Tax Settlements Under VSV Can't Be Changed Using Section 154

In a recent landmark judgment, the Delhi High Court has categorically held that the tax demands crystallized under the Direct Tax Dispute Resolution Scheme, namely the Vivad Se Vishwas (VSV) Scheme cannot be changed or reviewed through the rectification powers available under Section 154 of the Income Tax Act, 1961. This is rather a far-reaching decision in both the advisory and practical sense to both the taxpayers and the tax authorities since it re-establishes the finality and conclusiveness of the VSV settlements. 

Background of the Case 

This particular case concerned an individual taxpayer who declared an income of Rs. 50. 31 lakhs was proposed to be charged under Section 143(1) of the Income Tax Act. After scrutiny it showed an additional income of Rs. 54. 50 lakhs, a decision was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. During the pendency of ITAT appeal by the taxpayer, an opportunity was provided to the taxpayer to solve any of the legal issues related to the tax matters under the VSV scheme. It was the Designated Authority which calculated the amount payable and that was paid by the taxpaye. The issuance of Form 5 therefore is final and conclusive of the liability. 

However, almost after a year the Assessing Officer (AO) invoked Section 154 wherein he served a notice of rectification on the premise that he had on original assessment applied an incorrect tax rate. This action was not appreciated by the taxpayer, which has led to the present verdict of The High Court of Delhi. 

Courts’ Findings 

The Delhi High Court's ruling in this case provides a detailed interpretation of the provisions under the Direct Tax Vivad Se Vishwas (VSV) scheme, highlighting several key findings:

Finality of Determination Under VSV: The court also pointed out that in case of determination of tax liability under the VSV scheme and issuance of Form 5, the liability is final. The main aim of enacting the VSV Act is to give finality in respect of pending tax matters such that they cannot be reopened for further assessment or adjustment. The court mentioned Section 4(6) and Section 5(3) which makes such determination final and bars the Revenue from reopening matters once concluded. 

Limitations of Section 154 Rectification Power: The court also pointed out that Section 154 of the income tax act empowers the rectification of errors that can be seen on the record and cannot be used to reopen the finality of the VSV scheme. The Bench also observed that the VSV Act has its own protection measures against incorrect and fraudulent declarations and if rectification can be made following Section 154, it will be outside these situations and circumstances, and would be contradictory to the legislation’s intent of the VSV scheme. 

Statutory Period of Limitation: The court also turned to the timing of the rectification notice, it held that even if the principle of rectification power was well applicable then also the notice served to the assessee in this case was after the statutory period of limitation. The initial assessment order was passed on December 22, 2017, it was understandable that under Section 154 it should have been corrected, if at all possible until March 31, 2022. Nevertheless, the rectification order was passed on 22 nd April, 2022, and as such, is invalid due to the fact that it was passed after the permissible statutory period. 

No Material Misrepresentation: The court also took the note that the Revenue did not in any way accuse the taxpayer of any misrepresentation or concealment of facts. Hence, the circumstances under which the VSV Act permits the reopening of settled liabilities were not met to allow the rectification; this action was therefore unnecessary. 

Impact of the Ruling 

This ruling supports the rationale and existence of the VSV scheme which gives taxpayers a chance to resolve their tax cases once and for all. It also reminds the Revenue authorities that, once the settlement to VSV scheme has been arrived at, it cannot be reversed or changed by rectification actions under Section 154. This guarantees that there will be no additional scrutiny or change in the tax bills of the taxpayers who want to take advantage of the VSV scheme. 

Critical Analysis 

The judgment by the Delhi High Court presents a comprehensive understanding of Section 154 of the Income Tax Act and the use of rectification powers along with the VSV scheme. The ruling re-emphasises the need to respect the sanctity and finality of settlement made under the VSV scheme that was aimed at eliminating exhaustive highs and providing clarity to the taxpayers. Thus, by ruling out that there is a clear distinction between the VSV Act and the powers of rectification under the Income Tax Act, the court has ensured that the misuse of power in rectification with the intention of defeating the aim of the VSV scheme cannot be done. 

Also, the court dismisses the argument by stressing on the statutory limitation period within which the procedure should be carried out, and understanding that taxpayers should not remain in a state of suspense as to their tax obligations indefinitely. Although this aspect of the ruling is in a way protecting the rights of the taxpayers, it is also a word to the Revenue authorities urging them to exercise the powers granted to them in accordance with law. 

Thus, this judgment supports the basic legal proposition that once a tax liability becomes finally determined under a statutory regime like the VSV it cannot be further reviewed or modified by reference to other provisions of the Income Tax Act. This decision has a long term implication for the future of tax disputes in India: it increases the credibility of the government’s schemes of dispute resolution and generally increases the stability of the tax system in India. 

Conclusion 

The Delhi High Court order in this case is a welcome step confirming the law relating to non-appealability of tax settlements under the VSV scheme. For the taxpayers who sought to settle their disputes under this scheme, the court has offered much-needed relief by restraining the misuse of rectification powers. 

It is advisable to consult a tax lawyer regarding all your issues related to tax.

FAQs 

What is the Direct Tax Vivad Se Vishwas (VSV) scheme? 

The VSV scheme was launched by the Indian government to provide an efficient and acceptable method to resolve the pending direct tax disputes that allows taxpayers to come for an agreement with the tax authorities. However, once a settlement has been agreed to under this scheme the amount of tax is regarded as being final. 

Is it possible to change the tax liability which is paid under the VSV scheme? 

None, as soon as the tax liability under the VSV scheme is capped and form 5 issued, it cannot be changed or revised by the tax authorities as held by Delhi High Court. 

To what end was Section 154 of the Income Tax Act put into place? 

Section 154 empowers the commissioner of income tax to amend any mistake which is apparent from income tax returns. However, to utilize it for the purposes of this method, it cannot be used to adjust settled tax point liabilities under the VSV scheme. 

What should one do if he receives a rectification notice while he or she is transferred under the VSV scheme? 

In such a case, if you receive a rectification notice after the tax liability has been settled through the VSV scheme then one can approach court on the ground of the principle of finality settled by Delhi High Court on the issue. 

Can tax authorities reopen my settled tax liability in any way? 

Tax authorities can again look at your settled tax liability under the VSV scheme only if they have reasons to believe that the declaration made at the time of settlement was incorrect or fraudulent. Otherwise the liability remains final.