Credit of Failed IDS Payment While Computing Vivad se Vishwas Liability: Analysis of Bombay High Court Ruling in Pinnacle Vastunirman Private Limited Vs Union of India

1. Background of the Dispute

The decision of the Bombay High Court in Pinnacle Vastunirman Private Limited Vs Union of India examines a specific but important question:

Whether an amount deposited under the Income Declaration Scheme, 2016 (IDS)—where the declaration subsequently failed due to non-payment of subsequent instalments—can still be given credit when computing the amount payable under the Direct Tax Vivad Se Vishwas Act, 2020 (DTVSV Act).

The assessee, Pinnacle Vastunirman Private Limited, had:

  • Opted for the IDS for assessment year 2016-17,
  • Disclosed undisclosed income of Rs. 7,31,89,985/-,
  • Incurred a tax, surcharge and penalty liability of Rs. 3,29,35,493/- under IDS,
  • Paid the first instalment of Rs. 82,33,872/- through two challans of Rs. 41,16,937/- each,
  • Failed to pay the remaining instalments, resulting in failure of the declaration under Section 187(3) of the IDS.

Subsequently, regular assessment proceedings were undertaken under the Income Tax Act 1961, and later the assessee chose to settle the pending dispute under the DTVSV Act, claiming credit for the amount earlier deposited under the IDS. The Revenue declined this adjustment, leading to the writ petition.

2. Outline of the Income Declaration Scheme, 2016

2.1 Purpose and Time Frame

The IDS was introduced by Chapter 9 of the Finance Act, 2016 and:

  • Came into effect on 1st June 2016,
  • Remained open up to 30th September 2016 for filing declarations.

It provided an opportunity to any person to disclose income chargeable to tax under the Income Tax Act 1961 for any assessment year prior to the assessment year beginning on 1st April 2017, where:

  • No return had been filed under Section 139, or
  • Income was not disclosed in a previously filed return, or
  • Income had escaped assessment due to omission/failure to file return or to disclose fully and truly all material facts.

In essence, the scheme allowed voluntary disclosure of undisclosed income with specified immunities from interest, penalty and prosecution, subject to strict conditions.

2.2 Key Statutory Provisions Considered

The Court analysed several provisions of the IDS, notably:

  • Section 183 – Declaration of undisclosed income,
  • Section 184 – Charge of tax at 30% plus Krishi Kalyan Cess at 25% of such tax,
  • Section 185 – Penalty at 25% of the tax,
  • Section 187 – Time for payment of tax, surcharge and penalty and consequences of failure,
  • Section 188 – Exclusion of declared income from total income where full payment is made in time,
  • Section 191 – Bar on refund of tax, surcharge and penalty paid under the scheme,
  • Section 192 – Non-admissibility of declaration as evidence in specified proceedings,
  • Section 197 – Clarificatory provision regarding treatment of undisclosed income where scheme conditions are not satisfied.

Under Section 184 and Section 185, the composite liability under IDS was effectively 45% of undisclosed income (tax + surcharge + penalty).

Under Section 187(1) and Section 187(3):

  • Payment of the entire tax, surcharge and penalty had to be made by the date notified,
  • If such payment was not made within the prescribed time,

    “the declaration filed by him shall be deemed never to have been made under this Scheme.”

This deeming fiction—treating the declaration as non-existent—is central to the Court’s reasoning.

Section 197(b) further clarifies that where tax, surcharge and penalty are not paid within time, the undisclosed income becomes chargeable to tax under the Income Tax Act 1961 in the previous year in which the declaration was made.

Section 191 provides that any tax, surcharge or penalty paid in pursuance of a declaration under Section 183 “shall not be refundable”.

3. Facts of the Case and Procedural History

3.1 Declaration and Partial Payment under IDS

  • The assessee filed a declaration on 30th September 2016 under IDS for assessment year 2016-17.
  • It disclosed undisclosed income of Rs. 7,31,89,985/-.
  • Applying Section 184 and Section 185, the total amount payable under the scheme came to Rs. 3,29,35,493/-.
  • As per the payment schedule referred to by the parties, the assessee was required to pay:
    • 25% of the scheme tax by 30th November 2016,
    • 50% by 31st March 2017,
    • 100% by 30th September 2017.

The assessee actually paid only the first instalment of Rs. 82,33,872/- on 30th November 2016 by two challans of Rs. 41,16,937/- each. The declaration had earlier been acknowledged by the authority through Form-II dated 5th October 2016.

However, the remaining instalments were not paid. Consequently:

  • By virtue of Section 187(3), the declaration was deemed never to have been made;
  • Under Section 197(b), the income disclosed under IDS became taxable under the Income Tax Act 1961 in the year of declaration, i.e., assessment year 2016-17.

The assessee did not contest this legal consequence.

3.2 Assessment under Income Tax Act

The Assessing Officer subsequently passed an assessment order dated 29th December 2018 for assessment year 2016-17, determining a demand of Rs. 3,35,08,445/-.

While the order: