Income Declared Under VDIS Can Still Be Scrutinised If Higher Income Is Found: Madhya Pradesh High Court

The High Court of Madhya Pradesh at Jabalpur recently held that declaring income under the Voluntary Disclosure of Income Scheme, 1997 does not stop the income tax department from checking whether the correct income was disclosed, even though the scheme protects the assessee from being questioned about the source of that income.

A Division Bench of Justice Vivek Rusia and Justice Pradeep Mittal said that VDIS gives only limited immunity. “The assessee is only protected from disclosing the source of income, but as per the Scheme, the correct income is also liable to be disclosed,” it observed.

If higher income later comes to the department's notice, the declaration under the scheme does not become unquestionable, the bench held.

The case concerned a partnership firm engaged in the business of tractors and motorcycles at Satna.The firm had not filed its income tax returns on time for the assessment years 1996–97 and 1997–98.

It later declared its income under the Voluntary Disclosure of Income Scheme, paid the tax due, and received a certificate from the Commissioner of Income Tax, Jabalpur.

When the tax department later looked at the records, it noticed differences between the income disclosed under VDIS and what appeared in the firm's subsequent returns. This led to notices being issued, first to reopen the assessments and then to examine the firm's accounts in detail. The notices were issued under Section 143(2) of the Act and an order passed under Section 144A of the said Act.

The firm moved court against these notices and also challenged an order that allowed the Assessing Officer to carry on with the assessment.

Its stance was that once income had been disclosed under VDIS, it could not be reopened for scrutiny under the Income Tax Act. It also claimed that the notices were issued in breach of CBDT instructions

The High Court rejected the challenge. It noted that the CBDT instruction relied on by the firm came into force after the reopening notice had already been issued and, in any case, did not apply to a situation where returns were not filed on time.

The bench also pointed out that objections on sanction and procedure could be raised during the assessment itself. Holding that VDIS does not bar the department from examining under-declaration of income. The court, therefore, dismissed the writ petition after observing that the aggrieved had adequate remedies under the Income Tax Act once the assessment is completed.