Salient features of the Income Disclosure Scheme, 2016 - V. K. Subramani - Article published in Business Advisor, dated July 10, 2016 - http://www.magzter.com/IN/Shrinikethan/Business-Advisor/Business/

1. Volume XVI Part 1 July 10, 2016 23 Business Advisor
Salient features of the Income Disclosure
Scheme, 2016
V. K. Subramani
The Hon‟ble Finance Minister Arun Jaitley while
presenting the Budget 2016 observed that our country is
moving towards lower tax regime with non-litigious
approach. He wanted to give an opportunity to the non-
compliant taxpayer to shift to the category of compliant
by opting for Income Disclosure Scheme to be open from
1st June to 30th September, 2016. The tax on disclosed
income as per the scheme has to be paid within 2 months
of declaration. The tax payable on the disclosed income is
45% representing income-tax at 30%, surcharge @ 7.5% called as Krishi
Kalyan Surcharge besides penalty @ 7.5% of the disclosed income.
The Finance Act, 2016 contains the Income Declaration Scheme, 2016
which is meant to provide disclosure of undisclosed income providing
immunity from further action on such disclosure. This write-up discusses
the Income Declaration Scheme (hereinafter referred to as the Scheme) and
a snapshot of issues without going deep into the various circulars issued so
far.
An overview of the Scheme
 Any person who has any income not disclosed for income-tax for any
previous year prior to the assessment year 2017-18 can make a
declaration. It is applicable for a person who has - (i) failed to furnish a
return under section 139; or (ii) failed to disclose in the return filed before
the date of commencement of the Scheme; or (iii) such income has
escaped assessment by reason of omission or failure on the part of such
person to furnish a return or disclose fully and truly all material facts
necessary for assessment or otherwise.
 A declaration claiming income of the period from 01.04.2016 to
31.05.2016 is not eligible for disclosure under this Scheme.
 Where the income chargeable to tax is in the form of investment in any
asset, the fair market value of the asset as on 01.06.2016 shall be
deemed to be the undisclosed income for the purpose of this Scheme. The
fair market value shall be determined in such manner as may be
prescribed.

2. Volume XVI Part 1 July 10, 2016 24 Business Advisor
 No deduction in respect of any expenditure or allowance shall be allowed
against the income in respect of which declaration under this Scheme is
made.
Manner of declaration
 The declaration is to be furnished to the Principal Commissioner or
Commissioner or alternatively through online method. It should be signed
by the individual in case the declarant is an individual. Where such
individual is absent from India then any person authorised by him could
sign the declaration.
 In the case of Hindu Undivided Family, it should be signed by the Karta
and where the Karta is absent from India or mentally incapacitated from
attending to his affairs, by any other adult member of the family.
 Where the declarant is a company, by the managing director or where for
any unavoidable reason such managing director is not able to sign the
declaration or where there is no managing director, any director may sign
the declaration.
 In the case of a firm, by the managing partner or where for any
unavoidable reason such managing partner is not able to sign the
declaration or where there is no managing partner as such, it could be
signed by any partner other than a minor.
 Where the declarant is any other association, by any member of the
association or the principal officer thereof.
Disqualification
Where any person makes a declaration in respect of his income or as a
representative assessee in respect of the income, he shall not be entitled to
make any other declaration in respect of his income or in respect of income
of any other person. If such second declaration is made, it shall be void.
Notification of Rules
The CBDT in Notification No.SO 1831(E) dated 19.05.2016 has notified the
rules for the purpose of the Scheme.
In the case of undisclosed income held in the form of assets, the fair market
value (FMV) as on 01.06.2016 shall be disclosed under the Scheme. For the
determination of FMV, it has prescribed a separate rule.

3. Volume XVI Part 1 July 10, 2016 25 Business Advisor
Nature of undisclosed
asset
First
condition
Second condition
(i) Bullion, jewellery or
precious stone; (ii)
archaeological
collections, drawings,
paintings, sculptures or
any work of art; (iii)
unquoted equity share
and security other than
equity share in a
company; (iv) immovable
property; and (v) any
other asset
Cost of
acquisition
Value if sold in the
open market as on
01.06.2016 on the
basis of valuation
report obtained by
the declarant from a
registered valuer
Whichever
is higher
Quoted shares and
securities (where trading
of such shares was done
in recognised stock
exchange on
01.06.2016)
Cost of
acquisition
The average of the
lowest and highest
price of such shares
on 01.06.2016
Whichever
is higher
Quoted shares and
securities (where trading
of such shares was not
done in recognised stock
exchange on
01.06.2016)
Cost of
acquisition
The average of the
lowest and highest
price of such shares
and securities on a
recognised stock
exchange on a date
immediately
preceding the first
day of June 2016
Whichever
is higher
Unquoted equity shares* Its cost of
acquisition
The value of such
equity shares on
01.06.2016
determined in the
manner prescribed
in the rules
Whichever
is higher
Value of interest in a
partnership firm or AOP
The net asset of the firm shall be determined in
the same manner as unquoted equity shares

4. Volume XVI Part 1 July 10, 2016 26 Business Advisor
or LLP and such net asset shall be allocated among
the partners in the proportion in which capital
has been contributed by them. The residue
shall be allocated in accordance with the
agreement for allocation in the event of
dissolution of the firm, AOP or LLP. In the
absence of such agreement, it shall be in the
proportion of their entitlement to share profits
of the firm, AOP or LLP.
* The fair market value of equity shares shall be
= (A+B-L) X (PV)
PE
Where A = book value of all assets in the balance sheet (other than
bullion, jewellery, precious stone, artistic work, shares, securities and
immovable property) as reduced by, - (i) any amount of income-tax paid, if
any, less the amount of income-tax refund claimed, if any, and (ii) any
amount shown as asset including the unamortised amount of deferred
expenditure which does not represent the value of any asset;
B = fair market value of bullion, jewellery, precious stone, artistic work,
shares, securities and immovable property as determined in the manner
provided in this rule;
L = book value of liabilities shown in the balance sheet, but not including
the following amounts, namely; -
(i) the paid-up capital in respect of equity shares;
(ii) the amount set apart for payment of dividends on preference shares
and equity shares;
(iii) reserves and surplus, by whatever name called, even if the resultant
figure is negative, other than those set apart towards depreciation;
(iv) any amount representing provision for taxation, other than amount of
income-tax paid, if any, less the amount of income-tax claimed as refund,
if any, to the extent of the excess over the tax payable with reference to the

5. Volume XVI Part 1 July 10, 2016 27 Business Advisor
book profits in accordance with the law applicable thereto;
(v) any amount representing provisions made for meeting liabilities, other
than ascertained liabilities;
(vi) any amount representing contingent liabilities other than arrears of
dividends payable in respect of cumulative preference shares;
PE = total amount of paid up equity share capital as shown in the
balance-sheet;
PV = the paid up value of such equity share.
Partly disclosed asset
Where investment in any asset is partly disclosed prior to the assessment
year 2017-18, the fair market value shall be reduced by the amount which
bears to the value of the asset as on 1st day of June 2016, the same
proportion as the assessed income bears to the total cost of the asset.
Example: An asset acquired in the financial year 2010-11 for Rs 5 lakh is
disclosed to the extent of 50% only in the books of account. The FMV as on
01.06.2016 is found to be Rs 30 lakh. The amount to be disclosed under the
scheme would be 50% of the FMV which means Rs 15 lakh and not Rs 25
lakh.
Declaration
The declaration must be given in Form 1 which seeks details such as the
assessment years for which the declaration is being made. Also, a declarant
can pay tax on or before the date of declaration on suo moto basis.
In the Annexure to Form 1, detailed description of the items disclosed vis-à-
vis the valuation report to be attached is prescribed. Upon receipt of
declaration an acknowledgement would be given to the declarant and the
tax has to be paid on the undisclosed income which is eligible for the
scheme and the cut-off date is 30th November 2016.
Non-payment of tax on the income declared under Form 1 would lead to the
declaration being treated as void and shall be deemed never have to been
made.
The declarant after paying the tax must furnish details of tax payment in
Form 3. The certificate of declaration would be issued by the Principal
Commissioner/ Commissioner in Form 4 to complete disclosure procedure.

6. Volume XVI Part 1 July 10, 2016 28 Business Advisor
A declarant can declare even properties held by benamidar and pay tax.
However, after furnishing the declaration and payment of tax the property
must be transferred to the declarant being the real owner on or before
30.09.2017. In the event of failure, the immunity granted from Benami
Transactions (Prohibition) Act, 1988 shall not be available to the declarant.
Certain issues
A perusal of Form 2 of the Rules being the acknowledgement of the
declaration shows that the Principal Commissioner or Commissioner may
partly accept the declaration filed by the declarant. In column 3 of Form 1 it
is stated, „undisclosed income as declared in Form 1,‟ and in column 4 it is
stated, „undisclosed income eligible for the scheme.‟ In column 6, it is
stated, „Reasons (in case of difference in amounts in column (3) and (4)).‟
This acknowledgement does not seem to be automatic. It may be possible
that the declarant is partly eligible and made partly ineligible under the
Scheme.
In Form 2 it is stated that the declarant has to pay tax on or before
30.11.2016, which means that in respect of all declarations the cut-off date
is 30th November, 2016.
Exemption from wealth tax
Section 194 of the Scheme says that undisclosed income represented by
cash, bank deposits, bullion, investment in shares or any other asset shall
not be liable for wealth tax.
Disqualification
The following persons are not eligible to avail the Scheme:
(i) any person against whom an order of detention has been made under the
Conservation of Foreign Exchange and Prevention of Smuggling Activity
Act, 1974, unless such detention has been revoked in certain situations
given therein;
(ii) any person against whom proceedings for prosecution punishable under
Chapter IX or Chapter XVII of the Indian Penal Code, the Narcotic Drugs
and Psychotropic Substances Act, 1985, the Unlawful Activities
(Prevention) Act, 1967, and the Prevention of Corruption Act, 1988 has
been launched;
(iii) any person notified under section 3 of the Special Court (Trial of
Offences Relating to Transactions in Securities) Act, 1992;

7. Volume XVI Part 1 July 10, 2016 29 Business Advisor
(iv) in relation to any undisclosed foreign income and asset which is
chargeable to tax under the Black Money (Undisclosed Foreign Income
and Assets) and Imposition of Tax Act, 2015;
(v) in relation to any undisclosed income chargeable to tax under the
Income-tax Act for any previous year relevant to assessment year
preceding the assessment year 2017-18 if - (a) a notice under section 142
or sections 143(2), 148, 153A or 153C has been issued and is pending
before the Assessing Officer; or (b) where a search has been conducted
under section 132 or requisition has been made under section 132A or a
survey has been carried out under section 133A and a notice under
section 143(2) has not been issued but the time for issuance of notice has
not expired; or (c) where any information has been received by the
competent authority under an agreement entered into by the Central
Government under section 90 or section 90A of the Income-tax Act in
respect of such undisclosed asset.
Immunity
The Scheme grants immunity from penalty and prosecution under the
Income-tax Act, 1961, besides the Wealth tax Act, 1957. Additionally, it
provides immunity from the Benami Transaction (Prohibition) Act, 1988.
However, it does not grant immunity from the Foreign Exchange
Management Act, the Money Laundering Act, the Indian Penal Code or any
other Act.
Conclusion
In this write-up, only the salient features of the Income Disclosure Scheme
have been stated. So far, 3 circulars have been issued clarifying various
doubts in the minds of various stakeholders.
The following issues arise on a cursory look of the Scheme:
The Scheme seeks tax amount much more than the regular tax rate
applicable. It does not distinguish any corporate or non-corporate declarant
and the rate of tax is the same.
Fair market value on 01.06.2016 is to be adopted for assets for the purpose
of making declaration. Such value is eligible for adoption as cost of
acquisition for computing capital gain on sale of such declared asset at a
later date. However, such adoption needs to be incorporated by way of
amendment to section 55 of the Income tax Act, 1961.
(V. K. Subramani is Chartered Accountant, Erode.)