Income tax department can now pursue cases in six year window. Cases of companies entering into Vodafone-like transactions could be pursued after payment to the seller of a capital asset.

As per The Business Standard report: Income Tax Act amended as some foreign deals  escaped tax net in two-year window new provision effectively applicable post-FY06

The Finance Bill has amended the Income Tax Act to allow the tax department to go back up to six years, instead of two years at present, and seek tax from a person who could be treated as an agent of the non-resident.

The amendment in Section 149 of the Act will enable tax officers to serve a notice to furnish the return of income on a person, treated as the agent of a non-resident under Section 163, within a period of six years from the end of the relevant assessment year. That will help the department seek tax on capital gains made in other pending cases or reopen assessment in cases where some income has escaped taxation.

The provisions will be applicable for any assessment year beginning on or before April 1, 2012. In other words, since the taxman has the power to go back six years, the provision would apply to all relevant transactions entered into after financial year 2005-06.

Finance ministry officials said the amendment was mainly done to align the assessment of representative assesses with the existing law for reopening tax cases. In many cases, assessing officers got information about such transactions after the expiry of the two-year period and were not able to demand a tax on the gains realised by the seller of the capital asset.

“Often, by the time the tax department comes to know of the transaction, the two-year period is over. With the increase in the time limit, it would be easier to pursue such cases,” said an official.

The official, however, denied any implication of the amendment on the Bombay high court case, making Vodafone an agent of Hutchison in India for its $11.2-billion deal in 2007.

“If implemented, cases up to six years old could be reopened even in the hands of a representative assessee. The amendment is directed to cover all kinds of cases where reopening is justified; it is not to single out any particular case,” said Rahul Garg, executive director, PwC.

The provisions will also apply to individuals. For instance, if a non-resident makes gains when the underlying assets are situated in India, his representative assessee in India will have to deduct tax at source while making the payment, failing which he could be sent a notice till up to six years.

“So far, the department has chased the buyer in an offshore indirect transfer for failure to withhold tax. An alternative is to chase the seller for the substantive capital gains tax liability… With this, the department will get the flexibility to seek tax on capital gains in similar pending cases,” said Sunil Jain, partner, J Sagar Associates.