This writ petition involves the interpretation of some provisions of Karvivad Samadhan Scheme, 1998 (for short the Scheme). The petitioner is an individual assessee. He undertakes works of construction mainly for the Indian Railways. He submitted his income tax returns for the year 1996-97, showing the income of Rs. 2,31,490/-. The Income Tax Officer passed an order dated 02.02.1998 observing that the taxable income of the petitioner is Rs. 7,70,200/-, by adding certain items. In an appeal preferred before the Commissioner (Appeals), the taxable income was marginally reduced to Rs. 7,43,650/-. Not satisfied with the relief granted therein, the petitioner approached the Income Tax Appellate Tribunal, Hyderabad (for short the Tribunal) by filing a further appeal.
The Scheme came into operation when the appeal was pending before the Tribunal. Therefore, the petitioner submitted an application in the prescribed form, claiming benefit thereunder. It was mentioned that the disputed arrears vis--vis the petitioner comprised of tax of Rs. 1,05,977/-, interest of Rs. 53,593/- and penalty of Rs. 4,50,000/-. He offered to pay 30% of the disputed tax, in terms of the Scheme. The competent authority i.e., 1st respondent however passed a proforma order, dated 02.02.1999, requiring the petitioner to pay a sum of Rs. 3,04,483/-. The difference mainly arose on account of the levy of 35% amount on the component of interest and penalty. The petitioner challenges the order, dated 02.02.1999. He contends that though an application was filed in the prescribed form, and the stipulated amount was paid, the 1st respondent passed the impugned order, contrary to the provisions of the Scheme.
The 1st respondent filed a counter affidavit opposing the writ petition. According to him, the petitioner is under obligation to pay the amount at 50% of the arrears of taxm, under Clause (a)(iv) of Section 88 of the Finance Act, 1998 (for short the Act). It was also stated that when doubt arose in this behalf, clarification was sought from the Central Board of Direct Taxes (CBDT), and through letter, dated 03.09.1988, clarification was given; and the impugned order was passed in accordance with the same.
Sri A.V.Krihna Kowndinya, learned senior counsel appearing for the petitioner submits that the scheme maintains a clear distinction between the cases, in which, the amount due from an asessee comprises of (a) arrears of (i) tax; (ii) interest; and (iii) penalty, on the one hand, and (b) the amount due, comprising of arrears of (i) tax; and (ii) penalty, on other hand. He submits that the first category of cases is covered by Clause (a)(iii) of Section 88 of the Act, where the amount payable is 30% of disputed income, whereas in the second category of cases, covered by clause (a)(iv) of the Section, the amount becomes payable at 50% of tax arrears, as defined under Clause (m) of Section 87 of the Act. He submits that the case of the petitioner fell within the ambit of Clause (a)(iii) of Section 88 of the Act, but the 1st respondent made a demand by treating the case as falling under Clause (a)(iv) of Section 88 of the Act. Sri J.V.Prasad, learned Standing Counsel for the Income Tax Department, on the other hand, submits that the impugned order was passed strictly in accordance with the provisions of the Act and the Scheme. He contends that the mere fact that there existed some arrears of tax would not relieve the petitioner from the obligation to pay the amount on all three components. He further submits that the penalty levied against the petitioner was, in relation to a matter, totally unconnected with the assessment and the clarification issued by the CBDT dealt with such cases.
The Parliament introduced the Scheme by substituting Chapter IV through the Act. The objective appears to be to reduce the pendency of litigation in the field of taxation. The Scheme covers not only the cases under the Income Tax Act but also the cases under other taxation enactments. The various expressions that become relevant in operation of the Scheme are defined under Section 87 of the Act. One expression, which becomes relevant in the context of the present case is tax arrear. It is defined under clause (m) as under:
(m) tax arrear means,-
(i) in relation to direct tax enactment, the amount of tax, penalty or interest determined on or before the 31st day of March, 1998 under that enactment in respect of an assessment year as modified in consequence of giving effect to an appellate order but remaining unpaid on the date of declaration;
(Clause (ii) is omitted since it relates to the indirect tax enactments.)
The salient features of the Act is that irrespective of the nature or merits of the claim, an assessee is given the option to pay the stipulated percentage of the disputed amount, to give a quietus to the litigation. One of the conditions is that the proceedings in relation to the dispute must be pending before an authority under the Act, or the Court. There is no controversy in this case as to the applicability of the Scheme, since the appeal preferred by the petitioner was very much pending before the Tribunal.
The Scheme maintains a distinction between the assessees, who are individuals, on the one hand, and the assessees, that are companies, firms etc. on the other hand. For the individual assessees, the amount payable is 30% of the disputed income and for the corporate assessees, it is 35%.
The entire controversy in this case turns around the question as to whether it fits into Clause (a)(iii), or Clause (a)(iv) of Section 88 of the Act. The provisions read:
(iii) in the case where tax arrear includes income-tax, interest payable or penalty levied, at the rate of thirty-five percent of the disputed income for the persons referred to in clause (i) or thirty per cent of the disputed income for the persons referred to in clause (ii).
(iv) in the case where tax arrear comprises only interest payable or penalty levied, at the rate of fifty percent of the tax arrear.
A close perusal of Clause (a)(iii) makes it clear that it applies to cases, where the tax arrears include three components viz., income tax, interest and penalty, whereas Clause (a)(iv) applies, where the components are only two viz., interest and penalty. The qualitative difference is that in the cases falling under Clause (a)(iii), 30% (the assessee in this case being an individual) of disputed income, whereas in the cases falling under Clause (a)(iv), the amount which is required to be paid is 50% of tax arrear. Not only the percentage of the amount payable but also the substratum on which the percentage is to be calculated varies.
In his declaration, as prescribed under the Scheme, in clause (f), the petitioner has shown the following components:
(i) Tax - Rs. 1,05,977/-
(ii) Interest - Rs. 53,593/-
(iii) Penalty - Rs. 4,50,000/-
Stating that the income referable to tax is Rs. 2,64,943/- the petitioner deposited 30% thereof being Rs. 79,483/-. The 1st respondent however took the view that the petitioner is liable to pay 50% of all the three components aggregating to Rs. 3,04,483/-. He appears to have been guided by the clarification issued by the CBDT. The relevant clarification, which was extracted in the counter affidavit, reads:
Q.No.7. The scheme offers full waiver of interest and penalty where the tax arrear includes such interest or penalty along with tax. What kind of interest and penalty would be open for such waiver?
Ans. All interest and penalties that are directly related to assessed income or arrears of taxes will be open for full waiver, if the taxes are outstanding on the specified dates, e.g., interest u/s.234A, 234B, 234C, 139(B), 215, 216, 217, 158BFA, 220(2) or penalties u/s. 271(1)(c), 221, 158BFA, 273 etc. But where the interest or penalty is not directly related to assessed income/arrears of tax, waiver of only 50% thereof is available, eg., interest u/s. 201(1A) penalties u/s. 271(1)(b), 271A, 271B, 271BB, 271C, 271D, 271E, 271F, 272A, 272AA, 272BB etc.
We are of the view that the approach of the 1st respondent is not correct. Once the case falls under Clause (a)(iii) of Section 88 of the Act, the amount is payable at 30% of the disputed income. The word disputed income is defined under clause (e) of Section 87 of the Act as under:
(e) disputed income, in relation to an assessment year means the whole or so much of the total income as is relatable to the disputed tax.
To determine this, one has to fall back upon the disputed tax, which, in the instant case is Rs. 1,05,977/-. If this figure is multiplied by 100/40, the figure representing the disputed income would emerge, being Rs. 2,64,940/-.
An analysis of Clauses (a)(iii) and (a)(iv) of Section 88 of the Act would present some extraordinary features. A person, who is in arrears of tax, is exposed to higher obligation, whereas the one, who is in arrears of tax, interest and penalty, is relieved of a substantial obligation. That, however was the intention of the Parliament and the Courts or for that matter, the respondents cannot look into the reasons.
The clarification issued by the Board, in a way adds some more dimensions and angles to the Scheme. Basically, the Board can neither expand nor restrict the scope of the Act, but can only issue instructions and clarifications, for effective implementation.
Instances, though rare, are not lacking, in which a grammatical reading of a provision of law would lead to certain abnormal, if not absurd situations, that may not have been contemplated or foreseen by the concerned legislatures. Whenever Courts face situations of that nature, a device known as exceptional construction is resorted to, so that the provision is read in such a way, as not to lead any absurdity. Way back in 1857, the House of Lords in Grey v. Pearson , held, The ordinary grammatical sense of the words is to be adhered to, unless that would lead to an absurdity or some repugnance or inconsistency with the rest of the instrument, in which case the grammatical and ordinary sense of the words may be modified, so as to avoid such absurdity and inconsistency, but no further.
Maxwell in his treatise on The Interpretation of Statutes observed,
Where the language of a statute, in its ordinary meaning and grammatical construction, leads to a manifest contradiction of the apparent purpose of the enactment, or to some inconvenience or absurdity which can hardly have been intended, a construction may be put upon it which modifies the meaning of the words and even the structure of the sentence. This may be done by departing from the rules of grammar, by giving an unusual meaning to particular words, or by rejecting them altogether, on the ground that the legislature could not possibly have intended what its words signify, and that the modifications made are mere corrections of careless language and really give the true meaning. Where the main object and intention of a statute are clear, it must not be reduced to a nullity by the draftsmans unskilfulness or ignorance of the law, except in a case of necessity, or the absolute intractability of the language used.
He referred to the relevant precedents in this behalf.
Two illustrations in the form of precedence would make the principle involved clear. In Adler v. George, the relevant law prohibited any person to be within the vicinity of a particular place, and violation thereof provided for punishment. A person entered the premises and when sought to be prosecuted, he pleaded that the liability to be punished would arise, if only he was found within the vicinity, and not when he entered the same. The contention was repelled and the person was punished. This, notwithstanding the fact that the provisions of a criminal law must be construed strictly and no act or omission can be treated as crime, unless ordained by the competent legislature. Acceptance of the contention of the accused therein would have resulted to absurd situations.
In R. v Baker, Section 23(2) of the Firearms Act, 1937 fell for consideration. It provided for punishment of imprisonment of 7 years, if a person is arrested on suspicion of having committed schedule offence, i.e. possessing a firearm, whereas the punishment for a person found to be in possession of firearm is, imprisonment for 2 years. The Court took the view that the literal interpretation of the provision would lead to absurdities and removed the same.
Bennion in his Treatise on Statutory Interpretation has this to say, Common sense This section of the Code deals with an aspect of the principle that Parliament is taken to expect its Acts to be applied with common sense. According to Lord Simon of Glaisdale: a court would only be justified in departing from the plain words of a statute were it satisfied that: (1) there is clear and gross balance of anomaly; (2) Parliament, the legislative promoters and the draftsman could not have envisaged such anomaly and could not have been prepared to accept it in the interests of a supervening legislative objective; (3) the anomaly can be obviated without detriment to such legislative objective; (4) the language of the statute is susceptible of the modification required to obviate the anomaly.
Item (4) of this list is abscure, since it is precisely because the language is not susceptible of the meaning sought that it may be necessary to apply a strained construction to obviate the anomaly. Avoiding anomaly Every legal system must seek to avoid unjustified differences and inconsistencies in the way it deals with similar matters. As Lord Devlin said, no system of law can be workable if it has not got logic at the root of it. The logic here referred to is not formal or syllogistic logic. It was this formal logic that Lord Halsbury had in mind when he said that every lawyer must acknowledge that the law is not always logical. The American Holmes J is remembered for saying that The life of the law has not been logic: it has been experience.
While in formal logic the conclusion must inexorably follow from applying the minor premiss (the facts) to the major premiss (the legal rule), in informal logic it is the major premiss itself that is suspect.
On application of these principles to the facts of the case, it becomes clear that the view expressed by the authorities under the Act, vis-a-vis the claim of the petitioner that benefit under the Scheme cannot be sustained in law.
We, therefore, allow the writ petition and set aside the impugned order. Since the petitioner has already paid the amount in accordance with Clause (a)(iii) of Section 88 of the Act, it is declared that he is not in arrears of any tax nor he is under obligation to pay any further amount, with reference to the assessment year 1996-97. It is left open to the 1st respondent to pass consequential orders, if any.
The miscellaneous petition filed in this writ petition shall also stand disposed of. There shall be no order as to costs.