Tuf circular for Lecture

Tuf circular for Lecture on 22.11.14

Photos of CA Pawankumar Sony Lecture

Major Amendment in Budget 2014 - Direct Taxes

Major Amendment in Budget 2014 - Direct Taxes

CPE Date : 15^th November 2014

-          Complied by CA Pawankumar Soni

-          FCA , DISA(ICAI),B.Com

Ø Change of Income Tax Slab:

o   Income tax slab was increased from Rs. 2Lakh to Rs. 2.5Lakhs for individuals.

o   For Senior Citizens increased from Rs. 2.5Lakhs to Rs. 3Lakhs

Ø Increase of limit U/s. 80C

o   Now you can save extra Rs. 50,000 and get tax relief.

o   Now you have to increase your savings/other instruments to get this benefit.

o   Note : Corresponding changes in Increase of PPF Limit is also increased from Rs. 1 Lac to 1.5 Lac (Notification No. GSR 588(E) DT 13/8/2014)

Ø Increase in Interest on Housing Loan limit

o   Interest on housing loan increased from Rs. 1.5 Lakhs to Rs. 2 Lakhs

Ø Capital Gains Tax changes

o   Changes in brief: Budget changed taxation related to non-equity mutual funds like FMPs, Debt Funds, Liquid Funds

o   Need to hold 3 years to become long-term (instead of 1year)

o   Taxed @ 20% (Earlier minimum of 10% without indexation & 20% with indexation)

o   Impact: Now, return from these FMP/Funds will be included in your income if holding period is below 3years. Also it will have retrospective effect on your fixed instrument holdings. For example if you have purchased 1year-FMP in Mar-2014 of Rs. 10,000. The return would be included in your income & taxed based on the present slab. Means it may be taxed at 30%(plus SC+Cess)!!!…if you are in 30% slab.

o   With these changes – you need to rethink of investing in Liquid/Debt Funds & FMP of 1 year vis-à-vis Bank Fixed Deposits.

Ø Forfeited Advance

o   Forfeited advance is now taxable under Other Income instead of adjusting in capital gains.

Let us discuss few of the Amendment in Details

Parities & Anomalies Brought Between Section 40(a)(i) & Section 40(a)(ia) by

Finance Bill has tried to bring parity regarding the above issue by making both the dates specified same as due date of return filling of deductor as per section 139(1). The amendment to section 40(a)(i) has been discussed below in detail .

Here I am quoting the law and the amendment made hereunder.

As per Section40(a)(i) of Income Tax Act 1961, expenses mentioned here under will be disallowed if

“ any interest, royalty, fees for technical services or any other sum chargeable under act , which is payable,

(A)   Outside India or

(B)   In India to a Non Resident, or to a foreign company ,

on which tax is deductible at source under chapter XVIIB, and such tax has not been deducted or, after deduction has not been paid during the previous year, or on or before the due date specified as per section 200(1) or on or before the due date as per section 139(1).

Provided that where in respect of any sum, tax has deducted in any subsequent year or, has been deducted in the previous year but paid after the due date specified as per section 200(1) after the due date specified in section 139(1) , such sum shall be allowed as deduction in computing the income of the previous year in which such tax has been paid.”

Words in Bold are substituted by finance Bill 2014.

Meaning thereby disallowance under Section 40(a)(i) of Income Tax Act 1961 will be attracted

(i)    if the amount paid or payable is interest, royalty ,fees for technical services or any other sum chargeable under the income tax act and

(ii)  Aforesaid sum is paid/payable Outside India to a Non resident or a foreign company or  In India to a Non resident or a foreign company and

(iii) Sum is taxable in the hands of the recipient under the income tax and Tax is deductible at source (TDS) under chapter XVIIB

(iv)  And any of the following default takes place,

Default A : Tax at source has not been deducted or,

Default B: Tax at source has been deducted but has not been paid during the previous year, or       paid after the due date specified in section 139(1).

In case any of the two aforesaid defaults take place, then the payer is not allowed deduction(100%) of such sum paid or payable in that previous year for such previous year.

However one proviso (exception) to above case is where

(i)  Tax has been deducted in the subsequent year of credit or payment or,

(ii)  Tax has been deducted in the previous year but paid in any subsequent year after the time prescribed under section 139(1).

Then such sum will be allowed as deduction in the year in which such tax has been paid.

Here earlier there was an anomaly between section 40 (a)(i) and section 40 (a)(ia) [ discussed later in this article]. Government has tried to bring parity between the two by bringing amendment to the law by Finance Bill 2014.

Lets understand the amendment with help of an example, ABC Ltd. [due date of filling of income tax return is 30^th September as per section 139(1)] has to make a payment of Rs 5,00,000 to MR.B as fees for technical services availed in July 2015, MR.A has deducted tax at source on the aforesaid sum but has not deposited due to any reason it with government till 30^th September 2016. Prior to the amendment for claiming such payment as expense in the P/Y 15-16 MR. A has to deposit TDS with the government till 30^th april 2016(i.e. for any payment credited or paid in any previous year , TDS must be deposited till 30^th April of subsequent year following that previous year). But as per amendment such time limit has been extended till due date of filling of return as per section 139(1) of the deductor i.e. ABC Ltd.

Consequently , as per amendment ABC Ltd. can not claim such payment as expense for the previous year 2015-16(500000 is disallowed 100%) . He can claim such sum as expense in the year in which TDS is deposited by him with the government.

However one major difference has been introduced between the two sections by the Finance Bill 2014 . Prior to amendment, in case of default under section 40(a)(ia) [ discussed below] takes place then any sum paid under the aforesaid section is disallowed (100%) in the previous year in which such same is paid or credited in books.As per the Finance bill 2014, the disallowance in case of default is changed from 100% to 30%. Now in case of aforesaid default only 30% of such sum is disallowed and 70% will be given as deduction for the previous year in which such sum is paid or credited. The 30% of such sum will be allowed in the year of payment of TDS. Whereas in case of default under section 40(a)(i) the disallowance is 100% itself.

The amendment is discussed below in detail .

As per Section40(a)(ia) of Income Tax Act 1961, expenses mentioned here under will be disallowed if

“ any interest ,commission or brokerage, rent, royalty, fees for technical services , payable to a RESIDENT, or amounts payable to a contractor or sub- contractor being Resident for carrying out any work (including supply of labour for carrying out any work) or any salary payable under section 192 , on which tax is deductible at source under chapter XVIIB, and such tax has not been deducted or, after deduction has not been paid on or before the due date specified in section 139(1) , thirty percent of any sum payable to a resident.

Provided that where in respect of any sum, tax has deducted in any subsequent year or, has been deducted during the previous year but has been paid after the due date specified in section 139(1) , thirty percent of such sum shall be allowed as deduction in computing the income of the previous year in which such tax has been paid.

Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of chapter XVII-B on any such sum is not deemed to be an assessee in default under the first proviso to section 201(1), then for the purpose of this sub clause , it shall be deemed that 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.”

Words in Bold are inserted by finance Bill 2014.

Meaning hereby disallowance will be attracted under section 40 (a)(ia) if the amount payable isany interest, commission or brokerage, rent, royalty, fees for technical services , payable to a RESIDENT, or amounts payable to a contractor or sub- contractor being resident for carrying out any work  ( including supply of labour for carrying out any work) , on which tax is deductible at source under chapter XVIIB, and tax is not deducted or deducted but not paid to the credit of central government before the due date as per section 139(1) i.e. is the due date of filling of income tax return .

However, again there is an anomaly between the two sections and i.e. in case resident payee ( who has earned the income) has taken such sum for computing income in the return of income(ROI) under section 139 and resident payee has paid tax due on income declared by him in ROI, then the payer(who has to make payment) is not deemed to be defaulted under section 40(a)(ia).

Also salary payable to resident employees were not covered earlier by the said section which now stand covered under the same and all provisions of this section will apply same to salary also as to other nature of payment .

Lets understand this with the help of an example, say, A Ltd. Whose date of filling of return is 30^th September pays the following sums without deduction of TDS, Rs. 200000 to MR.B , a resident, as rent(due date of filling of return for MR.B is 31^st July) and Rs. 500000 to XYZ LTD , a resident company, as professional fees( due date of filling of return for XYZ LTD is 30^th September). The above sum were paid on 1^st july, 2015 without deduction of tax. Also MR.B & XYZ LTD has not added such income in their return of income.as per law tax has to be deducted and paid till 30^th September i.e. due date of filling of return of A LTD for availing such payment as expense in P/Y 2015-16. Now as per amendment to Finance Bill 2014, 210000 {30% of (200000+500000)} will be disallowed in the previous year 2015-16 and 490000 (700000-210000) will be allowed as expense previous year 2015-16. However had this payment is made to NON RESIDENT under section 40(a)(i) and TDS is not deposited by due date then 100% of amount Rs.700000 would have been disallowed.

Levy of penalty U/s. 276D mandatory for willful default U/s. 142(1) or 142(2A

Failure to produce accounts and documents Levy of penalty made mandatory. It is proposed to remove the monetary limit of fine and also proposed mandatory levy of fine. The existing provisions of section 276D of the Act provide that if a person willfully fails to produce accounts and documents as required in any notice issued under sub-section (1) of section 142 or willfully fails to comply with a direction issued to him under sub-section (2A) of section 142, he shall be punishable with rigorous imprisonment for a term which may extend to one year or with fine equal to a sum calculated at a rate which shall not be less than four rupees or more than ten rupees for every day during which the default continues, or with both.

It is proposed to amend the provisions of the said section so as to provide that if a person willfully fails to produce accounts and documents as required in any notice issued under sub-section (1) of section 142 or willfully fails to comply with a direction issued to him under sub-section (2A) of section 142, he shall be punishable with rigorous imprisonment for a term which may extend to one year and with fine.

Mode of acceptance or repayment of loans and deposits ECS, RTGS and NEFT etc. are now proposed to be allowed as permissible mode to accept or repay the deposit or loan specified under section 269SS and 269T respectively. -

Levy interest U/s. 220 from the date of expiry of period stated in the notice of demand U/s. 156 -

The existing provision contained in sub-section (1) of section 220 provides that any amount specified as payable in a notice of demand under section 156 shall be paid within thirty days of the service of notice at the place and to the person mentioned in the notice. Sub-section (2) states that if the amount specified in the notice is not paid within the period, the assessee shall be liable to pay simple interest at one per cent for every month or part of a month comprised in the period commencing from the day immediately following the end of the period mentioned in sub-section (1) and ending with the day on which the amount is paid. The proviso to sub-section (2) states that where as a result of an order under sections 154, 155, 250, 254, 260, 262, 264 or sub-section (4) of section 245D, the amount on which interest payable under this section had been reduced, the interest shall be reduced accordingly and the excess interest paid, if any, shall be refunded.

Liability of the assessee to pay interest is based on the theory of continuity of the proceedings and the doctrine of relation back. Accordingly, it is proposed to insert a new sub-section in section 220 so as to provide that where any notice of demand has been served upon an assessee and any appeal or other proceeding, as the case may be, is filed or initiated in respect of the amount specified in the said notice of demand, then such demand shall be deemed to be valid till the disposal of appeal by the last appellate authority or disposal of proceedings, as the case may be and such notice of demand shall have effect as provided in section 3 of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964.

It is further proposed to provide that where as a result of an order under sections specified in the first proviso, the amount on which interest was payable under this section had been reduced and subsequently as a result of an order under said sections or section 263, the amount on which interest was payable under section 220 is increased, the assessee shall be liable to pay interest under sub-section (2) of the said section on the amount payable as a result of such order, from the day immediately following the end of the period mentioned in the first notice of demand referred to in sub section (1) of the said section and ending with the day on which the amount is paid.

Grants Power of Survey for verification of TDS defaults -

Presumptive income amount increased to Rs. 7500 for Business of Plying, Hiring or Leasing Goods Carriages -

The existing provisions of section 44AE of the Act provides for presumptive taxation in the case of an assessee who is engaged in the business of plying, hiring or leasing goods carriages and not owning more than ten goods carriages at any time during the previous year. Income from the said business is calculated as under:

Type of Goods carriage	Amount of presumptive income
Heavy goods vehicle (HGV)	Rs.5,000 for every month (or part of a month) during which the goods carriage is owned by the taxpayer.
Vehicle other than HGV	Rs. 4,500 for every month (or part of a month) during which the goods carriage is owned by the taxpayer.

The amount of presumptive income was revised by the Finance (No.2) Act, 2009. Further, the existing provisions make a distinction between HGV and vehicle other than HGV for specifying the amount of presumptive income.

Considering the erosion in the real values of the amount of specified presumptive income due to inflation over the years and also in order to simplify this presumptive taxation scheme, it is proposed to provide for a uniform amount of presumptive income of Rs.7,500 for every month (or part of a month) for all types of goods carriage without any distinction between HGV and vehicle other than HGV.

Budget 2014 – Capital gains arising from transfer of an asset by way of compulsory acquisition - :

The existing provisions contained in section 45 provide for charging of any profits or gains arising from transfer of a capital asset. Sub-section (5) of the said section provides for dealing with capital gains arising from transfer by way of compulsory acquisition where the compensation is enhanced or further enhanced by the court, Tribunal or any other authority. Clause (b) of the said sub-section provides that where the amount of compensation is enhanced or further enhanced by the court it shall be deemed to be the income chargeable of the previous year in which such amount is received by the assessee. There is uncertainty about the year in which the amount of compensation received in pursuance of an interim order of the court is to be charged to tax, due to court orders. Accordingly, it is proposed to provide that the amount of compensation received in pursuance of an interim order of the court, Tribunal or other authority shall be deemed to be income chargeable under the head ‘Capital gains’ in the previous year in which the final order of such court, Tribunal or other authority is made. –

Trading in derivative by Company mainly engaged in Trading of Shares will be treated as Speculative -

Losses in Speculation Business The existing provisions of section 73 of the Act provide that losses incurred in respect of a speculation business cannot be set off or carried forward and set off except against the profits of any other speculation business. Explanation to section 73 provides that in case of a company deriving its income mainly under the head “Profits and gains of business or profession” (other than a company whose principal business is business of banking or granting of loans and advances), and where any part of its business consists of purchase or sale of shares, such business shall be deemed to be speculation business for the purpose of this section.

Sub-section (5) of section 43 defines the term speculative transaction as a transaction in which a contract for purchase or sale of any commodity, including stocks and shares, is settled otherwise than by way of actual delivery. However, the proviso to the said section exempts, inter alia, transaction in respect of trading in derivatives on a recognized stock exchange from its ambit.

It is proposed to amend the aforesaid Explanation so as to provide that the provision of the Explanation shall also not be applicable to a company the principal business of which is the business of trading in shares.

Exemption U/s. 54EC cannot exceed Rs. 50 Lakh despite investment in two Years -

Capital gains exemption on investment in Specified Bonds The existing provisions contained in sub-section (1) of section 54EC of the Act provide that where capital gain arises from the transfer of a long-term capital asset and the assessee has, within a period of six months, invested the whole or part of capital gains in the long-term specified asset, the proportionate capital gains so invested in the long-term specified asset, out of the whole of the capital gain, shall not be charged to tax. The proviso to the said sub-section provides that the investment made in the long-term specified asset during any financial year shall not exceed fifty lakh rupees. However, the wordings of the proviso have created an ambiguity. As a result the capital gains arising during the year after the month of September were invested in the specified asset in such a manner so as to split the investment in two years i.e., one within the year and second in the next year but before the expiry of six months. This resulted in the claim for relief of one crore rupees as against the intended limit for relief of fifty lakh rupees. Accordingly, it is proposed to insert a proviso in sub-section (1) so as to provide that the investment made by an assessee in the long-term specified asset, out of capital gains arising from transfer of one or more original asset, during the financial year in which the original asset or assets are transferred and in the subsequent financial year does not exceed fifty lakh rupees.

Benefit U/s. 54 / 54F available only if investment is made in one residential house situated in India –

Capital gains exemption in case of investment in a residential house property The existing provisions contained in sub-section (1) of section 54, inter alia, provide that where capital gain arises from the transfer of a long-term capital asset, being buildings or lands appurtenant thereto, and being a residential house, and the assessee within a period of one year before or two years after the date of transfer, purchases, or within a period of three years after the date of transfer constructs, a residential house then the amount of capital gains to the extent invested in the new residential house is not chargeable to tax under section 45 of the Act. The existing provisions contained in sub-section (1) of section 54F, inter alia, provide that where capital gains arises from transfer of a long-term capital asset, not being a residential house, and the assessee within a period of one year before or two years after the date of transfer, purchases, or within a period of three years after the date of transfer constructs, a residential house then the portion of capital gains in the ratio of cost of new asset to the net consideration received on transfer is not chargeable to tax. The benefit was intended for investment in one residential house within India. Accordingly, it is proposed to amend the aforesaid sub-section (1) of section 54 so as to provide that the rollover relief under the said section is available if the investment is made in one residential house situated in India. It is further proposed to amend the aforesaid sub-section (1) of section 54F so as to provide that the exemption is available if the investment is made in one residential house situated in India.

Loophole allowing Double deduction to Charitable Trust Related to Capital Assets and Depreciation plugged –

Existing scheme of section 11 as well as section 10(23C) provides exemption in respect of income when it is applied to acquire a capital asset. Subsequently, while computing the income for purposes of these sections, notional deduction by way of depreciation etc. is claimed and such amount of notional deduction remains to be applied for charitable purpose. Therefore, double benefit is claimed by the trusts and institutions under the existing law. The provisions need to be rationalised to ensure that double benefit is not claimed and such notional amount does not get excluded from the condition of application of income for charitable purpose. In view of the above, it is also proposed to amend the Act to provide that under section 11 and section 10(23C), income for the purposes of application shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under these sections in the same or any other previous year -        

TDS on non-exempt payments made under life insurance policy -

Under the existing provisions of section 10(10D) of the Act, any sum received under a life insurance policy, including the sum allocated by way of bonus on such policy is exempt subject to fulfillment of conditions specified under the said section. Therefore, the sum received under a life insurance policy which does not fulfill the conditions specified under section 10(10D) are taxable under the provisions of the Act. In order to have a mechanism for reporting of transactions and collection of tax in respect of sum paid under life insurance policies which are not exempted under section 10(10D) of the Act, it is proposed to insert a new section in the Act to provide for deduction of tax at the rate of 2 per cent. on sum paid under a life insurance policy, including the sum allocated by way of bonus, which are not exempt under section 10(10D) of the Act. In order to reduce the compliance burden on the small tax payers, it has also been proposed that no deduction under this provision shall be made if the aggregate sum paid in a financial year to an assessee is less than Rs.1,00,000/-.

Summary on Changes of Tax Deduction at Source (TDS)

·         To claim the expenditure, TDS on payment made to non-residents can be deposited before filing of return [Sec 40(a)(i)]

·          In case of non-deduction or non-payment of TDS from certain payments made to residents, only 30% of the expenditure shall be disallowed. [Sec 40(a)(ia)]

·         Disallowance u/s 40(a)(ia) shall extend to all payments on which tax is deductible

·         Time limit for 2 years to treat payer as assessee in default has been dispensed with.

·         Time limit of 6 years for TDS Statements not filed, extended to 7 years.

An income tax authority may for the purpose of checking of compliance of TDS may survey any premises and enquire about books of accounts etc u/s 133A

Other amendments

·         Corporate Social Responsibility (CSR) expenditure not allowed as deduction u/s 37

·         Transfer of Government Security (carrying a periodic payment of interest) by one non-resident to other non-resident shall be exempt from capital gains tax.

·         Transaction in respect of trading in Commodity derivatives carried out in recognized association and chargeable to CTT is not speculative transaction.

·         New Section 133C inserted to empower the prescribed income tax authority to issue notice to person, whose information is in possession of such authority, requiring him to furnish information or documents.

·         Sec 285BA includes more transactions and reportable accounts to be furnished by specified persons to the income tax authority.

·         Assessment of income of a person other than the searched person u/s 153C only if the Assessing officer of such other person is satisfied that books etc seized or requisitioned have a bearing on the determination of the total income of such other person.

·         Credit of Alternate Minimum Tax u/s 115C shall be allowed.

Thank you for your Patience Hearing

Proposed Action Plan for 13-14

ISSUE OF SHARES & GIFTS U/s.56 & 68 OF INCOME TAX ACT, 1961& CORRESPONDING TAX AUDIT REPORT

ISSUE OF SHARES & GIFTS U/s.56 & 68 OF INCOME TAX ACT, 1961& CORRESPONDING TAX AUDIT REPORT

                                                       CA Bhalchandra N. Thigale

M.com, M. Phil, FCA, DISA [ICAI]

As per Income Tax Act, receiver (donee) of gift is charged to taxation u/s 56 (2) (vii). The donor of gift is not charged to taxation under this section. However, the below cases is analyzed from the taxation as applicable to donor (Capital Gain taxability) and donee (Gift taxability) under Income Tax Act.

•Property means Capital Assets in the hands of Receiver means if property is Stock in Trade, Raw Material & Consumable Stores for receiver then it will not be taxable.

•Movable property means Shares and Securities, jewellery, Archaeological       collection, Drawings, Paintings, Sculptures any work of art, bullion.  If any movable property other than above is gifted then there is no taxability.

• Exceptions: Gifts received from the following persons / situations are not taxable –

i.                     From Relatives 

ii.                   On the marriage of individual,

iii.                  By will or inheritance

iv.                 In contemplation of Death of payer

v.                   From local authority

vi.                 From Charitable Trust registered u/s 12AA

vii.                From Any Trust, Foundation etc referred u/s 10(23c).

•  Relative Means -

i.                     - Spouse of Individual

ii.                   - Brother & Sister of Individual

iii.                  - Brother & Sister of Spouse of Individual

iv.                 - Brother & Sister of either of the parents of Individual

v.                   - Any Lineal ascendants or descendants of the individual

vi.                 -Any Lineal ascendants or descendants of the spouse of the individual.

Below is a comprehensive list of Donors as per definition of relative under I.Tax Act

List of Male Donors	List of Female Donors
Father	Mother
Brother	Sister
Son	Daughter
Grand Son	Grand Daughter
Husband	Wife
Sister’s Husband	Brother’s Wife
Wife’s Brother	Wife’s Sister
Husband’s Brother	Husband’s Sister
Mother’s Brother	Mother’s Sister
Mother’s Sister Husband	Wife’s brother’s wife
Father’s Brother	Father’s Brother’s Wife
Father’s Sister’s Husband	Father’s Sister
Grand Father	Grand Mother
Daughter’s Husband	Son’s Wife
Spouse Father	Spouse Mother
Spouse Grand Father	Spouse Grand Mother

• Gifts received by Individuals and HUF [Sec.56 (2) (vii)]

1. Applicability: Individuals and HUF.

2. Taxability: The following amounts received by an Individuals or HUF from any person(s) (subject to exceptions) is taxable as Income from other Sources –

-Any Lineal ascendants or descendants of the spouse of the individual.

Item Received	Nature	Amount Taxable under “Income from Other Sources” (Donee)	Donor
(a)Any sum of Money/Property	Without consideration, the aggregate Fair Market  value of which ≤ Rs. 50,000	1.Sec.56(2)(vii) Not Applicable 2.Income = NIL 3.COA= Previous owner’s Cost 4.Holding Period= Previous owner’s period	-No Capital Gain u/s 47(iii) -No Transfer
(aa)Any sum of money	Without consideration, the aggregate value of which exceeds Rs. 50,000	Whole of aggregate value of such sum.	Same as Above
(b)Immovable Property	(i)Without Consideration & Stamp Duty Value of property >  Rs. 50000	1.Stamp Duty Value of such property 2.COA=SDV 3.Holding Period= Previous owner’s period	Same as Above
	(ii)Inadequate consideration, and difference between Consideration & Stamp Duty Value exceeds Rs. 50000 AY14-15	1. Stamp Duty Value – Consideration 2.At the time of further sale COA=SDV 3.Holding Period= From the date of Acquisition	1.•Sec.50C applicable for Capital Assets •Capital Gain= SDV-COA 2.Section 43CA applicable if Land and Building is not Capital Asset
(c)Other than Immovable Property	(i)Without consideration & aggregate Fair Market Value > Rs.50,000	1.Fair Market Value of such property 2.COA=FMV 3. Holding Period= Previous owner’s period	-No Capital Gain u/s 47(iii) -No Transfer
	(ii)Inadequate Consideration, and difference between consideration & Fair Market Value exceeds Rs. 50,000	1.Fair Market Value- Consideration 2.COA=FMV 3. Holding Period= From the date of Acquisition	Capital Gain=   Sales Price  ­ COA

• Gifts received by Firms and Closely Held Companies [Sec.56 (2) (viia)]

Applicable if:

1.  Shares belong to a closely held company.

2.  Donor is any person.

Without Consideration:  if Fair Market value is more than Rs.50000/-:

For Donor:  No Capital Gain because u/s 47(iii) it is not consider as transfer.

For Donee:  FMV is income from other Sources u/s 56(2) (viia).

At the time of further sale COA will be FMV and for calculation of holding period previous owner period will be counted for donee.

Inadequate Consideration:  if the difference of consideration and FMV is greater than Rs.50000/- then difference amount will be taxable for receiver.

For Donor: Capital Gain will be Sale price – COA.

For Donee: Difference of FMV and Consideration is income from other Sources u/s 56(2) (viia). At the time of further sale COA will be FMV and holding period will be counted from the date of acquisition of Shares.

Exception: if Shares are received in nature of 47(via), 47(vic), 47(vicb), 47(vid), 47(vii)) (i.e. amalgamation, merger, demerger. reorganization etc.)

“Fair Market Value” of a property, being Shares of a Company (not being a Company in which Public are substantially interested), shall be determined as per the prescribed method of valuation. [Notification No. 52/2012 dt.29.11.2012].

• Premium on Issue of Shares, by Closely held Company [Sec.56 (2) (viib)]

1. Situation: A Company (not being a Company in which the Public are substantially interested), receives Consideration for Issue of Shares exceeding the Face Value of such shares (i.e. Issue at Premium).

2. Subscriber: Any person being Resident

3. Taxable Amount: The aggregate Consideration received as exceeds the FMV of Shares.

4. Exceptions: The above provision shall not apply where the consideration for issue of shares is received by a Venture Capital Undertaking from a Venture Capital Undertaking from a Venture Capital Company or a Venture Capital Fund [as defined in Sec. 10(23FB)] or by a Company from a class of a person as may be notified by the Central Government.

5. Fair Market Value of the shares shall be higher of the following –

 (a) Value determined in accordance with the prescribed method, or

 (b) Value substantiated by the Company to the satisfaction of the Assessing Officer, based on the value (on the date of issue of Shares) of its Assets, including Intangible Assets being Goodwill, Know-How, Patents, Copyrights, Trademarks, Licenses, Franchises or any other Business or Commercial Rights of similar nature.

•VALUATION RULE:Movable or Immovable properties shall be valued as follows:

Immoveable Property: SDV of the property but if date of agreement for fixing the consideration and date of registration are not same than date of agreement will be considered for SDV (Applicable from A.Y.2014-15).

Movable Property: FMV will be as follows:

→Jewellery, Archaeological collection, Drawings, Paintings, Sculptures any work of art, bullion:

a. Purchased from registered Dealer (under VAT): Invoice Value will be FMV.

b. In any Other Cases: Value of Property is less than Rs.50000/- than at which rate it can be sold in the open market will be FMV. And if value of property exceed Rs.50000/- than assessee has an option for FMV either it can be sold value or he can take report of registered valuer.

→ Quoted Shares and Securities: a. If Transaction is done through RSE than transaction value recorded in stock exchange

b. If Transaction is not done through RSE than the lowest price quoted on any RSE in India for such share and securities as on the date of valuation and if transaction is not done on the valuation date  regarding such shares and securities than the lowest price will be taken immediately preceding the valuation date.

→ Unquoted or Unlisted Shares & Securities:

-Unquoted Equity Shares:       Net worth * paid up value of one share

                                           Total Amount of paid up Equity Share Capital

Net Worth: Assets – Liabilities.

Assets:

Include: Book Value of all Assets i.e. Fixed Assets, Current Assets, Investments. It does not include: Advance Tax, TDS & TCS, Dr Balance of P & L A/c, Miscellaneous Expenditure, and Discount on issue of Debenture not written off.

Liabilities:

Include: book value of all liabilities i.e. Preference Share Capital, Debenture, Loans (Secured & Unsecured),Current Liabilities ,Ascertained Provisions, Depreciation Reserve, Dividend on Equity & Preference Share (declared before Transfer),Current Provision for Income Tax-Advance Tax –TDS & TCS, Arrears of Divided on Preference Shares even if shown under contingent liabilities. It does not include: Equity Share Capital, Provision for unascertained liabilities, Contingent Liabilities (except arrear of dividend of Pref. shares), Reserve & surplus

Or

Value determined by merchant banker or accountant

- Other Unquoted or Unlisted Shares & Securities: at which rate can be sold in market or a report from merchant banker or C.A

·        SECTION 68: CASH CREDITS :

Section 68 provides that:

-         where any sum is found credited in the books of an assessee maintained for any previous year,

-         and the assessee offers no explanation about the nature and source thereof,

-         or the explanation offered by him, in the opinion of Assessing Officer, is not satisfactory,

-         the sum so credited shall be charged to income tax as theincome of the assessee of that previous year.

The Supreme Court in case of Lovely Exports (P) Ltd. held that there is no onus on the company to prove the source of money in hands of shareholder or the person making payment of share application money. If company identifies the person from whom money has been received, then section 68 cannot be involved in the hands of company.

Proviso to section 68 has been added by Finance Act, 2012 which over-rules the Supreme Court judgment in Lovely Exports (P) Ltd. and provides as under:

-         if in case of a closely held company

-         any sum is found credited in its books of account as share application money, share capital, share premium or any such amount by whatever name called

-         and the person being a resident in whose name such credit is recorded in the books of account do not offer to the Assessing Officer an explanation about the nature and source of the sum so credited; or

-         the explanation given by the resident to the Assessing Officer is found to be unsatisfactory by the Assessing Officer.

-         then, it shall be deemed that the explanation offered by the assessee company about the sum so credited is not satisfactory.

-         and consequently sum credited in books of company as share application money, share capital, share premium, etc. shall be deemed as income of the company as unexplained credit under section 68.

-         The crux of amendment is that the closely held company receiving share application money/ share capital/ share premium/ any such amount has to prove the source of funds in the hands of shareholder/ person giving the share application money/ share capital/ share premium/ any such amount.

The Finance Act, 2012 has placed onus of proof on the closely held company receiving the share application money/ share capital/ share premium/ any such amount to prove that such money which is invested in the company belongs to the person who has given the money to the company. Otherwise, the money so received shall be taxable in hands of company as unexplained cash credit under section 68.

Notes:

(i)                  Proviso to section 68 introduced by Finance Act, 2012 is not applicable to money received from non-residents since money received from non-residents is regulated by FEMA and rules of RBI.

(ii)                Proviso to section 68 introduced by Finance Act, 2012 is not applicable to money received from Venture Capital Company and Venture Capital Fund since they are regulated by SEBI.

Further section 115BBE has been introduced by Finance Act, 2012 which provides as under:

(1)   Where the total income of an assessee includes any income referred to in section 68, section69, section 69A, section 69B, section69C or section 69D, the income-tax payable shall be the aggregate of –

(a)    the amount of income-tax calculated on income referred to in section 68, section69, section 69A, section 69B, section69C or section 69D, at the rate of thirty per cent; and

(b)   normal tax rate on the balance income.

(2)   Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provision of this Act in computing his income referred to in clause (a) of sub section (1).

Ø  Tax Audit Report Changed Accordingly as Follows :

28

Whether during the previous year the assessee has received any property, being share of a company not being a company in which the public are substantially interested, without consideration or for inadequate consideration as referred to in section 56(2)(viia), if yes, please furnish the details of the same.

:

Yes

Name of the person from which shares received

PAN of the person

Name of the company from which shares received

CIN of the company

No. of shares received

Amount of consideration paid

Fair market value of shares

Nil

29

Whether during the previous year the assessee received any consideration for issue of shares which exceeds the fair market value of the shares as referred to in section 56(2)(viib), if yes, please furnish the details of the same.

:

Yes

Name of the person from which consideration received for issue of shares

PAN of the person

No. of shares

Amount of consideration received

Fair market value of the shares

Nil

Some Illustrations:

1] Illustration– Transfer of Shares for Inadequate Consideration

Mr. B transferred 500 shares of Reliance Industries Ltd to M/s. B Co. (P) Ltd. On 10.10.2013 for Rs. 3,00,000 when the Market Price was Rs. 5,00,000. The Indexed Cost of Acquisition of Shares for Mr. B was computed at Rs. 4,45,000. The transfer was not subjected to Securities Transaction Tax. Determine the Income chargeable to Tax in the hands of Mr. B and M/s. B Co. (P) Ltd because of the above said transaction.

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2]  Illustration – Taxability of Gifts u/s 56

Discuss the Taxability or otherwise of the following transactions u/d 56(2) of the Income Tax Act –

JD Private Limited issued 50,000 Equity Shares of Face Value of Rs. 10 per Square at a Premium of Rs. 60 per share. The Fair Market Value of the Shares as per prescribed rule is Rs. 50 per Share.

3]  Illustration:

Mr. Harish entered into an agreement to sell a building and land appurtenant thereto to Mr. Kushal on 1.1.2013 for Rs. 50 Lakh. Mr. Kushal made an advance payment through cheque of Rs. 5 Lakh on 1.1.2013. The stamp duty value on the date of agreement was Rs. 58 Lakh. Mr. Harish purchased this property on 1.1.2011 for Rs. 10 Lakh.

Mr. Kushal makes the balance payment of Rs. 45 lakhs on 30.6.2013 and gets the property registered in his name on that date when the duty value has been increased to Rs. 70 Lakhs. Possession of the property was also handed over to him on 30.6.2013.

Mr. Kushal sold the property on 31.12.2013 for Rs. 100 lakhs.

Examine the taxability of the transaction in the hands of Mr. Harish and Mr. Kushal, if:

(i)                  Both Mr. Harish and Mr. Kushal treat is as capital asset.

(ii)                Both Mr. Harish and Mr. Kushal treat is as stock in trade.

(iii)               Mr. Harish treats it as capital asset but Mr. Kushal treats it as stock in trade.

(iv)              Mr. Harish treats it as stock in trade but Mr. Kushal treats it as capital asset.