The Bombay High Court ruled that under Section 9(a)(ii) of the Vivad se Vishwas Act, an individual or entity is only excluded from its benefits if they face ongoing prosecution for tax-related issues that were initiated on or before the date they filed their declaration for 'tax arrears.' If prosecution is pending for different issues unrelated to 'tax arrears' for the relevant assessment year, the taxpayer can still avail themselves of the benefits provided by the VsV Act.

The Division Bench, led by Justice K.R. Shriram and Justice Dr. N.K. Gokhale, made an observation regarding Section 9(a)(ii) of the Direct Tax Vivad se Vishwas (DTVSV) Act. They clarified that this section specifically excludes individuals or entities from the Act's benefits only if there is an ongoing prosecution related to tax arrears for a particular assessment year at the time of filing the declaration. It does not exclude those facing prosecution for any other issues related to an assessment year.

The Bench, when assessing the validity of FAQ 73 in CBDT Circular No. 21/2020 dated December 4, 2020, referred to a previous coordinate bench ruling in the case of Macrotech Developers. In the Macrotech Developers case, FAQ 73 was declared invalid on the basis that it prevented taxpayers who were undergoing prosecution from availing themselves of the Vivad se Vishwas (VsV) scheme. The Bench in the current case noted that the matter had already been settled by the Macrotech Developers case, and there was no longer any uncertainty regarding this issue (res integra).

According to the facts of this case, the Assessee underwent a reassessment for the tax years 2010-11 and 2011-12. The AO issued tax demands of Rs.6.77 crore and Rs.7.37 crore for these respective years. In response, the Assessee appealed to the CIT(A) and also paid 20% of the demanded amount as per a CBDT Office Memorandum from February 29, 2016. Subsequently, the AO initiated legal proceedings, accusing the Assessee of willfully attempting to evade tax payments related to the demands arising from the reassessment. While these legal proceedings were ongoing, the Assessee submitted a declaration under the VsV Act. However, this declaration was rejected, citing the provision in Section 9(a)(ii), which prohibits Assessees against whom prosecution has been initiated on or before the date of filing the declaration from benefiting under the Act.

Upon reviewing the submissions, the Bench noted that the primary objective of the VsV Act is to minimize legal disputes in the realm of direct taxes. Under this framework, taxpayers are expected to settle their disputed tax liabilities by paying the contested tax amount. In return, they become eligible for a complete waiver of interest and penalty, provided they meet the specified payment deadline.

The Bench referred to Section 2(1) of the VsV Act, which defines the term 'tax arrears' to encompass several components, including (i) disputed tax, (ii) disputed interest, (iii) disputed penalty, and (iv) disputed fee as determined under the Income-tax Act. The Bench observed that when examining Section 9(a)(ii) of the VsV Act, it is evident from a straightforward interpretation that the prosecution must pertain to 'tax arrears' related to a specific Assessment Year.

The Bench further supported its interpretation by citing a precedent from the Coordinate Bench in the case of Macrotech Developers Ltd. v. Principal Commissioner of Income Tax. In this case, it was held that the legislative intent behind Section 9(a)(ii) of the VsV Act was to exclude its application for declarants in cases where a prosecution had been initiated concerning tax arrears related to a specific Assessment Year on or before the date of filing the declaration. This interpretation was based on the understanding that the prosecution should naturally be connected to tax arrears attributable to a particular Assessment Year.

In the final observation, the High Court took note of the fact that the Assessee had paid the self-assessment tax but had not settled the demand arising from the reassessment. Additionally, the Assessee had challenged the reassessment order, and this challenge was currently pending before the Income Tax Appellate Tribunal (ITAT). Subsequently, the Assessee paid the entire outstanding amount.

Given these circumstances, the High Court determined that the Assessee should not be considered as an 'Assessee in default.' As a result, the High Court directed the Revenue Department to process the application submitted by the Assessee in accordance with the provisions of the VsV Act.