THE POLICY LAB (TPL) - 47
JULY 01, 2024

By J B Mohapatra

A: BENEFICIAL provisions found in fiscal enactments generally comprise of an enabling clause to trigger a benefit for the taxpayers on the basis of some broadly defined parameters, and the determining authority with the government to both identify and configure those relevant and specific conditions for availment of the benefit. Take Section 11C of the Central Excise Act, 1944 as an example. Object and purpose behind insertion of section 11C is to confer powers to the central government not to recover duty of excise not levied or short levied as a result of general practice. In terms thereof, the central government has been empowered to take cognisance of "a practice (which) was, or is generally prevalent regarding levy of duty of excise (including non-levy thereof) on any excisable goods" and "direct that the whole of the duty of excise payable on such goods, or as the case may be, the duty of excise in excess of that payable on such goods, but for the said practice, shall not be required to be paid in respect of the goods on which the duty of excise was not, or is not being levied, or was, or is being short levied, in accordance with the said practice." In such instance, in terms of this section, the Central government may exempt the levy of central excise duty altogether or up to a particular ceiling in order to legitimize an industry practice relating to non-payment or short payment of such duty. However, notification issued under section 11C being in the nature of subordinate legislation, it posits a discretionary power with the government either to issue or not to issue a notification and casts no obligation to necessarily issue such notification depending on government's own appreciation of the policy environment and imperatives for issuing or not issuing such notification.

B: On occasions however, beneficial provisions including the conditions precedent for invocation of those beneficial provisions are part of the legislation itself thus rendering the beneficial provisions free and unchained from government's discretion or control. Case in point is the updated return under section 139(8A) of the Income Tax Act (ITA) introduced through Finance Act, 2022.

C: Primarily, the felt need for a legislative intervention arose to address the hardship of taxpayers in complying to the reduced statutory time limitation for making the ITR filing compliances owing to series of amendments over many years. Belated return under section 139(4) of ITA for example: the limitation period for ITR filing for a liable entity who has not furnished a return within the time allowed under section 139(1) stood gradually reduced- from two years from the end of the relevant assessment year for all assessment years prior to AY 88-89; to one year from the end of the relevant assessment year with effect from AY 89-90; to the end of the relevant assessment year vide Finance Act 2016; and finally to three months prior to end of the relevant assessment year with effect from 1-4-21. Similar for the due date for filing revised returns under section 139(5) of ITA: from filing a revised return any time before an assessment is made prior to AY 88-89; to furnishing a revised return at any time before the expiry of one year from the end of the relevant assessment year with effect from 1-4-89; to furnishing a revised return at any time before three months prior to the end of the relevant assessment year with effect from 1-4-21. The end consequences of the series of amendments for an individual taxpayer is that the limitation period for filing of revised and belated returns are in essence a curtailment limitation period from an earlier available time span of 2 years to just 5 months. For a company, the amended limitation period for filing revised or belated return is as low as 2 months.

D: Coupled with the above is the peculiarities of system set-up and administration of the reassessment provisions under the direct tax laws built around the provisions contained in Explanation 1 in section 148, which includes reassessment anchored on information captured under the department's own risk management strategy particularly under the Non- Filers Monitoring System and attendant difficulties of the reassessment mechanism to address cases of voluntary admission of escaped income in the ITR already submitted and/or non-filing of ITR as a special category of reassessment cases under a different dispensation.

E: Above imperatives for extending the limitation period for filing belated/ revised returns are reflected in the Explanatory Memorandum to Finance Bill, 2022. The operative parts of the Explanatory Memorandum reads as follows:

"B. Promoting Voluntary Tax Compliance and Reducing Litigation-

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3. This provision (section 139(4) and section 139(5)) provides an additional time of approximately 5 months to an individual assessee, 2 months to a company/auditable case and 1 month to an assessee who enters into an international transaction or specified domestic transaction respectively, in a financial year to file belated or revised return. This additional timeline for filing a revised/belated return may not be adequate when we factor in utilization of huge information and data available coupled with the "nudge approach" that motivates the taxpayer towards the desired objective of voluntary tax compliance, starting with filing of correct tax returns."

F: The basic architecture of section 139(8A) with its 3 main elements has been kept simple, allowing taxpayers in genuine cases of omission or misstatement to file updated ITR and simultaneously refusing the benefit to those intending to harvest an undeserving advantage. The 3 elements are;

(a)Whether or not a taxpayer has filed his return under section 139(1) or section 139(4), the taxpayer is entitled to file an updated return. Provided the updated return (a) is not a return of loss, or (b) for lodging a claim of reduced tax liability as compared to the original return of income filed or (c) for claiming a refund or claiming an increased amount of refund or (d) in instances where an updated return of income has already been filed or (e) a case where a search has been initiated u/132 or survey has been initiated u/s 133A or (f) any proceeding for assessment or reassessment or re-computation or revision of income under ITA is pending or has been completed for the relevant assessment year, or (g) the assessing officer has information for the relevant assessment year under the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976 (13 of 1976) or the Prohibition of Benami Property Transactions Act, 1988 (45 of 1988) or the Prevention of Money-laundering Act, 2002 (15 of 2003) or the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (22 of 2015) or (h) information with the assessing officer received under an agreement referred to in section 90 or section 90A of ITA or (i) any prosecution proceedings under the chapter XXII of ITA initiated for the relevant assessment year.

(b) A taxpayer has time up to 24 months from the end of the relevant assessment year to file the updated return.

(c) Additional income tax of 25% and 50% of aggregate tax and interest is respectively payable for the updated return filed within the first 12 months from the end of the relevant assessment year or beyond 12 months but before completion of 24 months from the end of the relevant assessment year.

G: Data available on filing of the updated returns thus far since the introduction of the provision through Finance Act 2022 reads as follows:

H: One cannot deny, borne on the number of updated returns and the taxes paid through those returns, a wide public acceptance of the provision. Reasons why the provision resonated with the taxpayers are many. One, the provision did address a long-felt need both within and outside the tax department not to shut off genuine taxpayers who have the inclination and the resources from filing ITR just because there has been omission in filing a return or a misstatement in a return already filed within the statutory timelines, both non-filing and misstatement albeit on reasonable and bona fide grounds. Second, the trade-off between the conditions for filing an updated return and additional tax payable for filing the return has been fair and equitable. Third, the legislative intent matches the design of working of the provision. Finally, the significance of the E-Verification Scheme, 2021(which set up a system for processing and utilising the information available with the DG (Systems)) on the updated return, and the manner in which that scheme impacted both the non-filers and for return filers who had obvious and apparent misstatements in their returns.

Whether or not beneficial provisions in tax statutes should be directly addressed in the legislation itself or by the government through an enabling clause in the legislation is not easily answered, as that determination depends on reading and interpretation of relevant empirical data, and intrinsic and extrinsic conditions. Relative success of the beneficial provision among the two methodologies though is far more bright for the one which integrates behavioural economics in tax policy design and keeps an uncomplicated work method for administering the provision, as the updated return in ITA testifies.