Scheme Declaration Without Payment Cannot Terminate Statutory Appeal Rights: ITAT Chennai Analysis

Introduction

The Income Tax Appellate Tribunal, Chennai Bench, recently delivered a significant ruling addressing the interplay between the Direct Tax Vivad Se Vishwas Scheme, 2020 and statutory appellate rights under the Income Tax Act, 1961. In the matter of Sundararajan Raghunathan Vs ITO, the Tribunal clarified that merely filing a declaration form under the dispute resolution scheme does not automatically extinguish an assessee's right to pursue statutory appeal, particularly when the scheme settlement does not reach its logical conclusion through actual payment.

Background and Factual Matrix

Assessment Proceedings

The assessee in this case had originally filed the return of income on 24.10.2017, declaring total income of ₹11,15,500/- using ITR-4 Sugam form. The return reflected presumptive business income with 50% offered for taxation. Subsequently, the case was picked up for detailed scrutiny assessment through the Computer Assisted Scrutiny Selection (CASS) mechanism, specifically to examine credit card payment transactions.

During assessment proceedings, the Assessing Officer discovered that the assessee had made credit card payments aggregating to ₹38,37,072/- during the relevant financial year. When questioned, the assessee contended that these represented reimbursable expenses incurred on behalf of clients in the normal course of business operations. However, the assessee failed to furnish documentary evidence substantiating this explanation.

Assessment Order and Addition

Based on the lack of supporting documentation, the Assessing Officer proceeded to make an addition of ₹38,37,072/- to the returned income and completed the assessment on 19.12.2019. This substantial addition formed the basis of the subsequent appellate proceedings.

Appellate Proceedings and Scheme Opt-In

Aggrieved by the assessment order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), Kochi, challenging the addition made by the Assessing Officer. Concurrently, the assessee also chose to avail the benefit of the Direct Tax Vivad-Se-Vishwas Scheme-2020, which was introduced by the Government to resolve pending tax disputes.

The assessee duly filed Form-3 dated 05.02.2021, which was issued by the Principal Commissioner of Income Tax, Chennai-1. The CIT(A) acknowledged the filing of this form in his appellate order.

The CIT(A)'s Decision

Treatment as Withdrawn Appeal

The Commissioner of Income Tax (Appeals) took cognizance of the fact that the assessee had opted for settlement under the Scheme and filed the requisite Form-3. Based on this fact alone, the CIT(A) proceeded to dismiss the appeal by treating it as "withdrawn" in terms of the Direct Tax Vivad Se Vishwas Scheme, 2020.

Conditional Liberty Granted

However, the CIT(A) incorporated a caveat in his order, providing that if the tax dispute for the assessment year in question was not ultimately resolved under the aforesaid scheme, the assessee would have the liberty to approach the Appellate Authority for re-institution of the appeal. The order stated that the Appellate Authority would consider such application appropriately as per law.

With this reasoning, the appeal was formally dismissed without adjudication on merits.

Financial Constraints and Non-Completion of Settlement

A critical development occurred after the filing of Form-3 under the Scheme. Due to severe financial difficulties and cash flow constraints, the assessee found himself unable to remit the payment required under the Scheme before the stipulated deadline of 31.03.2021.

Consequently, the settlement process under the Direct Tax Vivad-Se-Vishwas Scheme-2020 never reached fruition. The dispute remained unresolved under the Scheme, and no certificate of settlement was issued. This meant that the original tax demand continued to remain alive and enforceable.