Circular No. 441

What this is

Circular No. 441 was issued by the Central Board of Direct Taxes on 15 November 1985. Its subject is Clarifications on issues relating to effect of filing higher estimates of income for advance tax purposes on assess­ments for earlier years/filing of returns of income by new assessees declaring substantial income in the initial assessment year/filing of higher returns of wealth for earlier years.

This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.

What it does

Tells taxpayers that declaring a much higher income this year will not by itself bring the earlier years under the microscope. Circular No. 423 dated 26 June 1985 and Circular No. 432 dated 15 November 1985 had not put to rest the fear of existing taxpayers proposing a substantially higher advance tax estimate, and of new taxpayers declaring their true income for the first time, that Income-tax Officers would suspect escapement in past years and open roving enquiries. The Board reiterates that reassessment may be begun only in the circumstances section 147 lays down, that each assessment year is a separate unit, and that a high advance tax declaration for the current year cannot by itself be a valid ground for starting proceedings for earlier years, so no question of roving enquiries arises. It couples this with a warning and an offer: the penal provisions will be applied strictly where a person with taxable income or wealth has to be brought into the net by the Department's own effort, while the approach to those who come forward with a full and true disclosure will be liberal and sympathetic, instructions to that effect going to all officers. The immunity from probing the past and from penalty and prosecution is expressly not permanent: it is for those who declare their true income and wealth and pay the tax by March 1986.

Why it was issued

Fears persisted, despite two earlier circulars, that a higher current declaration would itself invite reassessment of the past years, and the Board wanted voluntary compliance to rise.

Who it reaches

• Existing taxpayers raising their advance tax estimate for assessment year 1986-87
• First-time taxpayers declaring true income
• Assessees filing higher returns of wealth for earlier years
• Income-tax Officers tempted to reopen past years on the strength of the higher estimate

The instrument, as the Board published it

Clarifications on issues relating to effect of filing higher estimates of income for advance tax purposes on assess­ments for earlier years/filing of returns of income by new assessees declaring substantial income in the initial assessment year/filing of higher returns of wealth for earlier years
Effect of higher income estimates for assessment year 1986-87 in relation to other assessments - It has been brought to the notice of the Board that despite the issue of Circular No. 423, dated 26-6-1985 [Clarification 1] and Circular No. 432 dated 15-11-1985 [Clarification 2] on the above subject, fears continue to be expressed on behalf of some existing taxpayers who may declare for the purpose of payment of advance tax during the current financial year, a substantially higher income than that assessed for any earlier year and on behalf of some new taxpayers who may for the first time choose to declare their true income for the current year. The apprehension is that in their cases the ITOs may, in view of the declaration of substantially high incomes in the current year, suspect that incomes chargeable to tax for earlier years have escaped assessment and start roving enquiries against such taxpayers by starting assessment proceedings for the past years.
2. It is reiterated that the circumstances in which assessment proceedings can be started for past years are contained in sec­tion 147 of the Income-tax Act. These provisions are now well settled and clearly understood and Income-tax Officers are ex­pected to follow them. As per these provisions, each assessment year, being a separate unit, the mere declaration, for the purpose of payment of advance tax for the current year, of a substantially high income cannot by itself constitute a valid ground for starting assessment proceedings for the earlier years. Thus, the question of starting any roving enquiries against such taxpayers does not arise.
3. While it is true that the penal provisions of law will hereaf­ter be applied strictly in cases where a person having taxable income or wealth does not voluntarily come forward to declare the same and pay tax thereon and has, therefore, to be brought into the tax net only through efforts of the Department, the Depart­ment’s approach will be wholly different and necessarily liberal and sympathetic in the cases of those assessees who come forward voluntarily to make a full and true disclosure of their incomes and wealth. Instructions to this effect are being issued to all officers of the Department so as to ensure that the level of voluntary compliance increases substantially and the assessees, old as well as new, are enabled to avail themselves of this opportunity by voluntarily filing returns of income and wealth without fear of any penal consequences such as penalty or prose­cution.
4. Assessees will, therefore, do well to avail themselves of this opportunity and file estimates of advance tax based on true incomes for the current year as also disclose the consequential increased wealth without any fear.
5. Taxpayers will appreciate that such immunity from probing into the past and from penalty and prosecution cannot be extended permanently. It will be available only to such persons who come forward and show their true incomes and wealth and pay tax there­on by March 1986.
Circular: No. 441 [F. No. 225/86/87-IT(A-II)], dated 15-11-1985.

What to watch

• The immunity was available only to those who declared and paid by March 1986, a date long past, and the circular itself says it could not be extended permanently.
• Section 147 is untouched; the assurance is that the higher estimate alone is not a ground, not that no reassessment can be made on other material.
• The same paragraph promises strict penalty and prosecution where the Department has to unearth the income itself.
• Wealth stands on the same footing as income throughout, so the consequential higher wealth had to be disclosed too.

Where you meet it

In an old reassessment for a year before assessment year 1986-87 where the reasons recorded rest on nothing more than a sharply higher current declaration.

← Circular No. 440  ·  Circular No. 438 →