Legal: As a result of ambiguities in the Income Tax Act (ITA) 2001, the Jatan Prasad Lalchand Prasad (JPLP) tax evasion case is being prolonged.

Although the Office of the Attorney General’s (OAG) interpretation is in line with the customs department’s, the Phuentsholing dungkhag court is yet to arrive at a judgment.

The main confusion is with Section 35.1 and 35.2 (General Provision) of the ITA 2001. The same was discussed during the recent hearing on November 18.

The defendant, JPLP, has submitted that the company is liable for fines and penalties of Nu 8.69 million (M) and not Nu 184.90M as submitted by OAG.

OAG representatives said the taxable amount after fines and penalties was determined from what the Anti-Corruption Commission (ACC) discovered and what the defendant JPLP had declared to the customs office in Phuentsholing.

In 2011, JPLP had overstated its purchases while declaring taxes. ACC following its investigation stated that JPLP’s actual purchase was less than what was declared.

According to the OAG, when a business entity overstates purchase costs, deductions during tax declaration increase and profit is increased.

For example, if a book that is purchased at Nu 30 is falsely declared as Nu 40, the difference of Nu 10 is overstated. This overstated amount will also be deducted devaluing the income tax. The same difference of Nu 10 is also the concealed amount that ACC discovered.

In another case, OAG submitted that JPLP underreported its sales to evade tax from 2012 to 2014. Underreporting the sales will also reduce the value of the taxable income.

The OAG submitted that as per the ITA 2001, Section 35.1 (General Provision) a 200 percent penalty for the concealment is not imposed directly on the concealed income.

First, Business Income Tax (BIT) of 30 percent is levied on the concealed income that is the difference discovered. Only then, a 200 percent penalty is levied on the amount arrived after BIT is computed.

Again, a 24 percent late payment is computed on the same figure arrived after a 200 percent penalty.

Section 35.1 of the ITA 2001 states: “A fine equivalent to twice the tax amount sought to be evaded in addition to tax due shall be imposed on concealment of the particulars of income or furnishing inaccurate particulars of income.”

However, JPLP argued that the purchase cost should be allowed for deduction from the concealed income.

For instance, if an item purchased for Nu 30 is sold at Nu 40, the net profit is Nu 10. The defendant’s contention here is that that the fines and penalties must be on Nu 10 and not Nu 40. The purchase cost of Nu 30 should be deducted before imposing penalty, JPLP legal representatives argued. This means the deductions must be provided even after the concealment.

The prosecutor said these deductibles couldn’t be entertained once the “permissible time” for tax payment is exhausted.

This is as per the provision of section 35.2 of the ITA 2001 that states: “Expenses related to income under Section 35.1 shall be disallowed as deductions.”

The prosecutor explained taxpayers are allowed 15 days to correct tax returns from the date of filing the returns. For four consecutive years (2011 to 2014), JPLP filed inaccurate tax returns to customs in Phuentsholing.

If JPLP had no intention to conceal this income, the prosecutor said it should have used the provision. As no corrections were made, the prosecutor pointed out that it was clear that JPLP intentionally evaded taxes.

Meanwhile, the court said that Section 35.1 and 35.2 should not be read separately. A holistic interpretation of the Act should be considered as Section 35.1 says that 200 percent penalty should be imposed on taxes due

The other sections like Part II Chapter 5 Section 12.1 states that 30 percent BIT should be computed on net profit. Section 30 of the General Provision of the Act also says that 24 percent penal interest for late payment will be imposed on the taxes due.

To impose fines and penalties for the concealment as contended by OAG, the net profit must be determined. If this is the case, the court will give the defendant a benefit of deductions in the concealed income.

To address such issues, the court is also of the view that there has to be a specific provision that states allowable deductions as tax fraud will not be entertained.

However, if the law allows such deductions, then tax evasion would not have occurred, OAG representatives reiterated. Business entities would be complacent, they said.

The OAG submitted that a verdict was arrived at for a similar tax evasion case prosecuted in the Phuentsholing dungkhag court. The defendant, a woman was held liable for evading taxes after selling beer bottles to M/s Serzom Beer Agency.

After finding her liable, the income of the beer bottles were considered as concealed income and fines and penalties were imposed as per Section 35.1 and 35.2 of the Act. The case is with the Supreme Court today.

The court has asked both JPLP and OAG to prove how they are right as per the law. However, OAG representatives said nothing will change and whatever was submitted in the charge sheet will remain the same.

The defendant has also reiterated that OAG has wrongly inflated the sales of its income year 2014 by entering the same bills twice. The 2014 sales of Nu 522.186M declared in the charge sheet report are inflated from Nu 517.803M creating a difference of Nu 4.382M, the defendant had submitted to the Phuentsholing dungkhag court.

The OAG submitted that there are no double entries of the same bills. However, OAG said they would verify the bills once more and submit it on December 2.

Rajesh Rai | Phuentsholing