Insight of Few Sections

Relevant for Handling Income Tax Assessments

- C.A. Mehul Thakker

SECTION 2(14)

SECTION 2(14) – CAPITAL ASSET [W.E.F A.Y.2014-15]

Modification in parameters defining scope of land falling outsidethe ambit of “Agricultural land” and consequently, within thedefinition of “Capital Asset”

(a) Section 2(14) defines capital asset which excludes agriculturalland in India.

(b) However, following land is not excluded from the definition ofcapital asset.

(1) Land situated in any area which is comprised within thejurisdiction of a municipality or cantonment board having apopulation of not less than 10,000.(2) Land situated in any area within the distance measuredaerially as per table given below–

SECTION 2(14) – CONT…

(c) For the above purpose, “population” means thepopulation according to the last preceding census of whichthe relevant figures have been published before the date ofvaluation.

Population of municipality / cantonment

board

Distance measured

aerially

More than 10,000 but not exceeding 1 lakh 2 kilometers

More than 1 lakh but not exceeding 10 lakh 6 kilometers

More than 10 lakhs 8 kilometers

SECTION 43(5)

SECTION 43(5) – TRADING IN COMMODITY DERIVATIVES NOT A SPECULATIVE TRANSACTION [W.E.F A.Y.2014-15]

Meaning : Speculative transaction means a transaction involving acontract for purchase and sale of commodities, including stocksand shares, which is periodically or ultimately settled other than byactual delivery or transfer of commodities or scrips [Section 43(5)].

Exceptions: [Proviso to Section 43(5)]

Following transactions are not regarded as speculative transactions

(a) a contract in respect of raw materials or merchandise enteredinto by a person in the course of his manufacturing or merchantingbusiness to guard against loss through future price fluctuations inrespect of his contracts for actual delivery of goods manufacturedby him or merchandise sold by him;

SECTION 43(5) – CONT…(b) a contract in respect of stocks and shares entered into by adealer or investor therein to guard against loss in his holdings ofstocks and shares through price fluctuations;

(c) a contract entered into by a member of a forward market or astock exchange in the course of any transaction in the nature ofjobbing or arbitrage to guard against loss which may arise in theordinary course of his business as such member;

(d) an eligible transaction in respect of trading in derivativesreferred to in clause [(ac)] of section 2 of the Securities Contracts(Regulation) Act, 1956 (42 of 1956) carried out in a recognisedstock exchange;

(e) an eligible transaction in respect of trading in commodityderivatives carried out in a recognised association.

SECTION 43(5) – CONT…Explanation 2.—For the purposes of clause (e), the expressions—

(i) "commodity derivative" shall have the meaning as assigned to itin Chapter VII of the Finance Act, 2013;

(ii) "eligible transaction" means any transaction,—

(A) carried out electronically on screen-based systems throughmember or an intermediary, registered under the bye-laws, rulesand regulations of the recognised association for trading incommodity derivative in accordance with the provisions of theForward Contracts (Regulation) Act, 1952 (74 of 1952) and therules, regulations or bye-laws made or directions issued under thatAct on a recognised association; and

SECTION 43(5) – CONT…(B) which is supported by a time stamped contract note issued by suchmember or intermediary to every client indicating in the contract note, theunique client identity number allotted under the Act, rules, regulations or bye-laws referred to in sub-clause (A), unique trade number and permanentaccount number allotted under this Act;

(iii) "recognised association" means a recognised association as referred to inclause (j) of section 2 of the Forward Contracts (Regulation) Act, 1952 (74 of1952) and which fulfils such conditions as may be prescribed7a and is notifiedby the Central Government for this purpose;

Recognised Association for this purpose are:

1. National Commodity and Derivatives Exchange Ltd., Mumbai

2. Universal Commodity Exchange Ltd., Mumbai

3. Ace Derivatives and Commodity Exchange Ltd., Ahmedabad.

SECTION 43CA, 50C, 56(2)(vii) AND 49(4)

SECTION 43CA - W.E.F. A.Y.2014-15Stamp duty value of land and building to be taken as the fullvalue of consideration in respect of transfer, even if the same areheld by the transferor as stock-in-trade

(a) The provisions of section 50C require adoption of stamp dutyvalue of land or building or both, which are held as a capital asset,if the same are transferred for a consideration which is less thanthe value adopted, assessed or assessable by any authority of aState Government for the purpose of payment of stamp duty inrespect of such transfer.

(b) However, such provisions were not applicable in case of transferof immovable property, held by the transferor as stock-in-trade.

(c) Therefore, as an anti-avoidance measure, new section 43CA hasbeen inserted with effect from A.y.2014-15.

SECTION 43CA – CONT…

If Actual Consideration < Stamp Duty Valuation

Where the taxpayer accepts the stamp duty valuation

under Stamp Act

Taxpayer also agrees for Income

tax purpose

FVC= Stamp Duty Valuation

Taxpyaer does not agree for Income

Tax Purpose

Then Income Tax Officer shall refer matter to Valuation

Officer(VO)

VO determines Value > Stamp Duty

Valuation

FVC=Stamp Duty Valuation

VO determines Value < Stamp Duty Valuation

FVC= Value determined by VO

Where the taxpayer does not accept the stamp duty

valuation under Stamp Act

Taxpayer will prefer appeal to higher authority under

Stamp Act

FVC = Value determined by such higher Authority

SECTION 43CA - CONT…

NOTE: As per sub-section (3) and (4) of Section43CA, if there is a time gap between date ofagreement and date of registration, the stamp dutyvalue may be taken as on the date of agreementinstead of the date of registration. However, for thesame, at least a part of the consideration has beenpaid by any mode other than cash on or before thedate of agreement.

SECTION 43CA - CONT…

Now let’s compare section 43CA and 50CParticulars Land and/or Building

held as Business Asset

(stock-in-trade)

Land and/or

Building held as

Capital Asset.

Section Applicable43CA 50C

[See Chart above] [See Chart above]

Whether option to adopt

stamp duty value on date of

agreement is available?

YES NO

However, such

option is available

w.e.f A.Y.2017-18

SECTION 56(2)(vii) – W.E.F. A.Y. 2014-15

Where an individual or a Hindu undivided family receives, inany previous year, from any person or persons

(b) any immovable property,—

(ii) for a consideration which is less than the stamp dutyvalue of the property by an amount exceeding fifty thousandrupees, the stamp duty value of such property as exceedssuch consideration:

Provided that where the date of the agreement fixing theamount of consideration for the transfer of immovableproperty and the date of registration are not the same, thestamp duty value on the date of the agreement may be takenfor the purposes of this sub-clause:

SECTION 56(2)(vii) – CONT…

Provided further that the said proviso shall apply only in a case wherethe amount of consideration referred to therein, or a part thereof, hasbeen paid by any mode other than cash on or before the date of theagreement for the transfer of such immovable property;

Provided that where the stamp duty value of immovable property asreferred to in sub-clause (b) is disputed by the assessee on groundsmentioned in sub-section (2) of section 50C, the Assessing Officer mayrefer the valuation of such property to a Valuation Officer, and theprovisions of section 50C and sub-section (15) of section 155 shall, asfar as may be, apply in relation to the stamp duty value of suchproperty for the purpose of sub-clause (b) as they apply for valuation ofcapital asset under those sections:

PRACTICAL 1

Dhruv purchased flat from ABC Build Con Pvt. Ltd., details of which are asunder:

1. Date of entering into agreement :-1.7.2013.

2. Agreed consideration : Rs. 100 lakhs

3. Down payment of Rs. 15 lakhs was paid by cheque on the date ofagreement.

4. Stamp duty value of flat on the date of agreement was Rs. 120 lakhs.

5. Registration of sale deed in respect of flat took place on 1.1.2016.

6. Stamp Duty value on the date of registration of sale deed was Rs. 150lakhs.

Discuss tax implications in the hands Dhruv.

SECTION 56(2)(vii) CONT…

SOLUTION

Taxable Amount under the head “Income from Other Sources”

Taxable Amount=Stamp Duty Value Less Actual Consideration

= Rs.120 lakhs – Rs.100 lakhs

= Rs. 20 lakhs

Further, Dhruv shall deduct TDS under section 194 IA at 1 % of consideration (Reader must note that 1% is not of stamp duty value, it is of consideration). Therefore, Dhruv shall deduct TDS of Rs. 1,00,000/- while making payment to Rahul.

SECTION 56(2)(vii) CONT…

Where the capital gain arises from the transfer of aproperty, the value of which has been subject toincome-tax under clause (vii) or clause (viia) of sub-section (2) of section 56, the cost of acquisition of suchproperty shall be deemed to be the value which hasbeen taken into account for the purposes of the saidclause (vii) or clause (viia).

Considering the above, if Dhruv subsequently sell theproperty, then he is entitled to adopt Rs. 120 Lacs asCost of acquisition.

SECTION 49(4)

SECTION 78

SECTION 78 – CARRY FORWARD AND SET OFF OF LOSS IN THE CASE OF CHANGE IN THE CONSTITUTION OF FIRM

Section 78 provides that where there is achange in the constitution of the firm onaccount of death/retirement, the firm shall notbe entitled to set off and carry forward of somuch of the loss as is attributable to suchpartner. This provision covers when a partnergoes out of the firm (i.e., the case of retirementor death).

SECTION 78 – CONT…

Section 78 is not applicable in case offollowings:

1. Change in profit sharing ratio

2. Admission of a partner

3. Carry forward of unabsorbed depreciation.

SECTION 80GGB AND 80GGC

SECTION 80GGB AND 80GGC [W.E.F A.Y. 2014-15]Cash donations to political parties and electoral trusts not toqualify for deduction

(i) As per section 80GGB, deduction is allowable in respectof contributions given by an Indian company to any politicalparty or an electoral trust.

(ii) Likewise, under section 80GGC, deduction is allowable inrespect of contributions made by any person, except localauthority and every artificial juridical person wholly or partlyfunded by the Government, to any political party or electoraltrust.

(iii) A proviso has been inserted in both these sections that“no deduction shall be allowed in respect of any sumcontributed by way of cash.”

SECTION 142(2A)

SECTION 142(2A) w.e.f. 1st June, 2013Scope of reasons for directing special audit of accounts expanded

Old Provision New Provision

Under section 142(2A), if at any stage

of the proceeding, the Assessing

Officer having regard to the “nature

and complexity of the accounts of

the assessee” and the interests of the

revenue, is of the opinion that it is

necessary so to do, he may, with the

approval of the Chief Commissioner

or Commissioner, direct the assessee

to get his accounts audited by an

accountant and to furnish a report of

such audit.

Section 142(2A) now provides that if at any stage of the

proceedings before him, the Assessing Officer, having

regard to

the nature and complexity of the accounts,

volume of the accounts,

doubts about the correctness of the accounts,

multiplicity of transactions in the accounts or

specialized nature of business activity of the assessee,

and the interests of the revenue, is of the opinion that it

is necessary so to do, he may, with the previous approval

of the Chief Commissioner or the Commissioner, direct

the assessee to get his accounts audited by an

accountant and to furnish a report of such audit.

SECTION 92BA

SECTION 92BA [W.E.F A.Y. 2013-14]-TRANSFER PRICING REGULATIONSTO APPLY TO SPECIFIED DOMESTIC TRANSACTIONS

• Section 92BA has been inserted with effect from theassessment year 2013-14.

• It provides the meaning of “specified domestictransaction” with reference to which the income is to becomputed under section 92, having regard to arm’s lengthprice.

• The following transactions are covered within themeaning of “specified domestic transactions” if the aggregateof these transactions entered into by the assesse in aprevious year exceeds Rs.5 crore.

SECTION 92BA [W.E.F A.Y. 2013-14]-CONT…(a) any expenditure in respect of which payment has been

made or is to be made to a person referred to in section40A(2)(b);

(b) any transaction referred to in section 80A;

(c) any transfer of goods or services referred to in section80-IA(8);

(d) any business transacted between the assessee and otherperson as referred to in section 80-IA(10);

(e) any transaction, referred to in any other section underChapter VI-A or section 10AA, to which provisionssection 80-IA(8)/(10) are applicable; or

(f) any other transaction as may be prescribed,

SECTION 133C &

EXPLANATION 2 TO SECTION 147

SECTION 133C AND DEEMING FICTION FOR REASSESSMENT U/S 147

Section 133C was inserted by Finance Act, 2014with effect from 1st October, 2014:-

The prescribed income-tax authority, may for thepurposes of verification of information in itspossession relating to any person, issue a notice tosuch person requiring him, on or before a date to bespecified therein, to furnish information ordocuments verified in the manner specified therein,which may be useful for, or relevant to, any inquiryor proceeding under this Act.

SECTION 133C CONT…Explanation 2 to Section 147

For the purposes of this section, the following shall also be deemed to becases where income chargeable to tax has escaped assessment, namely :—

(a) where no return of income has been furnished by the assessee althoughhis total income or the total income of any other person in respect of whichhe is assessable under this Act during the previous year exceeded themaximum amount which is not chargeable to income-tax ;

(b) where a return of income has been furnished by the assessee but noassessment has been made and it is noticed by the Assessing Officer that theassessee has understated the income or has claimed excessive loss,deduction, allowance or relief in the return ;

(ba) where the assessee has failed to furnish a report in respect of anyinternational transaction which he was so required under section 92E;

SECTION 133C CONT…(c) where an assessment has been made, but—

(i) income chargeable to tax has been under assessed ; or

(ii) such income has been assessed at too low a rate; or

(iii) such income has been made the subject of excessive relief under this Act ; or

(iv) excessive loss or depreciation allowance or any other allowance under this Act has beencomputed;

(ca) where a return of income has not been furnished by the assessee or a return ofincome has been furnished by him and on the basis of information or document receivedfrom the prescribed income-tax authority, under sub-section (2) of section 133C, it isnoticed by the Assessing Officer that the income of the assessee exceeds the maximumamount not chargeable to tax, or as the case may be, the assessee has understated theincome or has claimed excessive loss, deduction, allowance or relief in the return;{effective from 1st June, 2016}

(d) where a person is found to have any asset (including financial interest in any entity)located outside India.

SECTION 142A

SECTION 142A –EXPANSION OF SCOPE OF SECTION 142A ANDPROVISION OF TIME LIMIT FOR SUBMISSION OF REPORT BY THEVALUATION OFFICER TO THE ASSESSING OFFICER-W.E.F. 01.10.2014-

Assessing officer can refer to the valuation officer, the estimation ofvaluation of any investment: -

Where an estimate of the value of any investment referred to in section 69or section 69B or the value of any bullion, jewellery or other valuable articlereferred to in section 69A or section 69B or (with effect from 1st July, 2010)fair market value of any property referred to in section 56(2) is required forthe purposes of making any assessment or re-assessment, the assessingofficer may require the valuation officer to make an estimate of the sameand report to the assessing officer.

Valuation officer has the same powers as given under Wealth-Tax Act

Provisions applicable upto 30th September, 2014.

SECTION 142A –CONT….

(1) The Assessing Officer may, for the purposes of assessment or reassessment,make a reference to a Valuation Officer to estimate the value, including fairmarket value, of any asset, property or investment and submit a copy of report tohim.

(2) The Assessing Officer may make a reference to the Valuation Officerwhether or not he is satisfied about the correctness or completeness of theaccounts of the assessee.

(3) The Valuation Officer, on a reference made, shall, for the purpose ofestimating the value of the asset, property or investment, have all the powers thathe has under section 38A of the Wealth-tax Act, 1957 (27 of 1957).

(4) The Valuation Officer shall, estimate the value of the asset, property orinvestment after taking into account such evidence as the assessee may produceand any other evidence in his possession gathered, after giving an opportunity ofbeing heard to the assessee.

Provisions applicable From 1st October, 2014.

SECTION 142A –CONT….

(5) The Valuation Officer may estimate the value of the asset, propertyor investment to the best of his judgment, if the assessee does not co-operate or comply with his directions.

(6) The Valuation Officer shall send a copy of the report of the estimatemade, to the Assessing Officer and the assessee, within a period of sixmonths from the end of the month in which a reference is made.

(7) The Assessing Officer may, on receipt of the report from theValuation Officer, and after giving the assessee an opportunity of beingheard, take into account such report in making the assessment orreassessment.

Explanation.—In this section, "Valuation Officer" has the same meaning asin clause (r) of section 2 of the Wealth-tax Act, 1957.

SECTION 149 and 151

SECTION 149 : Time limit for reopening assessment w.e.f. 1st June, 2015

Up to 4 years from the end of the

relevant assessment year

Beyond 4 years but up to 6 years form the

end of the relevant assessment year

Assessment can be re-opened whatever is

the amount of income escaped [Note 1]

If the escaped income is Rs. 1,00,000 or

more for that year [Note 2]

Notes [Section 151]:-1. No notice can be issued by an A.O. who is below the rank of Joint

Commissioner unless he is satisfied that on the reason recorded by A.O.that it is a fit case for issue of such notice.

2. Notice can be issued only if the Principal Chief Commissioner or ChiefCommissioner or Principal Commissioner or Commissioner is satisfiedon the reasons recorded by the A. O. that it is a fit case for issue ofnotice.

SECTION 263

SECTION 263 –EXPLANATION 2 TO SECTION 263 INSERTED WITHEFFECT FROM 01.06.2015

For the purposes of section 263, it is hereby declared that an order passedby the Assessing Officer shall be deemed to be erroneous in so far as it isprejudicial to the interests of the revenue, if, in the opinion of the PrincipalCommissioner or Commissioner,—

(a) the order is passed without making inquiries or verification which shouldhave been made;

(b)the order is passed allowing any relief without inquiring into the claim;

(c)the order has not been made in accordance with any order, direction orinstruction issued by the Board under section 119; or

(d)the order has not been passed in accordance with any decision which isprejudicial to the assessee, rendered by the jurisdictional High Court orSupreme Court in the case of the assessee or any other person.

SECTION 263 CONT…PRACTICAL 1

During the course of scrutiny proceedings, the assessee placed relianceon the decision of Rajasthan High Court for deductibility of certainexpenditure under section 37(1). The Assessing Officer, Ahmedabad,while passing an assessment order under section 143(3) allowed thededuction under section 37(1) relying on the said decision.

On 10-08-2015, the Commissioner of Income Tax assumed revisionjurisdiction under section 263 in respect of such order on the groundthat on similar facts, there was a decision of Madras High Court denyingdeduction under section 37(1). The Commissioner of Income tax is ofthe opinion that the order of Assessing officer under section 143(3) isdeemed to be erroneous and prejudicial to the interest of revenue.

Examine the validity of jurisdiction assumed by Commissioner ofIncome Tax under section 263.

SECTION 263 CONT…SOLUTION 1

On minute reading of the explanation 2 to Section 263 - clause (d),the order of assessing officer shall be deemed to be erroneous inso far as it is prejudicial to the interest of the revenue, if the samehas not been passed in accordance with any decision which isprejudicial to the assessee rendered by the jurisdictional HighCourt in case of the assessee or any other person.

In present case study, the jurisdictional High Court shall be GujaratHigh Court while the Commissioner of Income Tax relied on thedecision of Madras High Court. Therefore, the opinion of theCommissioner that order passed by Assessing Officer, Ahmedabadis deemed to be erroneous and prejudicial to the interest ofrevenue is not tenable.

SECTION 263 CONT…Further, Supreme Court in case of Malabar Industrial Co. Ltd. v. CIT held that recoursecannot be had to section 263(1) unless the Commissioner is satisfied with the twinconditions, namely,

- the order of the Assessing Officer sought to be revised is erroneous; and

- it is prejudicial to the interests of the revenue.

If one of the conditions is absent – if the order of the ITO is erroneous but is notprejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue –then jurisdiction under section 263 fails.

Therefore, every loss of revenue as a consequence of an order of the AssessingOfficer cannot be treated as prejudicial to the interests of the revenue, for example,when an Assessing Officer adopts one of the courses permissible in law and it hasresulted in loss of revenue; or where two views are possible and the Assessing Officerhas taken one view with which the Commissioner does not agree, it cannot betreated as an erroneous order prejudicial to the interests of the revenue.

Considering the above, action taken by Commissioner of Income tax is not tenable in

SECTION 263 CONT…

PRACTICAL 2

Does your answer differ, if there was a decision of Gujarat HighCourt instead of Madras High Court, denying deduction undersection 37(1)?

SOLUTION 2

If there was a decision of Gujarat High Court instead of MadrasHigh Court, denying deduction under section 37(1), then the orderof Assessing Officer falls within the explanation 2 to section 263-clause (d) and therefore, such order shall be deemed to beerroneous in so far as it is prejudicial to the interest of the revenue.Hence, Commissioner of Income Tax is justified in assumingjurisdiction under section 263 of the Act.