced, respectively. This article briefly explains the Rules, delves further into the manner of calculation under Rule 9 and highlights the possible issues that may be faced by taxpayers who opt for the scheme with respect to computation of Unabsorbed Depreciation.
Rules 9 and 10 explained
Rule 9 and Rule 10provide the taxpayers an option to choose either of the following methodologies:
1st Option: Include the amount of tax related to such MAT credit or losses or unabsorbed depreciation in the amount of disputed tax; or
2nd Option: Carry forward the reduced MAT credit or losses or unabsorbed depreciation.
Both rules also state that in case a taxpayer chooses the second option, they shall be liable to pay tax, including surcharge and cess, along with interest, if any, as a consequence of carrying forward the reduced amount of loss or unabsorbed depreciation or MAT credit in subsequent years.
On first blush, the first option looks more attractive for reasons that (i) it permits the entire loss/MAT credit or unabsorbed depreciation to be carried forward, and (ii) there would no liability vis-a-vis interest on the declarant. In contrast, in the 2nd Option, the declarant has to discharge the tax liability along with interest for subsequent years. It may therefore raise a question as to who will choose the 2nd Option. A logical guess would be those taxpayers who have not utilised MAT credit/loss/unabsorbed depreciation in the subsequent years. For example, a declarant who wishes to opt for lower tax rate may prefer 2nd option considering that MAT credit cannot be utilised if the lower tax rates is adopted[4].
In addition, the first proviso to Rule 9(2) also states that closing written-down value (‘WDV’) of the blockof assets in the year in whichsettlement under VSV Act has beenopted for, will not be reinstated by theamount of unabsorbed depreciationforegone. This condition is applicable for Assessees choosing the 2nd option.
It is unclear as to the intention of inserting this proviso. Legally, Section 43(6) of the IT Act, states that WDV will be calculated as the difference between actual cost of the asset less the depreciation “actually allowed under the Income Tax Act”. In case where a taxpayer settles a dispute, involving unabsorbed depreciation under the VSV Act, question would arise as to whether such ‘settlement’ amount to depreciation ‘actually allowed’?
It may be difficult to argue that settlement under the scheme would result in depreciation ‘actually allowed’ especially in the light of the Explanation to Section 5 of the VSV Act, which states that settlement would not amount to acquiescence. The Proviso is probably inserted to reflect the intention of Section 43(6) of the IT Act. In the absence of this Proviso, there is a possibility of view that the value of reduction in unabsorbed depreciation could be added to the block of assets and that consequent benefits could be claimed.
Let us consider the following basic data pertaining to a declarant for AY 2017-18 and AY 2018-19. Be it assumed that the declarant wishes to opt for VSV for AY 2017-18.This example is constructed considering a scenario where the declarant’s unabsorbed depreciation is reduced.
TABLE -1
(Amount in lakhs)
(UAD = Unabsorbed Depreciation)
| AY | Profit before Depn. | Depn. Claimed in the current year | Depre-ciation allowed in asses-sment | Returned Income | Assessed Income | UAD carried forward as per Return | UAD in dispute |
| 2017-18 | 10 | 40 | 25 |
Nil |
Nil |
30 |
15 |
| 2018-19 | 65 | 25 | Assessment proceedings not concluded | 10 | Assessment proceedings not concluded | – | – |
The consequences if the taxpayer chooses either of the options in the Rules are explained in the following tables:
TABLE -2
| Computation of disputed tax where the loss or unabsorbed depreciation is reduced | ||
| 1st Option | Pay tax on differential amount and continue carrying the unabsorbed depreciation or loss by ignoring the reduction | |
| Particulars | Rs. In lakhs | |
| A | Unabsorbed depreciation or loss claimed by the declarant | 30 |
| B | Unabsorbed depreciation assessed by the Department | 15 |
| C | Differential Amount (a-b) | 15 |
| Tax Rate – Basic Rate – 30%, Cess – 3% | ||
| D | Disputed tax on differential amount payable under the Scheme | 4.64 |
| E | Unabsorbed depreciation carried forward after payment of disputed tax | 30 |
| Note: The Declarant will continue to carry the same amount of unabsorbed depreciation or loss which he was carrying forward before making any declaration under the scheme. Further, there will be no change in the WDV as well. | ||
Table 3
| 2nd Option | Carry forward the reduced unabsorbed depreciation or loss | |
| Particulars | Rs. | |
| A | Unabsorbed depreciation or loss claimed by the declarant | 30 |
| B | Unabsorbed depreciation assessed by the Department | 15 |
| C | WDV of the assets on the last day of FY 2016-17(AY 2017-18) | 125 |
| D | If 2nd option is availed, amount of unabsorbed depreciation or loss the declarant can carry forward after declaration under the scheme | 15 |
| E | WDV of the assets on the last day of FY 2016-17(AY 2017-18) after declaration under VSV scheme | 125 |
| As per Sub Rule (2) of Rule 9 the declarant shall be liable to pay tax along with interest as a consequence of carrying forward the reduced amount of unabsorbed depreciation | ||
| F | Recomputed Taxable Income of AY 2018-19 | 25 |
| G | Returned Taxable Income of AY 2018-19 | 10 |
| H | Differential Taxable Income of AY 2018-19 on which tax to be paid (along with applicable interest) consequent to settlement under VSV | 15 |
| Tax Rate – Basic Rate – 30%, Cess – 3% | ||
| I | Tax to be paid by the declarant if he avails 2nd option | 4.64 |
| H | Interest under Section 234B
(Assumed to be for 12 months) |
0.56 |
| I | Total tax and interest payable | 5.20 |
| Note: The Declarant, by virtue of 1st Proviso to Rule 9, cannot add back the differential amount of Rs. 15of unabsorbed depreciation to its WDV i.e. he cannot treat its WDV to be Rs. 140. | ||
In the example above, it may appear that the tax amount payable under both 1st and 2nd Option is the same. However, on a closer look the following aspects emerge:
a. In the 1st option,the declarantis eligible to set off unabsorbed depreciationto the extent of Rs.15 (being the disputed UAD for AY 2017-18in Table -1) in the future years as a result of being allowed to carry forward the entire UAD of Rs.40.
b. On the contrary, in the 2nd Option, the declarant losses the benefit on the disputed UAD forever. The declarant is neither allowed to carry forward the disputed UAD nor allowed to add it back to the closing WDV. Thus, leavingno potential for any tax savings in future as well.
c. Apart from the above, in the 2nd Option, the declarant may also be liable to pay interest on the consequential tax demands for subsequent years (due to reduction in carry forward UAD). On the contrary, in the 1st Option, the declarant is not required to pay any interest due to waiver under the VSV Scheme.
Is the First Proviso to Rule 9 ultra vires the VSV Act?
As stated earlier, by virtue of the first proviso to Rule 9, a declarant choosing the 2nd Option is not permitted to restate its WDV to the extent of depreciation that was denied. An interesting question that arises is whether there is power to impose such embargo in the Rules without there being a corresponding provision in the Act.
Section 12 of the VSV provides for the power to make Rules. Section 12(2)(e) of the VSV Act grants power to the Central Government to make Rules only pertaining to ‘manner’ of set off of allowance of depreciationand not ‘consequence’ of such calculation when choosing that option. Section 12(2)(g) read with the Second proviso to Section 2(j) of the VSV Act,again only provides that a taxpayer can choose one of the two options discussed above in such manner as may be prescribed and Rules can be made to prescribe such manner. The Hon’ble Supreme Court[5]has defined ‘manner’ to mean the mode in which the thing is to be done, and do not introduce anything from the Act referred to as to the thing which is to be done or the time for doing it. The word ‘manner’ may at best only mean stipulating as to how such depreciation must be set off, for instance, against which income can it be set off or for how many years it can be set off.This power would clearly not extend to determining what the closing WDV ought to be.
It is a settled principle of law that delegated legislation is ultra vires if it does not have the sanction of the principal legislation under which it is framed.Thus, a view may be taken that the first proviso to Rule 9lacks the sanction of the powers/ conferred under VSV Act.
Practical Difficulties in choosing either of the Options
Keeping aside the validity of the first proviso to Rule 9 for a moment, it appears that exercising one option over the other is not as straight forward as one may perceive it to be. Practical hassles can come in the way of such an exercise of choice. While immediate cash outflow will be one important consideration, especially in the current scenario, there are certain other concerns as well that must be kept in mind. As already stated, in 2nd Option, the benefit of the reduction in depreciation is forever lost, considering the bar on upward revision to the WDV. Further, choosing the second option would mean paying tax along with interest for subsequent years while under 1st Option, one has the advantage of paying disputed tax without any interest.
Conclusion
The taxpayers will therefore have to weigh their options carefully before opting for settling their disputes pertaining to reduction in loss/unabsorbed depreciation or MAT credit. Every permutation and combination ought to be examined to determine whether it is advisable to avail the scheme or litigate the matter. The implications of the First Proviso to Rule 9 will also have to be kept in mind while making the decision.
The Hon’ble Finance Minister in her Budget speech had mentioned the English name of the scheme as “No Dispute, But Only Trust”. But by inserting a Rule without the sanction of law, it is only ironical that a scheme which is aimed at reducing the disputes may lead to more disputes.
[1] https://economictimes.indiatimes.com/news/economy/finance/sabka-vishwas-kitty-hits-over-rs-38000-cr/articleshow/73755631.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst
[2] In exercise of powers under the VSV Act, The Direct Tax Vivad se Vishwas Rules, 2020 (VSV Rules) was introduced vide Notification dated 18.03.2020. The date for availing the scheme has now been extended to 30.06.2020[2] owing to the uncertainties surrounding the global pandemic of COVID-19.
[3] First Proviso to Section 2(f) of the VSV Act
[4] Section 115BAA- Taxation laws (Amendment Bill), 2019 w.e.f 20.09.2019
[5] Sales Tax Officer vs K. I. Abraham (1967 AIR 1823)
By Sai Prashanth, Janane G and Meeth Desai
Option: Include the amount of tax related to such MAT credit or losses or unabsorbed depreciation in the amount of disputed tax; easy possible to carry forward patial Depreciation. In your case if the companies wants to Set off in subsequent year Rs 25/-(instedof Rs 30) then it would consider to pay tax Rs 10/- and forgo Rs 5/- perpetually.