The Bombay High Court at Goa has clarified that a taxpayer’s pending appeal against a penalty order, even in the absence of an appeal against the assessment order, is sufficient to qualify for settlement under the Vivad Se Vishwas Scheme. This ruling reinforces the scheme’s remedial purpose and recognizes the unique tax regime applicable to spouses governed by the Portuguese Civil Code in Goa.
Background & Facts
The Dispute
The petitioner, Smt. Sharen Nitiin Naik, and her husband are married under the Portuguese Civil Code, which governs their marital property as a community of assets. Under Section 5A of the Income Tax Act, 1961, income earned by the husband is statutorily apportioned 50% to the wife for assessment purposes. In Assessment Year 2012-13, the Assessing Officer reopened their joint income under Section 147 and passed a unified assessment order on 30.12.2016. A penalty under Section 271(1)(C) was imposed on both on 16.06.2017.
Procedural History
- The husband filed appeals against both the assessment order and the penalty order on 10.09.2015.
- The petitioner did not file a separate appeal against the assessment order, as the dispute was identical and jointly adjudicated.
- The petitioner filed only one appeal against the penalty order, which remained pending.
- Both spouses filed Forms 1 and 2 under the Vivad Se Vishwas Scheme on 17.03.2021.
- The husband’s application was accepted; the petitioner’s was rejected on the ground that no appeal against the assessment order was pending.
Relief Sought
The petitioner sought quashing of the rejection order and directed the Revenue to consider her application under the Scheme, arguing that her pending penalty appeal constituted a valid dispute under the Scheme’s definition.
The Legal Issue
The central question was whether a pending appeal against a penalty order under Section 271(1)(C), without a parallel appeal against the assessment order, qualifies as a ‘dispute’ under the Direct Tax Vivad Se Vishwas Scheme, 2020, particularly when the underlying income is statutorily shared under Section 5A.
Arguments Presented
For the Petitioner
Mr. Purushottam Karpe argued that the Scheme’s definition of ‘dispute’ under Rule 2(b) includes any appeal, not limited to assessment appeals. He emphasized that Section 5A creates a statutory fiction treating the couple’s income as a single community asset. Since the husband’s appeal encompassed the same disputed income, the petitioner’s penalty appeal was sufficient to establish a live dispute. He cited Marcrotech Developers Limited, Dongfang Electric Corporation Ltd, and MUFG Bank Limited to support a purposive interpretation favoring settlement.
For the Respondent
Ms. Susan Linhares contended that the Scheme requires a pending appeal against the assessment order itself, as only such appeals reflect a challenge to the ‘tax arrears’. She relied on the affidavit stating the petitioner had not challenged the assessment order and argued that the rejection was procedurally correct. She also raised objections regarding delay and the Scheme’s lapse, though these were not substantively engaged.
The Court's Analysis
The Court examined the statutory framework under Section 5A, which treats income earned by one spouse as jointly owned and assessable. It held that Section 5A does not permit bifurcation of a single economic unit into two independent disputes for settlement purposes. The Court observed:
"The income belongs to the material community, and the assessment is mechanically apportioned. Once the assessment itself is challenged and settled for one spouse, the dispute cannot survive independently for the other."
The Court rejected the Revenue’s narrow reading of ‘dispute’ as confined to assessment appeals. It emphasized that the Scheme is a beneficial legislation designed to reduce litigation, and its provisions must be interpreted liberally to achieve its objective. The pending penalty appeal, which directly relates to the same disputed income and assessment, constitutes a valid dispute under Rule 2(b). The Court further noted that the Revenue itself acknowledged in its affidavit that the petitioner’s penalty appeal was pending, making the rejection factually unsustainable.
The Court also dismissed the objection of delay, accepting the petitioner’s explanation relating to the pandemic, and held that since Forms 1 and 2 were filed during the Scheme’s operational period, the lapse of the Scheme thereafter does not invalidate the application.
The Verdict
The petitioner won. The Court held that a pending appeal against a penalty order under Section 271(1)(C), in the context of Section 5A income, constitutes a valid dispute under the Vivad Se Vishwas Scheme. The impugned order was set aside, and the Revenue was directed to consider the petitioner’s application and issue Form 3 and Form 5 within stipulated timelines.
What This Means For Similar Cases
A Penalty Appeal Is a Valid Dispute Under the Scheme
- Practitioners can now confidently argue that an appeal against penalty under Section 271(1)(C) satisfies the ‘pending appeal’ requirement under Rule 2(b), even if no appeal was filed against the assessment.
- This applies particularly where the underlying income is jointly assessed under Section 5A or similar statutory apportionment provisions.
Section 5A Income Cannot Be Fragmented for Settlement
- Where income is statutorily shared between spouses under Section 5A, the Revenue cannot demand separate appeals from each spouse.
- If one spouse’s appeal covers the entire disputed income, the other spouse need not file a duplicate appeal against the assessment to qualify.
Purposive Interpretation Prevails Over Technicality
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Courts will favor interpretations that advance settlement over rigid procedural compliance.
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Taxpayers should be encouraged to file appeals on any aspect of the assessment - penalty, addition, or interest - as all may constitute a ‘dispute’ under the Scheme.
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File Forms 1 and 2 immediately upon filing any appeal, even if only against penalty.
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In Goa and other jurisdictions with community property regimes, coordinate appeals between spouses to avoid inconsistent treatment.
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Challenge rejections based on ‘no assessment appeal’ as legally untenable under this judgment.
