Manner of computing disputed tax in cases where loss or unabsorbed depreciation is reduced – Vivad se Vishwas Scheme.

The Direct Tax Vivad se Vishwas Act, 2020 introduced a dispute resolution scheme, which was applicable to all appeals/petitions filed by the taxpayers or the income tax department, which were pending until 31 January 2020, before any appellate forum. In essence, it offered complete waiver of interest and penalty if the taxpayer agreed to pay the disputed tax amount by 31 March 2020 which is now extended to 30^th June 2020.

The VSV rules lays out the manner of computing disputed tax in specific situations such as those where loss or unabsorbed depreciation under Rule 9 of the DTVSV Rules 2020.

As per sub-rule(1), where the dispute in relation to an assessment year relates to reduction in loss or unabsorbed depreciation to be carried forward under the Income-tax Act, the declarant shall have an option to

(i) include the tax, including surcharge and cess, payable on the amount by which loss or unabsorbed depreciation is reduced in the disputed tax and carry forward the loss or unabsorbed depreciation by ignoring such amount of reduction in loss or unabsorbed depreciation; or

It means either to pay only tax amount on disputed amount/addition without reducing the carry forward of amount of loss or unabsorbed depreciation; or

(ii) carry forward the reduced amount of loss or unabsorbed depreciation.

It means to pay no tax under Vivad se Vishwas Scheme and carry forward the reduced amount of loss or unabsorbed depreciation for subsequent years.

As per sub-rule(2), where the declarant exercises the option as per clause (ii) of sub-rule (1), he shall be liable to pay tax, including surcharge and cess, along with interest, if any, as a consequence of carrying forward the reduced amount of loss or unabsorbed depreciation in subsequent years.

For Example:

XYZ Ltd. has carried forward loss of Rs.100 and addition made by the assessing officer is Rs.70, thus leaving a reduced carried forward loss of Rs.30. If XYZ Ltd. opts to go under VSV scheme, it will have two options:

Option-1– To pay Tax on Rs.70 (Disputed Addition) as per the provisions of the Act and carry forward the loss of Rs.100.

Option-2– To carry forward the reduced loss i.e. Rs.30. and pay no tax under VSV Scheme.

The option 2 for not to pay tax under VSV Scheme looks attractive but there is catch here which we should understand. The ITR returns of subsequent years are to be scrutinised. If the assessee has utilised the carry forward loss or unabsorbed depreciation of the relevant assessment year in the next assessment years and set off the same against income of future years, then the assessee shall have be liable pay tax to the extent of the loss utilised in subsequent years along with interest. In such scenario, exercising the option 2 shall be a costly affair and it is advisable to work out the cost benefit analysis based on facts and circumstances of each case before arriving at an option.  

For Example: Continuing the above example

Let us assume that XYZ Ltd. in the subsequent assessment year earns profit of Rs.140. Now as per assessee he had brought forward loss of Rs.100 and therefore paid taxes on profit of Rs.40 after setting of the brought forward losses of previous assessment year. However as per the provisions of the DTVSV Act and as per our understanding the assessee shall have to compute the tax liability after considering the reduced loss of Rs.30 only and shall have to pay taxes along with interest on Rs.70(as it has already paid taxes on profit of Rs.40) after setting off the brought forward losses computed by Assessing Officer.

Note: In case of tax authority’s appeal or in case where a favourable order has been obtained on the same issue from a higher appellate authority and which has not been reversed then the payment of disputed tax will be limited to 50% of the such tax.

Let us now take different scenarios and possibilities into consideration and determine the feasibility of the options in other cases.

Case 2- Where there was carry forward loss but after addition there is income

XYZ Ltd. had carry forward losses of Rs.100 but AO made addition of Rs.120. Now it is a case of disputed reduced losses as well as disputed income.

Option -1 To pay Tax on Rs.120 (Whole Disputed Addition) as per the provisions of the Act and carry forward the loss of Rs.100.

Option -2 To pay Tax on Rs.20 only under VSV Scheme. However, the carry forward will become Nil and assessee has to pay tax on Rs.100 if it has claimed set off, of such loss which is disallowed by AO in the current year, in any subsequent year or years.

Opinion: Usually, the carry forward losses is used as set off in subsequent years and in such case Option-2 is not a advisable option as the assessee have to pay taxes on such used carry forward loss(set off) along with interest. However, there can be a possibility that in subsequent years the tax rate is reduced and in such scenario the amount of reduced taxes will be more than the interest charged as per the provisions of DTVSV Act 2020. Then it might be a feasible option to choose.

Case 3- When the carry forward losses is not utilised in subsequent years or return filed in current year or subsequent is not within due date (i.e. Belated Return).

XYZ Ltd. has returned loss of Rs.100 and AO made addition of Rs.80. However, the assessee files belated return or in the subsequent year he fails to use the carry forward losses against its income. In simple words, the assessee did not take the benefit of losses in subsequent years.

Option-1 To pay Tax on Rs.80 and there will be no changes in the items of subsequent years as claimed by assessee.

Option-2 To pay No Tax under VSV Scheme.

Opinion: Insuch case it is advisable to choose Option-2 as there will be no benefit in choosing Option-1 as the assessee has failed to utilise the carry forward losses in subsequent year or is not allowed to carry forward the loss in subsequent years as it has not filed return within the due date or fails to fulfil the conditions of claiming carry forward losses. Therefore, in such case Option-2 is the preferred or advisable choice.

Conclusion: This option of non-payment of tax under VSV Scheme can be more expensive and can result in greater outflow of cash depending on case to case basis. Therefore, it is suggested that taxpayers should evaluate the actual tax/cash outflow currently as well as in future if they wish to opt for the VSV scheme.

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