RECENT ISSUES UNDER THE IT ACT, 1961AT AJMER BRANCH OF ICAI

ON 13.10.2013

Presented By P.C. Parwal, FCA

Email : pparwal@kalanico.comCell : 98298-88804

Amendment in the definition of Capital Asset by FA 2013

Taxability on transfer of immovable property - Sec. 43CA, Sec. 56(2)(vii)(b) and sec. 194IA

Meaning of word “a residential house” used in section 54 & 54F and reinvestment in house in Joint Name

Section 36(1)(va) – Due date of payment of PF/ESI

Retrospectivety of Amendment in Sec. 40(a)(ia) by FA 2010 and 2012

Section 206C – TCS on Scrap

Application of seized assets u/s 132B

Evidentiary value of statement recorded in survey u/s 133A

•Penalty u/s 271(1)(c)

•Specified Domestic Transaction vis-a-vis Section 40A(2)

Amendment in the definition of Capital Asset by FA 2013

• Section 2(14) of the Income Tax Act, 1961 defines Capital Asset.• The existing sec. 2(14)(iii) provides that capital asset does not

include agricultural land in India. • However, following agricultural land are considered as capital

asset:- (a) agricultural land situated within the jurisdiction of municipality

or cantonment board and having a population of 10,000 or more

(b) agricultural land situated within 8kms from the local limits of municipality or cantonment board as specified by CG by notification.

Sec. 2(14)(iii)(b) amended w.e.f. A.Y. 14-15 as under:-• The distance is to be measured aerially (shortest aerial distance) &

not by approach road. The amendment is made to overrule the judgment in case of CIT Vs. Satinder Pal Singh 33 DTR 281 (P&H)

• Instead of referring to the notification of CG, for cities & distance, following three categories has been provided & if the agricultural land is situated therein, it would be a capital asset

Distance of agricultural land from municipality or cantonment board

Population of the area

Upto 2 Kms Between 10,001 to 1,00,000

Upto 6 Kms Between 1,00,001 to 10,00,000

Upto 8 Kms Exceeding 10,00,000

The ITAT Jaipur Bench with reference to earlier section 2(14)(iii)(b) in case of Smt Subha Tripathi in ITA No. 1129/JP/2011 dated 24.05.2013 for A.Y 2008-09 has held that distance from the municipal limit is to be seen with reference to the local limits as existing on the date of notification dated 06.01.1994 and not the municipal limits as existing on the date of sale.

Special provision for full value of consideration for transfer of assets other than capital assets in certain cases

Presently section 50C does not apply to transfer of immovable property, held by the transferor as stock-in-trade.

New section 43CA inserted w.e.f. A.Y. 14-15 Where the consideration received or accruing on transfer by an assessee - of an asset (other than capital asset), being land or building or both - is less than the stamp duty value, - then, the value so adopted or assessed or assessable shall be deemed to be the FVOC for the purposes of computing income under the head “PGBP”. Provisions of sec. 50C(2) & 50C(3) shall apply for determination of value Amendment made various judgments of High Court holding that sec. 50C isn’t applicable to business asset, nugatory [CIT Vs. Thiruvengadam Investments Pvt. Ltd. 320 ITR 345 (Mad.)]

If there is a time gap between the date of agreement and date of registration - then the stamp duty value may be taken as on the date of the agreement for transfer & not as on date of registration of such transfer. - Exception shall apply only in a case where amount of consideration or a part thereof has been received by any mode other than cash on or before the date of agreement for transfer of asset

Issues in Sec. 43CA

Whether section 43CA would apply where sales is already recorded but sale deed is now executed

Where after the date of agreement, amount is received in cash, which value would be adopted for the purpose of this section. Whether as on the date of agreement or as on the date of transfer

Whether benefit of sub section 3 will be denied even if a token amount is received in cash before the date of agreement, though the major amount is received by cheque

If the real consideration is lower than the stamp valuation which is disputed by the assessee, is it mandatory for the AO to refer the matter to Departmental Valuation Officer [Refer Anil Kumar Jain Vs. ITO 143 ITD 659 (Del.)(Trib.)]

Taxability of immovable property received for inadequate consideration

As per existing provisions of sec. 56(2)(vii)(b), where any immovable property is received by an individual or HUF without consideration and the stamp duty value of which exceeds Rs.50,000/-, stamp duty value of such property would be charged to tax in the hands of the individual or HUF as Income from other sources.  Sub Clause (b) substituted w.e.f. A.Y. 14-15 to cover a situation of inadequate consideration. Where an individual or HUF receives any immovable property - for a consideration, which is less than the stamp duty value of the property by an amount exceeding Rs.50,000/-, -stamp duty value of such property as exceeds such consideration - shall be chargeable to tax as income from other sources. If there is a time gap between the date of agreement and date of registration - then the stamp duty value on the date of the agreement may be taken - Exception shall apply only in a case where amount of consideration or a part thereof has been paid by any mode other than cash on or before the date of agreement for transfer of such immovable property

This provision was also introduced by FA 2009 but withdrawn w.r.e. by FA 2010

Deduction of tax at source on transfer of certain immovable property other than agricultural land

New section 194IA inserted w.e.f. 01.06.2013

Any person, being a transferee (other than person referred in sec. 194LA) - responsible for paying to a resident transferor - any sum by way of consideration - for transfer of an immovable property (other than agricultural land) - shall at the time of credit of such sum to account of transferor or at the time of payment of such sum in cash or cheque or draft or by any other mode, whichever is earlier - deduct tax @1% of such sum - the tax so deducted shall be paid to the credit of CG within a period of 7 days from the end of the month in which the deduction is made and shall be accompanied by a challan-cum-statement in Form No.26QB - The transferee shall furnish the certificate of deduction of tax at source in Form No.16B to the payee within 15 days from the due date for furnishing the challan-cum-statement in Form No.26QB.

No deduction shall be made where the consideration for transfer of an immovable property is less than Rs. 50 lacs

Provisions of sec. 203A (Tax deduction account number) shall not apply

With section 43CA, 56(2)(vii)(b), 50C & 194IA, all transaction of immovable properties, should be at value adopted/assessed/assessable by stamp authorities

If there is variation between actual consideration & value as per stamp authority Buyer of property is Individual/HUF :- buyer of property would be taxed u/s 56(2)(vii) whether purchased as capital asset or stock in trade

Buyer of property is a firm or a company:- Sec. 56(2)(vii) would not apply

Seller of property would be taxed u/s 43C if its is stock in trade and u/s 50C if it is a capital asset

Where transferee makes payment in installment, tax is to be deducted at source at the time of making payment of each installment.

The meaning of agricultural land for the purpose of sec. 194IA is different than for the purpose of sec. 194LA

Tax to be deducted @ 20% if the PAN is not quoted by the seller.

‘Immovable property’ means any land (other than agricultural land) or any building or part of a building

‘Agricultural land’ means agricultural land in India, not being a land situated in any area referred in item (a) & (b) of sec. 2(14)(iii)

ANALYSIS

Meaning of word “a residential house” used in section 54 & 54F

Reading of sections 54 and 54F makes its clear that both the provisions are pari materia excepting the nature of LTCA which is subject to transfer

While in case of section 54, it is building or a land appurtenant thereto which is in the nature of residential house, in case of section 54F, the LTCA is an asset other than a residential house

However, both the sections speak of either purchase or construction of “a residential house”

ISSUE:- WHETHER THE WORD “A” SHOULD BE UNDERSTOOD TO INDICATE A SINGULAR NUMBER

In the following judicial pronouncements, it is held that expression ‘a residential house’ cannot be interpreted in a manner to suggest that

the exemption would be restricted to a single residential unit

Gita Duggal Vs. CIT 214 Taxman 51/84 DTR 346 (Del.)(HC)Sec. 54/54F uses the expression ‘a residential house’. The expression used is not ‘a residential unit’. Section requires the assessee to acquire a ‘residential house’ and so long as the assessee acquires a building, which may be constructed, in such a manner as to consist of several units which can, if the need arises, be conveniently and independently used as an independent residence, the requirement of the section should be taken to have been satisfied. Fact that the residential house consists of several independent units cannot be permitted to act as an impediment to the allowance of exemption u/s 54/54F.

Meaning of word “a residential house” used in section 54 & 54F

CIT Vs. Syed Ali Adil 352 ITR 418 (2013) (AP)(HC)Assessee claimed deduction u/s 54, by purchasing two independent flats with

sale proceeds of an ancestral house property. AO held that deduction u/s 54 was to be restricted to only one flat since the two residential units purchased by assessee was separated by a strong wall and moreover they were purchased from two different vendors under separate sale deeds. It was held that exemption u/s 54 only requires that property purchased by assessee out of sale proceeds should be of residential nature and fact that residential house consisted of several independent units could not be an impediment for granting relief under the said section, even if such independent units were situated side by side, on different floors or were purchased under separate sale deeds.

CIT Vs. Smt. Jyothi K. Mehta 201 Taxman 79 (Kar.) (HC) (Magz.)Expression “a residential house” should be read in consonance with the other

words ‘buildings’ and ‘lands’ and, therefore, the singular ‘a residential house’ also permits use of plural by virtue of s. 13(2) of General Clauses Act.

CIT & Anr. Vs. Smt. K.G. Rukmini Amma (2011) 331 ITR 211 (Kar.)(HC)

The expression ‘a residential house’ as appearing in sec. 54 cannot be interpreted in a manner to suggest that the exemption would be restricted to a single residential unit

Vittal Krishna Conjeevaram Vs. ITO (2013) 144 ITD 325 (Hyd.)(Trib.)Assessee, owner of a residential property, entered into a development agreement for construction of flats with a developer. Under agreement, assessee received 7 flats towards his share. He claimed exemption u/s 54F on the entire amount of capital gain. AO held that assessee is entitled to exemption u/s 54F but only in respect of 1 flat out of 7 flats. It was held that assessee is entitled to exemption u/s 54F in respect of all the 7 flats in light of consistent view of different High Courts holding that ‘a’ should not be understood to indicate a singular number

Smt. V.R. Karpagam Vs. ITO (2013) 143 ITD 126 (Chennai)(Trib.)Assessee entered into an agreement for development of a piece of land owned by her. As per agreement, assessee was to receive 43.75% of built up area after development which was translated to five flats. Assessee filed her return claiming exemption u/s 54F on the value of five flats. AO, however, restricted the assessee’s claim of deduction to one flat only. It was held that in context of sec. 54F, ‘a residential house’ could not be construed as a singular and moreover, it is not necessary that all residential units should have a single door number allotted to it. Therefore, assessee was eligible for claiming exemption u/s 54F in respect of all the five flats received by her in lieu of land she had parted with.

Whether house should be purchased in the name of assessee itself

Kalya vs. CIT & Ors. 208 Taxman 436/73 DTR 302 (Raj.)(HC) - AGAINSTThe word ‘assessee’ used in the IT Act needs to be given a ‘legal interpretation’ and not a ‘liberal interpretation’. If the word ‘assessee’ is given a liberal interpretation, it would tantamount to giving a free hand to the assessee and his legal heirs and it shall curtail the revenue of the Government, which the law does not permit. Therefore, exemption u/s 54B would not be available where the land is purchased by assessee in the name of his son & daughter in law.

Prakash Vs. ITO 312 ITR 40 (Bom.)(HC) - AGAINSTThe purpose of s. 54F is to give benefit on the ownership of one residential house only by the assessee and to encourage to have one residential house of the assessee. Therefore, right from the sale of original asset till the purchase and/or construction of the residential house i.e., the "new asset", the ownership and domain over the new asset is a must. The new property must be owned by the assessee and/or having legal title over the same. The others may use and occupy the same along with the assessee but the ownership should be of the assessee of the residential house so purchased from the net consideration/sale proceeds of the sale of original asset by the assessee. 

Whether house should be purchased in the name of assessee itself

CIT Vs. Kamal Wahal 214 Taxman 287/86 DTR 37 (Del.) (HC) - FAVOURAssessee claimed deduction u/s 54F by investing sale proceeds in acquisition of a vacant plot and purchase of a residential house in the name of his wife. Taking a view that u/s 54F, investment in residential house should be in assessee’s name, AO denied the deduction in respect of investment in residential house purchased by assessee in his wife’s name. It was held that predominant judicial view for the purpose of sec. 54F is that new residential house need not be purchased by assessee in his own name nor it is necessary that it should be purchased exclusively in his name. It is moreover to be noted that assessee in present case has not purchased the new house in name of a stranger or somebody who is unconnected with him. He has purchased it only in name of his wife. There is also no dispute that entire investment has come out of sale proceeds and that there was no contribution from assessee’s wife. Thus, deduction couldn’t be denied.

DIT vs. Mrs. Jennifer Bhide 75 DTR 402 (Kar.)(HC) - FAVOURFor availing exemption u/s 54 & 54EC, it is not necessary that purchase of property or investment in specified bond should be in the name of assessee only. When out of sale proceeds of residential property, assessee purchased another residential property and specified bonds in her name and the name of her husband, exemption could not be denied to assessee to the extent of 50% on the ground that new property and bonds were purchased in joint names when admittedly no consideration is flowed from the husband.

Whether house should be purchased in the name of assessee itself

CIT vs. Ravinder Kumar Arora 75 DTR 406 (Del.)(HC) - FAVOURWhere assessee has invested the whole amount of long term capital gain in purchase of new residential house, full exemption u/s 54F can be availed even if new residential property is purchased in the joint name of assessee and spouse. Objective of sec. 54F is to provide impetus to the house construction and so long as the purpose of house construction is achieved, such hyper technicality should not impede the way of deduction. Further Section 54F does not stipulate that the house should be purchased in the name of assessee. Sec. 54F mandates that house should be purchased by the assessee.

ACIT vs. Suresh Verma 135 ITD 102/72 DTR 82 (Del)(Trib.) - FAVOURAssessee sold an inherited property and purchased a new residential property in the joint name with his wife and claimed deduction u/s 54 in respect of amount so invested. AO restricted deduction u/s 54 on the ground that property was jointly held by assessee with his wife. It was found that name of assessee’s wife was entered in the sale agreement just for the purpose of security and, for purpose of sec. 22 to 26, 27 and 64, assessee would be the owner of the whole property and income therefrom would be assessable in the hands of the assessee. Therefore, benefit of sec. 54 of entire amount invested in new property was to be allowed

 

 

Section 36(1)(va)

Sec. 36(1)(va) provides deduction of any sum received by the assessee from his employees as contributions to any PF or ESI, if such sum is credited by the assessee to the employee’s account in the relevant fund on or before the due date explained in this section. If not, such sum is considered as income u/s 2(24)(x) of the Act

Explanation to the said section specifies the “due date” as the “date by which the assessee is required as an employer to credit an employee’s contribution to the employee account in the relevant fund under any Act, rule, order or notification issued there under or under any standing order, award, contract of service or otherwise”.

Section 36(1)(va)

CIT Vs. Sabari Enterprises (2008) 298 ITR 141 (Karn.)(HC)Deduction of statutory liability towards PF and other funds referred to in cl. (b) of s. 43B is permissible if the payments are made by the assessee before the due date of submission of return under s. 139(1) even if the contributions are paid beyond the due dates under the respective statutory enactments

CIT Vs. Udaipur Dugdh Utpadak Sahakari Sangh Ltd. (2013) 217 Taxman 64 (Raj)(HC)(Mag.)Assessee deposited the amount received from his employees as contribution in provident fund and ESI fund after due date, i.e., after 15th of the next month, but before the due date of filing the return. The AO, added the said amount to the income of assessee as per provisions of sec. 36(1)(va) r.w.s. 2(24)(x). It was held that since assessee had deposited the said amount in provident fund and ESI fund of employees before the due date of filing the return, AO was wrong in adding the impugned amount to the income of assessee.

ISSUE :- Whether the term “due date” as specified in the said Explanation refers to the due date fixed for filing the return of

income u/s 139(1) or not

Spectrum Consultants India (P) Ltd. Vs. CIT (2013) 89 DTR 274 (Kar.)(HC)In view of non obstante clause in sec. 43B and the words “due date” in the proviso thereto, read with the words ‘due date’ in the Explanation to sec. 36(1)(va), authorities were not justified in disallowing the employees contribution remitted by the employer assessee. AO as well as the revision authority fell in error in disallowing the deduction of employee’s contribution remitted by the employer assessee both under the ESI and EPF Acts, partly before 31.03.2006 in the F.Y concerned and the balance before the filing of the returns u/s 139(1) as extended upto 30.11.2006.

CIT Vs. Kichha Sugar Co. Ltd. (2013) 216 Taxman 90 (Uttarakhand)(HC)Due date for payment of employees contribution of provident fund u/s 36(1)(va) is same as contemplated u/s 43B. Therefore, payment made before due date of filing return is allowable.

CIT Vs. Nipso Polyfabriks Ltd. (2013) 84 DTR 424 (HP) (HC)Assessee-employer having deposited the employee’s contribution towards ESI before due date for filing the return though after due date prescribed under the 1948 Act, the same had to be allowed as deduction and could not be treated as income of assessee u/s 2(24)(x) r.w.s. 36(1)(va). For this purpose, no distinction can be made between employer’s contribution and employee’s contribution.

Section 36(1)(va)

Retrospectivety of Amendment in Sec. 40(a)(ia) by FA 2010 and 2012The Finance Act 2010 amended sec. 40(a)(ia) w.e.f. 01.04.2010 allowing the expenditure if the tax deducted at source during the first eleven months of the previous year is paid up to the due date of filing of return u/s 139(1).

ISSUE 1 :- Whether the said amendment is Retrospective or Prospective

AGAINST VIEW Bharti Shipyard Ltd. Vs. DCIT (2011) 61 DTR 41/132 ITD 53 (Mum.) (Trib.)(SB)The said amendment has not been given retrospective effect by the legislature & thus it can not be considered as retrospective on the solitary ground that the original provision caused some hardship to the assessee’s. The amendment is not aimed at removing any unintended hardship to the assessee but to relax the intended hardship to some extent by increasing the time period for deposit of tax. It is nowhere expressly set out that the amendment is curative or merely declaratory of the previous law. Further, the amendment has been specifically made retrospectively applicable from A.Y. 10-11. Therefore, if tax at source deducted by assessee in Feb 2005 is deposited in April/June 2005, there is a failure to comply with the provisions of section 40(a)(ia).

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Retrospectivety of Amendment in Sec. 40(a)(ia) by FA 2010 and 2012

FAVOURABLE VIEWCIT Vs. Rajinder Kumar (2013) 90 DTR 297 (Del.)(HC)

Provisions of sec. 40(a)(ia) as amended by FA, 2010 clearly support the view that the expression ‘said due date’ used in clause (A) of the proviso to unamended section refers to time specified in sec. 139(1).The amended sec. 40(a)(ia) expands and further liberalizes the statute when it stipulates that deduction made in the first eleven months of the previous year but paid before the due date of filing the return, will constitute sufficient compliance.Thus, assessee having deposited TDS in the month of April 2007, i.e. before the date on which return u/s 139(1) was to be filed, sec. 40(a)(ia) could not be invoked to disallow the payments in the relevant year

CIT Vs. Virgin Creations ITA No. 302/2011 dt. 23.11.2011 (Cal.)(HC) In this case, assessee deducted tax at source from the paid charges between the period 01.04.2005 and 28.04.2006 and the same were paid by the assessee in July and Aug 2006 i.e. well before the due date of filing of the return of income for the year under consideration. This factual position was undisputed.

It was held that in view of the authoritative pronouncement of the SC in case of Allied Motors Pvt. Ltd. and also in the case of Alom Extrusions Ltd., that sec. 40(a)(ia) has retrospective application, this Court cannot decide otherwise.

Retrospectivety of Amendment in Sec. 40(a)(ia) by FA 2010 and 2012

ISSUE 2 :- Whether second proviso of section 40(a)(ia) inserted by FA, 2012 w.e.f. 01.04.2013 is Retrospective or

Prospective

The said proviso provides that where an assessee fails to deduct the whole or any part of the tax under Chapter XVII-B but is not deemed to be assessee in default under the 1st proviso of sec.201(1), then it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso.

There is no clarification as to whether the said amendment is retrospective or prospective. However, taking a clue from a recent decision dt. 06.09.2013 pronounced by Rajkot Special Bench (Tribunal) in case of Bharti Auto Products Vs. CIT reported at (2013) 92 DTR 345 wherein it is held that in view of the fact that the first proviso to sub-sec. (6A) of sec. 206C not only seeks to rationalize the provisions relating to collection of tax at source but is also beneficial in nature in that it seeks to provide relief to the collectors of tax at source from the consequences flowing from non/short collection of tax at source after ensuring that the interest of the Revenue is well protected, the said proviso would apply retrospectively, the second proviso of section 40(a)(ia) can be said to have retrospective application.

Retrospectivety of Amendment in Sec. 40(a)(ia) by FA 2010 and 2012The proviso to sec. 201(1) provides that assessee shall not be

considered to be an assessee in default if the resident payee –-has furnished his ROI u/s 139- has taken into account such amount for computing income in such ROI and- has paid tax due on the income declared by him in such ROI - furnishes a certificate from CA in Form No. 26A

Form 26A has two parts. 1st Part is the form for furnishing accountant certificate which is to be given by the payer and Annexure A to this form is a certificate of the CA who is to certify after examining the books of accounts and other documents of the payee that payee has furnished the ROI and has included such sum in computing his taxable income in the return filed by him. He is also to certify that he or any of his partner is a director, partner or employee of the payer/payee or its associate concern and that if the statement made in this certificate is proved incorrect or false, he would be liable for penal or other consequences as may be prescribed.

Section 206C – TCS on ScrapSection 206C fastens liability on a seller of scrap for collection of tax at source. Explanation (b) to the said section defines ‘scrap’ to mean

- waste and scrap from the manufacture or mechanical working of materials - which is definitely not usable as such because of breakage, cutting up, wear and other reasons

ISSUE 1 :- Whether a Trader of Scrap is subject to section 206C

Rajkot Special Bench (Tribunal) in its recent decision dt. 06.09.2013 in case of Bharti Auto Products Vs. CIT (2013) 92 DTR 345 held as under:-

In common parlance, “waste” is understood as something unusable or unwanted. Scrap refers to the incidental residue derived from certain types of manufacture which is recoverable without further processing. Thus, the words “from the manufacture or mechanical working of materials” qualify the word “scrap” and not “waste”.

Definition of “scrap” as given in Explanation (b) is not limited to scrap arising from the manufacture or mechanical working of materials alone but extends to cover “waste” also. “Waste is a term of wider import than “scrap”.

Section 206C – TCS on Scrap Use of words “Profits & gains from business of trading in…….scrap etc.” in

the head note of sec. 206C makes it clear that the applicability of sec. 206C is not restricted to the sale of scrap generated from the business of manufacturing undertaken by the assessee himself but also covers the sale of scrap in the business of trading in scrap.

Explanation (c) to sec. 206C which explains the term “seller” doesn’t require that a seller of scrap must himself generate scrap from manufacture or mechanical working of materials. Thus, such a requirement cannot be read in sec. 206C for its applicability to sale of scrap.

The said decision given by Rajkot Special Bench (Trib.) has overruled the decisions of following Benches holding that a trader of scrap is not subject to section 206C

-Nathalal P. Lavti Vs. ITO (2012) 65 DTR 133 (Rajkot)(Trib.)-Navine Flourine International Ltd Vs. ACIT (2011) 56 DTR 273 (Ahd.)(Trib.)

Sec. 206C – TCS on ScrapISSUE 2 :- Whether first proviso to sub sec. (6A) of section 206C

inserted by FA, 2012 w.e.f. 01.07.2012 is Retrospective or Prospective

The said proviso provides that where any person [other than a person referred in sub section (1D)] responsible for collecting tax, fails to collect the same, he shall not be deemed to be an assessee in default in respect of such tax if the buyer or licensee or lessee:-

- has furnished his ROI u/s 139- has taken into account such amount for computing income in such ROI

and- has paid tax due on the income declared by him in such ROI - furnishes a certificate from CA in Form No. 27BA

Rajkot Special Bench (Tribunal) in its recent decision dt. 06.09.2013 in case of Bharti Auto Products Vs. CIT (2013) 92 DTR 345 held that in view of the fact that the first proviso to sub-sec. (6A) of sec. 206C not only seeks to rationalize the provisions relating to collection of tax at source but is also beneficial in nature in that it seeks to provide relief to the collectors of tax at source from the consequences flowing from non/short collection of tax at source after ensuring that the interest of the Revenue is well protected, the said proviso would apply retrospectively.

Application of seized assets u/s 132BSection 132B(1)(i) provide that seized assets may be adjusted

against any existing liability under the IT Act, WT Act, Expenditure-tax Act, Gift-tax Act and Interest-tax Act and the amount of liability determined on completion of assessment pursuant to search, including penalty levied or interest payable in connection with such assessment and in respect of which such person is in default or deemed to be in default

Explanation 2 inserted w.e.f. 01.06.2013 - for removal of doubts - that ‘existing liability’ doesn’t include advance tax payableTherefore, seized cash can't be adjusted against advance tax

Explanation 2 is inserted from 01.06.2013. Therefore, the question arises is whether it has retrospective or prospective effect.

The Hon’ble ITAT Ahmadabad Bench in the case of Kanishka Prints (P.) Ltd. Vs. ACIT 143 ITD 716 has held that amendment to sec.132B is applicable prospectively w.e.f. 01.06.2013. Therefore, where AO applied the Explanation retrospectively in case of assessee and adjusted the cash seized towards self assessment tax instead of towards advance tax payable as claimed by assessee, it was not sustainable. Cash seized was to be adjusted against advance tax payable for A.Y. 07-08.

Evidentiary value of statement recorded in survey u/s 133A

Section 133A(3)(iii) empowers an IT authority to record the statement of any person which may be useful for any proceedings under the Act.

Section 133A(5) empowers the IT authority to record the statement of assessee or other person in respect of the expenditure incurred in connection with any function, ceremony or event. Such statement may thereafter be used in evidence in any proceedings under the Act.

The various High Courts namely:- -MP in case of CIT Vs. Digambar Kumar Jain (HUF) (2013) 84 DTR 365, -Delhi in case of CIT Vs. Dhingra Metal Works (2010) 328 ITR 384, -Madras in case of CIT Vs. S. Khader Khan Sons (2008) 300 ITR 157

-Kerela in case Paul Mathews & Sons Vs. CIT (2003) 263 ITR 101,

has held that the statement recorded in survey u/s 133A(3) has no evidentiary value as it is not recorded on oath whereas a statement u/s 132(4) has a evidentiary value as it is recorded on oath. Similarly, the statement recorded u/s 133A(5) has a evidentiary value as the section itself provides that such statement may be used as evidence.

Evidentiary value of statement recorded in survey u/s 133AThe decision of Madras High Court in CIT Vs. S. Khader Khan

Son culling out the following principals has been affirmed by the Supreme Court reported in (2013) 79 DTR 184

In contradistinction to the power under s. 133A, s. 132(4) of the IT Act enables the authorized officer to examine a person on oath and any statement made by such person during such examination can also be used in evidence under the IT Act. On the other hand, whatever statement is recorded under s. 133A of the IT Act it is not given any evidentiary value obviously for the reason that the officer is not authorized to administer oath and to take any sworn statement which alone has evidentiary value as contemplated under law

The word "may" used in s. 133A(3)(iii) of the Act, viz., "record the statement of any person which may be useful for, or relevant to, any proceeding under this Act", makes it clear that the materials collected and the statement recorded during the survey under s. 133A are not conclusive piece of evidence by itself.

The above view is clearly supported by CBDT Circular dt. 10.03.2003 with regard to the confession of additional income during the course of search and seizure and survey operations. Thus, the materials collected and the statement obtained under s. 133A would not automatically bind upon the assessee

Principles laid down by the Karnataka High Court for levy of penalty u/s 271(1)(c)

A person is liable for penalty u/s 271(1)(c) of the Income Tax Act, 1961 if the Assessing Officer or the Commissioner or Commissioner(Appeals) in the course of any proceedings is satisfied that any person has concealed the particulars of his income or furnished inaccurate particulars of income.

However, it has been experienced that the revenue authorities sought to initiate the penalty proceedings in most of the cases whenever the “income assessed” is more than the “income returned” without analyzing whether the assessee is guilty of concealment of income or furnishing inaccurate particulars of income and impose the penalty in a mechanical manner.

Karnataka High Court recently in case of CIT & ANR. Vs. MANJUNATHA COTTON & GINNING FACTORY (2013) 92 DTR 111 after considering the various judgments of Supreme Court & High Courts has laid down the following principles in relation to penalty proceedings u/s 271(1)(c):-

1. Penalty u/s 271(1)(c) is a civil liability (Principal also laid down by Hon’ble SC in case of UOI & Ors. Vs. Dharamendra Textile Processors 306 ITR 277)

2 . Willful concealment is not an essential ingredient for attracting civil liability.

3. Mens Rea is not an essential element for imposing penalty for breach of civil obligations or liabilities.

4. The imposition of penalty is not automatic.

5. Imposition of penalty even if the tax liability is admitted is not automatic.

Mere completion of assessment at an income higher than

the income returned does not automatically lead to the imposition of penalty on the assessee. The levy of penalty is not an automatic concomitant of the assessment. It has to be found that the assessee has concealed the income or furnished inaccurate particulars of its income. The Apex Court in the case of Dilip N. Shroff Vs. JCIT (2007) 291 ITR 519 at Para 62 has observed that finding in the assessment proceedings cannot automatically be adopted in the penalty proceedings and the authorities have to consider the matter afresh from a different angle. Hon’ble Apex Court in the case of Suresh Chand Mittal (2001) 251 ITR 9 has held that higher income offered after search would not lead to levy of penalty automatically.

6.The penalty proceedings are distinct from the assessment proceedings. The proceedings for imposition of penalty though emanate from the proceedings of assessment; it is independent and separate aspect of proceedings.

7.The validity of the assessments or reassessments in pursuance of which penalty is levied, cannot be the subject-matter of penalty proceedings. The assessment or the reassessment cannot be declared as invalid in the penalty proceedings.

8.Taking up of penalty proceedings on one limb and finding the assessee guilty on another limb is bad in law. This principle has been also held by the Gujarat High Court in case of Commissioner of Income-Tax v. Lakhdhir Lalji 85 ITR 77.

9. Existence of conditions stipulated in sec. 271(1)(c) is a sine qua non for initiation of penalty proceedings u/s 271. The existence of such conditions should be discernible from the assessment order or the order of the appellate authority or the revisional authority.

Penalty can be levied if the AO during the course of proceedings is satisfied that assessee has concealed the income or furnished inaccurate particulars of such income. However, by insertion of sub section (1B) to section 271, if the AO writes in the assessment order that “Penalty proceedings have been initiated” the same will be treated as recording of satisfaction. In other words, even if there is no specific finding regarding the existence of the conditions mentioned in sec. 271(1)(c), at least from the facts set out in Expln. 1(A) and (B), it should be discernible from the said order which would by a legal fiction constitute the concealment because of deeming provision.

Even if these conditions do not exist in the assessment order passed, at least, a direction to initiate proceedings under sec. 271(1)(c) is a sine qua non for the assessment officer to initiate the proceedings because of the deeming provision contained in sec. (1B).

The said deeming provisions are not applicable to the orders passed by the CIT(A) and the CIT.

10. Only when no explanation is offered or the explanation offered is found to be false or when the assessee fails to prove that the explanation offered is not bona fide, an order imposing penalty could be passed.

11. If the explanation offered, even though not substantiated by the assessee, but is found to be bona fide and all the facts relating to the same and material to the computation of his total income have been disclosed by him, no penalty could be imposed.

12. The direction referred to in the sub-section (1B) to sec. 271 of the Act should be clear and without any ambiguity.

13. If the AO has not recorded any satisfaction or has not issued any direction to initiate the penalty proceedings, in appeal, if the appellate authority records satisfaction, then the penalty proceedings have to be initiated by the appellate authority and not the assessing authority.

14. Notice under sec. 274 of the Act should specifically state the grounds mentioned in sec. 271(1)(c), i.e., whether it is for concealment of income or for furnishing of incorrect particulars of income

15. The findings recorded in the assessment proceedings insofar as “concealment of income” and “furnishing of incorrect particulars” would not operate as res judicata in the penalty proceedings. It is open to the assessee to contest the said proceedings on merits.

16. Even if the assessee has not challenged the order of assessment levying tax and interest and has paid tax and interest that by itself would not be sufficient for the authorities either to initiate penalty proceedings or to impose penalty, unless it is discernible from the assessment order that, it is on account of such unearthing or enquiry concluded by authorities it has resulted in payment of such tax or such tax liability came to be admitted and if not it would have escaped from tax net and as opined by the AO in the assessment order.

17. Sending printed form where all the grounds mentioned in sec. 271 are mentioned would not satisfy the requirement of law.

18. The assessee should know the grounds which he has to meet specifically. Otherwise, principles of natural justice is offended. On the basis of such proceedings, no penalty could be imposed to the assessee.

Specified Domestic Transaction vis-a-vis Section 40A(2)

New section inserted in Chapter X w.e.f. 01.04.2013 providing the computation of ALP in respect of SDT

SDT defined in section 92BA to cover the following transactions:- Expenditure referred in sec. 40A(2)(b) Transactions referred in sec. 80A Transfer of goods or services referred in sec. 80IA(8) Business transacted between persons referred in sec. 80IA(10) –

Close connection Any transaction referred in Chapter VIA or sec. 10AA to which

sec. 80IA(8) or 80IA(10) are applicable Any other transaction as may be prescribedProvided that aggregate of such transactions entered in the previous

year exceeds Rs. 5 crores

ALP is to be computed u/s 92C by most appropriate method namely CUP, RPM, CPM, PSM , TNMM or such other method as may be prescribed.

Specified Domestic Transaction vis-a-vis Section 40A(2)

Sec. 40A(2)(a) gives an authority to the AO to disallow payment of expenditure made to persons specified in clause (b) which he considers to be excessive or unreasonable :-

(a) having regard to FMV of goods services or facility (b) legitimate needs of business or profession of assessee (c) benefit derived or accruing to the assessee from such expenditure

From A.Y. 13-14, the FMV in respect of SDT shall be determined at ALP. Thus, even now, AO can disallow the expenditure u/s 40A(2)(a), if such expenditure is excessive or unreasonable considering the legitimate needs of business or the benefit derived there from.

Sec. 40A(2) covers transaction in the nature of expenditure and not income.

Sec. 40A(2) inapplicable if expenses is lower than ALP

SDT not restricted to transactions with resident only. For e.g. remuneration paid by Indian Co. to NR director or payment made by Indian Co. to Foreign Co. where foreign co. holds 20% < 26% in Indian co. or where foreign co. having PE would be covered

Specified Domestic Transaction vis-a-vis Section 40A(2)

Payment to related parties covered under non business head -Interest payment to related party claimed as deduction u/s 57;

sec. 50A(2) extends sec. 40A(2) to income from other sources -Cost of capital asset acquired from related party

Payment of capital asset under business head - depreciation claimed u/s 32 - full deduction claimed u/s 35(1)(iv)

Illustrative Coverage of sec. 40A(2)(b)

Scope of sec. 40A(2)(b) is very wide. It would cover payment of expenditure made to following persons:-

Taxpayer Illustrative Coverage

Individual -Relatives- Firm in which he is partner- Company in which he is director/has more than 20% shareholding

Firm -Partners/relatives- Company/firm in which partner/relative has substantial interest (>20%)

Company - Director/relatives- Company/firms in which director/relative has substantial interest (>20%) - Parent (>20%)- Sister subsidiary (common parent holding >20%)

Payment to Related Party – Illustration

Beneficial shareholding >20% Beneficial shareholding >20%

Any payment towards expenditure by - A Co. to its own directors as remuneration, salary, bonus etc. - A Co. to X Co. (Parent Co.) - A Co. to directors of X Co. - A Co. to relatives of directors of A Co. and X Co. - A Co. to B Co.

Any payment towards expenditure by - X Co. to A Co./B Co.

X Co. (Indian Co.)

A Co.(Indian Co.)

B Co.(Indian Co.)

Payment to Related Party – Illustration

Whether shareholding needs to be aggregated to determine substantial interest?

10% 10% 10% 10% 60%

Are A Pvt. Ltd. and B Pvt. Ltd. related concerns? - Substantial holding is to be determined qua individual - Preference shareholding to be excluded

For entities other than companies, beneficial share in profits is relevant; share in corpus not relevant

A B C D Others

B Pvt. Ltd

A Pvt. Ltd

THANK YOUPresented by

P.C. Parwal ,FCA5th Floor, Milestone Building, Tonk

Road, JaipurE-mail: pparwal@kalanico.com

Cell : 98298-88804