ca final revision material

MT Educare -CAFinal DT Classes - R. SOUMYANARAYANAN FCA, GRAD CWA

DIRECT TAX RAPID REVISION MATERIAL INDEX

S.NO TOPIC Page No

1 Rate of Tax for the A.Y. 14 - 15 A 1 - A 10

2 Taxation of Gifts B 1 - B 18

3 Income from VCC/VCF - Tax Treatment C 1 - C 9

4 Dividend D 1 - D 4

5 Distribution Tax E 1 - E 33

6 Amendments in Sec.10 F 1 - F 5

7 Amendments in Chapter VIA G 1 - G 18

8 TDS U/s 194 IA & 194 LA H 1 - H 6

9 Additional Depreciation & Investment Allowances I 1 - I 14

10 Deduction in respect of Bad debts & PBDD J 1 - J 16

11 Amendments in TCS K 1 - K 7

12 Amendments in PGBP (Fin. Act 2012) L 1 - L 15

13 Amendments in Advance Tax Provisions M 1 - M 3

14 Exemption U/s 54GB N 1 - N 8

15 Taxation of NR Sportsmen etc O 1 - O 4

16 Wealth Tax Act - Part I P 1 - P 7

17 Measures to prevent circulation of Unaccounted Money

Q 1 - Q 4

18 Vodafone Amendments R 1 - R 6

19 Taxability of Software Payments S 1 - S 8

A-PDF Merger DEMO : Purchase from www.A-PDF.com to remove the watermark


20 Taxability of Satellite Payments T 1 T4

21 Taxability of Royalty & FTS in the hands of NR U 1 - U 2

22 Taxability of Interest in the hands of NR V 1 - V 9

23 Assessment of AOP W 1

24 Electoral Trust X 1 - X 6

25 Assessment of Co-operative Societies Y 1

26 Assessment Procedure Z 1 -Z 21

27 Transfer Pricing AA 1 - AA 46

28 Deduction U/s 10AA & Issues in Chapter VIA - Part C

BB 1 - BB 4

29 Assessment of Trust CC 1 - CC 6

30 Post Search Assessment DD 1 - DD 13

31 Issues in Interest U/s 234 A,B & C EE 1 - EE 2

32 Refund & Interest thereon FF 1

33 Collection & Recovery GG 1

34 Provisions to discourage Cash Payments HH 1 - HH 7

35 Provisions of Sec.234E & 271H II 1 - II 4

36 Settlement Commission JJ 1 - JJ 4

37 MAT KK 1 - KK 4

38 Revision LL 1 - LL 2

39 Appeals MM 1 - MM 3

40 Taxation of Mutual Concern NN 1 - NN 3


41 Set-off of c/f losses OO 1 - OO 7

42 Assessment of Firm PP 1 - PP 3

43 Penalty QQ 1 - QQ 4

44 PGBP RR 1 - RR 36

45 TDS Violations SS 1 - SS 5

46 TDS TT 1 - TT 27

47 Tonnage Taxation - Amendment UU 1

48 DTAR VV 1 - VV 6

49 AMT WW 1 - WW 9

50 Other Amendments XX 1 - XX 12

51 Important case laws in Salary & IFHP YY 1 - YY 4

52 Important case laws in Capital Gains ZZ 1 - ZZ 16

Chapter-1: Rates of Income Tax for the AY 14-15

MT Educare CA Final DT Classes CA. R. SOUMYANARAYANAN. FCA. GRAD CWA. Page A1

1. Rates of tax: A. Introduction:

1 S. 2 of the Finance Act, 2013 read with Part I of 1st Schedule to the Finance Act, 2013, seeks to specify the rates at which income-tax is to be levied on income chargeable to tax for the AY 13-14.

2 Part II lays down the rate at which tax is to be deducted at source during the FY 2013-14 from income subject to such deduction under the Income-tax Act;

3 Part III lays down the rates for charging income-tax in certain cases (i.e. accelerated assessment U/s 172, 174, 174A, 175 & 176), rates for deducting income-tax from income chargeable U/H "salaries" and the rates for computing advance tax for the FY 2013-14 i.e. AY 2014-15.

4 Part III of 1st Schedule to the Finance Act, 2013 will become Part I of the 1st Schedule to the Finance Act, 2014 and so on.

B. Rates for deduction of tax at source for the FY 2013-14 from income other than salaries

1 Part II of the 1st Schedule to the Act specifies the rates at which income-tax is to be deducted at source during the FY 2013-14 from income other than "salaries".

2 These rates of tax deduction at source are the same as were applicable for the FY 2012-13.

3 However, the rate of tax deduction at source has been increased to 25% in respect of royalties and fees for technical services payable by the Government or an Indian concern in pursuance of an agreement made on or after 01.04.1976, to a non-corporate non-resident or a foreign company.

4 Surcharge would be levied on income-tax deducted at source in case of non-corporate non-residents and foreign companies.

5 If the recipient is a non-corporate non-resident, surcharge @10% would be levied on such income-tax if the income or aggregate of income paid or likely to be paid and subject to deduction exceeds Rs. 1 crore.

6 If the recipient is a foreign company, surcharge@

(i) 2% would be levied on such income-tax, where the income or aggregate of such incomes paid or likely to be paid and subject to deduction exceeds Rs. 1 crore but does not exceed Rs. 10 crore; and

(ii) 5% would be levied on such income-tax, where the income or aggregate of such incomes paid or likely to be paid and subject to deduction exceeds Rs. 10 crore.

7 Surcharge would not be levied on deductions in all other cases.

8 Also, education cess and secondary and higher education cess would not be added to tax deducted or collected at source in the case of a domestic company or a resident non-corporate assessee.

9 However, education cess @2% and secondary and higher education cess @ 1% on income-tax plus surcharge, wherever applicable, would be added to tax deducted or collected at source in cases of non-corporate non-residents and foreign companies.



C. Rates for deduction of tax at source from "salaries", computation of "advance tax" and charging of income-tax in certain cases during the FY 2013-14:

1 Part III of the 1st Schedule to the Act specifies the rate at which income-tax is to be deducted at source from "salaries" and also the rate at which "advance tax" is to be computed and income-tax is to be calculated or charged in certain cases for the FY 2013-14 i.e. AY 2014-15.

2 It may be noted that education cess @2% and secondary and higher education cess @1% would continue to apply on tax deducted at source in respect of salary payments.

3 The general BEL for individuals (men and women)/HUFs/AOPs/BOIs and AJPs has been retained at Rs. 200000.

4 There is also no change in the BEL of Rs. 250000 for senior citizens, being resident individuals of the age of 60 years or more but less than 80 years.

5 Further, resident individuals of the age of 80 years or more at any time during the PY would continue to be eligible for a higher BEL of Rs. 500000.

Tax slabs: The tax slabs are shown hereunder (a) Individual/HUF/ AOP & BOI (not covered by S. 167B) and every AJP:

Level of TI Rate of income-tax

Where the TI does not exceed Rs. 2,00,000

Nil

Where the TI exceeds Rs. 2,50,000 but does not exceed Rs. 5,00,000

10% of the amount by which the TI exceeds Rs. 2,00,000


Rs. 30,000 plus 20% of the amount by which the TI exceeds Rs. 5,00,000

Where the TI exceeds Rs. 10,00,000 Rs. 1,30,000 plus 30% of the amount by which the TI exceeds Rs. 10,00,000

(b) For resident individuals of the age of 60 years or more but less than 80 years at any time during the PY:



Nil




Rs. 25,000 plus 20% of the amount by which the TI exceeds Rs. 5,00,000


(c) For resident individuals of the age of 80 years or more at any time during the PY:





Nil




(d) Co-operative society:

Level of TI Rate of tax

Where the TI does not exceed Rs. 10000

10% of TI

Where the TI exceeds Rs. 10000 but does not exceed Rs. 20000

Rs. 1000 plus 20% of the amount by which the TI exceeds Rs. 10000

Above Rs. 20,000 Rs. 3000 plus 30% of the amount by which the TI exceeds Rs. 20000.

(e) Firm/LLP: The rate of tax for a firm for AY 2014-15 is the same as that for AY 2013-14 i.e. 30% on the whole of the TI of the firm. This rate would apply to an LLP also. (f) Local authority: The rate of tax for a local authority for AY 2014-15 is the same as that for AY 2013-14 i.e. 30% on the whole of the total income of the local authority. (g) Company: The rates of tax for AY 2014-15 are the same as that for AY 2013-14.

(1) In the case of a domestic company

30% on the TI

(2) In the case of a company other than a domestic company

40% on the TI

Surcharge: The rates of surcharge applicable for AY 2014-15 are as follows 1. Individual HUF AOP BOI AJP Co-operative society Local authority Firm LLP:

(a) Where the TI exceeds Rs. 1 crore, surcharge is payable @ 10% of tax computed in accordance with the provisions of para (a) to (f) above or S. 111A or S. 112.



(b) Marginal relief is available in case of such persons having a TI exceeding Rs. 1 crore i.e. the additional amount of income-tax payable (together with surcharge) on the excess of income over Rs. 1 crore should not be more than the amount of income exceeding Rs. 1 crore.

2. Domestic company (a) In case of a domestic company whose TI > Rs. 1 crore but is Rs. 10 crores:

1 Where the TI exceeds Rs. 1 crore but does not exceed Rs. 10 crore, surcharge is payable @ 5% of income-tax computed in accordance with the provisions of para (g) above or S. 111A or S. 112.

2 Marginal relief is available in case of such companies i.e. the additional amount of income-tax payable (together with surcharge) on the excess of income over Rs. 1 crore should not be more than the amount of income exceeding Rs. 1 crore.

Illustration: Compute the tax liability of X Ltd, a domestic company, assuming that the TI of X Ltd is Rs. 10100,000 and the TI does not include any income in the nature of capital gains. Answer: Computation of tax liability:

1 Tax on TI (including surcharge) @ 31.50% Rs. 3181500

2 Marginal relief Rs. 81500

3 Tax after marginal relief (1-2) Rs. 3100000

4 Education cess @ 3% Rs. 93000

5 Tax liability (3+4) Rs. 3193000

Computation of marginal relief:

1 Tax on TI (including surcharge) @ 31.50% Rs. 3181500

2 Tax on Rs. 1 crore Rs. 3000000

3 TI Rs. 1 crore Rs. 100000

4 Marginal relief (1-2-3) Rs. 81500

(b) In case of a domestic company, whose total income is > Rs. 10 crores

1 Where the TI exceeds Rs. 10 crores, surcharge is payable @ 10% of income-tax computed in accordance with the provisions of para (g) above or S. 111A or S. 112.

2 Marginal relief is available in case of such companies i.e. the additional amount of income-tax payable (together with surcharge) on the excess of income over Rs. 10 crores should not be more than the amount of income exceeding Rs. 10 crore.



Illustration: Compute the tax liability of X Ltd, a domestic company, assuming that the TI of X Ltd. is Rs. 100100000 and the TI does not include any income in the nature of capital gains. Answer: Computation of tax liability:

1 Tax on TI (including surcharge) @ 33% Rs. 33033000

2 Marginal relief Rs. 1433000

3 Tax after marginal relief (1-2) Rs. 31600000


5 Tax liability (3+4) Rs. 32548000

Computation of marginal relief:

1 Tax on TI (including surcharge) @ 33% Rs. 33033000

2 Tax on Rs. 10 crores (including surcharge) @ 31.5% Rs. 31500000

3 TI Rs. 10 crores Rs. 100000


3. Foreign company (a) In case of a foreign company, whose TI > Rs. 1 crore but is Rs. 10 crores

1 Where the TI exceeds Rs. 1 crore but does not exceed Rs. 10 crores, surcharge is payable @ 2%-tax computed in accordance with the provisions of paragraph (g) above or S. 111A or S. 112.

2 Marginal relief is available in case of such companies i.e., the additional amount of income-tax payable (together with surcharge) on the excess of income over Rs. 1 crore should not be more than the amount of income exceeding Rs. 1 crore.

(b) In case of a foreign company, whose TI is > Rs. 10 crores

1 Where the TI exceeds Rs. 10 crores, surcharge is payable @ 5% tax computed in accordance with the provisions of para (g) above or S. 111A or S. 112.

2 Marginal relief is available in case of such companies i.e. the additional amount of income-tax payable (together with surcharge) on the excess of income over Rs. 10 crores should not be more than the amount of income exceeding Rs. 10 crores.

Note Marginal relief would also be available to those companies which are subject to MAT U/s 115JB, in cases where the book profit (i.e. deemed TI) exceeds Rs. 1 crore and Rs. 10 crores, respectively.



Income-range over which marginal relief is available: Marginal relief will be available in case the TI falls in the following range:

1 Resident senior citizen Rs. 100L Rs. 104.2164L

2 Resident super senior citizen Rs. 100L Rs. 104.1791L

3 Any other resident individual, any non-resident individual, any HUF or AOP & BOI (not covered by S. 167B)

Rs. 100L Rs. 104.2238L

4 Firm Rs. 100L Rs. 104.4776L

5 Domestic company Rs. 100L Rs. 102.1897L

Rs. 1000L Rs. 1022.388L

6 Foreign company Rs. 100L Rs. 101.3513L

Rs. 1000L Rs. 1020.6896L

7 Co-operative society Rs. 100L Rs. 104.4731L

Note: The above TI ranges will be valid only if he assessee does not have any income which is chargeable to tax at special rates of tax (example: LTCG, STCG (S. 111A) & casual income referred to in S. 115BB). Book profit range over which marginal relief is available: In case of AMT or MAT, the marginal relief will be available in case adjusted TI or book profit falls in the following range:

1 Non-corporate assessee Rs. 100L Rs. 102.3226L

2 Domestic company Rs. 100L Rs. 101.1479L

Rs. 1000L Rs. 1011.6133L

3 Foreign company Rs. 100L Rs. 100.4560L

Rs. 1000L Rs. 1006.8879L

Education cess / Secondary and higher education cess on income-tax:

(a) The amount of income-tax as increased by the union surcharge, if applicable, should be further increased by an Education cess on income-tax, calculated @ 2% of such income-tax and surcharge, wherever applicable.

(b) Education cess is leviable in the case of all assessees i.e., individuals, HUFs, AOP/BOIs, co-operative societies, firms, LLPs, local authorities and companies.



(c) Further, Secondary and higher education cess on income-tax @1% of income-tax and surcharge, wherever applicable, is leviable to fulfill the commitment of the Government to provide and finance secondary and higher education.

(d) No marginal relief would be available in respect of such cess.

Illustration: X (aged 40 years) furnishes the following particulars pertaining to PY 13-14:

Salary Rs. 7L

LTCG Rs. 15L

Lottery winnings Rs. 80L

GTI Rs. 102L

Contribution to PPF (Rs. 1L)

Taxable income Rs. 101L

Determine the tax liability of X for the AY 14-15. Solution: A. Determination of tax liability:

1 Tax on TI (Refer B) Rs. 2750000

2 Surcharge @ 10% Rs. 275000

3 Tax + Surcharge Rs. 3025000

4 Marginal relief (Refer C) (Rs. 205000)

5 Tax + Surcharge (after marginal relief) Rs. 2820000


7 Tax liability Rs. 2904600

B. Computation of tax on TI:

1 Tax on lottery winnings (Rs. 80L * 30%) Rs. 24L

2 Tax on LTCG (Rs. 15L *20%) Rs. 3L

3 Tax on other income (slab rate) Rs. 0.50L

4 Tax on TI (1+2+3) Rs. 27.50L

C. Computation of marginal relief:

1 Tax on TI + Surcharge Rs. 3025000

2 Tax on Rs. 100L (Refer D) (Rs. 2720000)

3 TI- Rs. 100L (Rs. 100000)




D. Computation of tax on Rs. 100L:

1 Tax on LTCG (Rs. 15L *20%) Rs. 3L

2 Tax on other income (slab rate) Rs. 0.50L

3 Tax on lottery winnings of Rs. 79L @ 30% Rs. 23.70L

4 Tax on Rs. 100L (1+2+3) Rs. 27.20L

Applicability of surcharge and cess on distribution tax Surcharge @ 10% would be leviable on distribution tax levied U/s 115-O, 115-QA, 115R and 115TA. Further, education cess@2% and secondary and higher education cess@1% would be leviable on the distribution tax inclusive of surcharge.

Section Particulars Rate of tax

Effective rate of tax

115-O Tax on distributed income of domestic companies by way of dividend 15% 16.995%

115QA Tax on distributed income of domestic company for buyback of shares 20% 22.66%

115R Tax on distributed income of mutual funds - Distribution by debt funds to individuals and HUFs 25.00% 28.33%

- Distribution by debt funds to other persons 30.00% 33.99%

- Distribution by infrastructure debt funds to non- corporate non-residents and foreign companies 5.00% 5.67%

115TA Tax on income distributed by securitization trusts - Distribution to persons exempt from tax Nil Nil - Distribution to individuals and HUFs 25.00% 28.33% - Distribution to other persons 30.00% 33.99%

2. Rebate of up to Rs. 2,000 for resident individuals having TI of up to Rs. 5 lakh [New S.

87A]:

1 In order to provide tax relief to the individual tax payers who are in the 10% tax slab, S. 87A has been inserted by the Finance Act 2013.

2 It provides a rebate from the tax payable by an assessee, being an individual resident in India, whose TI does not exceed Rs. 500000.

3 The rebate shall be equal to the amount of income-tax payable on the TI for any AY or an amount of Rs. 2,000, whichever is less.

4 Consequently, any individual having TI up to Rs. 220000 will not be required to pay any tax.

5 Further, every individual having TI above Rs. 220000 but not exceeding Rs. 500000 shall get a tax relief of Rs. 2,000. In effect, the rebate would be the tax payable or Rs. 2000, whichever is less.



6 Consequential amendment has been made in S. 87 providing that in computing the amount of income-tax on the TI of an assessee with which he is chargeable for any AY, rebate as computed U/s 87A shall be allowed.

7 Further, the aggregate amount of rebate U/s 87A shall not exceed the amount of income-tax (as computed before allowing such rebate) on the TI of the assessee with which he is chargeable for any AY.

8 These amendments are effective from AY 2014-15.

Illustration-1: The GTI of Mr. X, a resident aged 30 years, for the PY 2013-14 comprises of salary (Rs. 505000) and interest on savings bank (Rs. 8000). Compute his tax liability for the AY 2014-15, assuming that he has deposited Rs. 50,000 in PPF. Answer: Computation of TI of Mr. X for the AY 2014-15 Particulars

Rs.

Salary

5,05,000

Interest on savings bank account

8,000

Gross Total Income

5,13,000 Less: Deductions under Chapter VIA

Section 80C (deposit in PPF) 50,000

Section 80TTA (interest on savings bank account) 8,000 58,000

Total Income

4,55,000

Computation of tax liability of Mr. X for the AY 2014-15 Particulars Rs. Tax on TI @10% of Rs. 255000 (Rs. 455000 Rs. 200000) 25,500 Less: Rebate U/s 87A 2,000

23,500

Add: Education cess@2% 470 Secondary and higher education cess@1% 235

Total tax liability

24,210 (rounded

off)

Illustration-2: Find out the tax liability of X (Resident, age - 59 years) for the AY 2014-15 in the following situations:



Situation TI

1 Rs. 210000

2 Rs. 220000

3 Rs. 500000

4 Rs. 600000

Answer: Computation of tax liability for the AY 2014-15:

SN Particulars Situation-1 Situation-2 Situation-3 Situation-4

1 TI Rs. 210000 Rs. 220000 Rs. 500000 Rs. 600000

2 IT on TI Rs. 1000 Rs. 2000 Rs. 30000 Rs. 50000

3 Rebate U/s 87A Rs. 1000 Rs. 2000 Rs. 2000 -

4 Tax after rebate (2-3) - - Rs. 28000 Rs. 50000

5 EC @ 3% - - Rs. 840 Rs. 1500

6 Tax liability (4+5) - - Rs. 28840 Rs. 51500

Illustration-3: Find out the tax liability of X (Resident, age - 62 years) for the AY 2014-15 in the following situations:

Situation TI

1 Rs. 260000

2 Rs. 270000

3 Rs. 500000

4 Rs. 600000

Answer: Computation of tax liability for the AY 2014-15:

SN Particulars Situation-1 Situation-2 Situation-3 Situation-4

1 TI Rs. 260000 Rs. 270000 Rs. 500000 Rs. 600000

2 IT on TI Rs. 1000 Rs. 2000 Rs. 25000 Rs. 45000

3 Rebate U/s 87A Rs. 1000 Rs. 2000 Rs. 2000 -

4 Tax after rebate (2-3) - - Rs. 23000 Rs. 45000

5 EC @ 3% - - Rs. 690 Rs. 1350

6 Tax liability (4+5) - - Rs. 23690 Rs. 46350

Chapter-2: Taxation of Gifts

Page B1 MT Educare - CA Final DT Classes - R. SOUMYANARAYANAN FCA, GRAD CWA

Gifts received by HUF from its members are exempted from tax S. 56 (2) (vii): Existing provisions of S. 56 (2) (vii):

1 Under the existing provisions of S. 56 (2) (vii), any sum or property received by an individual/HUF for inadequate consideration or without consideration is taxed U/H IFOS.

2 However, in the case of an individual, receipts from relatives are excluded from the purview of this section and are therefore not taxable.

3 The definition of relative as given in this sub-clause is only in relation to an individual and not in relation to a HUF. Therefore, gifts received by HUF from its members are not exempt in the hands of HUF.

Amendment to S. 56 (2) (vii):

1 In order to remove the unintended inequity, clause (e) of the Explanation below S. 56 (2) (vii), which defines the term relative, is amended by Finance Act 2012 with retrospective effect from 01.10.09.

2 Now, the term relative shall mean, in relation to an HUF, any member thereof.

3 As a result, any sum or property received without consideration or for inadequate consideration by an HUF from its members would be excluded from taxation.

A word of caution:

1 While the aforesaid amendment exempts HUF from taxation of gifts received from its members, the clubbing provisions of S. 64 (2) will operate as before.

2 The income arising to the HUF from the gift received from the member would continue to be chargeable to tax in the hands of the member in his individual capacity, as no change has been made in S. 64 (2).

3 Therefore, the amendment brought in does not have any practical significance or application. It may be useful only when the gifted asset is a dead investment which does not yield any income to the HUF.

Question-1: Discuss the taxability of the following in the hands of recipient U/s 56 (2) (vii):

(i) Akhil HUF received ` 75000 in cash from niece of Akhil (i.e., daughter of Akhils sister). Akhil is karta of the HUF.

(ii) Nitisha, a member of her fathers HUF, transferred a house property to the HUF without consideration. The SDV of the house property is ` 9L.

(iii) Kishan HUF gifted a diamond ring to son of karta. The FMV of the diamond ring is ` 6L.

Hints:

(i) Sum of `75000 is taxable. Sum of money exceeding `50,000 received without consideration from a non relative is taxable U/s 56 (2) (vii). Daughter of Mr. Akhils sister is not a relative of Akhil HUF, since she is not a member of Akhil HUF.



(ii) Not taxable. Immovable property received without consideration by a HUF from its relative is not taxable U/s 56 (2) (vii). Since Nitisha is a member of the HUF, she is a relative of the HUF. However, income from such asset would be included in the hands of Nitisha U/s 64(2).

(iii) Not taxable. Vineetkumar Raghavjibhai Bhalodia Vs ITO [2011] 11 taxmann.com 384 (Rajkot) + ITO Vs Subhadra Devi Nevatia [ITA No. 1298 (Kol.) of 2011] and ITO Vs Nidhi Goenka (Podder) [I.T.A. No. 1542(Kol.) of 2009].

Question-2: Gifts received by members from HUF:

During the course of assessment proceedings the AO noticed that the assessee had accepted gift of ` 60L from HUF and the AO was of the view that HUF is not covered in the definition of 'relative'. Therefore, the gift received from the HUF was held to be taxable. Examine the validity of the contention of the AO. Analysis:

1 An HUF is nothing but 'a group of relatives'. So if an individual receives gifts whether from an individual relative or a group of relatives, he should be exempt from taxation.

2 Hence, the contention of AO is wrong. This is the ruling of ITAT in Vineetkumar Raghavjibhai Bhalodia Vs ITO [2011] 11 taxmann.com 384 (Rajkot) + ITO Vs Subhadra Devi Nevatia [ITA No. 1298 (Kol.) of 2011] and ITO Vs Nidhi Goenka (Podder) [I.T.A. No. 1542(Kol.) of 2009].

Question-3: Gift received by assessee on his own marriage is exempt from tax and not the

gift received on the marriage of his children: During the relevant PY, the assessee received a gift of ` 21L from various friends at the time of marriage of his daughter. The cheques were issued in assessee's name and not in favour of his daughter whose marriage was solemnized. Further, the money was also not transferred to his daughter and was utilized by him only. In the course of assessment proceedings, the AO contends that the gifts are taxable in the hands of assessee U/s 56 (2) (vii). Examine the correctness of the contention of the AO. Analysis:

1 S. 56 (2) (vii) provides that any sum of money in aggregate exceeding ` 50,000 received by an individual without consideration is taxable in his hands as income from other sources.

2 However, this clause applies only to money received on the occasion of the marriage of the individual.

3 That is, what is exempt is only the gift received directly by the bride or bridegroom whose marriage is to be solemnized and not the gift received by the parents on such occassion.

4 Hence, the amount received by the assessee on the occasion of marriage of his daughter is taxable in his hands U/s 56 (2) (vii). Accordingly, the contention of AO is correct.



5 This is the view expressed by the ITAT in Rajinder Mohan Lal Vs DCIT [2012] 49 SOT 713 (Chand).

Whether indexation benefit in respect of the gifted asset shall apply from the year in which the asset was first held by the assessee or from the year the same was first acquired by the

previous owner? [CIT Vs Manjula J. Shah 16 Taxman 42 (Bom)]:

1 As per Exp 1 to S. 2(42A), in case the capital asset becomes the property of the assessee in the circumstances mentioned in S. 49(1), inter alia, by way of gift by the previous owner, then for determining the nature of the capital asset, the aggregate period for which the capital asset is held by the assessee and the previous owner shall be considered.

2 As per the provisions of S. 48, the profit and gains arising on transfer of a LTCA shall be computed by reducing the indexed cost of acquisition from the net sale consideration.

3 The ICOA meant the amount which bears to the cost of acquisition the same proportion as Cost Inflation Index (CII) for the year in which the asset is transferred bears to the CII for the year in which the asset was first held by the assessee transferring it i.e., the year in which the asset was gifted to the assessee in case of transfer by the previous owner by way of gift.

4 In the present case, the assessee had acquired a capital asset by way of gift from the previous owner. The said asset when transferred was a LTCA considering the period of holding by the assessee as well as the previous owner.

5 The assessee computed the LTCG considering the CII of the year in which the asset was first held by the previous owner. The AO raised an objection mentioning that as per meaning assigned to the Indexed cost of acquisition, the CII of the year in which the asset is first held by the assessee need to be considered and not the CII of the year in which the asset was first held by the previous owner.

6 In the present case, the Bombay High Court held that by way of deemed holding period fiction created by the statute, the assessee is deemed to have held the capital asset from the year the asset was held by the previous owner and accordingly the asset is a long term capital asset in the hands of the assessee.

7 Therefore, for determining the indexed cost of acquisition U/s 48, the assessee must be treated to have held the asset from the year the asset was first held by the previous owner and accordingly the CII for the year the asset was first held by the previous owner would be considered for determining the indexed cost of acquisition.

8 Hence, the ICOA in case of gifted asset has to be computed with reference to the year in which the previous owner first held the asset and not the year in which the assessee became the owner of the asset.

9 Similar views were expressed by the Delhi HC in Arun Shungloo Trust (2012) 205 Taxman 456.

Taxability of immovable property received for inadequate consideration:

A. Explanatory memorandum explaining the rationale behind the amendment:



1 The existing provisions of S. 56 (2) (vii) (b) provide that where any immovable property is received by an individual or HUF without consideration, the SDV of which exceeds Rs. 50000, the SDV of such property would be charged to tax in the hands of the individual or HUF as income from other sources.

2 The existing provision does not cover a situation where the immovable property has been received by an individual or HUF for inadequate consideration.

3 Accordingly, the provisions of S. 56 (2) (vii) (b) are amended so as to provide that where any immovable property is received for a consideration which is less than the SDV of the property by an amount exceeding Rs. 50000, the SDV of such property as exceeds such consideration, shall be chargeable to tax in the hands of the individual or HUF as income from other sources.

4 Considering the fact that there may be a time gap between the date of agreement and the date of registration, it is provided that where the date of the agreement fixing the amount of consideration for the transfer of the immovable property and the date of registration are not the same, the SDV may be taken as on the date of the agreement, instead of that on the date of registration.

5 This exception shall, however, apply only in a case where the amount of consideration, or a part thereof, has been paid by any mode other than cash on or before the date of the agreement fixing the amount of consideration for the transfer of such immovable property.

6 This amendment will take effect from 01.04.2014 and will, accordingly, apply in relation to the AY 2014-15 and subsequent AYs.

B. Amended provision: (S. 56 (2) (vii) (b) (ii)):

Where an individual or a HUF receives, in any PY, from any person or persons on or after 01.04.2013, any immovable property, for a consideration which is less than the SDV of the property by an amount exceeding Rs. 50000, the SDV of such property as exceeds such consideration shall be charged to tax U/H IFOS. Provided that where the date of the agreement fixing the amount of consideration for the transfer of immovable property and the date of registration are not the same, the SDV on the date of agreement may be taken for the purposes of this sub-clause: Provided further that the said proviso shall apply only in a case where the amount of consideration referred to therein, or a part thereof, has been paid by any mode other than cash on or before the date of the agreement for the transfer of such immovable property;

Note: The cost of acquisition of the immovable property in the hands of purchaser is not the consideration actually paid by him. The SDV of such property on the date of agreement or the date of registration, as the case may be, shall be taken as cost of acquisition. (S. 49 (4)).

C. Problems on amendment: Problem-1: SSR purchases the following immovable properties in the PY 13-14:



Property Purchase Price

SDV Seller

Commercial property Rs. 10L Rs. 50L A (not relative of SSR)

Agricultural land in a village in Kerala (population: 4000)

Rs. 6L Rs. 40L B (not relative of SSR)

Shop Rs. 5L Rs. 30L C (Grandfather of SSR)

Residential plot Rs. 25L Rs. 25.5L

D (not relative of SSR)

Agricultural land in Delhi Rs. 7L Rs. 42L E (not relative of SSR)

Discuss the tax implications. Problem-2: MPV purchases the following properties:

Developer Date of agreement

Purchase price

SDV on the date of agreement

Date of registration

SDV on the date of registration

DLF 10.06.13 Rs. 40L (Note-1)

Rs. 42L 10.08.14 Rs. 49L

Anant Raj 11.07.13 Rs. 60L (Note-2)

Rs. 64L 11.05.14 Rs. 70L

Hanu Reddy

12.03.14 Rs. 80L (Note-3)

Rs. 80.4L 25.06.14 Rs. 86L

Note:

1 Rs. 1L is paid by cheque on 10.06.13 & Rs. 39L is paid in cash on 05.08.14.

2 Rs. 55L is paid by cheque on 12.07.14 & Rs. 5L is paid by cheque on 06.05.14.

3 Rs. 50000 is paid by cheque on 10.03.14 & balance is paid by cheque on 20.06.14.

In the all the aforesaid cases, possession of the property is given to MVP only in the PY 14-15. Discuss the tax implications.

D. Provocation for the amendment: The provocation for this amendment seems to be the decision of the Delhi HC in CIT Vs Khoobsurat Resorts (P) Ltd. [2012] 28 taxmann.com 93. Facts: During the relevant PY, the assessee purchased an immovable property for a price which was less than the SDV. In the course of assessment, the AO made an addition in respect of the difference between SDV and the price paid.



Ruling: In appeal, the Delhi HC, ruled as under:

1 With the insertion of S. 50C, a presumption can be drawn that property was sold for a higher value for determining capital gains, in case of the SDV was higher than the consideration disclosed in the sale deed.

2 It is apparent from the provision of S. 50C that a presumption that the sale price is higher can be drawn, if the circumstances spelt out in S. 50C are fulfilled.

3 The fiction created by virtue of S. 50C applies only in respect of escaped income of a seller, for the determination of the true capital gain. Such a special provision has to be construed narrowly, having regard to the subject matter, and the extension of the fiction or presumption in respect of any matter not covered by it is unauthorized by the law.

4 The express provision of S. 50C enabling the revenue to treat SDV as FVC, ipso facto, cannot be a legitimate ground for concluding that there was undervaluation in the acquisition of immovable property. If parliamentary intention was to enable such a finding, a provision akin to S. 50C would have been included in the statute book to assess income on the basis of a similar fiction in the case of the assessee who acquires such an asset.

5 In no case, the SDV can be taken as purchase price.

6 Hence, the AO was not justified in making the aforesaid addition.

Note: The Revenue will have to establish that additional consideration had passed on to the seller from the purchaser before making any such addition. (CIT Vs Bhanwarlal Murwatiya [2008] 215 CTR 489 (Raj)). E. Criticism:

1 The effect of this amendment would be that not only the case where an immovable property is transferred for inadequate consideration would be covered U/s 50C and the FVC being SDV will be considered for calculating CG in the hands of the transferor but also the difference between the SDV and apparent consideration will be treated as deemed income U/H IFOS in the hands of the transferee.

2 Thus, same difference will be considered for computation of income twice, one in the hands of the transferor in the computation of capital gains U/s 50C and again in the hands of the transferee as deemed income U/s 56(2)(vii)(b)(ii).

3 Therefore, this is apparently a case of double taxation.

Computation of income U/H PGBP for transfer of immovable property in certain cases - S.

43CA: A. Explanatory memorandum explaining the rationale behind the amendment:

1 Currently, when a capital asset, being immovable property, is transferred for a consideration which is less than the SDV, then such SDV is taken as FVC for the purpose of computation of capital gains U/s 50C.



2 The provisions of S. 50C do not apply to transfer of immovable property, held by the transferor as stock-in-trade. This view has been held in several cases such as

1 CIT Vs Kan Construction & Colonizers (P) Ltd. [2012] 20 taxmann.com 381 (All).

2 K.R. Palanisamy Vs Union of India [2009] 180 Taxman 253 (Mad).

3 Thiruvengadam Investments (P) Ltd [2010] 320 ITR 345 (Mad).

4 ACIT v. Excellent Land Developers (P) Ltd. [2010] 1 ITR (Trib.) 563 (Delhi).

5 Inderlok Hotels (P) Ltd Vs ITO [2009] 32 SOT 419 (Mum).

3 It is because S. 50C uses the word 'capital asset'; for applicability of S. 50C, one of the essential requirements is that land or buildings sold should be capital asset; stock-in-trade has been excluded from the definition of 'capital asset' by S. 2 (14).

4 The result was the flats/building constructed and sold by builders and developers are their 'stock-in-trade' and could not be brought into S. 50C. Therefore, the SDV could not be substituted for apparent sale consideration in case of the transfer of flats/buildings for a consideration less than the SDV.

5 To plug out this lacuna, it is provided by inserting a new S. 43CA that where the consideration for the transfer of an asset (other than capital asset), being land or building or both, is less than the SDV, the SDV shall be deemed to be the FVC for the purposes of computing income U/H PGBP.

6 It is also provided that where the date of an agreement fixing the value of consideration for the transfer of the asset and the date of registration of the transfer of the asset are not same, the SDV may be taken as on the date of the agreement for transfer and not as on the date of registration for such transfer.

7 However, this exception shall apply only in those cases where amount of consideration or a part thereof for the transfer has been received by any mode other than cash on or before the date of the agreement.

8 These amendments will take effect from 01.04.2014 and will, accordingly, apply in relation to the AY 2014-15 and subsequent AYs.

B. Newly inserted section: S. 43CA: Special provision for FVC for transfer of assets other

than capital assets in certain cases:

S. 43CA (1): Where the consideration received or accruing as a result of the transfer by an assessee of an asset (other than a capital asset), being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of computing profits and gains from transfer of such asset, be deemed to be the FVC received or accruing as a result of such transfer. S. 43CA (2): The provisions of S. 50C (2) & (3) shall, so far as may be, apply in relation to determination of the value adopted or assessed or assessable U/s 43CA (1). S. 43CA (3): Where the date of agreement fixing the value of consideration for transfer of the asset and the date of registration of such transfer of asset are not the same, the value referred to in S. 43CA (1) may be taken as the value assessable by any authority of SG for the purpose of payment of stamp duty in respect of such transfer on the date of the agreement.



S. 43CA (4): The provisions of S. 43CA (3) shall apply only in a case where the 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 the asset.

C. Reference to DVO:

1 The assessee can claim that the SDV > FMV of the property as on the date of transfer. If this claim is made before the AO and the assessee has not disputed the SDV in appeal or revision or reference before any authority or court, the AO shall refer the valuation of the relevant asset to DVO in accordance with S. 55A.

2 If the FMV determined by the DVO is less than the SDV, the AO may take such FMV to be the FVC.

3 However, if the FMV determined by the DVO is more than the SDV, the AO shall not take the FMV to be the FVC. He shall take the SDV only as the FVC.

D. Points requiring attention:

1 In the case of builders and developers mostly the first instalment (generally a very small token amount) is paid in cash in the form of booking advance and the next instalment(s) may be paid by way of cheque/DD/ RTGS, etc.

2 Such builders or developers will lose the benefit of taking the SDV on the date of such agreement, merely by the receipt of that petty amount of booking advance in cash. Therefore, the builders and developers have to be very cautious and careful while accepting the booking advance from their customers and issuing them receipts; otherwise they may be forced to shell out hefty amount(s) towards taxes.

3 S. 43CA (4) does not lay down any monetary limit of receipt of money (other than by cash) by the transferor. Even a token amount received on the date of the agreement would be sufficient to get the benefit of S. 43CA (3).

Share premium in excess of the FMV to be treated as income [Sec. 56(2)(viib)]:

Introduction: Transactions which are being used to build up capital and to generate income without affecting tax liability were under scanner of the Government for the last number of years. The scope of S. 56 has been enlarged year after year. This year the Finance Minister has taken a step further by inserting S. 56 (2) (viib).

S. 2 (24) (xvi): Income includes any consideration received for issue of shares as exceeds the FMV of the shares referred to in S. 56 (2) (viib). S. 56 (2) (viib): Where a company, not being a company in which the public are substantially interested, receives, in any PY, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the FMV of the shares, shall be chargeable to income-tax U/H IFOS.



Proviso to S. 56 (2) (viib): Provided that this clause shall not apply where the consideration for issue of shares is received

(i) by a VCU from a VCC or a VCF; or

(ii) by a company from a class or classes of persons as may be notified by the CG in this behalf.

Explanation to S. 56 (2) (viib):For the purposes of this clause,

(a) the FMV of the shares shall be the value

(i) as may be determined in accordance with such method as may be prescribed; or

(ii) as may be substantiated by the company to the satisfaction of the AO, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, whichever is higher;

(b) VCC, VCF and VCU shall have the meanings respectively assigned to them in Explanation 1 to S. 10 (23FB);

Analysis: A. Applicability: S. 56 (2) (viib) applies if the following conditions are satisfied:

1 A company receives consideration for issue of shares (Preference or equity) from a resident on or after 01.04.2012.

2 Such company is not a company in which public are substantially interested.

3 The consideration received exceeds the face value of the shares.

4 The consideration received exceeds the FMV of the shares.

B. Impact of S. 56 (2) (viib): If the aforesaid conditions are satisfied, the excess of consideration over the FMV of the shares issued shall be regarded as income of the issuing company (S. 2 (24) (xvi)) and shall be assessed to tax U/H IFOS (S. 56 (2) (viib). C. FMV for this purpose: The FMV of the shares shall be the higher of

(a) the value as may be determined in accordance with the method as may be prescribed; or

(b) the value as may be substantiated by the company to the satisfaction of the AO, based on the value of its assets, including intangible assets, being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.

Illustration: X Ltd is a public company but its shares are not listed in any stock exchange in India. On 06.04.2013, 5000 shares are issued to A (resident), 10000 shares are issued to B (resident) and 20000 shares are issued to C (non-resident). These shares are issued in one of the following situations



Particulars Situation-1

Situation-2

Situation-3

Situation-4

Face value per share (in `) 10 10 10 10

Issue price per share (in `) 10 9 40 40

FMV of each share determined U/s 56 (2) (viib) (in `)

3 4 42 31

Required: (a) Discuss the tax implications in the hands of X Ltd in the aforesaid situations.

Situation Tax implications

1 Shares are issued at par. Hence, S. 56 (2) (viib) shall not apply.

2 Shares are issued at discount. Hence, S. 56 (2) (viib) shall not apply.

3 Shares are issued at a premium. However, the consideration for issue of shares is less than the FMV of the shares. Hence, S. 56 (2) (viib) shall not apply.

4 X Ltd is a closely held company. Shares are issued at a premium. Issue price is more than the FMV. A and B are residents. Hence, S. 56 (2) (viib) shall apply in respect of shares issued to A and B. Accordingly, (`40-31)*15000 shall be taxed in the hands of the company for the AY 2014-15.

(b) Suppose, C was never in India up to 06.04.2013, but he comes to India on 03.09.2013. Will you answer differ?

Situation Tax implications

1 to 3 Answer is the same.

4 C is also a resident. Accordingly, (`40-31)*35000 shall be taxed in the hands of the company for the AY 2014-15.

(c) Suppose, shares of X Ltd are listed in the BSE with effect from 07.03.2014. Will your answer differ?

(i) X Ltd will be a company in which the public are substantially interest within the parameters of S. 2 (18) for the PY 2013-14.

(ii) Consequently, nothing will be taxable U/s 56 (2) (viib) even in situation-4.

Points requiring attention:

1 Share application money is received in the PY 13-14 and share allotment takes place in the PY 14-15. The payer is non-resident for the PY 13-14 but becomes resident for the PY 14-15. Discuss the applicability of S. 56 (2) (viib)?

The residential status at the time of receipt of consideration by company and not the residential status at the time of allotment is relevant.

Therefore, as the person from whom the consideration was received is non-resident at the time of receipt of consideration, no question of taxability U/s 56 (2) (viib) arises.



2 Share application money is received in the PY 13-14 and share allotment takes place in the PY 14-15. In the PY 14-15, the shares of the company were listed in the RSE. Discuss the applicability of S. 56 (2) (viib)?

The status of the company at the time of receipt of consideration is relevant and not its status at the time of allotment of shares.

In the case under consideration, since company was a closely held company at the time of receipt of consideration, S. 56 (2) (viib) applies.

3 Where new proviso to S. 68 is attracted, will there be double taxation? (taxation U/s 56 (2) (viib) as well as S. 68)? -

The new proviso to S. 68 says that any explanation offered by assessee-company (being a closely held co.) in respect of share application money/share premium/share capital credited in its books shall be deemed to be not satisfactory unless the resident in whose name such credit is recorded also offers a satisfactory explanation about the nature and source of such sum so credited.

Courts have held in a catena of cases when law deems a state of affairs to exist, all consequences as if such state of affairs really existed shall follow.

Therefore, if the explanation that amounts represent share capital/share premium/share application is deemed unsatisfactory, then Revenue cannot resort to S. 56 (2) (viib) which can be invoked only when amounts received are established to represent consideration for issue of shares.

Nor can the assessee-company without discharging the additional onus U/s 68 insist that S. 56 (2) (viib) be applied as that is more beneficial.

Thus, it appears that double taxation under both provisions is not possible. However, it will be better if suitable clarificatory provisions are incorporated in S. 56 (2) (viib).

D. Immunity from S. 56 (2) (viib): This provision is not applicable in the following two cases where

(a) the consideration for issue of shares is received by a VCU from a VCC or a VCF; or

(b) the consideration for issue of shares is received by a company from a class(es) of person as notified by the CG.



Determination of FMV: R. 11UA (1) For the purposes of S. 56, the FMV of a property, other than immovable property, shall be determined in the following manner, namely, (a) Valuation of jewellery,

(i) the FMV of jewellery shall be estimated to be the price which such jewellery would fetch if sold in the open market on the VD;

(ii) in case the jewellery is received by the way of purchase on the VD, from a registered dealer, the invoice value of the jewellery shall be the FMV;

(iii) in case the jewellery is received by any other mode and the value of the jewellery > Rs. 50000, then assessee may obtain the report of registered valuer in respect of the price it would fetch if sold in the open market on the VD;

(b) Valuation of archaeological collections, drawings, paintings, sculptures or any work of art,

(i) the FMV of archaeological collections, drawings, paintings, sculptures or any work of art (hereinafter referred as artistic work) shall be estimated to be price which it would fetch if sold in the open market on the VD;

(ii) in case the artistic work is received by the way of purchase on the valuation date, from a registered dealer, the invoice value of the artistic work shall be the FMV;

(iii) in case the artistic work is received by any other mode and the value of artistic work > Rs. 50000, then assessee may obtain the report of registered valuer in respect of the price it would fetch if sold in the open market on the VD;

(c) Valuation of shares and securities,

(a) the FMV of quoted shares and securities shall be determined in the following manner, namely,

(i) if the quoted shares and securities are received by way of transaction carried out through any RSE, the FMV of such shares and securities shall be the transaction value as recorded in such RSE;

(ii) if such quoted shares & securities are received by way of transaction carried out other than through any RSE, the FMV of such shares & securities shall be,(a) the lowest price of such shares and securities quoted on any RSE on the VD, and (b) the lowest price of such shares and securities on any RSE on a date immediately preceding the VD when such shares and securities were traded on such RSE, in cases where on the VD there is no trading in such shares and securities on any RSE;

(b) the FMV of unquoted equity shares shall be the value, on the VD, of such unquoted equity shares as determined in the following manner, namely:

the FMV of unquoted equity shares = (A L)

(PV),

(PE)



Where, A = book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in the balance-sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset;

L = book value of liabilities shown in the balance-sheet, but not including the following amounts, namely:

(i) the paid-up capital in respect of equity shares;

(ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company;

(iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation;

(iv) any amount representing provision for taxation, other than amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;

(v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities;

(vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares;

PE = total amount of paid up equity share capital as shown in the balance-sheet;

PV = the paid up value of such equity shares;

(c) the FMV of unquoted shares and securities other than equity shares in a company which are not listed in any RSE shall be estimated to be price it would fetch if sold in the open market on the VD and the assessee may obtain a report from a merchant banker or an accountant in respect of such valuation.

R. 11UA (2): Notwithstanding anything contained in R. 11UA (1) (c) (b), the FMV of unquoted equity shares for the purposes of sub-clause (i) of clause (a) of Explanation to S. 56 (2) (viib) shall be the value, on the VD, of such unquoted equity shares as determined in the following manner under clause (a) or clause (b), at the option of the assessee, namely:

(a) the FMV of unquoted equity shares =

(A L) (PV),

(PE)

Where, A = book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in the balance-sheet as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset;

L = book value of liabilities shown in the balance-sheet, but not including the following amounts, namely:

(i) the paid-up capital in respect of equity shares;



(ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company;

(iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation;

(iv) any amount representing provision for taxation, other than amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;

(v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities;

(vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares;

PE = total amount of paid up equity share capital as shown in the balance-sheet;

PV = the paid up value of such equity shares;

(b) the FMV of the unquoted equity shares determined by a merchant banker or an accountant as per the Discounted Free Cash Flow method.

Meaning of expressions used in determination of fair market value - R. 11U:

For the purposes of this rule and rule 11UA,

(a) Accountant means

(i) for the purposes of R. 11UA (2), means a fellow of ICAI, who is not appointed by the company as an auditor U/s 44AB of the Act or U/s 224 of the Companies Act, 1956; and

(ii) in any other case, shall have the same meaning as assigned to it in the Explanation below S. 288(2);

(b) "B/s" means,

(i) for the purposes of R. 11UA (2), the B/s of such company (including the notes annexed thereto and forming part of the accounts) as drawn up on the VD which has been audited by the auditor of the company appointed U/s 224 of the Companies Act, and where the B/s on the VD is not drawn up, the B/s (including the notes annexed thereto and forming part of the accounts) drawn up as on a date immediately preceding the VD which has been approved and adopted in the AGM of the shareholders of the company; and

(ii) in any other case, the balance-sheet of such company (including the notes annexed thereto and forming part of the accounts) as drawn up on the VD which has been audited by the auditor appointed U/s 224 of the Companies Act, 1956.

(c) "Merchant banker" means

category I merchant banker registered with SEBI;

(f) "Registered dealer" means

a dealer who is registered under CST Act, 1956 or GST Law for the time being in force in any State including value added tax laws;



(g) "Registered valuer"

shall have the same meaning as assigned to it in section 34AB of the Wealth-tax Act, 1957 (27 of 1957) read with rule 8A of Wealth-tax Rules, 1957;

(j) "VD " means the date on which the property or consideration, as the case may be, is received by the assessee.

Treatment of advance tax and provision for income-tax in determination of FMV of

unquoted equity shares by the formula Illustration: Illustration-1:

1 In Bharat Hari Singhania Vs CWT [1994] 73 Taxman 3 (SC), the Supreme Court explained an identical provision in Rule 1D of the Wealth Tax Rules, 1957 with an illustration.

2 Suppose a company has paid Rs. 8L by way of advance tax which is shown as an asset in the balance sheet and tax payable on book profits is Rs. 10L. The company has made a provision of Rs. 15L for taxation which is shown as a liability in the balance sheet.

3 The provision for taxation Rs. 15 lakhs exceeds the tax payable on book profits by Rs. 5L. Thus, this excess of Rs. 5L will be ignored and not deducted from the book value of assets for determining FMV of the unquoted equity share of the company.

4 Only Rs. 10L will be considered for deduction. Of this Rs. 8L has already been deducted as "advance tax/TDS/TCS paid". So, if full amount of Rs. 10L is deducted as provision for taxation, there will be a double deduction to the tune of Rs. 8L. So, only Rs. 2L should be deducted as provision for taxation.

Illustration-2: Suppose, the figures are as under:

Year Provision for taxation

(Rs.)

Tax payable on book

profits as per law (Rs.)

Total of Advance Tax, TDS&TCS (Rs.)

Net amount of (current tax asset)/current tax liability as per (AS) 22

(Rs.)

2009-10 15 10 8 7-Current Tax liability

2010-11 12 12 15 (3)Current Tax Asset claimed as refund

2011-12 18 18 19 (1) Current Tax Asset claimed as refund

Total 45 40 42 3-Current Tax liability(reflected in BS as

at 31-3-2012)

In the above case, total of advance tax, TDS &TCS excluded from gross assets shall be Rs. 42 (total) less Rs. 4 (refund claim) = Rs. 38.



Amount of Rs. 4 (i.e. to the extent of refund claim) shall be included in assets as part of 'A' in the formula. Provision of taxation to be considered in liabilities shall be Rs. 40 and not Rs. 45. Excess Rs. 5 being in excess of tax payable on book profits shall be ignored. From this Rs. 40, Rs. 38 shall be deducted and balance Rs. 2 will be deducted from total assets towards provision for taxation as part of Liabilities 'L' in the formula.

Question-1: Item purchased from registered dealer tax implications: On June 25, 2013, X purchases a painting from Shyam Art Gallery vide Bill No.426/2013. Painting is purchased at invoice price of `525000. Shyam Art Gallery is a registered dealer under VAT/Sales Tax. This painting can be sold in the market for `900000. Discuss the tax consequences. Analysis:

1 In the case of purchase of movable property from a registered dealer (under VAT/Sales Tax), the invoice value is taken as the FMV of the property for the purpose of S. 56 (2) (vii).

2 If such property is purchased at the invoice value from a registered dealer, nothing will be taxable U/s 56(2)(vii).

Question-2: Item purchased from a person other than registered dealer:

Computation of value of gift: On 20.09.13, X purchases a Tangore painting (as a capital asset) for `8L from Y (who is not a registered dealer in paintings). The FMV of the painting is `11L. Discuss the tax consequences. Analysis:

1 In the case of purchase of movable property, the FMV shall be the price which such painting would fetch if sold in the open market on the valuation date. In the given case, the difference of `3L is taxable in the hands of X U/s 56 (2) (vii) (c) (ii).

2 If X transfers this painting, the cost of acquisition for the purpose of computation of CG will be `11L. (49(4)).

Annexure:

Modification in parameters defining scope of land falling outside the ambit of Agricultural

land and consequently, within the definition of capital asset U/s 2 (14).

1 S. 2 (14) defines the term "capital asset" as property of any kind held by an assessee, whether or not connected with his business or profession. The definition excludes certain categories of properties including agricultural land in India specified in S. 2 (14) (iii).



2 The definition of agricultural land in S. 2 (14) (iii) excludes: (a) agricultural land situated in any area within the jurisdiction of a municipality or cantonment board having population of not less than 10000 according to last preceding census, or (b) agricultural land situated in any area within such distance not exceeding 8 km from the local limits of any municipality or cantonment board, as notified by the CG having regard to the extent and scope of urbanization and other relevant factors.

3 Accordingly, the agricultural land covered by (a) and (b) above, being land situated within the specified urban limits, would fall within the definition of capital asset and transfer of such land would attract capital gains tax.

4 The Finance Act 2013 has amended 2 (14) (iii) (b) so as to provide that capital asset would include the agricultural land situated in any areas within such distance, measured aerially, in relation to the range of population according to the last preceding census as shown hereunder:

Shortest aerial distance from the local limits of a municipality or cantonment board having a population of 10000 or more

Population according to the last preceding census of which the relevant figures have been published before the first day of the PY

2 Km >10000 & 100000

6 Km >100000 & 10L

8 Km > 10L

5 This amendment will take effect from 1st April, 2014 and will, accordingly, apply in relation to AY 2014-15 and subsequent AYs.

How to measure distance? In following cases, the Courts have decided that the distance of land has to be taken in terms of approach by road and not as per straight line distance on a horizontal plane or as per crow flying distance:

1 ITO Vs Ashok Shukla [2012] 139 ITD 666 / 28 taxmann.com 112 (Indore)

2 CIT Vs Lal Singh [2010] 195 Taxman 420 (P&H)

3 CIT Vs Satinder Pal Singh [2010] 188 Taxman 54 (P&H)

4 Laukik Developers Vs DCIT [2007] 105 ITD 657 (Mumbai)

To supercede these rulings, the amended law provides that the distance shall be measured aerially for the above purpose. Impact of the amendment: The impact of change can be listed as under:

1 No specific notification for treating agricultural land as capital asset based on distance is required to be given as the change of law will cover all municipalities.

2 Any agricultural land within the distance specified in the said three categories given above fall within the definition of the term 'capital asset';

3 This change is a welcome change as the agricultural lands beyond municipal limits not notified so far were outside the tax net and with the change of definition all such agricultural lands falling within the specified distance from the local limits would be chargeable to capital gains tax.



4 The distance for the purpose is to be measured aerially in the shortest manner;

5 The changes are effective from the AY 2014-15; and

6 The population shall be with reference to the population according to the last preceding census the relevant figures of which is published before the first day of the PY (i.e. , what is notified before 1-4-2013 will be relevant for AY 2014-15).

Similar amendment in S. 2 (1A):

1 Similar amendments are also proposed in clause (1A) of section 2 of the Income-tax Act, 1961 relating to the definition of "agricultural income".

2 As per S. 2 (1A) (c), income derived from any building which is on or in the immediate vicinity of land in India, used for agricultural purposes, and is occupied as a dwelling house, store house or other building by (a) the receiver of rent or revenue of such land or (b) the cultivator or receiver of rent-in-kind, would be treated as agricultural income provided:

(a) the land on which such building is situated is assessed to land revenue in India or subject to a local rate, or

(b) if not so assessed or subject to local rate, the land is not situated within specified urban limits as stated in item (A) and (B) of S. 2 (1A) (c) (ii).

3 These limits are in line with the limits specified in item (a) and (b) of S. 2 (14) (iii). Therefore, in line with the amendment in item (b) of S. 2 (14) (iii), item (B) of S. 2 (1A) (c) (ii) has also been amended.

4 Accordingly, if the land is situated within the new limits specified thereunder, the income from building which is situated on such land would not be treated as agricultural income.

5 This amendment will take effect from 1st April, 2014 and will, accordingly, apply in relation to AY 2014-15 and subsequent AYs.

Chapter-3: Taxability of income from VCCs/VCFs

MT EducareCA Final DT Classes CA. R. SOUMYANARAYANAN. FCA. GRAD CWA Page C1

Taxability of income of VCCs/VCFs in the hands of the investor on accrual basis [S. 115U]: 1. Rationale behind amendment to S. 115U by Finance Act 2012:

1 Provisions of S. 10 (23FB) and S. 115U were intended to ensure a tax pass through status to Venture Capital Fund (VCF) or Venture Capital Company (VCC) registered with SEBI.

2 S. 10 (23FB) granted exemption in respect of income of such VCF/VCC. The benefit was available if investment by such VCC/VCF was in unlisted shares of a domestic company, i.e. a VCU.

3 S. 115U ensures that income, in the hand of the investor through VCF/VCC is taxed in like manner and to the same extent as if the investment was directly made by investor in the VCU.

4 Further, TDS provisions are not applicable to any payment made by the VCF to its investor and payment by VCC to the investor is exempted from DDT.

5 S. 10 (23FB) further provides that income of a SEBI regulated VCF or VCC, derived from investment in a domestic company i.e. VCU, is exempt from taxation, provided the VCU is engaged in only nine specified businesses.

6 The working of VCF, VCC or VCU is regulated by SEBI and RBI. In order to avoid multiplicity of conditions in different regulations for the same entities, the sectoral restriction on business of VCU is required to be removed from Income Tax Act and such VCU is to be allowed to be governed by conditions imposed by SEBI and RBI.

7 The provisions of S. 115U currently allow an opportunity of indefinite deferral of taxation in the hands of investor. With a view to rationalize the above position and to align it with the true intent of a pass-through status, it is proposed to amend S. 10 (23FB) and S. 115U to provide that.-

(i) The VCU shall have same meaning as provided in relevant SEBI regulations and there would be no sectoral restriction.

(ii) Income accruing to VCF/VCC shall be taxable in the hands of investor on accrual basis with no deferral.

8 These amendments will take effect from 01.04.2013, and will, accordingly, apply in relation to the AY 2013-14 and subsequent AYs.

2. Amended provision:

S. 115U (1): Notwithstanding anything contained in any other provisions of this Act, any income received by a person out of investments made in a VCC or VCF shall be chargeable to income-tax in the same manner as if it were the income accruing or arising to or received by such person had he made investments directly in the VCU. S. 115U (2): The person responsible for crediting or making payment of the income on behalf of a VCC or a VCF and the VCC or VCF shall furnish, within such time as may be prescribed, to the person (receiving) who is liable to tax in respect of such income and to the prescribed income-tax authority, a statement in the prescribed form (Form-64) and verified in the prescribed manner, giving details of the nature of the income paid or credited during the PY and such other relevant details as may be prescribed.



S. 115U (3): The income paid or credited by the VCC and the VCF shall be deemed to be of the same nature and in the same proportion in the hands of the (person receiving such income) person referred to in S. 115U (1) as it had been received by, or had accrued or arisen to, the VCC or the VCF, as the case may be, during the PY. S. 115U (4): The provisions of Chapter XII-D (DDT) or Chapter XII-E (Tax on income distributed by MF) or Chapter XVII-B (TDS) shall not apply to the income paid by a VCC or VCF under this Chapter. S. 115U (5): The income accruing or arising to or received by the VCC or VCF, during a PY, from investments made in VCU if not paid or credited to the person referred to in S. 115U (1), shall be deemed to have been credited to the account of the said person on the last day of the PY in the same proportion in which such person would have been entitled to receive the income had it been paid in the PY. Explanation 1: For the purposes of this Chapter, VCC, VCF and VCU shall have the meanings respectively assigned to them in S. 10 (23FB). Explanation 2: For the removal of doubts, it is hereby declared that any income which has been included in TI of the person referred to in S. 115U (1) in a PY, on account of it having accrued or arisen in the said PY, shall not be included in the TI of such person in the PY in which such income is actually paid to him by the VCC or the VCF.

3. Meaning of VCC/VCF/VCU:

(1) VCC means such company

(i) which has been granted a certificate of registration under the SEBI Act, 1992, and regulations made thereunder;

(ii) which fulfils the conditions as may be specified, with the approval of the CG, by the SEBI, by notification in the OG, in this behalf;

(2) VCF means such fund

(i) operating under a trust deed registered under the provisions of the Registration Act, 1908 or operating as a venture capital scheme made by the UTI established under the UTI Act, 1963;

(ii) which has been granted a certificate of registration under the SEBI Act, 1992, and regulations made thereunder;

(iii) which fulfils the conditions as may be specified, with the approval of the CG, by the SEBI, by notification in the OG, in this behalf; and

(3) VCU means such domestic company whose shares are not listed in a RSE in India and which is engaged in the

(i) business of nanotechnology;

(ii) business of information technology relating to hardware and software development;



(iii) business of seed R & D;

(iv) business of bio-technology;

(v) business of R & D of new chemical entities in the pharmaceutical sector;

(vi) business of production of bio-fuels;

(vii) business of building and operating composite hotel-cum-convention centre with seating capacity of more than 3000; or

(viii) business of developing or operating and maintaining or developing, operating and maintaining any infrastructure facility as defined in the Explanation to S. 80IA (4) (i); or

(ix) dairy or poultry industry;

Definition modified by the Finance Act, 2012, w.e.f. 1-4-2013: VCU means a VCU referred to in the SEBI (Venture Capital Funds) Regulations, 1996 made under the SEBI Act, 1992;

Examination question: A VCF derived income of `17L comprising dividend of `4L from shares from a VCU and interest of `13L on loan granted to such undertaking. Mr. G receives income of `2L from such fund. Examine the taxability of the sum of `2L received by Mr. G. [Nov 2012]. [4 Marks].

Amendment brought out by Finance Act 2013:

A. Certain Alternative Investment Funds (AIFs) recognized by SEBI to enjoy pass-through status, subject to satisfying certain conditions [S. 10(23FB)]

1 S. 10 (23FB) exempts any income of a VCC or VCF from investment in a VCU. Further, as per S. 115U, income accruing or arising or received by a person out of investment made in a VCC or VCF shall be taxable in the like manner as if the person had made direct investment in the VCU.

2 In effect, U/s 10 (23FB) and S. 115U, a tax pass through status (i.e. income is taxable in the hands of investors instead of VCF/VCC) is available to such funds which satisfy the investment and other conditions as are provided in SEBI (Venture Capital Funds) Regulations, 1996.

3 Further, these sections provide a pass through status only in respect of income which arises to the fund from investment in VCU, being a company which satisfies the conditions provided in SEBI (Venture Capital Fund) Regulations, 1996.

4 The SEBI (Alternative Investment Funds) Regulations, 2012 (AIF regulations) have replaced the SEBI (Venture Capital Fund) Regulations, 1996 (VCF regulations) from 21.05.2012.

5 In order to provide benefit of pass through to similar VCF as are registered under new Regulations and subject to same conditions of investment restrictions in the context of investment in a VCU, S. 10 (23FB) has been amended (with effect from AY 2013-14) as follows:



The existing VCFs and VCCs (i.e. which have been registered before 21.05.2012) and regulated by VCF regulations, as they stood before repeal by AIF regulations, would continue to avail pass through status as currently available.

In the context of AIF Regulations, the VCC shall be defined as a company and VCF shall be defined as a fund set up as a trust, which has been granted a certificate of registration as VCF being a sub-category I AIF and satisfies the following conditions:

(a) At least 2/3rd of its investible funds are invested in unlisted equity shares or equity linked instruments of VCU.

(b) No investment has been made by such AIFs in a VCU which is an associate company.

(c) Units of a trust set up as AIF or shares of a company set up as AIF, are not listed on a RSE.

In the context of AIF Regulations, VCU shall be defined as a domestic company

(i) which is not listed on a recognised stock exchange in India at the time of making investment; and

(ii) which is engaged in the business for providing services, production or manufacture of article or things and does not include following activities or sectors: (1) NBFCs i.e., non-banking financial companies; (2) gold financing; (3) activities not permitted under industrial policy of Government of India; (4) any other activity which may be specified by the Board in consultation with Government of India from time to time;

B. Amended S. 10 (23FB):

S. 10 (23FB): Any income of a VCC or VCF from investment in a VCU is exempt. Explanation.For the purposes of this clause, (a) VCC means a company which (A) has been granted a certificate of registration, before 21.05.2012, as a VCF and is regulated under the SEBI (VCF) Regulations, 1996 (hereinafter referred to as the Venture Capital Funds Regulations) made under the SEBI Act, 1992; or (B) has been granted a certificate of registration as VCF as a sub-category of Category I AIF and is regulated under the SEBI (AIF) Regulations, 2012 (hereinafter referred to as the AIF Regulations) made under the SEBI Act, 1992, and which fulfils the following conditions, namely:



(i) it is not listed on a RSE; (ii) it has invested not less than 2/3rd of its investible funds in unlisted equity shares or equity linked instruments of VCU; and (iii) it has not invested in any VCU in which its director or a substantial shareholder (being a beneficial owner of equity shares exceeding 10% of its equity share capital) holds, either individually or collectively, equity shares in excess of 15% of the paid-up equity share capital of such VCU; (b) VCF means a fund operating under a trust deed registered under the provisions of the Registration Act, 1908, which: (I) has been granted a certificate of registration, before 21.05.2012, as a VCF and is regulated under the VCF Regulations; or (II) has been granted a certificate of registration as VCF as a sub-category of Category I AIF under the AIF Regulations and which fulfils the following conditions, namely: (1) it has invested not less than 2/3rd of its investible funds in unlisted equity shares or equity linked instruments of VCU; (2) it has not invested in any VCU in which its trustee or the settler holds, either individually or collectively, equity shares in excess of 15% of the paid-up equity share capital of such VCU; and (3) the units, if any, issued by it are not listed in any RSE; or (c) VCU means (i) a VCU as defined in Regulation 2 (n) of the VCF Regulations; or (ii) a VCU as defined in Regulation 2 (1) (aa) of the AIF Regulations;

Chapter-4: Dividend

Page D1 MT Educare - CA Final DT Classes - R. SOUMYANARAYANAN FCA, GRAD CWA

Question-1: Only gratuitous loan/advances are within the net of S. 2 (22) (e): The assessee had substantial shareholding in a company. He had mortgaged his valuable immovable property with the bank as a security for the loan facility enjoyed by that company. Consequently, the company passed a resolution authorising the assessee to obtain interest free deposit upto `50L as and when required from it. When the assessee required funds for his personal needs, he requested the said company to purchase the said property or to release the same so that he could sell it to some other person. The company was unable to purchase the property or to release same from mortgage. It, therefore, gave a sum of `20.75L to the assessee as security deposit. While making assessment, the AO added said sum to the assessee's income as deemed dividend. Examine the validity of the action of AO. Analysis:

1 The phrase 'by way of advance or loan' appearing to S. 2 (22) (e) must be construed to

mean those advances or loans which a shareholder enjoys for simply on account of being a person who is the beneficial owner of equity shares holding not less than 10% of the voting power; but if such loan or advance is given to such share holder as a consequence of any further consideration which is beneficial to the company received from such a shareholder, in such case, such advance or loan cannot be said to a deemed dividend within the meaning of the Act.

2 Thus, for gratuitous loan or advance given by a company to those classes of shareholders would come within the purview of S. 2 (22) but not to the cases where the loan or advance is given in return to an advantage conferred upon the company by such shareholder.

3 In the instant case, the assessee permitted his property to be mortgaged to the bank for enabling the company to take the benefit of loan and in spite of request of the assessee, the company was unable to release the property from the mortgage.

4 In such a situation, for retaining the benefit of loan availed from the bank if decision was taken to give advance to the assessee such decision was not to give gratuitous advance to its share holder but to protect the business interest of the company.

5 Therefore, the AO erred in law in treating the advance given by the company to the assessee by way of compensation for keeping its property as mortgage on behalf of the company to reap the benefit of loan as deemed dividend within the meaning of S. 2(22)(e).

6 This is the ruling of Calcutta HC in Pradip Kumar Malhotra Vs CIT [2011] 15 taxmann.com 66.

Question-2: Advance made in the course of business is it hit by S. 2 (22) (e)? Dhaval is in business of manufacturing customized kitchen equipments. He is also the Managing Director and held nearly 65% of the paid up share capital of Aarav Ltd. A substantial part of the business of Dhaval is obtained through Aarav Ltd. For this purpose Aarav Ltd passed on the advance received from its customers to Dhaval to execute the job work entrusted to him. The AO held that the advance money received by Dhaval is in the nature of loan given by Aarav Ltd to him and accordingly is deemed dividend within the meaning of provisions of S. 2

Chapter-4: Dividend

Page D2 MT Educare - CA Final DT Classes - R. SOUMYANARAYANAN FCA, GRAD CWA

(22) (e) of the IT Act, 1961. The AO, therefore made the addition by treating advance money as the deemed dividend income of Dhaval. [May 2012] Analysis:

1 Advances received in the ordinary course of business cannot be described as one falling within the ambit of S. 2 (22) (e).

2 Hence, nothing is taxable in the hands of Mr. Dhaval U/s 2 (22) (e).

3 This is based on the decision of Delhi HC in Ambassador Travels (P) Ltd 318 ITR 376 + Creative Dyeing & Printing (P) Ltd 318 ITR 476 + Ankitech (P) Ltd [2011] 199 Taxman 341.

Question-3: Whether money lending constitutes substantial part of business?

The assessee-co is in the business of manufacture of plastic caps for bottles. During the relevant PY, the assessee-co took an unsecured loan of `12L from its sister concern, namely, AMPL. AMPL is engaged in the business of production, sale and distribution of soft drinks, aerated water and mineral water. It is also engaged in the business of money lending. During the relevant PY, 40% of the total assets of AMPL were deployed in money lending business. It had reported a profit of `56L (which includes interest earned from money lending `100L). As majority of the share capital of the assessee-co was held by two individuals who were also majority shareholders of AMPL and AMPL was a company in which public was not substantially interested, the AO held that the loan amount as dividend in the hands of the assessee-co U/s 2 (22) (e). Examine the correctness of the stand taken by the AO. Analysis: The action of AO is not correct for the following reasons:

1 As per S. 2 (22) (e), any payment made by a closely held company by way of loan or advance to a concern in which

ca final revision material

Documents

rates of tax

incometax act

rates of income tax

rate of tax

charging incometax

deducting incometax

wealth tax act

advance tax provisions