COURSE: CA FINAL SUBJECT: Direct Tax – Finance Act 2020 ...

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COURSE: CA FINAL

SUBJECT: Direct Tax – Finance Act 2020 – Book 1

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PREFACE

Paper 7 at the Final CA level is Direct Tax Laws & International Taxation: As the name

suggests:

Part A is Direct Tax Laws & Part B is International Taxation. This is a perfect example of

letting students experience new concepts and giving them a flavour of being a global

profession by including International Taxation in their curriculum for just 30 marks, thus

making it significantly relevant and also not diluting the importance of Direct Tax Laws

which is applicable upfront to any Indian CA.

Further, if a student wishes to specialize in International Tax they may choose to do so

in Paper 6 C Elective Paper where there is a dedicated paper available on International

Taxation.

PART A IS DIRECT TAX LAWS

The courseware has been designed to inculcate the latest tax amendments as per the

applicable Finance Act for the two attempts in May & November of the year respectively.

Central Board of Direct Taxes (CBDT) is the regulatory body for collection and management

of Direct taxes in India, they are responsible for implementing the provisions of the Income

Tax Act 1961 and to provide clarification regarding interpretations of the laws/amendments

from time to time. There are other decisions/judgements which are given by various courts

regarding Direct tax matters interpreting the provisions of tax laws. The students are expected

to refer the content for this subject to the amendments in the provisions as suggested by the

Finance Act of the applicable-year and also refer the significant notifications and circulars

issued till 30th April / 31st October for November/May Attempt respectively.

The Direct Tax Laws subject includes the overall applicability of specific laws,

Interpretations of Laws, Compliance mechanisms and mandates as per the act, and also tax

planning and assessment procedure and the various alternatives available to the assessee's and

also the authorities to ensure legitimate tax collection and also prosecution in case of any

deviation or non- compliance from the laws. To sum it all up it would mean to experience,

discuss the practical problems that the authority or the assessee's face and the remedial

measures available to the concerned parties.

PART B: INTERNATIONAL TAX

Chartered Accountancy is a globally recognised degree issued by the ICAI, it had to give a

flavour of an international professional. What better for a CA to know that the applicable tax

laws at international waters, which significantly includes:

• The Double Taxation Avoidance Agreements (DTAA)

• Applicability of Tax Rules to Non-Residents

• Transfer Pricing Including Anti Avoidance Measures

• Model Tax Conventions (Overview)

• Applicability & Interpretation of the Tax Treaties

• Equalisation Levy

• Lastly, Base Erosion & Profit Shifting

If the above topics are given a close consideration it is obvious that the Institute of Chartered

Accountants of India (ICAI) wants that the India CA should have a global exposure with

expertise in internationally applicable tax laws, treaties, Transfer Pricing. Given the depth of

coverage even in Paper 7 it truly makes CA a profession with International expertise, which

makes it a natural choice over multiple options of professional courses available. The

dynamism with which the ICAI is updating the content and bringing up radical changes in the

syllabus, it is not too long before Indian CAs will enjoy global authority in the advisory &

reporting domain.

Thanks,

Regards

CA AARISH KHAN.

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6. REVISION VIDEOS to memorise this GIGANTIC Subject in just few hours.

INDEX

CH. NO. CHAPTER NAME

1 Charging Section

2 Depreciation

3 Specific Deductions

4 Sector-wise Deductions

5 General Deduction

6 Disallowances

7 Recovery of Expenditure & Remission and Cessation

of Trading Liability

8 Miscellaneous Issues

9 Presumptive Income (other than Non-Resident)

10 Taxation of Various Entities (other than

MAT/AMT/ Trust)

11 Filing of Return of Income

12 Assessment Procedures

13 Income Escaping Assessment

14 Time Limit for Completion of Assessment and

Reassessment

15 Miscellaneous Provisions

16 Income Tax Authorities & their powers

17 Appeals and revision

18 Search & Seizure

19 Assessment in course of Search & Seizure

20 Taxation of Trust

21 Minimum Alternate Tax

22 Alternate Minimum Tax

23 Penalties & Prosecution

24 Clubbing of Income (To be done by students)

25 Taxation of Investment Fund

26 Taxation of Securitisation Trust

27 Past Questions for Practice (Most Important Topic)

CA AARISH KHAN

Introduction & Chargeability AJ Education NeXt

1.1

CHAPTER 1. INTRODUCTION & CHARGEABILITY

THE INCOME TAX ACT 1961

INTRODUCTION

1. As per Article 265 of the constitution, no law can be made to impose duties & taxes

unless the constitution gives the power.

2. In the VII Schedule to the constitution, it is segregated into the following 3 lists:

a. UNION LIST:

This covers revenue as well as non - revenue matters from Entry 1 to Entry 96 as

specific entries and Entry 97 to impose taxes & duties on those matters which are not

enumerated in the above 96 entries. The right to make the Income Tax Act comes from

Entry 82 which states that IT can be imposed by Central Government on any income

except agricultural income. The above entries include both revenue as well as non -

revenue matters. As far as the IT is considered, it is a revenue matter and therefore it

should first be laid down in the lower house, i.e., Lok Sabha & then the Upper House,

i.e., Rajya Sabha.

b. STATE LIST:

This covers the matters related to State Government i.e Stamp Duty etc. The state list

does not have any residuary entry, therefore, any new taxes or duties which has to be

imposed must be imposed through Entry 97 given in Union list Eg: STT, CTT, Health

& Education Cess, etc. Further these will be imposed through a relevant Finance Act.

c. CONCURRENT LIST:

This covers matters related to both Governments. Eg: Octroi duty (Now after GST not

relevant), a revenue matter & education a non-revenue matter.

3. Once the power has been established through the constitution, the Act can be made by

the government through Parliamentary process. An Act always comes below the

Constitution & it is divided into Chapter numbers (23 CHAPTERS) and sections (298).

4. The rules made by the Central Government will follow the Act and therefore the Rules

can never override the Act but should be consistent with it. The power to make rules

under IT Act is given in Section 295.

THE INCOME TAX ACT 1961

(1) The first section of every Act is Short Title, Extent & Applicability &

Commencement. The Income Tax is effective from 1st April 1962.

As per Section 1, this Act is applicable to whole of India including the state of J & K.

As per Sec 2(25A), India include landmass. Further, it also includes territorial waters of

India up to 12 Nautical Miles (12NM). Further it also includes air space above its

landmass & territorial waters. Further, it also extends to the EEZ of India up to 200NM.

The Central Government notifies the activities to be conducted in EEZ.


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(2) The charging Sec of Income Tax law is given under Sec 4 which reads as follows:-

“Total Income of a Person for a P.Y. is charged or assessed to tax in the next

following A.Y.”

(3) The event of computation is always done in A.Y. by the assessee himself known as

“Self-Assessment”.

(4) Income Tax = Total Income (x) Tax Rates.

(5) For tax rates we have two sources: -

• Relevant Finance Act. {Person Based Rates}

• Income Tax Act itself. {For certain Special Incomes u/s 110 to 115BBG}

(6) The Income Tax Act is generally made with reference to A.Y. The relevant Finance Act

for P.Y 2020-2021 will be Finance Act 2020 i.e. which was passed last year if an

assessee stands in A.Y and see back. Therefore, the assessee has to stand in A.Y. and

see which Finance Bill was passed last year. Therefore, most of the amendments are

made with reference to A.Y.

(7) Therefore, in FA 2020 if an amendment states that it is applicable with the effect from

01.04.21 it means that it is applicable from A.Y. 21 – 22 i.e. P.Y. 20 – 21. Further, if

some amendments in FA 2020 states that it is applicable retrospectively w.e.f 01.04.12

then it means it is applicable from A.Y 12 – 13 i.e. P.Y. 11 – 12.

(8) WHAT IS THE DEFINITION OF THE TERM TOTAL INCOME?

® The term “TOTAL INCOME” is defined u/s 2(45) which means Income referred in

section 5 & computed in the manner laid down in this Act.

(9) SECTION 5: - SCOPE OF TOTAL INCOME

For Resident & Ordinary Resident world income is taxable whereas for Non-Residents

only those incomes are taxable in India which are accrued or deemed to accrue or arise

in India or which are received in India.

Once this is established, that total income comes within the purview of Sec 5 then, it

has to be computed in the manner laid down in this Act.

(10) SEC 14: DIVIDES THE INCOME INTO 5 HEADS AS FOLLOWS:

• Income from Salary (Sec 15 to Sec 17)

• Income from House property (Sec 22 to 27)

• Income from B & P (Sec 28 to 44DB)

• Capital Gains (Sec 45 to 55A)

• Income from Other Sources (Sec 56 to 59)

• Clubbing Provisions (Sec 60 to 65)

• Set off & Carry forward (Sec 70 to 80)


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• Deductions under Chapter VIA (80C to 80U)

(11) WHAT DO YOU MEAN BY THE TERM ‘INCOME’?

® The term income in general terminology means something which is a real income,

which is regular in nature and it is derived from a definite source. This theory is called

as ‘Real Income Theory’ which was the base to draft Income Tax Act, 1961:

• Salary is an income because it is derived from a source i.e. Employment.

• Rental is an income because it is derived from a source i.e. House property.

• Profits and Gains is an income because it is derived from a source i.e. Business or

Profession.

• Interest, Dividend & CG is an income because it is derived from a source i.e.

Investment.

Therefore, we can conclude lottery winnings, crosswords, puzzles, gifts, non-compete

fees, etc. are not income in the real sense as they are not regular in nature and therefore

to expand the base of Income Tax , the Central Government slowly & gradually started

amending the definition of Income given u/s 2(24) to incorporate Capital Receipts or

Artificial Incomes instead of increasing the rates of Income Tax.

“Today the definition of Income has in all 31 clauses”.

CLASSIFICATION OF INCOMES: -

Classifying the Income under the correct head is of utmost importance, because wrong

classification would amount to wrong computation and would lead to further tax

liabilities.

Following incomes will always be charged under their respective head as they have

a SPECIFIC CHARGE under the ACT.

• Lottery, winnings, crosswords, puzzles, etc.

• Gifts.

• Dividends whether accrued to investor or dealer.

• Rent from House Property.

JUDICIAL PRONOUNCEMENTS

In CHENNAI PROPERTIES AND INVESTMENTS LTD. V. CIT (2015), the

Supreme Court observed that holding of the properties and earning income by letting

out of these properties is the main objective of the company. Further, in the return of

income filed by the company and accepted by the Assessing Officer, the entire

income of the company comprised of income from letting out of such properties.

The Supreme Court, accordingly, held that such income was taxable as business

income. Likewise, in Rayala Corporation (P) Ltd. v. Asst. CIT (2016) 386 ITR 500,

the Supreme Court noted that the assessee was engaged only in the business of renting

its properties and earning rental income therefrom and accordingly, held that such

income was taxable as business income. In this case, however, on account of lack


1.4

of sufficient material to prove that substantial income of the assessee was from letting

out of property, the Supreme Court held that the rental income has to be assessed as

“Income from house property”.

Following incomes are chargeable based on COMPARATIVE CHARGE: -

• Interest will be chargeable under IFOS if not classified under PGBP.

• If Jewellery is held as capital Asset and it is sold then it will be chargeable under

the head capital Gains, whereas if a jewellery is sold by a jeweller, then it would

be considered as Income from PGBP.

SECTION 28: CHARGING SECTION

The following incomes shall be chargeable to tax under the head "Profits and gains of

business or profession":

(i) The profit and gains of any business or profession, which was carried on by the

assessee at any time during the previous year. (Refer Compendium for detail

analysis)

(ii) Profits on sale of a license granted under Imports (Control) Order under a scheme of

exports. (To be done later)

(iii) Cash assistance received or receivable against exports under any scheme of

Government. (To be done later)

(iv) Any duty of customs or excise repaid or repayable as drawback against exports under

scheme of the Government. (To be done later)

(v) Any profit on the transfer of the Duty Entitlement Passbook Scheme, being the Duty

Remission Scheme under the export and import policy. (To be done later)

(vi) The value of any benefit or perquisite, whether convertible into money or not, arising

from any business or profession. (To be done later)

(vii) any sum, whether received or receivable in cash or kind, under an agreement for not

carrying out any activity in relation to any business or Profession. (To be done later)

AMENDMENT MADE BY FINANCE ACT 2018

Any compensation due (or received) by any person (by whatever name called) at or in

connection with the termination (or the modification of the terms and conditions) of any

contract relating to his business, shall be chargeable to tax under the head "Profits and gains

of business or profession".

SECTION 29: HOW TO COMPUTE INCOME FROM PROFITS AND GAINS OF

BUSINESS OR PROFESSION

The income under the head "Profits and gains of business or profession" shall be computed in accordance with the provisions contained in sections 30 to 43D.

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Depreciation AJ Education NeXt

2.1

CHAPTER 2. DEPRECIATION

SECTION 32(1)(ii): DEPRECIATION

- In respect of-

(i) buildings, machinery, plant or furniture, being tangible assets;

(ii) know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets

- owned WHOLLY OR PARTLY by the assessee

- and used for the purposes of the business or profession

- depreciation shall be allowed

- on the written down value

- of the block of assets

- at the prescribed percentage.

WHAT DOES THE TERM OWNERSHIP MEANS FOR THE PURPOSE OF

DEPRECIATION ?

1. BENEFICIAL OWNER IS RELEVANT RATHER THAN LEGAL OWNER:

MYSORE MINERALS LTD (SUPREME COURT)

In this case, Supreme Court held that depreciation is allowable to the assessee on the buildings whose possession has been acquired by the assessee and which were used by him for the purposes of his business or profession, even though such buildings were not transferred in the name of the assessee. Registration of name under the Registration Act is not determinative of ownership. What has to be seen is the beneficial ownership. Therefore, if the assessee has taken the possession of a building in pursuance of an agreement to sell, then he is deemed as the owner of the building for claiming depreciation even if the building is not

registered in his name.

MEANING OF USE:

WHAT DOES THE TERM ‘USE’ MEAN FOR THE PURPOSE OF

DEPRECIATION?

The term ‘use’ means both active as well as passive use. (i.e. ready for use).

Use includes passive use in certain circumstances: One of the conditions for claim of depreciation is that the asset must be “used for the purpose of business or profession”. Courts have held that, in certain circumstances, an asset can be said to be in use even when

it is “kept ready for use”.

For example, stand by equipment and fire extinguishers can be capitalized if they are

‘ready for use’’.

Likewise, machinery spares which can be used only in connection with an item of tangible fixed asset and their use is expected to be irregular, has to be capitalised. Hence, in


2.2

such cases, the term “use” embraces both active use and passive use. However, such passive use should also be for business purposes.

CIT V. CHENNAI PETROLEUM CORPORATION LTD. (MADRAS)

Can depreciation under section 32 be allowed on the plant and machinery which is

ready for use but could not be put to use at any time during the previous year due to

some extraneous reason, for example, paucity of raw material?

The assessee claimed depreciation on the gas sweetening plant, which was built during the relevant previous year and was not used in that year on account of non-availability of raw

material i.e., sour gas.

High Court's observations:

The High Court held that so long as the business was a going one and the machinery got ready for use but could not be put to use due to certain extraneous circumstances, depreciation under section 32 would be allowable.

High Court's decision:

The High Court confirmed the majority decision of the Tribunal holding that, in this case, the machinery was entitled to depreciation since the business was a going concern and the machinery, being ready for use, could not be actually put to use due to an extraneous reason, namely, raw material paucity.

Sec 2(11): BLOCK OF ASSETS:

Block of Assets means a group of assets falling within a class of assets comprising:

(a) tangible assets, being buildings, machinery, plant or furniture;

(b) intangible assets, being know-how, patents, copy-rights, trade marks, licences,

franchises or any other business or commercial rights of similar nature in respect of which the same percentage of depreciation is prescribed.

KEY POINTS:

1. Normal depreciation shall be allowed even if actual cost of the asset is less than Rs. 5,000.

2. "Know-how" means any industrial information or technique likely to assist in the manufacture or processing of goods or in the working of a mine, oil-well or other sources of mineral deposits (including searching for discovery or testing of deposits for the winning of access thereto.)

Therefore, there will be separate blocks of assets for:

i) Buildings

ii) Plant and machinery

iii) Furniture

iv) Intangible assets

3. Temple inside factory will form part of the factory building and is eligible for depreciation. Management expenses of temple are deductible under section 37(1) as

revenue expenditure.


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4. It may be noted that revaluation of assets does not have any impact under the Income-tax Act. What is relevant for the purposes of calculating depreciation under the Income-

tax Act is the actual cost. Revaluation of asset should be ignored.

5. It may be noted that depreciation on asset partially owned by the assessee shall be allowed to him to the extent of his share in asset.

6. CBDT Circular

Irrespective of accounting treatment prescribed by the Accounting Standard, the lessor shall be entitled to claim depreciation on leased assets whether the lease is an operating

lease or a financial lease.

7. Is the assessee entitled to depreciation on the value of goodwill considering it

as an asset within the meaning of Explanation 3(b) to Section 32(1)?

CIT V. SMIFS SECURITIES LTD. (2012) (SC)

Facts of the case: In this case, the assessee has paid an excess consideration over the value of net assets of the amalgamating company acquired by it, which is treated as goodwill, since the extra consideration was paid towards the reputation which the amalgamating company was enjoying in order to retain its existing clientele. The assessee had claimed depreciation on the said goodwill. However, the Assessing Officer contended that the goodwill is not an asset falling under Explanation 3 to section 32(1) and therefore, is not eligible for depreciation.

Supreme Court’s Observations: On this issue, the Supreme Court observed that Explanation 3 to section 32(1) states that the expression 'asset' shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.

Supreme Court’s Decision: A reading of the words 'any other business or commercial rights of similar nature' in Explanation 3(b) indicates that goodwill would fall under the said expression. In the process of amalgamation, the amalgamated company had acquired a capital right in the form of goodwill because of which the market worth of the amalgamated company stood increased.

Therefore, it was held that 'Goodwill' is an asset under Explanation 3(b) to section

32(1) and depreciation thereon is allowable under the said section.

8. Can depreciation on leased vehicles be denied to the lessor on the ground that

the vehicles are registered in the name of the lessee and that the lessor is not

the actual user of the vehicles?

I.C.D.S. Ltd. v. CIT (2013) (SC)

Facts of the case: The assessee is a non-banking finance company engaged, inter

alia, in the business of leasing and hire purchase. The assessee purchased vehicles directl y from the manufacturers and as a part of its business, leased out these vehicles to its customers, after which the physical possession of the vehicles was


2.4

with the lessee. Further, the lessees were registered as the owners of the vehicles in the certificate of registration issued under the Motor Vehicles Act, 1988. The

assessee-lessor claimed depreciation on such vehicles.

The Assessing Officer disallowed the depreciation claim on the ground that the assessee’s use of these vehicles was only by way of leasing out the vehicles to others and not as actual user of the vehicles in the business of running them on hire and secondly, the vehicles were registered in the name of the lessee and not the assessee-lessor. Therefore, according to the Assessing Officer, the assessee had merely financed the purchase of these assets and was neither the owner nor the user

of these assets.

High Court’s view: The High Court was also of the view that the assessee could not be treated as the owner of the vehicles, since the vehicles were not registered in the name of the assessee and the assessee had only financed the transaction. Therefore, the High Court held that the assessee was not entitled to claim depreciation.

Supreme Court’s Observations: The Supreme Court observed that section 32 imposes a twin requirement of “ownership” and “usage for business” as conditions for claim of depreciation thereunder. The Apex Court further observed that as far as usage of the asset is concerned, the section requires that the asset must be used in the course of business. It does not mandate actual usage by the assessee itself. In this case, the assessee did use the vehicles in the course of its leasing business. Hence, this requirement of section 32 has been fulfilled, notwithstanding the fact that the

assessee was not the actual user of the vehicles.

The Supreme Court further noted that section 2(30) of the Motor Vehicle Act, 1988, is a deeming provision which creates a legal fiction of ownership in favour of the lessee only for that Act, not for the purpose of law in general. No inference could be drawn from the registration certificate as to ownership of the legal title of the vehicles, since registration in the name of the lessee during the period of lease is mandatory as per the Motor Vehicles Act, 1988. If the lessee was in fact the legal owner, he would have claimed depreciation on the vehicles which was not the case.

The Apex Court observed that as long as the assessee-lessor has a right to retain the legal title against the rest of the world, he would be the owner of the asset in the eyes of law. In this regard, the following provisions of the lease agreement are

noteworthy –

• The assessee is the exclusive owner of the vehicle at all points of time;

• The assessee is empowered to repossess the vehicle, in case the lessee committed a default;

• At the end of the lease period, the lessee was obliged to return the vehicle to the assessee;

• The assessee had a right of inspection of the vehicle at all times.

It can be seen that the proof of ownership lies in the lease agreement itself, which clearly points in favour of the assessee.

Supreme Court’s Decision: The Supreme Court, therefore, held that assessee was entitled to claim depreciation in respect of vehicles leased out since it has satisfied both the requirements of section 32, namely, ownership of the vehicles and its usage in the course of business.


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9. Extracts from “Income Computation and Disclosure Standard V relating to

Tangible Fixed Assets”

Where a person owns tangible fixed assets jointly with others, the proportion in

the actual cost, accumulated depreciation and written down value is grouped

together with similar fully owned tangible fixed assets. Details of such jointly

owned tangible fixed assets shall be indicated separately in the tangible fixed

assets register.

RULE 5(1): RATES OF DEPRECIATION

PART A TANGIBLE ASSETS

I Buildings

Block 1. Buildings which are used mainly for residential purposes except hotels and boarding houses

5%

Block 2. Buildings which are not used mainly for residential purposes and not covered by Block (1) above and (3) below

10%

Block 3. Buildings acquired on or after 1st September, 2002 for installing machinery and plant forming part of water supply project or water treatment system and which is put to use for

the purpose of business of providing infrastructure facilities

40%

Block 4. Purely temporary erections such as wooden structures 40%

II Furniture and Fittings

Block 1. Furniture and fittings including electrical fittings ["Electrical fittings" include electrical wiring, switches, sockets, other fittings and fans, etc.]

10%

III Plant & Machinery

Block 1. Motor cars other than those used in a business of running them on hire, acquired or put to use on or after 1-4-1990

Motor cars other than those used in a business of running

them on hire, acquired during the period from 23.8.2019 to

31.3.2020 and put to use on or before 31.3.2020

15%

30%

Block 2 Motors buses, motor lorries, motor taxis used in the business of running them on hire

Motor buses, motor lorries and motor taxis used in a

business of running them on hire, acquired during the

period from 23.8.2019 to 31.3.2020 and put to use on or

before 31.3.2020

30%

45%

Block 3. Moulds used in rubber and plastic goods factories 30%

Block 4. Aeroplanes, Aeroengines 40%

Block 5. Specified air pollution control equipments, water pollution control equipments, solid waste control equipment and

solidwaste recycling

40%

Block 6 Plant & Machinery used in semi-conductor industry covering all Integrated Circuits (ICs)

30%


2.6

Block 7. Life saving medical equipments 40%

Block 8. Machinery and plant, acquired and installed on or after the 1st day of September, 2002 in a water supply project or a water treatment system and which is put to use for the purpose of business of providing infrastructure facility

40%

Block 9. Oil wells 40%

Block 10. Renewable Energy Saving Devices (as specified) 40%

(i) Windmills and any specially designed devices which run on windmills installed on or after 1.4.2014

40%

(ii) Any special devices including electric generators and pumps running on wind energy installed on or after

1.4.2014 would be eligible for depreciation

40%

(iii) Windmills and any specially designed devices running on windmills installed on or before 31.3.2014 and any special devices including electric generators and pumps running on wind energy

installed on or before 31.3.2014

15%

Block 11. Computers including computer software 40%

Block 12. Books (annual publications or other than annual publications) owned by assessees carrying on a profession

40%

Block 13. Books owned by assessees carrying on business in running lending libraries

40%

Block 14. Plant & machinery (General rate) 15%

IV Ships

Block 1. Ocean-going ships 20%

Block 2. Vessels ordinarily operating on inland waters not covered by Block 3 below

20%

Block 3. Speed boats operating on inland water 20%

PART B INTANGIBLE ASSETS

Know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature

25%

SECTION 43(3): DEFINITION OF "PLANT"

Section 43(3) defines "Plant" to include ships, vehicles, books, scientific apparatus, and surgical equipment used for the purposes of the business or profession but does not include

tea bushes or livestock OR BUILDINGS OR FURNITURE AND FITTINGS. [The words in bold and capital letters have been added by Finance Act, 2003] Therefore, as per the amendment made by Finance Act, 2003 specially designed building such as hospital, cinema hall, theatre, shall not be treated as plant and machinery but shall be treated as buildings. Similarly, furniture and fittings specially designed for a hotel, cinema hall, hospital shall not be treated as plant and machinery but shall be treated as furniture and fittings.


2.7

EXPLANATION 1 TO SECTION 32(1): DEEMED BUILDING

Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which he holds a lease or any other right of occupancy, and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or by way of renovation or extension or improvement to the

building, then such capital expenditure will be treated as the building owned by the assessee.

Illustration :

Mr X is a tenant in a building in which he carries on his business. On 31.12.2018 he incurred an expenditure of Rs. 4 lakhs on constructing of a room to be used as office. On 29.11.2020, he vacated the building and receives from landlord:

Case I: Rs. 2,40,000

Case II: Rs. 5,00,000

Answer: Block of building (10%)

Deemed Building as per Explanation 1 to Section 32(1) Rs 4,00,000

Less: Depreciation @ 5% for the Assessment Year 2019-2020 Rs 20,000

Opening WDV as on 01.04.2019 Rs3,80,000

Less: Depreciation @ 10% for Assessment Year 2020-2021 Rs 38,000

Opening WDV as on 01.04.2020 Rs3,42,000

- WDV of the block shall be Nil since, the block ceases to exist on the transfer of the deemed building.

- Section 50 is attracted since block ceases to exist on the transfer of deemed building.

Assessment Year 2021-2022

Capital Gains - Case I

Compensation from landlord Rs. 2,40,000

Less: Opening WDV as on 01.04.2020 Rs 3,42,000

Short Term Capital Gain/Loss (-) Rs 1,02,000

Capital Gains - Case II

Compensation from landlord Rs.5,00,000

Less: Opening WDV as on 01.04.2020 Rs 3,42,000

Short Term Capital Gain Rs. 1,58,000

EXPLANATION 5 TO SECTION 32(1): MANDATORY TO CLAIM

DEPRECIATION

It is mandatory for the assessee to claim depreciation. Depreciation shall be allowed to

the assessee whether or not the assessee has claimed deduction in respect of depreciation

in computing his total income. Therefore, in computing the profits and gains of business

or profession for any previous year, the deduction of depreciation under section 32 shall

be mandatory.


2.8

NO DEPRECIATION WHERE ACTUAL COST ALLOWED AS DEDUCTION

UNDER SECTION 42

No depreciation shall be allowed in respect of any plant or machinery if the actual cost thereof is allowed as deduction in one or more years under an agreement under section 42.

PROVISO TO SECTION 32(1): 50% DEPRECIATION WHEN ASSET IS PUT TO

USE FOR LESS THAN 180 DAYS

Where any asset falling within a block of assets is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than 180 days in that previous year, then the deduction of depreciation in respect of such asset shall be restricted to fifty percent of the depreciation allowable. This is applicable for

depreciation under sections 32(1)(i), 32(1)(ii) and 32(1)(iia).

Illustration :

Asset is purchased on 10.02.2020 for Rs. 3,00,000. Depreciation is allowable @ 15%. Asset

is installed and put to use on 25.12.2020.


No depreciation shall be allowed since the asset is put to use on 25.12.2020.


Restriction of 50% of depreciation applies only in the year in which the asset is purchased or

acquired; therefore, normal depreciation @ 15% shall be allowed.

Hence, Depreciation on asset for Assessment Year 2021-2022 = 15% of Rs.3,00,000

= Rs. 45,000

WHEN DEPRECIATION CAN BE CLAIMED?

(1) The block of asset must be positive on the last day.

AND (2) The Block must not cease to exist on last day.

Example:

a. Ideal Situation to claim depreciation

Opening WDV Qty Nil PY 2020 – 21

(+) Purchase (01.04.20)

2 200,000 Furniture Rate = 10%

(-) Sold (NIL) (-)

WDV before depreciation

2 2,00,000

(-) Depreciation (20 – 21) (20,000)

Cl. WDV after depreciation 1,80,000


2.9

b. Case I :- No depreciation (2020 – 21)

Opening WDV Qty Nil

(+) Purchase 2 2,00,000

(-) Sold (1) (3,00,000)

Cl. WDV before depreciation 1 (1,00,000)

• Cannot claim dep & Sec. 50, i.e. STCG will be applicable {Refer Book 2}

c. Case II :- No depreciation (2020 – 21)

Opening WDV Qty Nil

(+) Purchase 2 2,00,000

(-) Sold (2) (1,00,000)

Cl. WDV before depreciation 0 100000

• Cannot claim depreciation & Sec. 50, i.e. STCG will be applicable {Refer Book 2}

PROVISO TO SECTION 32(1): DEPRECIATION IN CASE OF SUCCESSION,

AMALGAMATION AND DEMERGER

The aggregate deduction, in respect of depreciation of:

(a) buildings, machinery, plant or furniture, being tangible assets or

(b) know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets

allowable to:

(i) the predecessor and the successor in case of succession referred to in section 47(xiii) or

section 47(xiiib) or section 47(xiv) or section 170, or

(ii) the amalgamating company and the amalgamated company in the case of

amalgamation, or

(iii) the demerged company and the resulting company in case of demerger as the case may be,

shall not exceed in any previous year, the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger had not taken place. Such deduction shall be apportioned between the predecessor and the successor, or the amalgamating company and the amalgamated company, or the demerged company and the resulting company, as the case may be, in the ratio of the number of days for which the assets were used by them.

SECTION 32(1)(iia): ADDITIONAL DEPRECIATION

In the case of any new machinery or plant

- other than ships and aircraft

- which has been acquired and installed

- by an assessee

- engaged in the business of manufacture or production of any article or thing

- OR IN THE BUSINESS OF GENERATION, TRANSMISSION OR

DISTRIBUTION OF POWER


2.10

- a further sum equal to 20% of the actual cost of such machinery or plant

- shall be allowed as deduction under section 32(1)(ii).

– Provided that where an assessee,

– sets up an undertaking or enterprise

– for manufacture or production of any article or thing

– on or after the 1st day of April, 2015 in any backward area notified by the Central Government in this behalf,

– in the State of Andhra Pradesh or in the State of Bihar or in the State of Telangana or in

the State of West Bengal; and

– acquires and installs any new machinery or plant (other than ships and aircraft)

– for the purposes of the said undertaking or enterprise

– during the period beginning on the 1st day of April, 2015 and ending before the 1st day

of April, 2020 in the said backward area.

– then, the provisions of clause (iia) shall have effect, as if for the words "twenty per cent", the words "thirty-five per cent" had been substituted.

Provided further that no deduction shall be allowed in respect of—

(a) any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person; or

(b) any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house; or

(c) any office appliances or road transport vehicles; or

(d) any machinery or plant, the whole of the actual cost of which is allowed as a deduction (by way of depreciation or otherwise) in computing the income chargeable under the head "Profits and Gains of Business or Profession" of any one previous year.

Provided also that where an asset referred to in clause (iia) or the first proviso to clause

(iia), as the case may be, is acquired by the assessee during the previous year and is put

to use for the purposes of business for a period of less than 180 days in that previous

year, and the additional depreciation in respect of such asset is restricted to 50% of the

amount calculated at the percentage prescribed for an asset under clause (iia) for that

previous year, then, the deduction for the balance 50% of the amount calculated at the

percentage prescribed for such asset under clause (iia) shall be allowed in the

immediately succeeding previous year in respect of such asset.

SECTION 32 OF THE INCOME-TAX ACT, 1961 - DEPRECIATION -

ADDITIONAL DEPRECIATION UNDER SECTION 32(1)(iia) FOR ASSESSEES

ENGAGED IN BUSINESS OF MANUFACTURE OR PRODUCTION OF AN

ARTICLE OR THING

CIRCULAR N0.15/2015, DATED 19-5-2016

An assessee, engaged in the business of manufacture or production of an article or thing, is eligible to claim additional depreciation under clause (iia) of sub-section (1) of section 32 of the Income- tax Act, 1961 (hereinafter referred to as the Act) in addition to the depreciation

allowance under sub-section (1) of section 32 of the Act.


2.11

Whether or not an assessee engaged in printing or printing and publishing is eligible for grant of additional depreciation under clause (iia) of sub-section (1) of section 32 of the Act, has been a contentious issue. In other words, whether printing or printing and publishing amounts to manufacture or production of article or thing has been contested in legal forums.

The Board has accepted the position that printing or printing and publishing amounts to

manufacture or production of article or thing.

It is, therefore, a settled position that the business of printing or printing and publishing

amounts to manufacture or production of an article or thing and is accordingly eligible

for additional depreciation under section 32(1)(iia) of the Act.

SECTION 43(6): WRITTEN DOWN VALUE

Up to Assessment Year 1987-88, the concept of individual asset was relevant and depreciation was allowed on each asset. From Assessment Year 1988-89, the concept of

Block of assets has been introduced.

The written down value of the block of assets shall be calculated as under:

W.D.V. of the block at the beginning of Previous Year

Add: Actual Cost of the assets falling within this block acquired during the

Previous Year

Less: Moneys payable in respect of assets falling in this block which are sold,

discarded, demolished or destroyed during the Previous Year and the

amount of scrap value

Less: Actual cost of the assets falling within that block transferred by way of

slump sale referred to in section 50B as reduced by:

(i) depreciation actually allowed upto assessment year 1987-88 in respect of the asset transferred.

(ii) depreciation that would have been allowable for assessment year 1988-89 and future assessment years as if the asset was the only asset in the block of assets. [Section 43(6)(c)(i)(C)]

W.D.V. of block for the Assessment Year

However, the above reduction i.e. under section 43(6)(c)(i)(C) shall be limited to the

written down value of Block of assets. {See After Slump sale under Capital Gains}

KEY POINTS:

1. The reduction of moneys payable shall only be to the extent that W.D.V. becomes NIL.

2. Moneys payable means the sale price of the asset and includes any insurance, salvage

or compensation payable in respect of the asset.

3. Any allowance in respect of any depreciation carried forward under section 32(2) shall be deemed to be "depreciation actually allowed".

4. Where section 50 is not attracted, then expenditure incurred wholly and exclusively in connection with transfer of asset e.g., commission paid to the broker for selling the asset, shall not be adjusted from the WDV of the block of assets. The gross sale price of the asset shall be deducted from the WDV of the Block of assets. Such expenditure on transfer of asset is allowable as revenue expenditure under section 37(1).


2.12

5. Can "moneys payable" in respect of a building sold by the assessee (which has to

be reduced from the opening written down value of the block of assets for

calculating depreciation) be construed as the fair market value of the asset instead

of the actual sale price?

CIT v. Cable Corporation of India Ltd. (Bom.)

The written down value of the asset falling within that block of assets at the beginning of the previous year has to be adjusted by the amount for which the asset is actually

sold and not by its fair market value.

SECTION 43(1): ACTUAL COST

Actual Cost means the actual cost of the asset to the assessee, reduced by that portion of the cost which has been directly or indirectly met by any other person or authority.

However, where an assessee incurs any expenditure for acquisition of any asset or part thereof in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft or use of electronic clearing system through a bank account or such other

electronic mode as may be prescribed , exceeds Rs. 10,000, such expenditure shall not form part of actual cost of such asset [Proviso to section 43(1)] {To be done later after

sec 40A(3)}. (Underlined and bold words are amended by Finance Act (No.2) 2019)

KEY POINTS:

1. In Challapali Sugar Mills Ltd (SC), it was held that the interest paid before the commencement of production on the amounts borrowed by the assessee for the acquisition and installation of plant and machinery, buildings, furniture and fixture forms part of the actual cost.

2. Explanation 8 to section 43(1) provides that where any interest is paid or is payable as

interest in connection with the acquisition of an asset, so much of the amount as is relatable to any period after such asset is first put to use shall not be included in the actual cost of the asset.

3. Salaries, expenses of guest house maintained for erection staff, travelling, vehicle and

general expenses pertaining to setting up of the plant forms part of the actual cost.

4. Expenses on test runs of machinery prior to production are part of the actual cost of

plant & machinery.

5. EXTRACTS FROM ICDS-V RELATING TO TANGIBLE FIXED ASSET

(a) Administration and other general overhead expenses are to be excluded from the cost of tangible fixed assets if they do not relate to a specific tangible fixed asset. Expenses which are specifically attributable to construction of a project or to the acquisition of a tangible fixed asset or bringing it to its working condition, shall be included as a part of the cost of the project or as a part of the cost of the

tangible fixed asset.

(b) The expenditure incurred on start-up and commissioning of the project, including the expenditure incurred on test runs and experimental production, shall be capitalised. The expenditure incurred after the plant has begun commercial production, that is production intended for sale or captive consumption, shall be

treated as revenue expenditure.


2.13

6. Section 36(1)(iii) provides that while computing the income under the head P/G/B/P, deduction shall be allowed for the amount of interest paid in respect of capital borrowed for the purposes of business or profession. The Finance Act, 2003 has added the following proviso to section 36(1)(iii) w.e.f. Assessment Year 2004-05:

"Provided that the amount of the interest paid, in respect of capital borrowed for

acquisition of an asset (whether capitalized in the books of account or not); for

any period beginning from the date on which the capital was borrowed for

acquisition of the asset till the date on which such asset was first put to use, shall

not be allowed as deduction."

EXTRACTS FROM “INCOME COMPUTATION AND DISCLOSURE STANDARD – 9

RELATING TO BORROWING COSTS”

Borrowing Costs Eligible for Capitalisation

1. To the extent the funds are borrowed specifically for the purposes of acquisition, construction or production of a qualifying asset, the amount of borrowing costs to be capitalised on that asset shall be the actual borrowing costs incurred during the period on the funds so borrowed.

2. To the extent the funds are borrowed generally and utilised for the purposes of acquisition, construction or production of a qualifying asset, the amount of borrowing costs to be capitalised shall be computed in accordance with the following formula namely:-

A X B

C

Where A = borrowing costs incurred during the previous year except on borrowings

directly relatable to specific purposes;

B = (i) the average of costs of qualifying asset as appearing in the balance sheet of a person on the first day and the last day of the previous year;

(ii) in case the qualifying asset does not appear in the balance sheet of a person on the first day or both on the first day and the last day of previous year, half of the cost of qualifying asset;

(iii) in case the qualifying asset does not appear in the balance sheet of a person on the last day of previous year, the average of the costs of qualifying asset as appearing in the balance sheet of a person on the first day of the previous year and on the date of put to use or completion, as the case may be, other than those qualifying assets which are directly funded out of specific borrowings; or

C = the average of the amount of total asset as appearing in the balance sheet of a person on the first day and the last day of the previous year, other than those assets which are directly funded out of specific borrowings;

Commencement of Capitalisation

3. The capitalisation of borrowing costs shall commence:

(a) in a case referred to in paragraph 5, from the date on which funds were borrowed;

(b) in a case referred to in paragraph 6, from the date on which funds were utilised.


2.14

Cessation of Capitalisation

4. Capitalisation of borrowing costs shall cease:

(a) in case of a qualifying asset referred to in item (i) and (ii) of clause (b) of sub-paragraph (1) of paragraph 2, when such asset is first put to use;

(b) ------

EXPLANATIONS TO SECTION 43(1): DETERMINATION OF ACTUAL COST IN

SPECIAL CASES

EXPL. TO

SEC. 43(1)

MODE OF ACQUISITION ACTUAL COST

1 Asset acquired for scientific research subsequently brought into business use

NIL (To be done with Sec 35)

2 Asset acquired by way of gift or inheritance

Actual Cost to the previous owner minus depreciation actually to him.

Eg :- Mr. X acquired a machinery on 02/02/2016 for Rs. 1,00,000. Rate = 15%. Mr. X gifted this to Mr. Y on 31/12/2020. WDV of Block of Asset of Mr. X and Mr. Y on 01/04/2020 is Rs.

5,00,000 and Rs. 3,00,000 respectively. Determine Actual cost in the hands of Mr. Y.

Ans.

Actual Cost to Mr. X 1,00,000

(-) Depreciation actually allowed

P.Y 2015 – 2016 @ 7.5% (7,500)

P.Y. 2016 – 2017 @ 15% (13,875)

P.Y. 2017 – 2018 @ 15% (11,794)

P.Y. 2018 – 2019 @ 15% (10,025)

P.Y. 2019 – 2020 @ 15% (8,521)

Actual cost to Mr. Y. 48,285

3 Asset acquired at higher price from any other person using the asset for his business or profession with a view to claim depreciation on enhanced cost and reduce tax liability

Actual cost to be determined by the Assessing Officer with prior approval of Joint Commissioner.

Eg :- Mr. X

1. Op WDV as on 01.04.2020 of block (15%) 10,00,000

2. PGBP before depreciation 4,00,000

3. B/F Loss under head Capital Gains (1,20,00,000)

Mr X sells the entire Block for Rs. 1,30,00,000.


2.15

• Mr. X files a return :-

1. PGBP 4,00,000

2. Short term Capital Gain 1,20,00,000

(-)Short term Capital Loss (1,20,00,000) Nil

Mr. X’s total income 4,00,000

• Relevant information of Mr. Y :-

PGBP before depreciation 50,00,000

Op WDV (15%) on 01.04.2020 20,00,000

• Mr. Y files a return

PGBP income 50,00,000

Less: Depn @ 15% on (1,30,00,000 + 20,00,000) (22,50,000)

Total Income of Y 27,50,000

• After Explanation 3 to Sec. 43(1)

Now the A.O. invokes explanation 3 and he determines that the FMV of the

asset transferred for Rs.1,30,00,000 is Rs 15,00,000

PGBP 50,00,000

(-) Depo @ 15% [15,00,000 + 20,00,000] (5,25,000)

Total Income of Y 44,75,000

Note: The Sale consideration of X will not change because of Explanation 3.

4 Asset once belonged to the assessee which was used by him for business & is transferred and reacquired by him

The WDV at the time of original transfer or the price paid for reacquiring the asset, whichever is less.

Eg :- Mr. A acquired an asset on 01.01.2015 for Rs 1,00,000 and the asset was taken to the Block on which dep @ 15%. Mr. A sold the asset to Mr. B on 01.01.2017 for Rs 1,50,000 and Mr. B sold the asset to Mr. C on 01.01.2018 for Rs 200,000. Mr. C sells the asset to Mr. A on

01.01.21 for Rs 450,000. Determine “Actual cost” to Mr. A.

Ans. Expln 4 of Sec 43(1) will be attracted in the hands of Mr.A. Actual cost will be lower of

:-

(i) Actual price for which asset is reacquired Rs ,4,50,000

(ii) Actual cost to Mr. A when he first acquired the Asset Rs.1,00,000

(-) Less : Dep :- P.Y 2014 – 2015 @ 7.5% 7,500

P.Y. 2015 – 2016 @ 15% 13,875 (Rs 21,375)

Actual Cost Rs 78,625


2.16

5 Building used for private purpose subsequently brought into business use.

The cost of purchase or construction of the building as reduced by the notional depreciation calculated at the depreciation rate applicable to the year of conversion in to business use.

Eg:

Mr. X purchased a building on 01.01.2017 for personal residence for Rs 10,00,000. The Building is now a factory building on 01.01.2021 when its FMV is Rs 800,000. Assume that depn rate on building was 7.5% upto A.Y. 2017 – 18 and depn rate building from A.Y. 2018 –

19 is 10%.

Ans. As per expln 5 to 43(1), the actual cost of building to Mr. X

Actual Cost 10,00,000

(-) Depn for P.Y 16 – 17 @ 5% (50,000)

Depn for P.Y. 17 – 18 @ 10% (95,000)

Depn for P.Y. 18 – 19 @ 10% (85,500)

Depn for P.Y. 19 – 20 @ 10% (76,950)

Actual cost for P.Y. 2020 – 21 6,92,550.

Note for Plant & Machinery & Furniture:

6 & Exp. 2 to section 43(6)

Asset transferred by a holding Co. to its subsidiary Co. or by a Subsidiary Co., to holding Co. if the following two conditions are satisfied: -

i) Shares of the subsidiary Co. should be wholly owned by the holding co. or its nominees,

ii) The transferee co. should be an Indian company.

Note: If transferor company was not claiming depreciation since it was not used for its business, then the actual cost to the transferee company shall be the actual cost to the transferor Company.

WDV on 1st day of FY to the transferor company will be adopted as the actual cost to the transferee company.

(To be done with Capital Gains)

7 & Exp. 2 to section 43(6)

Transfer of asset in a scheme of amalgamation by amalgamating company to amalgamated Indian company.

Note: If amalgamating Company was

WDV to the amalgamating company on 1st day of FY of amalgamation will be adopted as the actual cost to the amalgamated company.


2.17

not claiming depreciation since it was not used for its business, then actual cost to the amalgamated company shall be the actual cost to the amalgamating company.


7A Asset transferred by a demerged company to the resulting Indian company.

Actual cost shall be the written down value in the hands of the demerged company on the 1st day of FY of demerger.


8 Asset acquired out of borrowed funds

{Do along with CSM & proviso to sec 36(1)(iii)}

Interest on loan borrowed relating to the period after the asset is first put to use shall never form part of actual cost.

9 Asset acquired subject to levy of excise duty or customs duty in respect of which CENVAT credit is availed.

So much of the duty in respect in respect of which a claim of credit has been made and allowed under the Central Excise Rules, 1944 shall not form part of the actual cost.

Eg:

Machinery :-

BSP 10,00,000

(+) GST @ 10% 1,00,000 ® Input Credit

11,00,000 is Availed.

Note :- The Actual cost in this case will be amount excluding the Input Credit.

10 A portion of the cost of an asset acquired is met directly or indirectly by Government or any statutory authority or any other person in the form of a subsidy or grant or reimbursement.

So much of the cost as is relatable to such subsidy or grant or reimbursement shall not form part of the actual cost.

If subsidy is not directly relatable to the asset acquired, but subsidy is with reference to the assets then the subsidy shall be proportionately reduced from the actual cost of the assets with reference to which subsidy has been granted.


2.18

Eg:- Say if an assessee wants to acquire an asset of Rs 100 Cr & central govt. is reimbursing Rs 30 Cr. directly in respect of that asset then actual cost would be Rs 100 Cr -Rs 30 Cr. = Rs 70 Cr.

• However, if the subsidy is not directly related to asset, but is in reference to many assets, then it must be proportionately reduced.

Eg:- If an assessee is acquiring a pool of assets of Rs 120 Cr. which includes 3 assets :-

1. Building Rs 60

2. P & M Rs 40

3. Furniture Rs 20

The Central Govt. is reimbursing 30% of entire cost

The actual cost of every asset will be as follows:-

1. Building = 60(-) 18 = 42

2. P & M = 40(-) (12) = 28

3. Furniture = 20 (-) 6 = 14

11 Asset brought into India by a Non-resident assessee or a foreign company for use in his business or profession.

Actual cost as reduced by the amount of depreciation calculated at the rate in force as if the asset was used in India since the date of acquisition.

Eg:- Mr. A a non-resident purchased a computer in U.S.A on 1.01.2016 for Rs 10,00,000. It was used for his business outside India. On 01.01.21, he starts a business in India and computer

is brought in India on that day when its FMV is Rs 200,000

Ans. The Actual cost of the computer for A.Y. 21 – 22 shall be as under

Actual cost 10,00,000

(-) Dep A.Y. 16 – 17 @ 30% (3,00,000)

(-) Dep A.Y. 17 – 18 @ 60% (4,20,000)

(-) Dep A.Y. 18 – 19 @ 40% (1,12,000)

(-) Dep A.Y. 19 – 20 @ 40% (67,200)

(-) Dep A.Y. 20 – 21 @ 40% (40,320)

Actual cost for A.Y. 21 – 22 60,480

12 Any capital asset acquired under a scheme of corporatisation of a recognised stock exchange in India, approved by SEBI.

The amount, which would have been regarded as actual cost, had there been no such corporatisation shall be deemed to be the actual cost.


13 Actual cost of capital asset has been allowed as deduction under section 35AD and capital asset is transferred by way of transactions referred to in section 47.

The actual cost of such asset to the transferee shall be NIL.

(To be done with sec 35AD)


2.19

EXPLANATION 7 TO SECTION 43(6)

For the purposes of this clause, where the income of an assessee is derived, in part from

agriculture and in part from business chargeable to income-tax under the head "Profits

and gains of business or profession", for computing the written down value of assets

acquired before the previous year, the total amount of depreciation shall be computed

as if the entire income is derived from the business of the assessee under the head

"Profits and gains of business or profession" and the depreciation so computed shall be

deemed to be the depreciation actually allowed under this Act. (Inserted by Finance

Act, 2009)

ANALYSIS OF EXPLANATION 7 TO SECTION 43(6)

Explanation 7 to section 43(6) has been introduced by Finance Act, 2009 to nullify the judgement of Commissioner of Income-Tax vs. Doom Dooma India Ltd. (Supreme

Court) [2009]

1. In this case, the assessee company was engaged in the business of growing and manufacturing tea in India. During the previous year, the income was computed as under:

Composite income from growing & manufacturing tea in India before depreciation 3000 Lakhs

Less: Depreciation on actual cost of assets of Rs.1000 Lakhs @ 15% 150 Lakhs

Total Income 2850 Lakhs

2. Out of which 60% is agricultural income and 40% of 2850 Lakhs i.e., 1140 Lakhs is taxable business income.

3. The question before the Supreme Court was whether in cases where Rule 8 applies and income which is brought to tax as 'business income' is only 40% of composite income, only 40% of depreciation allowed at prescribed rate is required to be taken into account for computing WDV of Block of Assets because that is depreciation 'actually allowed'.

4. Supreme Court held that in case where Rule 8 applies, the income which is brought to tax as 'business income' is only 40 per cent of the composite income and, consequently, proportionate depreciation is required to be taken into account because that is the depreciation 'actually allowed'. Therefore, WDV of block of asset shall be taken as Rs. 940 Lakhs.

5. As per the Supreme Court, the WDV of block of assets for the next year shall be:

Actual Cost 1000 Lakhs

Less: Depreciation 60 Lakhs

WDV 940 Lakhs


2.20

6. After the insertion of Explanation 7 to section 43(6), the WDV of block of assets for the next year shall be:

Actual Cost 1000 Lakhs

Less: Depreciation 150 Lakhs

WDV 850 Lakhs

SECTION 32(2): SET-OFF AND CARRYFORWARD OF UNABSORBED

DEPRECIATION

1. The current year depreciation for any assessment year shall be set off

(i) against the profits and gains of any business or profession carried on by the assessee assessable for that assessment year and

(ii) the balance if any, against the income under any head EXCEPT SALARIES assessable for that assessment year. (It can be set-off against income under the head Capital Gains, Income from other sources, House property EXCEPT Salaries.)

2. Depreciation to the extent not set off shall be carried forward to the next assessment year and set off against

(i) profits and gains of any business or profession carried on by the assessee and

(ii) the balance if any against the income under any head EXCEPT SALARIES. (It can be set-off against income under the head Capital Gains, Income from other sources, Income from House Property EXCEPT Salaries.)

3. The unabsorbed depreciation can be carried forward indefinitely.

4. Priority of set-off

(i) Current Year Depreciation.

(ii) Brought forward Business Losses.

(iii) Brought forward Depreciation.

5. Set-off and carry forward of depreciation is not governed by section 80 but by section 32(2). Therefore, unabsorbed depreciation can be carried forward and set-off, even if

the return is filed after the time prescribed under section 139(1).

KEY POINT:

Depreciation can be carried forward only if the assessee is the same, i.e., the assessee who claimed depreciation and the assessee who wants to carry forward the depreciation must bethe same. Exception to this rule is section 72A/72AA/72AB where depreciation can be carried forward even when the assessee has changed in the following situations:

- Firm succeeded by a Company {Section 47(xiii)}

- Proprietorship Concern succeeded by a company {Section 47(xiv)}

- Unlisted Company succeeded by LLP {Section 47(xiiib)}

- Amalgamation

- Demerger

- Amalgamation referred to in section 72AA

- Amalgamation and Demerger of Co-operative Bank referred to in section 72AB.


2.21

MISCELLANEOUS ISSUES

1. Leased Assets

A lessee of a plant or machinery is not entitled to claim depreciation thereon as he does not own the plant. A lessor can, however, claim depreciation on the assets leased out by

him if he is engaged in the business of leasing out the assets.

Section 57 provides that if the lessor is not in the business of leasing, then lease income is taxable as "Income from Other Sources" and depreciation computed as per section 32

shall be allowed.

2. Assets acquired on Hire Purchase

Where the terms of the hire purchase agreement provide that the hired asset shall eventually become the property of the hirer or give the hirer an option to purchase the asset, the transaction would be governed by CBDT Circular No. 9 of 1943. Accordingly, the periodical payments made by the hirer would be broken into interest charges (to be allowed as deduction to the hirer) and payment on account of capital cost of the asset. Depreciation is allowed to the hirer on the initial value of the asset, i.e., the amount for which the hired item would have been sold for cash at the date of agreement.

SECTION 38(2): ASSETS NOT EXCLUSIVELY USED FOR BUSINESS

PROFESSION

Where any building, machinery, plant or furniture is not exclusively used for the purposes of the business or profession, then the deduction under section 30 (repairs & insurance premium of the building), deduction under section 31 (repairs and insurance premium of machinery, plant and furniture) and the deduction under section 32 shall be restricted to a fair proportionate part thereof which the Assessing Officer may determine having regard to the use of such building, machinery, plant or furniture for the purposes of business or profession.

SUBSIDIES ( INSERTED BY FINANCE ACT 2015 )

SECTION 2(24) (xviii) : DEFINITION OF INCOME INCLUDES SUBSIDY AND GRANTS

Income includes

– assistance in the form of

– a subsidy or

– grant or

– cash incentive or

– duty drawback or

– waiver or

– concession or

– reimbursement (by whatever name called)

– by the Central Government or

– a State Government or

– any authority

– or body

– or agency

– in cash or kind


2.22

– to the assessee

– other than, -

(a) the subsidy or grant or reimbursement which is taken into account for

determination of the actual cost of the asset in accordance with the provisions

of Explanation 10 to section 43(1); or

(b) the subsidy or grant by the Central Government for the purpose of the

corpus of a trust or institution established by the Central Government or a

State Government, as the case may be.

(Added by Finance Act, 2016)

SUBSIDIES

• If subsidy is for acquiring an asset, it shall be deducted from actual cost of asset as per Explanation 10 to section 43(1).

• If subsidy is with reference to the assets, it shall be deducted from actual cost of the assets as per Proviso to Explanation 10 to Section 43(1).

• If loan taken for acquisition of an asset is waived, then such loan waived shall be income now as per section 2(24)(xviii).

• Any other subsidy / waiver of loan/ grant from Government / any authority / body / agency will be taxable as income as Profits and Gains of Business or Profession or

Income from other sources.

PRESS RELEASE DATED 5TH MAY 2015:

The amended definition of income shall not apply to the LPG subsidy or any other welfare subsidy received by an individual in his personal capacity and not in connection with the business or profession carried on by him.".

INCOME COMPUTATION AND DISCLOSURE STANDARD VII RELATING TO

GOVERNMENT GRANTS

Preamble

This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” and not for the purpose of maintenance of books of account.

In case of conflict between the provisions of the Income Tax Act, 1961 (‘the Act’) and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that

extent.

Scope

1. This Income Computation and Disclosure Standard deals with the treatment of Government grants. The Government grants are sometimes called by other names such as subsidies, cash incentives, duty drawbacks, waiver, concessions, reimbursements, etc.

2. This Income Computation and Disclosure Standard does not deal with :-

(a) Government assistance other than in the form of Government grants; and

(b) Government participation in the ownership of the enterprise.


2.23

Definitions

3(1). The following terms are used in the Income Computation and Disclosure Standard with the meanings specified:

(a) “Government” refers to the Central Government, State Governments, agencies

and similar bodies, whether local, national or international.

(b) “Government grants” are assistance by Government in cash or kind to a person for past or future compliance with certain conditions. They exclude those forms of Government assistance which cannot have a value placed upon them and the transactions with Government which cannot be distinguished from the normal trading transactions of the person.

3(2). Words and expressions used and not defined in this Income Computation and Disclosure Standard but defined in the Act shall have the meaning assigned to the in the Act.

Recognition of Government Grants

4(1). Government grants should not be recognised until there is reasonable assurance that (i) the person shall comply with the conditions attached to them, and (ii) the grants shall be

received.

4(2). Recognition of Government grant shall not be postponed beyond the date of actual

receipt.

Treatment of Government Grants

5. Where the Government grant relates to a depreciable fixed asset or assets of a

person, the grant shall be deducted from the actual cost of the asset or asset

concerned or from the written down value of block of assets to which concerned

asset or assets belonged to.

6. Where the Government grant relates to a non-depreciable asset or assets of a

person requiring fulfilment of certain obligations, the grant shall be recognised as

income over the same period over which the cost of meeting such obligations is

charged to income.

7. Where the Government grant is of such a nature that it cannot be directly

relatable to the asset acquired, so such of the amount which bears to the total

Government grant, the same proportion as such asset bears to all the assets in

respect of or with reference to which the Government grant is so received, shall be

deducted from the actual cost of the asset or shall be reduced from the written

down value of block of assets to which the asset or assets belonged to.

8. The Government grant that is receivable as compensation for expenses or losses

incurred in a previous financial year or for the purpose of giving immediate

financial support to the person with no further related costs, shall be recognised as

income of the period in which it is receivable.


2.24

9. The Government grants other than covered by paragraph 5, 6, 7, and 8 shall be

recognised as income over the periods necessary to match them with the related

costs which they are intended to compensate.

10. The Government grants in the form of non-monetary assets, given at a concessional rate, shall be accounted for on the basis of their acquisition cost.

Refund of Government Grants

11. The amount, refundable in respect of a Government grant referred to in paragraph 6,8 and 9 shall be applied first against any unamortised deferred credit remaining in respect of the Government grant. To the extent that amount refundable exceeds any such deferred credit, or where no deferred credit exists, the amount shall be charged to profit

and loss statement.

12. The amount refundable in respect of a Government grant related to a depreciable fixed asset or assets shall be recorded by increasing the actual cost or written down value of block of assets by the amount refundable. Where the actual cost of the asset is increased, depreciation on the revised actual cost or written down value shall be provided prospectively at the prescribed rate.

Transitional Provisions

13. All the Government grants which meet the recognition criteria of para 4 on or after 1st day of April, 2015 shall be recognised for the previous year commencing on or after 1st day of April, 2015 in accordance with the provisions of this standard after taking into account the amount, if any, of the said Government grant recognised for any previous

year ending on or before 31st day of March, 2015.

Disclosures

14. Following disclosure shall be made in respect of Government grants, namely:-

(a) nature and extent of Government grants recognised during the previous year by way of deduction from the actual cost of the asset or assets or from the written down value of block of assets during the previous year;

(b) nature and extent of Government grants recognised during the previous year as income;

(c) nature and extent of Government grants not recognised during the previous year by way of deduction from the actual cost of the asset or assets or from the

written down value of block of assets and reasons thereof; and

(d) nature and extent of Government grants not recognised during the previous

year as income and reasons thereof.

DEPRECIATION FOR POWER GENERATING UNDERTAKINGS

Assessees in the business of generation or generation and distribution of power, have the option to claim depreciation on

1. Straight Line method on each asset or

2. Written down value method on block of assets (This we have already done earlier.)


2.25

SECTION 32(1)(i): DEPRECIATION FOR POWER GENERATING UNDERTAKINGS

Section 32(1)(i) provides that an assessee in the business of generation or generation and distribution of power will be allowed depreciation

- in respect of

- building, machinery, plant or furniture being tangible assets;

- know-how, patents, copyrights, trademarks, licences, franchises or any other

business or commercial rights of similar nature, being intangible assets

- owned wholly or partly by the assessee. and used for the purposes of business,

at the prescribed rates on actual cost of each asset on straight line method of depreciation.

KEY NOTES:

1. Where any asset is acquired by the assessee during the previous year and is put to use for the purposes of business for a period of less than 180 days in that previous year, the depreciation allowance in respect of such asset shall be restricted to 50% of the amount calculated at the prescribed percentage.

2. The aggregate depreciation allowed in respect of any asset for different assessment

years shall not exceed the actual cost of the asset.

SECTION 32(1)(iii): TERMINAL DEPRECIATION

- In the case of any building, machinery, plant or furniture or intangible asset.

- owned wholly or partly by an undertaking engaged in generation or generation and distribution of power.

- on which depreciation has been claimed and allowed under section 32(1)(i)

[Depreciation on straight line method]

- and which is sold, discarded, demolished or destroyed in the previous year (other than

the previous year in which it was acquired)

- the amount of depreciation allowed in the previous year in which it is sold, discarded, demolished or destroyed

- shall be equal to

- the amount by which moneys payable in respect of such building, machinery, plant or furniture or intangible asset together with scrap value, if any, fall short of the written

down value of such asset; and

- The deduction is allowable only if such deficiency is actually written off in the books of assessee.

KEY NOTES:

1. If the asset is sold in the same previous year in which it was acquired, then there will be short term capital gains on sale of such asset.

2. The expression 'moneys payable' in respect of any building, machinery, plant or furniture or intangible asset includes: -

(i) any insurance, salvage, or compensation moneys payable in respect thereof.


2.26

(ii) where the building, machinery, plant or furniture or intangible asset is sold, the price for which it is sold.

SECTION 41(2): BALANCING CHARGE

- where any building, machinery, plant or furniture or intangible asset owned by the assessee in respect of which depreciation is claimed under section 32(1)(i) and which was or has been used for the purpose of business.

- is sold, discarded, demolished or destroyed and

- moneys payable in respect of such building, machinery, plant or furniture or intangible asset together with the scrap value, if any,

- exceeds the written down value

- least of the following shall be charged to Income tax as income of the business in the previous year in which the moneys payable for the building, machinery, plant or furniture or intangible asset became due

(a) difference between actual cost and written down value.

(b) difference between aggregate of (moneys payable and scrap value) and written down value.

Further where such moneys payable become due in a previous year in which the business for the purpose of which the building, machinery, plant or furniture or intangible asset was being used is no longer in existence, the provisions of this subsection shall apply as if such business is in existence in the previous year in which the moneys payable became due.

KEY NOTE:

Where the asset is sold in the same previous year in which it was acquired, then section 41(2)

shall not be applicable and the profit on sale of asset shall be short term capital gains.

SECTION 50A: SPECIAL PROVISION FOR COST OF ACQUISITION IN CASE

OF DEPRECIABLE ASSET

Where the capital asset is an asset in respect of which a deduction on account of depreciation under section 32(1)(i) has been obtained by the assessee in any previous year, the provisions of section 48 and 49 shall apply subject to the modification that the written down value, as defined in section 43(6), of the asset, as adjusted, shall be taken as the cost of acquisition of

the asset.

Written down value as adjusted should mean:

Written down value

Add: Income assessed under section 41(2)

Less: Terminal depreciation under section 32(1)(iii)

ANALYSIS

Where an asset on which depreciation has been claimed on SLM basis is sold then,

(i) If Sale Price WDV of asset, then section 32(1)(iii) shall apply.


2.27

WDV of asset - Sale Price = Allowed on Terminal depreciation in year of sale provided the deficiency is w/off in the books of accounts

No Capital Gain shall arise.

(ii) If Sale Price WDV of asset, then the least of the following shall be taxable

Under section 41(2) as PGBP income in the year of sale:

(a) Depreciation allowed till date

(b) Sale price-WDV

Capital Gains will be arise under section 50A if Sale Price exceeds Actual cost of the

asset.

STCG = Sale Price - Actual Cost of the asset

FOREIGN EXCHANGE FLUCTUATIONS IN CASE OF IMPORTED ASSETS

SECTION 43A: SPECIAL PROVISION CONSEQUENTIAL TO CHANGES IN

RATE OF EXCHANGE OF CURRENCY

(1) The section provides that where an assessee has acquired any asset from a foreign country for the purpose of his business or profession, and due to a change thereafter in the exchange rate of the two currencies involved, there is an increase or decrease in the liability (expressed in Indian rupees) of the assessee at the time of making the payment, the following values may be changed accordingly with respect to the increase or decrease in such liability:

(i) the actual cost of the asset under section 43(1)

(ii) the amount of capital expenditure incurred on scientific research under section 35(1)(iv)

(iii) the amount of capital expenditure incurred by a company for promoting family

planning amongst its employees under section 36(1)(ix)

(iv) the cost of acquisition of a non-depreciable capital asset falling under section

48.

The amount arrived at after making the above adjustment shall be taken as the amount of capital expenditure or the cost of acquisition of the capital asset, as the

case may be.

(2) Where the whole or any part of the liability aforesaid is met, not by the assessee, but, directly or indirectly, by any other person or authority, the liability so met shall not be taken into account for the purposes of this section.

(3) Where the assessee has entered into a contract with authorised dealer as defined in section 2 of the Foreign Exchange Management Act, 1999 for providing him with a specified sum in a foreign currency on or after a stipulated future date at the rate of exchange specified in the contract to enable him to meet the whole or any part of the liability aforesaid, the amount, if any, for adjustment under this section shall be computed with reference to the rate of exchange specified therein.


2.28

• The adjustments referred in section 43A are as under:

Suppose on 30.6.2014, a foreign currency loan of $1,00,000 is taken and an asset is purchased from a foreign country for $ 1,00,000 on that date. The rate of exchange as on

30.6.2013 is 1$ = Rs. 40. Now on 30.6.2014, the asset shall be recorded as under:

No repayment is made in Previous Year 31.3.2015 and rate of exchange 1$ = Rs. 42 as on 31.3.2015. Hence as per section 43A, no adjustment shall be made in previous year

31.3.2015. Depreciation of Assessment Year 2015-16 shall be Rs. 6,00,000 @ 15%.

(Additional Depreciation under section 32(1)(iia) shall be allowed but the same has not been

considered in this question assuming that machinery is an old machinery.)

Now in Previous Year 31.3.2016 the loan of $25,000 is repaid on 30.11.2015 @ 1$ = Rs. 43.

Now adjustment as per section 43A shall be:

(Rs.43 minus Rs.40) x $25,000 = 75,000

Rs. 75,000 shall be added to the WDV of Rs. 34,00,000 as per Supreme Court in Arvind Mills Ltd., and depreciation shall be allowed in Assessment Year 2016-17 on Rs. 34,75,000 i.e. 15% thereof – Rs. 5,21,250

Now in Previous Year 31.3.2017 the loan of $50,000 is repaid on 31-12-2016 when 1$ = Rs. 39. The adjustment as per section 43A shall be:

(Rs. 39 minus Rs. 40) x $50,000 = 50,000

Therefore, for Assessment Year 2017-18, Rs. 50,000 shall be reduced from WDV of asset as per Supreme Court in Arvind Mills Ltd. Hence, depreciation for Assessment Year 2017-18

shall be allowed on Rs. 29,53,750 – Rs. 50, 000 = Rs. 29,03,750 @ 15%.

TAXATION OF FOREIGN EXCHANGE FLUCTUATION [SECTION 43AA]

(i) Section 43AA provides that, subject to the provisions of section 43A, any gain or loss arising on account of any change in foreign exchange rates shall be treated as income or loss, as the case may be, which shall be computed in accordance with the notified ICDS

i.e., ICDS VI: The effects of changes in foreign exchange rates.

(ii) Gain or loss arising on account of the effects of change in foreign exchange rates shall be in respect of all foreign currency transactions, including those relating to –

(a) monetary items and non-monetary items;

(b) translation of financial statements of foreign operations

(c) forward exchange contracts;

(d) foreign currency translation reserves.


2.29

INCOME COMPUTATION AND DISCLOSURE STANDARD VI RELATING TO

THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES

Foreign Currency Transactions

Initial Recognition

3(1) A foreign currency transaction shall be recorded, on initial recognition in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting

currency and the foreign country at the date of the transaction.

(2) An average rate for a week or a month that approximates the actual rate at the date of the transaction may be used for all transaction in each foreign currency occurring during that period. If the exchange rate fluctuates significantly, the actual rate at the date of the

transaction shall be used.

Conversion at Last Date of Previous Year

At last day of each previous year:-

(a) foreign currency monetary items shall be converted into reporting currency by applying

the closing rate;

(b) where the closing rate does not reflect with reasonable accuracy, the amount in reporting currency that is likely to be realized from or required to disburse, a foreign currency monetary item owing to restriction on remittances or the closing rate being unrealistic and it is not possible to effect an exchange of currencies at that rate, then the relevant monetary item shall be reported in the reporting currency at the amount which is likely to be realized from or required to disburse such item at the last date of the

previous year; and

(c) non –monetary items in a foreign currency shall be converted into reporting currency

by using the exchange rate at the date of the transaction.

Recognition of Exchange Differences

(i) In respect of monetary items, exchange differences arising on the settlement thereof or on conversion thereof at last day of the previous year shall be recognised as income or as expense in that previous year.

(ii) In respect of non-monetary items, exchange differences arising on conversion thereof a the last day of the previous year shall not be recognised as income or as expense in that previous year.

Exceptions to Paragraph 3,4 and 5

Notwithstanding anything contained in paragraph 3, 4 and 5, initial recognition, conversion and recognition of exchange difference shall be subject to provisions of section 43A of the Act or Rule 115 of income-tax Rules, 1962, as the case may be.

***************************************************************************

Specific Deductions AJ Education NeXt

3.1

CHAPTER 3. SPECIFIC DEDUCTIONS.

SECTION 30: RENT, RATES, TAXES, REPAIRS AND INSURANCE FOR

BUILDINGS

Section 30 allows deduction in respect of the rent, rates, taxes, repairs and insurance of

buildings used by the assessee for the purpose of his business or profession.

• Where the premises are occupied by the assessee as a tenant, the rent paid for

such premises and the amount paid on account of cost of repairs, if the assessee has

undertaken to bear such repairs to the premises.

• Premises sub-let: Where the assessee has sublet a part of the premises, the

allowance under the section would be confined to the difference between the rent

paid by the assessee and the rent recovered from the sub-tenant.

The rent payable would be an allowable deduction under this section even though the

income from the property in respect of which it is paid may be exempt from taxation in

the hands of the owner.

• Occupation of premises by the assessee being the owner: Where the assessee

himself is owner of the premises and occupies them for his business purposes, no

notional rent would be allowed under this section. However, where a firm runs its

business in the premises owned by one of its partners, the rent payable to the

partner will be an allowable deduction to the extent it is reasonable and is not

excessive.

• Repairs of the premises: Apart from rent, this section allows deductions in respect of

expenses incurred on account of repairs to building in case where

• the assessee is the owner of the building or

• the assessee is a tenant who has undertaken to bear the cost of repairs to the premises.

• Even if the assessee occupies the premises otherwise than as a tenant or owner, i.e., as

a lessee, licensee or mortgagee with possession, he is entitled to a deduction under

the section in respect of current repairs to the premises.

• Cost of repairs and current repairs of capital nature not to be allowed: As per

section 30(a), deduction for cost of repairs to the premises occupied by the assessee

as a tenant and the amount paid on account of current repairs to the premises

occupied by the assessee, otherwise than as a tenant, is allowed but it will not

include any expenditure in the nature of capital expenditure.

• Other expenses: In addition, deductions are allowed in respect of expenses by way

of land revenue, local rates, municipal taxes and insurance in respect of the

premises used for the purposes of the business or profession. Cesses, rates and taxes

levied by a foreign Government are also allowed.


3.2

• Premises used partly for business and partly for other purposes: Where the

premises are used partly for business and partly for other purposes, only a

proportionate part of the expenses attributable to that part of the premises used for

purposes of business will be allowed as a deduction [section 38(1)].

SECTION 31: REPAIRS AND INSURANCE OF MACHINERY, PLANT AND

FURNITURE

Section 31 allows deduction in respect of the expenses on current repairs and insurance of

machinery, plant and furniture in computing the income from business or profession.

• Usage of the asset: In order to claim this deduction, the assets must have been

used for purposes of the assessee’s own business the profits of which are being taxed.

The word ‘used’ has to be read in a wide sense so as to include a passive as well

as an active user. Thus, insurance and repair charges of assets which have been

discarded (though owned by the assessee) or have not been used for the business

during the previous year would not be allowed as a deduction.

Even if an asset is used for a part of the previous year, the assessee is entitled to

the deduction of the full amount of expenses on repair and insurance charges and not

merely an amount proportionate to the period of use.

• Repairs exclude replacement or reconstruction: The term ‘repairs’ will include

renewal or renovation of an asset but not its replacement or reconstruction.

Also, the deduction allowable under this section is only of current repairs but not

arrears of repairs for earlier years even though they may still rank for a deduction

under section 37(1).

• Insurance premium: The deduction allowable in respect of premia paid for insuring

the machinery, plant or furniture is subject to the following conditions:

¨ The insurance must be against the risk of damage or destruction of the

machinery, plant or furniture.

¨ The assets must be used by the assessee for the purposes of his business or

profession during the accounting year.

¨ The premium should have been actually paid (or payable under the mercantile

system of accounting).

The premium may even take the form of contribution to a trade association which

undertakes to indemnify and insure its members against loss; such premium or

contribution would be deductible as an allowance under this section even if a part of

it is returnable to the insured in certain circumstances.

It does not matter if the payment of the claim will enure to the benefit of someone

other than the owner.

• Current repairs of capital nature not to be allowed: As per section 31, the amount

paid on account of current repairs of machinery, plant or furniture is allowed as

deduction in the computation of income under the head “profits and gains of


3.3

business or profession” but it will not include any expenditure in the nature of capital

expenditure.

OTHER DEDUCTIONS [SECTION 36]

This section authorises deduction of certain specific expenses. The items of expenditure

and the conditions under which such expenditures are deductible are:

(1) Insurance premia paid [Section 36(1)(i)] - If insurance policy has been taken out

against risk, damage or destruction of the stock or stores of the business or

profession, the premia paid is deductible. But the premium in respect of any

insurance undertaken for any other purpose is not allowable under the clause.

(2) Insurance premia paid by a Federal Milk Co-operative Society [Section 36(1)(ia)]

Deduction is allowed in respect of the amount of premium paid by a Federal Milk

Co- operative Society to effect or to keep in force an insurance on the life of the

cattle owned by a member of a co-operative society being a primary society engaged

in supply of milk raised by its members to such Federal Milk Co-operative Society.

The deduction is admissible without any monetary or other limits.

(3) Premia paid by employer for health insurance of employees [Section 36(1)(ib)]-

This clause seeks to allow a deduction to an employer in respect of premia paid by him

by any mode of payment other than cash to effect or to keep in force an insurance on

the health of his employees in accordance with a scheme framed by

(i) the General Insurance Corporation of India and approved by the Central

Government; or

(ii) any other insurer and approved by the IRDA.

(4) Bonus and Commission [Section 36(1)(ii)] - These are deductible in full provided

the sum paid to the employees as bonus or commission shall not be payable to

them as profits or dividends if it had not been paid as bonus or commission.

It is a provision intended to safeguard against a private company or an association

escaping tax by distributing a part of its profits by way of bonus amongst the

members, or employees of their own concern instead of distributing the money as

dividends or profits. (Refer Summary for Example)

(5) Interest on borrowed capital [Section 36(1)(iii)] - Deduction of interest is allowed

in respect of capital borrowed for the purposes of business or profession in the

computation of income under the head "Profits and gains of business or profession".

Capital may be borrowed for several purposes like for acquiring a capital asset, or to

pay off a trading debt or loss etc. The scope of the expression ‘for the purposes of

business’ is very wide. Capital may be borrowed in the course of the existing

business as well as for acquiring assets for extension of existing business.

As per proviso to section 36(1)(iii), deduction in respect of any amount of interest paid,

in respect of capital borrowed for acquisition of new asset (whether capitalised in the

books of account or not) for any period beginning from the date on which the capital

was borrowed for acquisition of the asset till the date on which such asset was first put

to use shall not be allowed.


3.4

Explanation 8 to section 43(1) clarifies that interest relatable to a period after the

asset is first put to use cannot be capitalised. Interest in respect of capital borrowed

for any period from the date of borrowing to the date on which the asset was first

put to use should, therefore, be capitalised.

Note: In the case of genuine business borrowings, the department cannot disallow any

part of the interest on the ground that the rate of interest is unreasonably high except

in cases falling under section 40A.

NOTE 1:

S.A. BUILDERS LTD. VS. COMMISSIONER OF INCOME TAX (APPEALS)

(SUPREME COURT)

FACTS

During the assessment proceedings for the assessment years 1991-92 and 1992-93, the

Assessing Officer found that the assessee had advanced huge amounts as interest-free

loans out of its cash credit account in which there was a huge debit balance. The

Assessing Officer disallowed the proportionate interest relating to said amount out of

total interest paid to bank, holding that the assessee had diverted its borrowed funds to

its sister concern without charging any interest.

HELD

The expression 'commercial expediency is an expression of wide import and includes

such expenditure as a prudent businessman incurs for the purpose of business. The

expenditure may not have been incurred under any legal obligation, yet it is allowable

as business expenditure if it was incurred on grounds of commercial expediency.

If the money advanced to sister concern was on account of commercial expediency,

then the interest on loan shall be allowed as deduction.

It is not in every case that interest on borrowed loan has to be allowed if the assessee

advances it to a sister concern. It all depends on the facts and circumstances of the

respective case. For instance, if the directors of the sister concern utilize the amount

advanced to it by the assessee for their personal benefit, obviously it cannot be said that

such money was advanced as a measure of commercial expediency. However, money

can be said to be advanced to a sister concern for commercial expediency in many other

circumstances. Where holding company, has a deep interest in its subsidiary, and the

holding company advances borrowed money to a subsidiary and the same is used by the

subsidiary for some business purposes, the holding company would ordinarily be

entitled to deduction of interest on its borrowed loans.

Therefore, interest on loan advanced to sister concern for commercial expediency shall

be allowed as deduction.

NOTE 2 :

East India Pharmaceuticals Works Ltd. (1997) Supreme Court

Interest on loans taken for payment of income-tax is not an allowable expenditure since

payment of income-tax is a personal liability.


3.5

NOTE 3:

Guarantee Commission paid to the bank in relation to the bank guarantee given by the

assessee to the Income-tax department is an expense related to Income-tax and is thus

not allowable as expenditure.

NOTE 4:

Litigation expenses in relation to Income-tax cases are allowable as deduction under

section 37(1).

NOTE 5:

Tax audit fees paid is allowable as expenditure under section 37(1).

NOTE 6:

CIT v. Tulip Star Hotels Ltd. (2011) (Del.)

Can a company engaged in the business of owning, running and managing hotels

claim interest on borrowed funds, used by it for investing in the equity share

capital of a wholly owned subsidiary company, as deduction where the subsidiary

company was formed for exercising effective control of new hotels acquired by the

parent company under its management?

The High Court held that the assessee was in the business of owning, running and

managing hotels. For the effective control of new hotels acquired by the assessee under its

management it had invested in a wholly owned subsidiary company. The expenditure

incurred was for business purposes and was thus allowable under section 36(1)(iii).

Under section 36(1)(iii), the amount of the interest paid in respect of capital

borrowed for the purposes of the business or profession is allowable as deduction.

In this case, it has been held that interest paid on capital borrowed for investment

in a subsidiary company is allowable as deduction since the subsidiary company

was formed to carry on the business of the parent company in a more effective

manner.

(6) Discount on Zero Coupon Bonds (ZCBs) [Section 36(1)(iiia)]

The pro rata amount of discount on a zero coupon bond having regard to the period of

life of such bond calculated in the manner as may be prescribed.

For the purposes of clause (iiia) of sub-section (1) of section 36, the pro-rata amount of

discount on a zero coupon bond shall be computed in the following manner, namely:

(a) the period of life of the bond shall be converted into number of calendar months and,

for this purpose, where the calendar month in which the bond is issued or the bond

matures or is redeemed contains a part of a calendar month then, if such part is fifteen

days or more than fifteen days, it shall be increased to one calendar month and if such

part is less than fifteen days it shall be ignored;

(b) the amount of discount shall be divided by the number of calendar months determined

in accordance with clause (a);

(c) where one or more than one calendar month out of calendar months determined in

accordance with clause (a) is or are included in a previous year, the amount determined

in accordance with clause (b) shall be multiplied by the number of calendar months so


3.6

included and the amount so arrived at shall be taken to be the pro-rata amount of

discount for that previous year.

ANALYSIS

Tax treatment in the hands of company issuing such bonds-

(i) Discount is deductible on pro rata basis as stated above.

(ii) Tax will not be deducted at source under section 194A by the payer company.

Tax treatment in the hands of investor-

(i) Maturity/Redemption of zero coupon bonds will amount to transfer under section

2(47)(iva)

(ii) If period of holding is more than 12 months, such bonds would be long-term capital

asset under section 2(42A).

(iii) Long Term capital Gains would be taxable at the rate of 10% without indexation under

section 112.

Illustration:

Zero coupon bonds are issued by X Ltd. an infrastructure capital company on October 10,

2020. (Issue price: Rs. 85, Face Value as well as amount payable at the time of redemption:

Rs. 100) Redemption date: July 9, 2025, Number of bonds subscribed by public: 100,000.

These bonds have been notified as zero coupon bonds by notification by the Central

Government.

Pro rata deduction available to X Ltd.

Amount of discount offered by X ltd. [(Rs100 -Rs85) X 1,00,000]: Rs15,00,000 (a)

Period of life of the bond (July 9, 2025 minus October 10, 2020): 57 months (b)

Pro rata deduction for 1 month: Rs.26,316 [(a) / (b)] (c)

Amount deductible in previous year 2020-2021: Rs 1,57,895 [(c) X 6]

Amount deductible in previous year 2021-2022 to 2024-2025: Rs 3,15,789 [(c) X 12]

Amount deductible in previous year 2025-2026: Rs 78,947 [(c) X 3]

(7) Contributions to provident and other funds [Section 36(1)(iv) and (v)] -

Contribution to the employees’ provident and other funds are allowable subject to the

following conditions:

(a) The fund should be settled upon a trust.

(b) In case of Provident or superannuation or a Gratuity Fund, it should be one

recognised or approved under the Fourth Schedule to the Income-tax Act, 1961.

(c) The amount contributed should be periodic payment and not an adhoc payment

to start the fund.

(d) The fund should be for exclusive benefit of the employees.

The nature of the benefit available to the employees from the fund is not material; it

may be pension, gratuity or provident fund.


3.7

(8) Employer’s contribution to the account of the employee under a Pension Scheme

referred to in section 80CCD [Section 36(1)(iva)]

(i) Section 36(1)(iva) to provide that the employer’s contribution to the account of

an employee under a Pension Scheme as referred to in section 80CCD would

be allowed as deduction while computing business income.

(ii) However, deduction would be restricted to 10% of salary of the employee in the

previous year.

(iii) Salary, for this purpose, includes dearness allowance, if the terms of

employment so provide, but excludes all other allowances and perquisites.

(iv) Correspondingly, section 40A(9), which provides for disallowance of any sum

paid by an employer towards contribution to any fund or trust has been

amended to exclude from the scope of its disallowance, contribution by an

employer to the pension scheme referred to in section 80CCD, to the extent to

which deduction is allowable under section 36(1)(iva).

(9) Amount received by assessee as contribution from his employees towards their

welfare fund to be allowed only if such amount is credited on or before due

date – Clause (va) of section 36(1) and clause (ia) of section 57 provide that

deduction in respect of any sum received by the taxpayer as contribution from his

employees towards any welfare fund of such employees will be allowed only if

such sum is credited by the taxpayer to the employee’s account in the relevant fund

on or before the due date.

Due date The date by which the assessee is required as an employer to credit such

contribution to the employee’s account in the relevant fund under the

provisions of any law on term of contract of service or otherwise.

As per the Employees Provident Funds Scheme, 1952, the amounts under

consideration in respect of wages of the employees for any particular month shall

be paid within 15 days of the close of every month.

(10) Allowance for animals [Section 36(1)(vi)]

In respect of animals which have been used for the purposes of business otherwise than

as stock-in-trade and have died or become permanently useless for such purposes, the

difference between the actual cost of the animals to the assessee and the amount, if any,

realised in respect of animals or carcasses.

(11) Actual Bad debts [Section 36(1)(vii)]

A bad debt shall be allowed as deduction if the following conditions are satisfied:

1. The bad debt should be written off as irrecoverable in the books of account of

the assessee for the previous year in which deduction is claimed.

2. The debt should have been taken into account in computing the income of the

previous year in which deduction is claimed or any earlier previous year; OR

the debt represents the money lend in the ordinary course of business of

money lending or banking carried on by the assessee.

Provided further that where the amount of such debt or part thereof has been taken

into account in computing the income of the assessee of the previous year in which the

amount of such debt or part thereof becomes irrecoverable or of an earlier previous


3.8

year on the basis of income computation and disclosure standards notified under sub-

section (2) of section 145 without recording the same in the accounts, then, such debt or

part thereof shall be allowed in the previous year in which such debt or part thereof

becomes irrecoverable and it shall be deemed that such debt or part thereof has been

written off as irrecoverable in the accounts for the purposes of this clause.


ANALYSIS OF AMENDMENT MADE BY FINANCE ACT, 2015

As per AS – 9 revenue from sale of goods as well as services must be recognized in BOA

where there is a reasonable certainity of receiving it.

ICDS IV notified by CBDT on revenue recognition also states that revenue from goods must

be recognized when there is reasonable certainty of receiving it [This is the same treatment

like AS – 9]. However, revenue from provision of service must be recognized in Income Tax

irrespective of its certainity to receive. [This treatment under Income Tax is different from

AS-9]

Say if an assessee provides services of Rs. 1,00,000 and there is no certainity in regard of its

receipt, then such service will not be recorded in BOA. However, it has to be offered for tax

as per ICDS IV.

Now Later on if such debt which are offered in Income Tax but not recorded in BOA

becomes bad then assessee must get the deduction of such bad debt u/s 36(1)(vii). However,

the technical issue which will arise is that the assessee has to write off that debt in the BOA.

This condition cannot be fulfilled by assessee under such circumstances as such debt is not

recorded only in the BOA then how the assessee will write off such debt in BOA.

In order to reduce litigation and provide clarity Finance Act 2015 has inserted a proviso to

sec 36(1)(vii) which states that “Any income which is offered for tax as per ICDS without

recording the same in the BOA, if it becomes bad then it shall be DEEMED that such debt is

written off as irrecoverable and deduction will be allowed.

Explanation: For the purposes of this clause, any bad debt or part thereof written off as

irrecoverable in the accounts of the assessee, shall not include any provision for bad or

doubtful debts made in accounts of the assessee.

There is no requirement to establish that the debt or part thereof has become bad. The

essential condition for claiming this deduction is that the debt in respect of which deduction

is claimed should have been taken into account in computing the income of the assessee of

the previous year in which deduction is claimed or any earlier previous year.

For example, the assessee gives an advance of Rs. 10,000 for purchase of raw material to Mr. X. Mr. X could not supply the goods as he had become bankrupt and the advance of Rs. 10,000 cannot be recovered from him. The assessee writes off the debt as bad debt.

Here, the second condition that the debt should have been taken into account in computing

the income of the previous year in which deduction is claimed or any earlier previous year, is


3.9

not satisfied and therefore, the debt cannot be allowed under section 36(1)(vii). However, the

same can be claimed under section 37(1) as a trading loss.

KEY POINTS:

1. SECTION 41 (4): BAD DEBT RECOVERY:

Where a deduction has been allowed in respect of a bad debt and the bad debt is

subsequently recovered, then the amount so recovered shall be deemed to be the

income under the head P/G/B/P of the previous year in which the amount is so

recovered. This shall apply even if the business or profession is not in existence in the

previous year in which recovery is made.

For example, Rs 1,00,000 is recoverable from a debtor Mr. A. The assessee writes off

Rs 40,000 as bad debt in the previous year 31.03.2010. Subsequently, in the previous

year 31.03.2016, Rs 70,000 is recovered from Mr. A. Here, Rs 60,000 shall be deemed

to have been recovered towards the debt and Rs 10,000 towards the recovery of bad

debt of Rs 40,000. Rs 10,000 will be taxable as P/G/B/P under section 41(4) in the

previous year 31.03.2016.

2. P.K.KAIMAL { TO BE DISCUSSED LATER WITH SEC 41(4) }

In this case, a firm had claimed and was allowed bad debt of Rs. 1,00,000 in the

previous year 31.3.2010. The firm was dissolved and was taken over by a partner Mr.

A. The partner Mr. A recovers Rs. 1,00,000 bad debt in the previous year 31.03.2016.

Held, that for the applicability of section 41(4), the assessee who claimed the deduction

of bad debt and the assessee who recovers the bad debt must be the same. Where a bad

debt has been allowed to a firm and the firm makes the recovery thereof, then section

41(4) is attracted in the hands of the firm. But, if the firm is dissolved and the business

is continued by an erstwhile partner, then any recovery made by the partner towards

bad debt will not attract section 41(4) since the assessee has changed. In the present

case, Rs. 1,00,000 is not taxable in the hands of the firm or the partner and the same is a

capital receipt in the hands of the partner.

3. T. VEERABHADRA RAO K .KOTESHWARA RAO (SUPREME COURT)

In this case, a firm made a sale to Mr. X of Rs. 1,00,000. The firm was succeeded to by

a company and the debtor Mr. X was also transferred to the company. The company

writes off the debtor Mr. X of Rs. 1,00,000 and claims deduction of bad debt.

The Supreme Court in Veerabhadra Rao held that a successor to a business will be

entitled to claim an allowance for bad debt even though the debt did not relate to the

business of the assessee but to the business it has succeeded. The court held that even if

the relevant debt had been taken into account in computing the income of the

predecessor only and had been written off as irrecoverable in the accounts of the

successor assessee, the assessee will be entitled to the deduction of bad debt. In the

present case Rs. 1 lakh is a deductible as bad debt in the hands of the company.

4. T.R.F LTD. VS. CIT (SUPREME COURT)

After 1.4.1989, it is not necessary for the assessee to establish that the debt, in fact, has

become irrecoverable. It is enough if the bad debt is written off as irrecoverable in the

accounts of the assessee.


3.10

(12) Expenses on Family Planning [Section 36(1)(ix)] - Any expenditure of revenue

nature bona fide incurred by a company for the purpose of promoting family

planning amongst its employees will be allowed as a deduction in computing the

company’s business income;

• Where, the expenditure is of a capital nature, one-fifth of such

expenditure will be deducted in the previous year in which it was incurred

and in each of the four immediately succeeding previous years.

• This deduction is allowable only to companies and not to other assessees.

• The assessee would be entitled to carry forward and set off the

unabsorbed part of the allowance in the same way as unabsorbed

depreciation.

The capital expenditure on promoting family planning will be treated in the same

way as capital expenditure for scientific research for purposes of dealing with the

profit or loss on the sale or transfer of the asset including a transfer on amalgamation.

(13) Deduction of securities transaction tax paid [Section 36(1)(xv)]

An amount equal to the securities transaction tax paid by the assessee in respect of the

taxable securities transactions entered into in the course of his business during the

previous year, if the income arising from such taxable securities transactions is included

in the income computed under the head "Profits and gains of business or profession."

(14) Deduction for commodities transaction tax paid in respect of taxable commodities

transactions [Section 36(1)(xvi)]

An amount equal to the commodities transaction tax paid by the assessee in respect of

the taxable commodities transactions entered into in the course of his business during

the previous year, if the income arising from such taxable commodities transactions is

included in the income computed under the head "Profits and gains of business or

profession".

(15) Amount of expenditure incurred by a co-operative society for purchase of

sugarcane at price fixed by the Government allowable as deduction [Section

36(1)(xvii)]

Section 36(xvii) provides for deduction of expenditure incurred by a co-operative

society engaged in the business of manufacture of sugar for purchase of sugarcane at

a price equal to or less than the price fixed or approved by the Government.


3.11

AMENDMENT MADE BY FINANCE ACT 2018:

Amendment to sections 36 and 40A

The following amendments have been made to sections 36 and 40A (with effect from

the assessment year 2017-18)-

• Section 36(1) provides for allowing certain deductions in computing income under the

head "Profits and gains of business or profession". A new clause (xviii) has been

inserted in the said sub-section so as to provide that deduction in respect of any marked

to market loss (or other expected loss) shall be allowed. However, deduction is

available only if such loss is computed in accordance with ICDS.

• Section 40A provides for disallowance of certain expenses or payments while

computing income under the head "Profits and gains of business or profession". A new

sub-section (13) has been inserted in the said section so as to provide that no deduction

or allowance shall be allowed in respect of any marked to market loss or other expected

loss except as allowable under section 36(l)(xviii).

**************************************************************************

Sectorwise deductions AJ Education NeXt

4.1

CHAPTER 4. SECTORWISE DEDUCTIONS

SECTION 32AD: INVESTMENT IN NEW PLANT OR MACHINERY IN NOTIFIED

BACKWARD AREAS IN CERTAIN STATES

(1) In order to encourage the setting up of industrial undertakings in the backward areas

of the States of Andhra Pradesh, Bihar, Telangana and West Bengal, section 32AD

provides for a deduction of an amount equal to 15% of the actual cost of new

plant and machinery acquired and installed in the assessment year relevant to the

previous year in which such plant and machinery is installed, if the following

conditions are satisfied by the assessee -

(a) The assessee sets up an undertaking or enterprise for manufacture or production

of any article or thing on or after 1st April, 2015 in any backward area

notified by the Central Government in the State of Andhra Pradesh or Bihar or

Telangana or West Bengal; and

(b) the assessee acquires and installs new plant and machinery for the purposes of

the said undertaking or enterprise during the period between 1st April, 2015

and 31st March, 2020 in the said backward areas.

(2) For the purposes of this section, “New plant and machinery” does not include—

(a) any ship or aircraft;

(b) any plant or machinery, which before its installation by the assessee, was used

either within or outside India by any other person;

(c) any plant or machinery installed in any office premises or any residential

accommodation, including accommodation in the nature of a guest house;

(d) any office appliances including computers or computer software;

(e) any vehicle;

(f) any plant or machinery, the whole of the actual cost of which is allowed as

deduction (whether by way of depreciation or otherwise) in computing the

income chargeable under the head “Profits and gains of business or profession” of

any previous year.

Note: However, computer used in the factory for manufacture or production, then it

is an eligible machinery.

(3) In order to ensure that the manufacturing units which are set up by availing this

incentive actually contribute to economic growth of these backward areas by carrying

out the activity of manufacturing for a substantial period of time, a suitable

safeguard restricting the transfer of new plant and machinery for a period of 5 years

has been provided.

Accordingly, section 32AD(2) provides that if any new plant and machinery

acquired and installed by the assessee is sold or otherwise transferred except in

connection with the amalgamation or demerger or re-organisation of business,

within a period of 5 years from the date of its installation, the amount allowed

as deduction in respect of such new plant and machinery shall be deemed to be the

income chargeable under the head “Profits and gains from business or profession”

of the previous year in which such new plant and machinery is sold or transferred, in


4.2

addition to taxability of gains, arising on account of transfer of such new plant and

machinery.

(4) However, this restriction shall not apply to the amalgamating or demerged company

or the predecessor in a case of amalgamation or demerger or business

reorganization, within a period of five years from the date of its installation, but

shall continue to apply to the amalgamated company or resulting company or

successor, as the case may be.

NOTIFIED BACKWARD AREAS:

State Notified Backward Areas

(1) Telengana Adilabad, Nizamabad, Karimnagar, Warangal, Medak,

Mahbubnagar, Rangareddy, Nalgoda, Khammam

(2) West Bengal South 24 Parganas, Bankura, Birbhum, KakshinDinajpur, Uttar

Dinajpur, Jalpaiguri, Malda, East Medinipur, West Medinipur,

Murshidabad, Purulia

(3) Bihar Patna, Nalanda, Bhojpur, Rohtas, Maimur, Gaya, Jehanabad,

Aurangabad, Nawada, Vaishali Samastipur, Darbhanga,

Madhubani, Purnea, Katihar, Araria, Jamui, Lakhisarai, Supaul,

Muzaffarpur, SheoharArwal, Banka, Begusarai, Bhagalpur, Buxar,

Gopalganj, Khagaria, Kishanganj, Madhepura, Munger, West

Champaran, East Champaran, Sahara, Saran, Sheikhpura, Sitamarhi,

Siwan.

(4) Andhra Pardesh Anantapur, Chittoor, Cuddapah, Kurnool, Srikakulam

Vishakhapatnam, Vizianagaram

SECTION 33AB: INCOME FROM MANUFACTURE OF TEA, COFFEE AND

RUBBER

1) Eligibility for deduction: This section provides for a deduction in the computation

of the taxable profits in the case of an assessee carrying on business of growing

and manufacturing tea or coffee or rubber in India.

(2) Quantum of deduction: It provides that where the assessee has before the expiry

of six months from the end of the previous year or before the due date of

furnishing the return of income, whichever is earlier,

(i) deposited with NABARD any amount in a special account maintained by

the assesse in accordance with a scheme approved by Tea Board or

Coffee Board or Rubber Board, or

(ii) deposited any amount in an account to be known as Deposit Account

opened by the assessee in accordance with the scheme framed by the

Tea Board or Coffee Board or Rubber Board, as the case may be,

(hereinafter referred to as the deposit scheme) with the previous approval

of the Central Government,

the assessee shall be allowed a deduction of:

(a) A sum equal to the aggregate of the deposits made or

(b) 40% of the profits of such business (as computed under the head ‘Profits

and gains of business or profession’ before making any deduction under

this section),


4.3

whichever is less.

The above deduction will be allowed before the setting off of brought-forward

loss under section 72.

(3) No deduction to partner of assessee-firm or member of assessee-

firm/AOP/BOI: Where the assessee is a firm or any association of persons or

anybody of individuals the deduction under this section shall not be allowed in the

computation of the income of any partner or member of such firm, AOP or BOI.

(4) Audit of books of accounts: This deduction shall not be allowed unless the

accounts of such business of the assessee for the previous year have been audited by

a chartered accountant and the assessee furnishes before the specified date

referred to in section 44AB and the assessee furnishes by that date the report of

such audit in the prescribed form duly signed and verified by such accountant.

However, where the assessee is required by any other law to get his accounts audited

it shall be sufficient compliance with the provision of this section if such assessee

gets the accounts of such business audited under any such law and furnishes the

report of the audit and a further report in the prescribed form under this section.

(5) Condition to withdraw the amount from special account or deposit account:

Any amount standing to the credit of the assessee in the special account or deposit

account cannot be withdrawn except for the purposes specified in the scheme, or, as

the case may be, in the deposit scheme.

The above amount can also be withdrawn in the following circumstances:

(a) Closure of business (Will be Taxable)

(b) Death of an assesse (Will be Exempt)

(c) Partition of HUF (Will be Exempt)

(d) Dissolution of a firm (Will be Taxable)

(e) Liquidation of a company. (Will be Exempt)

(6) Withdrawal of deduction: Where the sum standing to the credit of the assessee in

the Special account or in the Deposit account is released by the National Bank or is

withdrawn by the assessee from the Deposit account and is utilised for the purchase of:

(a) Any machinery or plant installed in any office premises or residential

accommodation including a guest house.

(b) Any office appliances (other than computers)

(c) Any machinery or plant, the whole of the actual cost of which is

allowed as a deduction (whether by way of depreciation or otherwise) in

computing the income chargeable under the head ‘Profits and gains of

business or profession’ of any one previous year;

(d) Any new machinery or plant to be installed in an industrial

undertaking for the purpose of the business of construction, manufacture

or production of any article or thing specified in the list in the Eleventh

Schedule.

the whole of such amount so utilised will be treated as taxable profits of that

year and taxed accordingly.


4.4

(7) Withdrawal of deduction if amount is withdrawn on the closure of his business

or dissolution of a firm: Where any amount is withdrawn by the assessee from the

special account or deposit account during any previous year on the closure of his

business or dissolution of a firm, the whole of such withdrawal shall be deemed to

be the profits and gains of business of that previous year and shall be chargeable to

tax as the income of that previous year, as if the business had not closed or the firm

had not been dissolved.

(8) Utilisation from scheme for business purpose not available as a deduction:

Where any amount standing to the credit of the assessee in the special account or

in the deposit account is utilised by the assessee for the purpose of any expenditure in

connection with such business in accordance with the scheme or deposit scheme,

such expenditure shall not be allowed in computing the business income.

(9) Consequences of non-utilisation of withdrawn amount: Where any amount in

the special account which is released during any previous year by the National Bank

or is withdrawn by the assessee from the Deposit Account, for being utilised by the

assessee for the purposes of such business and is not utilized in accordance with the

scheme or deposit scheme in that year, the unutilised amount shall be deemed to

be profits and gains and chargeable to income-tax as the income of that previous

year.

However, where such amount is released during the previous year at the closing of

the account on the death of the assessee, partition of a HUF or liquidation of a

company, the above restriction will not apply.

(10) Consequences of sale or transfer: Where an asset acquired in accordance with the

scheme or deposit scheme is sold or otherwise transferred in any previous year by

the assessee to any person at any time before the expiry of 8 years from the end

of the previous year in which it was acquired, such portion of the cost relatable to

the deduction allowed under section 33AB(1) shall be deemed to be profits and

gains of business or profession of the previous year in which the asset is sold or

transferred and shall be chargeable to income-tax as the income of that previous year.

Exception: Such restriction will not apply in the following cases:

(i) Where the asset is sold or otherwise transferred to Government, local

authority, statutory corporation or a Government company.

(ii) Where the sale or transfer is made in connection with the succession of a

firm by a company in the business or profession carried on by the firm

as a result of which the firm sells or otherwise transfers any asset to the

company and the scheme or deposit scheme continues to apply to the

company in the same manner as applicable to the firm.

Further, all the properties and liabilities of the firm relating to the business or

profession immediately before the succession should become the properties and

liabilities of the company and all the shareholders of the company should have been

partners of the firm immediately before the succession.


4.5

RULE 7A: INCOME FROM THE MANUFACTURE OF RUBBER

Income derived from the sale of centrifuged latex or cenex or latex based crepes (such as

pale latex crepe) or brown crepes (such as estate brown crepe, remilled crepe smoked blanket

crepe or flat bark crepe) or technically specified block rubbers manufactured or processed

from field latex or coagulum obtained from rubber plants grown by the seller in India

shall be computed as if it were income derived from business, and 35% of such income

shall be income liable to tax.

RULE 7B: INCOME FROM THE MANUFACTURE OF COFFEE

1. Income derived from the sale of coffee grown and cured by the seller in India shall be

computed as if it were income derived from business, and 25% of such income shall be

deemed to be income liable to tax.

2. Income derived from the sale of coffee grown, cured, roasted and grounded by the

seller in India, with or without mixing chicory or other flavouring ingredients, shall be

computed as if it were income derived from business, and 40% of such income shall be

deemed to be income liable to tax.

RULE 8: INCOME FROM MANUFACTURE OF TEA

1. Income derived from the sale of tea grown and manufactured by the seller in India shall

be computed as if it were income derived from business, and 40% of such income shall

be deemed to be income liable to tax.

2. In computing such income, an allowance shall be made in respect of the cost of

planting bushes in replacement of bushes that have died or become permanently useless

in an area already planted.

Illustration 1:

X Ltd. engaged in the business of growing and manufacturing tea in India has derived a total

income from growing and manufacturing tea of Rs. 200 lakhs for previous year 31.3.2021.

The said income is computed before allowing deduction under section 33AB. The company

has deposited Rs. 60 lakhs with NABARD on 23.5.2021 for claiming deduction under section

33AB. The company also has brought forward business losses of Rs. 12 lakhs.

Answer:

As per Rule 8, the total income of an assessee in the business of growing and manufacturing

tea in India shall be calculated after allowing all deductions under the Chapter of P/G/B/P.

Thereafter, 40% of such income shall be taxable income.

Total Income before deduction under section 33AB 200 lakh

Less: Deduction under section 33AB

Lower of the following:

(i) 40% of Rs. 200 Lakh 80 lakh

(ii) Amount deposited with NABARD 60 lakh 60 lakh

Total Income 140 lakh

As per Rule 8,40% of Rs.140 lakh is taxable i.e. 56 lakh

Less: B/F Business Losses 12 lakh

Taxable Income 44 lakh


4.6

Illustration 2:

In Illustration 1 above, the assessee withdraws Rs.20 lakhs from NABARD Account on

30.6.2021 and utilises as follows:

(i) Rs. 5 lakhs for meeting an expenditure as per the Scheme of Tea-Board on 31.12.2021.

(ii) Rs. 6 lakhs for meeting an expenditure as per the Scheme of Tea Board on 4.4.2022.

(iii) Rs. 9 lakhs for meeting an expenditure not specified by Scheme of Tea Board on

31.1.2022.

Answer:

(i) Rs5,00,000 shall not be allowed as deduction in Assessment Year 2022-2023.

(ii) Rs.6,00,000 is taxable as business income in Assessment Year 2022-2023 since it is not

utilised in the year of withdrawal. (40% of Rs. 6,00,000 shall be taxable income).

(iii) Rs. 9 lakhs is taxable as business income in Assessment Year 2022-2023. (40% of

Rs. 9,00,000 shall be taxable income).

SECTION 33ABA: SITE RESTORATION FUND

(SIMILAR TO 33AB - Refer Compendium for differences)

SECTION 35: EXPENDITURE ON SCIENTIFIC RESEARCH

(1) This section allows a deduction in respect of any expenditure on scientific research

related to the business of assessee.

Meaning of certain terms:

Term Meaning

Scientific

research

Activities for the extension of knowledge in the fields of natural

or applied science including agriculture, animal husbandry or

fisheries [section 43(4)(i)].

Scientific

research

expenditure

Expenditure incurred on scientific research would include all

expenditure incurred for the prosecution or the provision of

facilities for the prosecution of scientific research but does not

include any expenditure incurred in the acquisition of rights in

or arising out of scientific research.

Scientific

research related

to a business or

a class of

business

Scientific research related to a business or a class of business

would include

(i) any scientific research which may lead to or facilitate an

extension of that business or all the business of that class, as

the case may be;

(ii) any scientific research of a medical nature which has a

special relation to the welfare of the workers employed in

that business or all the business of that class, as the case may

be.


4.7

(I) INCURRED BY ASSESSEE:

(i) Revenue Expenditure: Any revenue expenditure incurred by the assessee on

scientific research related to his business.

Expenditure incurred within 3 years immediately preceding the commencement of

the business on payment of salary to research personnel engaged in scientific

research related to his business carried on by the taxpayer or on material inputs for

such scientific research will be allowed as deduction in the year in which the

business is commenced. The deduction will be limited to the amount certified by

the prescribed authority [Section 35(1)(i)].

(ii) Capital Expenditure: Any expenditure of a capital nature related to the business

carried on by the assessee would be deductible in full in the previous year in which it

is incurred [Section 35(1)(iv)].

(a) Capital expenditure prior to commencement of business

The Explanation 1 to sub-section (2) specifically provides that where any capital

expenditure has been incurred prior to the commencement of the business the

aggregate of the expenditure so incurred within the three years immediately

preceding the commencement of the business shall be deemed to have been incurred

in the previous year in which the business is commenced.

Consequently, any capital expenditure incurred within three years before the

commencement of business will rank for deduction as expenditure for scientific

research incurred during the previous year.

Expenditure on land disallowed

No deduction will be allowed in respect of capital expenditure incurred on the

acquisition of any land whether the land is acquired as such or as part of any

property.

(b) Carry forward of deficiency

Capital expenditure incurred on scientific research which cannot be absorbed by

the business profits of the relevant previous year can be carried forward to the

immediately succeeding previous year and shall be treated as the allowance for

that year. In effect, this means that there is no time bar on the period of carry

forward. It shall be accordingly allowable for that previous year. It shall be treated like

UAD.

(c) No depreciation

Section 35(2)(iv) clarifies that no depreciation will be admissible on any capital

asset represented by expenditure which has been allowed as a deduction under

section 35 whether in the year in which deduction under section 35 was allowed or

in any other previous year.

(d) Sale of asset representing expenditure of capital nature on scientific research

Section 41, inter alia, seeks to tax the profits arising on the sale of an asset

representing expenditure of a capital nature on scientific research.

Such an asset might be sold, discarded, demolished or destroyed, either after having

been used for the purposes of business on the cessation of its use for the purpose of


4.8

scientific research related to the business or without having been used for other

purposes. In either case, tax liability could arise.

Where the asset is sold, etc., after having been used for the purposes of the

business - It may be noted that in such cases, the actual cost of the concerned

asset under section 43(1) read with explanation 1 would be nil and no depreciation

would be allowed by virtue of section 35(2)(iv). On sale of such asset, the moneys

payable in respect of such asset together with the amount of scrap value, if any,

could be brought to charge under section 41(1) the provisions of which are wide

enough to cover such situations and to bring to tax that amount of deductions

allowed in earlier years.

Where the asset representing expenditure of a capital nature on Scientific

Research is sold without having been used for other purposes - This case

would come under section 41(3) and if the proceeds of sale together with the total

amount of the deductions made under section 35 exceed the amount of capital

expenditure, the excess or the amount of deduction so made, whichever is less, will

be charged to tax as income of the business of the previous year in which the sale

took place.

In simple words, if (sale proceeds + deduction under section 35) > amount of

capital expenditure, then sale proceeds + deduction under section 35 – amount of

capital expenditure OR deduction under section 35, whichever is less will be the

charged to tax as income of the business.

(II) AMOUNT CONTRIBUTED OR PAID TO:

(i) Notified approved research association, university, college or other institution:

An amount equal to 100% of any sum paid to -

- a research association which has as its object, the undertaking of

scientific research or

- to a university, college or other institution to be used for scientific

research.

provided that such university, college, institution or association is approved for this

purpose and notified by the Central Government. [Section 35(1)(ii)]

The payments so made to such institutions would be allowable irrespective of

whether:

a) the field of scientific research is related to the assessee’s business or not,

and

b) the payment is of a revenue nature or of a capital nature.

(ii) Company for scientific research: A sum equal to any amount paid to a company

to be used by it for scientific research [Section 35(1)(iia)]

However, such deduction would be available only if;

- the company is registered in India and

- has as its main object the scientific research and development.

Further, it should be approved by the prescribed authority and should fulfill the

other prescribed conditions.


4.9

(iii) Approved notified research association or university, college or other

institution: A sum equal to any amount paid to

- a research association which has as its object the undertaking of research

in social science or statistical research or

- to a university, college or other institution to be used for research in any

social science or statistical research

provided that they are approved for this purpose and notified by the Central

Government. [Section 35(1)(iii)]

Further, it has been clarified that the deduction to which an assessee (i.e. donor)

is entitled on account of payment of any sum to a research association or

university or college or other institution, shall not be denied merely on the ground

that subsequent to payment of such sum by the assessee, the approval granted to

any of the aforesaid entities is withdrawn.

If any question arises under this section as to whether, and if so, to what extent,

any activity constitutes, or any asset is being used, for scientific research, the

Board shall refer the question to—

v the Central Government, when such question relates to any activity under clauses (ii)

and (iii) of sub-section (1) i.e. any scientific research, or any research in social

science or statistical research carried on by a association, university, college or

institution approved for this purpose, and its decision shall be final;

v the prescribed authority, when such question relates to any activity other than the

activity specified above, whose decision shall be final. [Section 35(3)]

(iv) Sum paid to National Laboratory, etc. [Section 35(2AA)]

Weighted Deduction: Sub-section (2AA) of section 35 provides that any sum paid by

an assessee to a National Laboratory or University or Indian Institute of

Technology or a specified person for carrying out programmes of scientific

research approved by the prescribed authority will be eligible for 100% deduction of

the amount so paid.

No other deduction under the Act: No contribution which qualifies for weighted

deduction under this clause will be entitled to deduction under any other provision of

the Act.

It has been clarified that the deduction to which an assessee is entitled on account

of payment of any sum by him to a National Laboratory, University, Indian

Institute of Technology or a specified person for the approved programme shall not

be denied to the donor-assessee merely on the ground that after payment of such sum

by him, the approval granted to any of the aforesaid donee-entities or to the

programme has been withdrawn.

(III) Company engaged in Business of Bio-technology or manufacturing of article or

thing etc. [Section 35(2AB)]

Where a company engaged in the business of bio-technology or in any business of

manufacture or production of any article or thing, not being an article or thing

specified in the list of the Eleventh Schedule incurs any expenditure on scientific

research on in -house research and development facility as approved by the


4.10

prescribed authority, a deduction of a sum equal to the expenditure will be allowed.

Such expenditure should not be in the nature of cost of any land or building.

“Expenditure on scientific research” in relation to drugs and pharmaceuticals shall

include expenditure incurred on clinical drug trial, obtaining approval from any state

regulatory authority, and filing an application for a patent under the Patents Act, 1970.

No other deduction under the Act: No deduction will be allowed in respect of

the above expenditure under any other provision of the Income-tax Act, 1961.

Agreement with the prescribed authority: No company will be entitled to this

deduction unless it enters into an agreement with the prescribed authority for co-

operation in such research and development facility and fulfills the prescribed

conditions with regard to maintenance and audit of accounts and also furnishes

prescribed reports in the prescribed manner.

Approval of the Authority: The prescribed authority shall submit its report in

relation to the approval of the said facility to the Principal Chief Commissioner or

the Chief Commissioner or Principal Director General Director General in such

form and within such time as may be prescribed.

WEIGHTED DEDUCTION UNDER SECTION 35: A SUMMARY

The following table gives a summary of weighted deduction available under

section 35 for A.Y.2021-22 in respect of contributions made by any assessee to

certain specified/ approved institutions:

Section Expenditure incurred/Contribution made to Deduction

(as a % of

contribution

made)

35(1)(i) Revenue expenditure incurred on scientific research

related to the assessee’s business

100%

35(1)(ii) Research Association/ university/ collage/ other

institution for scientific research

100%

35(1)(iia) Company for scientific research 100%

35(1)(iii) Research association/ university/ collage/ other

institution for research in social science or statistical

research

100%

35(1)(iv) Capital Expenditure (Other than expenditure on land) 100%

35(2AA) National Laboratory / University / IIT for scientific

research undertaken under a approved programme

100%

35(2AB) By a company engaged in Bio-technology or any

business of production or manufacturing of article or

thing, not being listed in Eleventh Schedule (other than

cost of land & building)

100%


4.11

SECTION 35ABB: EXPENDITURE FOR OBTAINING LICENCE TO OPERATE

TELECOMMUNICATION SERVICES

(i) TAX TREATMENT OF LICENSE FEE:

Transaction Manner of deduction

(1) Acquisition of right to operate telecommunication services

Any capital

expenditure incurred

for acquisition of

any right to operate

telecommunication

services either

before the

commencement of

the business or

thereafter at any

time during any

previous year and

for which payment

has actually been

made (actual

payment of

expenditure) to

obtain a license.

Appropriate fraction of the amount of such expenditure

[/total number of relevant previous years]

Meaning of relevant previous years:

Case Meaning

Where the licence

fee is actually paid

before the

commencement of

business to operate

telecommunication

services

The previous years beginning

with the P.Y. in which such

business commenced and the

subsequent P.Y. or P.Y.s

during which the licence, for

which the fee is paid, shall be

in force.

In any other case The previous years beginning

with the P.Y. in which the

licence fee is actually paid

and the subsequent P.Y. or

years during which the

licence, for which the fee is

paid, shall be in force.

Payment has actually been made means the actual payment of

expenditure irrespective of the previous year in which the liability for the

expenditure was incurred according to the method of accounting regularly

employed by the assessee.

(ii) No depreciation

Where a deduction is claimed and allowed for any previous year under this section,

then no depreciation on capital expenditure so incurred shall be allowed by way of

depreciation under section 32(1) for the same previous year or in any other previous

year.

NEW SECTION INSERTED BY FINANCE ACT, 2016

Deduction for expenditure incurred for obtaining right to use spectrum for

telecommunication services – Section 35ABA

A new section is inserted to allow deduction to an assessee for the capital expenditure

incurred for acquiring any right to use spectrum for telecommunication services. The actual

amount paid is allowed as a deduction over the period of right to use the license. The

deduction is allowable starting from the previous year in which spectrum fee is actually paid.

If the spectrum fee is actually paid before the commencement of the business to operate

telecommunication services, the deduction is allowed starting from the previous year in

which business commences.

The provisions relating to transfer of license, amalgamation and demerger as contained in

sub-sections (2) to (8) of section 35ABB have also been made applicable to spectrum.


4.12

SECTION 35D: AMORTISATION OF PRELIMINARY EXPENSES

(1) Nature of expenditure: Section 35D provides for the amortisation of preliminary

expenses incurred by Indian companies and other resident non-corporate taxpayers

for the establishment of business concerns or the expansion of the business of existing

concerns.

(2) Applicable: This section applies

(a) only to Indian companies and resident non-corporate assessees;

(b) in the case of new companies to expenses incurred before the commencement of the

business;

(c) in the case of extension of an existing undertaking to expenses incurred till the

extension is completed, i.e., in the case of the setting up of a new unit -

expenses incurred till the new unit commences production or operation.

(3) Amount eligible for deduction: Such preliminary expenditure incurred shall be

amortised over a period of 5 years. In other words, 1/5th of such expenditure is

allowable as a deduction for each of the five successive previous years beginning

with the previous year in which the business commences or, the previous year in

which the extension of the undertaking is completed or the new unit commences

production or operation, as the case may be.

(4) Eligible expenses - The following expenditure are eligible for amortisation:

(i) Expenditure in connection with–

(a) the preparation of feasibility report

(b) the preparation of project report;

(c) conducting market survey or any other survey necessary for the business of

the assessee;

(d) engineering services relating to the assessee’s business;

(e) legal charges for drafting any agreement between the assessee and any

other person for any purpose relating to the setting up to conduct the

business of assessee.

(ii) Where the assessee is a company, in addition to the above, expenditure

incurred –

(a) by way of legal charges for drafting the Memorandum and Articles of

Association of the company;

(b) on printing the Memorandum and Articles of Association;

(c) by way of fees for registering the company under the Companies Act;

1956,

(d) in connection with the issue, for public subscription, of the shares in

or debentures of the company, being underwriting commission,

brokerage and charges for drafting, printing and advertisement of the

prospectus; and


4.13

(iii) Such other items of expenditure (not being expenditure qualifying for any

allowance or deduction under any other provision of the Act) as may be

prescribed by the Board for the purpose of amortisation. However, the Board,

so far, has not prescribed any specific item of expense as qualifying for

amortisation under this clause.

In the case of expenditure specified in items (a) to (d) above, the work in

connection with the preparation of the feasibility report or the project report

or the conducting of market survey or any other survey or the engineering

services referred to must be carried out by the assessee himself or by a concern

which is for the time being approved in this behalf by the Board.

(5) Overall Limits - The maximum aggregate amount of the qualifying expenses that

can be amortised has been fixed at 5% of the cost of the project or in the case of an

Indian company, or, at the option of the company, 5% of the capital employed in the

business of the company, whichever is higher. The excess, if any, of the qualifying

expenses shall be ignored.

(6) Meaning of certain terms:

Terms Meaning

Cost of the

project (i) Expenses incurred before the commencement of business:

The actual cost of the fixed assets, being land, buildings,

leaseholds, plant, machinery, furniture, fittings, railway sidings

(including expenditure on the development of land, buildings)

which are shown in the books of the assessee as on the last day

of the previous year in which the business of the assessee

commences;

(ii) Expenses incurred for extension of the business or setting up of

a new unit: The actual cost of the fixed assets being land,

buildings, leaseholds, plant, machinery, furniture, fittings, and

railway sidings (including expenditure on the development of

land and buildings) which are shown in the books of the

assessee as on the last day of the previous year in which the

extension of the undertaking is completed or, as the case may

be, the new unit commences production or operation, in so far

as such fixed assets have been acquired or developed in

connection with the extension of the undertaking or the setting

up of the new unit.

Capital

employed in

the business

of the

company

(i) In the case of new company: The aggregate of the issued

share capital, debentures and long-term borrowings as on the

last day of the previous year in which the business of the

company commences;

(ii) In the case of extension of the business or the setting up of a

new unit: The aggregate of the issued share capital,

debentures, and long-term borrowings as on the last day of the

previous year in which the extension of the undertaking is

completed or, as the case may be, the unit commences

production or operation in so far as such capital, debentures

and long-term borrowings have been issued or obtained in


4.14

connection with the extension of the undertaking or the setting

up of the new undertaking or the setting up of the new unit of

the company.

Long-term

borrowing (i) Any moneys borrowed in India by the company from the

Government or the Industrial Finance Corporation of India or

the Industrial Credit and Investment Corporation of India or

any other financial institution eligible for deduction under

section 36(1)(viii) or any banking institution, or

(ii) any moneys borrowed or debt incurred by it in a foreign

country in respect of the purchase outside India of plant and

machinery where the terms under which such moneys are

borrowed or the debt is incurred provide for the repayment

thereof during a period of not less than 7 years.

(7) Audit of accounts: In cases where the assessee is a person other than a company or

a co- operative society, the deduction would be allowable only if the accounts of the

assessee for the year or years in which the expenditure is incurred have been

audited by a Chartered Accountant and the assessee furnishes before the specified

date referred to in section 44AB the report of such audit in the prescribed form duly

signed and verified by the auditor and setting forth such other particulars as may be

prescribed.

(8) Special provisions for amalgamation and demerger- Where the undertaking of an

Indian company is transferred, before the expiry of the period of 10 years, to another

Indian company under a scheme of amalgamation, the aforesaid provisions will

apply to the amalgamated company as if the amalgamation had not taken place. But

no deduction will be admissible in the case of the amalgamating company for the

previous year in which the amalgamation takes place.

Sub-section (5A) provides similar provisions for the scheme of demerger where the

resulting company will be able to claim amortisation of preliminary expenses as if

demerger had not taken place, and no deduction shall be allowed to the demerged

company in the year of demerger.

(9) No other deduction under any provision of the Act: It has been clarified that in

case where a deduction under this section is claimed and allowed for any

assessment year in respect of any item of expenditure, the expenditure in respect of

which deduction is so allowed shall not qualify for deduction under any other

provision of the Act for the same or any other assessment year.

Illustration:

XYZ Ltd. is incorporated on September 3, 2020. It commences its production on March 14,

2022. During the previous year 2020-2021, the following preliminary expenses are incurred

by it:

(a) registration fees for incorporation Rs.17,600

(b) printing expenses of memorandum, articles, prospectus, etc. Rs.28,000

(c) legal charges for drafting the memorandum and articles Rs.36,000

(d) underwriting commission for issue of shares Rs.75,000


4.15

(e) cost of advertisements (for prospectus) Rs.92,000

(f) expenditure on the refund of the amount of oversubscription of shares Rs.81,000

Besides, the company has incurred the following expenses before commencement of

business:

• Preparation of feasibility report (the work is undertaken by the assessee) Rs.97,000

• Preparation of the project report (the work is undertaken by an approved concern) Rs.1,45,000

• Expenditure on conducting market survey necessary for the business for the company

(the work is undertaken by a concern which is not approved for this purpose) Rs 62,000

• Legal charges for entering into a foreign collaboration Rs 43,000

• Engineering services in connection with the erection of plant and machinery Rs 3,12,900

• Cost of plant and machinery Rs 87,92,000

Determine the amount deductible under section 35D for the assessment years 2021-2022 and

2022-2023 assuming the following figures of fixed assets and capital:

On March 31, On March 31,

2021 2022

Rs Rs

Cost of fixed assets 51,00,000 96,01,850

Share Capital 26,00,000 57,00,000

Debentures 9,00,000 11,00,000

Long -term borrowing from a financial institution 3,08,000 24,00,000

Answer:

Since the company commences its business by starting commercial production on March 14,

2022, the benefit of amortisation of pre-commencement expenses under section 35D is

available in 5 assessment years beginning with the assessment year 2022-2023. The

expenditure qualified for this purpose is as follows:

Registration fees 17,600.00

Printing charges 28,000.00

Legal charges for drafting 36,000.00

Underwriting commission 75,000.00

Cost of advertisement 92,000.00

Expenditure on refund of amount of over-subscription 81,000.00

Cost of preparation of feasibility report 97,000.00

Cost of preparation of project report 1,45,000.00

Cost of conducting market survey (not included as the work is undertaken by Nil

an unapproved concern)

Legal charges for foreign collaboration 43,000.00

Engineering services for erection of plant 3,12,900.00

Total qualifying amount 9,27,500.00


4.16

Maximum qualifying amount

Cost of project (being cost of fixed assets on March 31, 2022) 96,01,850.00

Capital employed on March 31, 2022 (i.e., Rs 57,00,000 + Rs 11,00,000 + Rs.24,00,000) 92,00,000.00

5% of cost of project or capital employed at the option of the assessee (i.e. 5% of Rs 96,01,850) 4,80,093.00

Amount to be amortised in 5 assessment years beginning with the assessment

year 2022-2023 96,018.50

KEY POINT:

Since the entire qualification amount is not eligible for amortisation, it is advisable to

include cost of engineering service for erection of plant in the "actual cost" of plant,

which will be eligible for depreciation under section 32. If the company includes such

cost in "actual cost" of the plant, the same will be excluded from qualifying amount

which will be reduced to Rs. 6,14,600. However, the maximum amount eligible for

amortisation will be increased to Rs. 99,14,750 (i.e., Rs. 96,01,850 + Rs. 3,12,900) and,

consequently, the amount to be amortised in 5 installments will become Rs. 99,147.50

(i.e., 1/5 of 5% of Rs. 99,14,750).

SEC 35AD: INVESTMENT LINKED DEDUCTION

(1) List of specified businesses: Although there are a plethora of tax incentives available

under the Income-tax Act, 1961 they do not fulfill the intended purpose of

creating infrastructure since these incentives are linked to profits and consequently

have the effect of diverting profits from the taxable sector to the tax-free sector.

With the specific objective of creating rural infrastructure and environment friendly

alternate means for transportation of bulk goods, investment-linked tax incentives

have been introduced for specified businesses, namely–

• setting-up and operating ‘cold chain’ facilities for specified products;

• setting-up and operating warehousing facilities for storing agricultural produce;

• laying and operating a cross-country natural gas or crude or petroleum oil

pipeline network for distribution, including storage facilities being an integral

part of such network;

• building and operating a hotel of two-star or above category, anywhere in India;

• building and operating a hospital, anywhere in India, with at least 100 beds for

patients;

• developing and building a housing project under a scheme for slum

redevelopment or rehabilitation framed by the Central Government or a State

Government, as the case may be, and notified by the CBDT in accordance with

the prescribed guidelines.

• developing and building a housing project under a notified scheme for affordable

housing framed by the Central Government or State Government;

• production of fertilizer in India;

• setting up and operating an inland container depot or a container freight station

notified or approved under the Customs Act, 1962;

• bee-keeping and production of honey and beeswax;

• setting up and operating a warehousing facility for storage of sugar.


4.17

• laying and operating a slurry pipeline for the transportation of iron ore;

• setting up and operating a semiconductor wafer fabrication manufacturing unit,

if such unit is notified by the Board in accordance with the prescribed

guidelines;

• developing or maintaining and operating or developing, maintaining and operating

a new infrastructure facility

DATE OF COMMENCEMENT OF SPECIFIED BUSINESSES:

S. No. Specified business Date of commencement

of operations

1. Laying and operating a cross country natural gas

pipeline network for distribution

on or after 1st April,

2007

2. (a) building and operating anywhere in India, a

hotel of two-star or above category as

specified by the Central Government

(b) building and operating a hospital with at

least 100 beds for patients

(c) slum redevelopment or rehabilitation

housing projects


2010

3. (a) affordable housing projects and

(b) production of fertilizer in a new plant or in

a newly installed capacity in an existing

plant


2011

4. (a) setting up and operating an inland container

depot or a container freight station notified

or approved under the Customs Act, 1962.

(b) bee-keeping and production of honey and

beeswax and

(c) setting up and operating a warehousing

facility for storage of sugar


2012

5. (a) laying and operating a slurry pipeline for

the transportation of iron ore or

(b) setting up and operating a semi-conductor

wafer fabrication manufacturing unit


2014

6. Developing or operating and maintaining or

developing, operating and maintaining, any

infrastructure facility


2017

7. In any other case, namely –

(a) setting and operating "cold-chain" facilities

for specified products or

(b) warehousing facilities for storing

agricultural produce


2009


4.18

Can an assessee setting up a hotel claim deduction under section 35AD for the relevant

previous year, on the basis that it had commenced its operations and made an

application for three-star category classification in beginning of the said previous year,

even though the same was granted by the authority only in the next year due to the

requirement of completion of inspection?

CIT V. CEEBROS HOTELS PRIVATE LIMITED [2018] (MAD)

High Court’s Observations :

1. The assessee had made an application for classification as early as in the month of April

of the relevant previous year. Thereafter, an inspection was required to be conducted for

such purpose.

2. The manner in which the inspection was conducted, and the time frame taken by the

competent authority were factors beyond the control of the assessee.

3. The Department had not disputed the operation of the new hotel from the relevant

previous year as it had accepted the income, which was offered to tax.

4. Under section 35AD, deduction is available from the previous year in which the assessee

commences operation of the specified business i.e., hotel business, in this case.

5. Section 35AD does not mandate that the date of the certificate has to be with effect from

a particular date.

High Court’s Decision:

The High Court upheld the Tribunal’s view that the assessee is entitled to claim the

deduction under section 35AD for the relevant previous year, opining that the provision

which was introduced to encourage the establishment of hotels of a particular category is a

beneficial provision, and hence, should be read and interpreted liberally.

(2) Deduction for Capital Expenditure: 100% of the capital expenditure incurred

during the previous year, wholly and exclusively for the above businesses would be

allowed as deduction from the business income.

® However, expenditure incurred on acquisition of any land, goodwill or financial

instrument would not be eligible for deduction.

® Further, any expenditure in respect of which payment or aggregate of payment

made to a person of an amount exceeding Rs. 10,000 in a day otherwise than by

account payee cheque drawn on a bank or an account payee bank draft or use of

electronic clearing system through a bank account or such other electronic mode as

may be prescribed would not be eligible for deduction.

(Underlined and bold words are amended by Finance Act (No.2) 2019)

(3) Expenditure prior to commencement of operation: Further, the expenditure

incurred, wholly and exclusively, for the purpose of specified business prior to

commencement of operation would be allowed as deduction during the previous

year in which the assessee commences operation of his specified business.

The amount incurred prior to commencement should be capitalized in the books of

account of the assessee on the date of commencement of its operations.


4.19

(4) Conditions to be fulfilled: For claiming deduction under section 35AD, the

specified business should fulfill the following conditions –

General Conditions:

To be fulfilled by every specified business

(i) it should not be set up by splitting up, or the reconstruction, of a business already in

existence;

(ii) it should not be set up by the transfer to the specified business of machinery or

plant previously used for any purpose;

In order to satisfy this condition, the total value of the plant or machinery so

transferred should not exceed 20% of the value of the total plant or machinery

used in the new business.

For the purpose of this condition, machinery or plant would not be regarded as

previously used if it had been used outside India by any person other than the

assessee provided the following conditions are satisfied:

(a) such plant or machinery was not used in India at any time prior to the date of

its installation by the assessee;

(b) the plant or machinery was imported into India from a foreign country;

(c) no deduction in respect of depreciation of such plant or machinery has b e e n

allowed to any person at any time prior to the date of installation by the

assessee.

Conditions required to be fulfilled by certain specified businesses:

I. Business of laying and operating a cross-country natural gas or crude or

petroleum oil pipeline network for distribution, including storage facilities being an

integral part of such network

(i) Such business should be owned by a company formed and registered in India under the

Companies Act, 1956 or by a consortium of such companies or by an authority or a

board or a corporation established or constituted under any Central or State Act;

(ii) It should have been approved by the Petroleum and Natural Gas Regulatory Board

and notified by the Central Government in the Official Gazette

II. Business of developing or operating and maintaining or developing, operating

and maintaining a new infrastructure facility

(i) The business should be owned by a company registered in India or by a

consortium of such companies or by an authority or a board or corporation or any

other body established or constituted under any Central or State Act.

(ii) The entity should have entered into an agreement with the Central Government or a

State Government or a local authority or any other statutory body for developing

or operating and maintaining or developing, operating and maintaining, a new

infrastructure facility.

(5) No deduction under section 10AA or Chapter VI-A under the heading “C.-

Deductions in respect of certain incomes”: Where a deduction under this section

is claimed and allowed in respect of the specified business for any assessment year,

no deduction under the provisions of Chapter VI-A under the heading “C.-

Deductions in respect of certain incomes” or section 10AA is permissible in

relation to such specified business for the same or any other assessment year.

Correspondingly, section 80A has been amended to provide that where a deduction

under any provision of this Chapter under the heading “C – Deductions in respect of


4.20

certain incomes” is claimed and allowed in respect of the profits of such specified

business for any assessment year, no deduction under section 35AD is permissible

in relation to such specified business for the same or any other assessment year.

® Once the assessee has claimed the benefit of deduction under section 35AD for a

particular year in respect of a specified business, he cannot claim benefit under

Chapter VI -A under the heading “C.-Deductions in respect of certain incomes” or

section 10AA, for the same or any other year and vice versa.

(6) No deduction allowable under the Act in respect of expenditure for which

deduction allowed under this section: The assessee cannot claim deduction in

respect of such expenditure incurred for specified business under any other provision

of the Income-tax Act, 1961 in the current year or under this section for any other

year.

(7) MEANING OF CERTAIN TERMS

Term Meaning

Cold chain

facility

A chain of facilities for storage or transportation of agricultural and

forest produce, meat and meat products, poultry, marine and

dairy products, products of horticulture, floriculture and

apiculture and processed food items under scientifically controlled

conditions including refrigeration and other facilities necessary for

the preservation of such produce.

Infrastructure

facility (i) A road including toll road, a bridge or a rail system.

(ii) A highway project including housing or other activities being

an integral part of the highway project.

(iii) A water supply project, water treatment system, irrigation

project, sanitation and sewerage system or solid waste

management system.

(iv) A port, airport, inland waterway, inland port or navigational

channel in the sea.

Can Inland Container Depots (ICDs) be treated as infrastructure facility, for profits

derived therefrom to be eligible for deduction under section 80-IA?

CIT V. CONTAINER CORPORATION OF INDIA LIMITED [2018] (SC)

Facts of the case: M/s. Container Corporation of India Ltd. (CONCOR) is a Government

company engaged in the business of handling and transportation of containerized cargo. Its

operating activities are mainly carried out at its Inland Container Depots, Container Freight

Stations and Port Side Container Terminals. CONCOR filed its income-tax returns for the

relevant assessment years and claimed deduction under various heads including deduction

under section 80-IA for profits derived from inland container depots. The claim for deduction

on the profits earned from inland container depots was, however, rejected by the Assessing

Officer.

Issue: The issue under consideration is whether profits derived from inland container depots

can be treated as an infrastructure facility eligible for deduction under section 80-IA.


4.21

Supreme Court’s Observations:

1. Inland Container Depots function for the benefit of exporters and importers located

in industrial centres which are situated at distance from sea ports.

2. The purpose of establishing them was to promote the export and import in the

country as these depots acts as a facilitator and reduce inconvenience to the exporter or

importer.

3. The Finance Act, 2001 substituted section 80-IA(4), consequent to which the

definition of “infrastructure facility” in Explanation to section 80-IA(4)(i) included an

inland port.

4. The Supreme Court observed that, considering the nature of work such as custom

clearance carried out at inland container depots, it can be considered as an inland port within

the meaning of section 80IA(4). Thus, deduction under section 80-IA can be claimed in

respect of income earned therefrom.

Supreme Court’s Decision: The Supreme Court, accordingly, upheld the decision of the

division bench of the High Court and held that CONCOR can claim for deduction under

Section 80-IA in respect of profits derived from Inland Container Depots.

Note: Now Infrastructure facility is covered under section 35AD.

(8) Set-off or carry forward and set-off of loss from specified business:

The loss of an assessee claiming deduction under section 35AD in respect of a

specified business can be set-off against the profit of another specified business

under section 73A, irrespective of whether the latter is eligible for deduction under

section 35AD.

Example: A assessee can therefore, set-off the losses of a hospital or hotel which

begins to operate after 1st April, 2010 and which is eligible for deduction section

35AD, against the profits of the existing business of operating a hospital (with atleast

100 beds for patients) or a hotel (of two-star or above category), even if the latter

is not eligible for deduction under section 35AD.

(9) Transfer of hotel built by the assessee: Where the assessee builds a hotel of two-

star or above category as classified by the Central Government and subsequently,

while continuing to own the hotel, transfers the operation of the said hotel to

another person, the assessee shall be deemed to be carrying on the specified

business of building and operating a hotel. Therefore, he would be eligible to claim

investment-linked tax deduction under section 35AD.

® Therefore, in effect, the assessee shall be deemed to be carrying on the specified

business of building and operating hotel if –

(i) The assessee builds a hotel of two-star or above category;

(ii) Thereafter, he transfers the operation of the hotel to another person;

(iii) He, however, should continue to own the hotel.


4.22

AMENDMENT IN SECTION 28: CHARGING SECTION

The following income shall be chargeable to income tax under the head "Profits & Gains of

Business or Profession"

Any sum, whether received or receivable, in cash or kind, on account of any capital asset

(other than land or goodwill or financial instrument) being demolished, destroyed, discarded

or transferred, if the whole of the expenditure on such capital asset has been allowed as a

deduction under section 35AD.

Therefore, if the asset whose cost has been allowed as deduction under section 35AD is sold,

demolished, discarded or destroyed then,

I. the sale price of such asset shall be taxable as "Profits & Gains of Business or

Profession".

II. the insurance compensation on destruction of such asset shall be taxable as "Profits &

Gains of Business or Profession".

EXPLANATION 13 TO SECTION 43(1): ACTUAL COST

1. The actual cost of any capital asset to the assessee on which deduction has been

allowed under section 35AD to the assessee shall be treated as NIL

2. Where the capital asset is received by the assessee:

(i) By way of gift, will or irrevocable trust

(ii) On distribution on liquidation of the company

(iii) On partition of HUF

(iv) From its holding company

(v) From its subsidiary company

(vi) On amalgamation

(vii) On demerger

(viii) On succession of proprietorship concern/ firm by a company

(ix) On conversion of unlisted company into LLP

and the cost of such asset has been allowed as deduction under section 35AD to the

transferor, then its cost of acquisition to the assessee shall be taken as NIL.

AMENDMENT IN SECTION 35AD BY FINANCE ACT, 2014

(7A) Any asset in respect of which a deduction is claimed and allowed under this section

shall be used only for the specified business, for a period of eight years beginning with

the previous year in which such asset is acquired or constructed.

(7B) Where any asset, in respect of which a deduction is claimed and allowed under this

section, is used for a purpose other than the specified business during the period

specified in sub-section (7A), otherwise than by destruction/ demolition / discarding/

sale / transfer, the total amount of deduction so claimed and allowed in one or more

previous years, as reduced by the amount of depreciation allowable in accordance with

the provisions of section 32, as if no deduction under this section was allowed, shall be

deemed to be the income of the assessee chargeable under the head "Profits and gains

of business or profession" of the previous year in which the asset is so used.


4.23

(7C) Nothing contained in sub-section (7B) shall apply to a company which has become a sick

industrial company under sub-section (1) of section 17 of the Sick Industrial Companies

(Special Provisions) Act, 1985, during the period specified in sub-section (7A).


ACTUAL COST OF ASSET IN CASE OF WITHDRAWAL OF DEDUCTION IN

TERMS OF SUB-SECTION (7B) OF SECTION 35AD

Clause (1) of section 43 defines "actual cost" for the purposes of claiming depreciation under

section 32 of the Act in certain situations. However, there is no clarity on determination of

actual cost for the purposes of allowance of depreciation of such assets in respect of which

the deduction which is already allowed in a previous year under section 35AD of the Act, is

withdrawn in terms of sub-section (7B) of the said section.

In light of the recommendations of Income-tax simplification committee and to bring clarity,

it is proposed to amend the provisions of the section 43 of the Act, to provide that where any

capital asset in respect of which deduction allowed under section 35AD is deemed to be the

income of the assessee in accordance with the provisions of sub-section (7B) of the said

section, the actual cost to the assessee shall be the actual cost to the assessee, as reduced by

an amount equal to the amount of depreciation calculated at the rate in force that would have

been allowable had the asset been used for the purposes of business since the date of its

acquisition.


Providing an option to the assessee for not availing deduction under section 35AD.

Section 35AD of the Act, relating to deduction in respect of expenditure on specified

business, provides for 100 per cent. deduction on capital expenditure (other than

expenditure on land, goodwill and financial assets) incurred by the assessee on certain

specified businesses. Under sub-section (1) of section 35AD, the said deduction of 100

per cent. of the capital expenditure is allowable during the previous year in which such

expenditure has been incurred. Further, sub-section (4) provides that no deduction is

allowable under any other section in respect to the expenditure referred to in sub-section

(1). At present, an assessee does not have any option of not availing the incentive under said

section.

Due to this, a legal interpretation can be made that a domestic company opting for

concessional tax rate under section 115BAA or section 115BAB of the Act, which does

not claim deduction under section 35AD, would also be denied normal depreciation under

section 32 due to operation of sub-section (4) of section 35AD. This has not been the

intention of the statute.

Therefore, it is proposed to amend sub-section (1) of section 35AD to make the deduction

thereunder optional. It is further proposed to amend sub-section (4) of section 35AD to

provide that no deduction will be allowed in respect of expenditure incurred under sub-

section (1) in any other section in any previous year or under this section in any other

previous year, if the deduction has been claimed by the assessee and allowed to him under

this section.

This amendment will take effect from 1st April, 2020 and will, accordingly, apply in

relation to the assessment year 2020-21 and subsequent assessment years.


4.24

SECTION 35E: AMORTISATION OF EXPENDITURE ON PROSPECTING ETC. OF

CERTAIN MINERALS

(1) Eligible Assessee: This provision applies only to expenditure incurred by an Indian

company or other resident non-corporate taxpayer. In order to qualify for

amortisation, the assessee should be engaged in any operations relating to prospecting

for or the extraction or production of any mineral.

(2) Eligible expenses - The nature and kind of expenditure qualifying for amortisation

are–

(i) It must have been incurred during the year of commercial production and any

one or more of the four years immediately preceding that year,

(ii) It must be incurred wholly and exclusively on any operations relating to the

prospecting for or extraction of certain minerals listed in the Seventh

Schedule of the Income-tax Act, 1961.

(3) Expenditure not allowed for deduction - However, any portion of the expenditure

which is met directly or indirectly by any other persons or authority and the sale,

salvage, compensation or insurance moneys realised by the assessee in respect of

any property or rights brought into existence as a result of the expenditure should

be excluded from the amount of expenditure qualifying for amortisation.

Further, specific provision has been made to the effect that the following items of

expenses do not qualify for amortisation at all viz.:

(i) Expenditure incurred on the acquisition of the site of the source of any minerals

or group of associated minerals stated above or of any right in or over such site;

(ii) Expenditure on the acquisition of the deposits of minerals or group of

associated minerals referred to above or to any rights in or over such deposits; or

(iii) Expenditure of a capital nature in respect of any building, machinery, plant or

furniture for which depreciation allowance is permissible under section 32.

(4) Amount of deduction - The assessee will be allowed for each of ten relevant previous

years, a deduction of an amount equal to one-tenth of the aggregate amount of the

qualifying expenditure.

Thus, the deduction to be allowed for any relevant previous year is

(i) one-tenth of the expenditure or

(ii) such amount as will reduce to nil the income of the previous year arising

from the commercial exploration of any minerals or other natural deposit of the

mineral or minerals in a group of associated minerals in respect of which

the expenditure was incurred,

whichever figure is less.

The amount of the deduction admissible in respect of any relevant previous year to the

extent to which it remains unallowed, shall be carried forward and added to the

installment relating to the previous year next following and shall be deemed to be a

part of the installment and so on, for ten previous years beginning from the year of

commercial production.


4.25

Illustration:

X Ltd., an Indian company, is engaged in the business of production of minerals since 1960.

During the year ending 31.03.2020, it starts commercial exploitation of a new mine at

Hazaribag. Compute the amount deductible under section 35E for the assessment years 2020-

2021 and 2021-2022 from the given information-

Previous Year Previous Year

2019-2020 2020-2021

Rs. Rs.

Income from mining (before section 35E deduction)

• From old mining 20,000 4,00,000

• From new mining at Hazaribag 25,000 75,000

Other business income 4,00,000 3,90,000

(5) Meaning of certain terms:

Term Meaning

Operation

relating to

prospecting

Any operation undertaken for the purpose of exploiting, locating or

proving deposits of any minerals and includes any such operation

which proves to be infructuous or abortive.

Year of

commercial

production

The previous year in which as a result of any operation relating to

prospecting or commercial production of any material or one or more

of the minerals in a group of associated minerals specified in Part

A or Part B, respectively, of the Seventh Schedule to Act actually

commences.

Relevant

previous year

Ten previous years beginning with the year of commercial

production

(6) Audit of accounts: The provisions with regard to audit of accounts relating to the

qualifying expenditure are similar to those applicable for amortisation of preliminary

expenses discussed earlier.

(7) Special provisions for amalgamation or demerger: In the case of amalgamation,

such deduction would continue to be admissible to the amalgamated company as

if the amalgamation had not taken place.

Sub-section (7A) provides for similar provisions in cases of demerger where such

deduction can be availed of by the resulting company as if the demerger had not taken

place.

Further, no deduction will be admissible to the amalgamating/demerged company in

the year of amalgamation/demergers.

(8) No other deduction allowed in respect of the expenditure for which deduction is

claimed under this section: Where a deduction is claimed and allowed on account of

amortisation of the expenses under section 35E in any year in respect of any

expenditure, the expenditure in respect of which deduction is so allowed shall not

again qualify for deduction from the profits and gains under any other provisions of

the Act for the same or any other assessment year.


4.26

Qualifying expenditure:

Rs

Expense for the purpose of exploring and locating mineral incurred up to

31-3-2015

7,20,000

Expenses for the purpose of exploring and locating mineral from April 1, 2015

to March 31, 2020 (out of which Rs 6,000 is met by the State Government)

9,36,000

Acquisition of site on June 30, 2015 4,00,000

Purchase of Plant, Machinery and building on July 31, 2016 6,00,000

Solution:

Computation of Qualifying Expenditure

Rs. 7,20,000 incurred prior to April 1, 2015 is not part of qualifying

expenditure

Nil

(Expenditure incurred during 2019-2020 and earlier 4 years will be considered)

Out of Rs. 9,36,000, Rs. 6,000 is met by the Government; only Rs. 9,30,000

shall be included

9,30,000

Expenditure on acquisition of site is not qualifying amount Nil

Building, plant and Machinery are qualified for depreciation; deduction under

Section 35E is not available

Nil

Qualifying expenditure 9,30,000

Amount deductible during 10 years: Assessment Years 2020-2021 to 2029-

2030

93,000


Income from mining (old and new)

Less: Deduction under section 35E (i.e. Rs. 45,000 or Rs. 93,000 whichever

less)

Mining Income

Other income

Net income

45,000

45,000

NIL

4,00,000

4,00,000

Note: The amount of unabsorbed deduction under section 35E of Rs. 48,000 (i.e., Rs. 93,000

– Rs.45,000) will become the part of deduction for the next year.


Mining Income (old and new) 4,75,000

Less: Deduction under Section 35E (i.e., Rs. 93,000 + Rs. 48,000, subject to 1,41,000

a maximum of mining income)

Balance 3,34,000

Other business income 3,90,000

Net income 7,24,000


4.27

SEC 36(1)(viia): SPECIAL PROVISION FOR TAXATION OF BANKS & NBFC’S

The business income of a bank is computed normally as per section 28 to 44D. However, the

banks are allowed a deduction of provision made for bad and doubtful debts under

section 36(1)(viia) which is discussed below:

The amount of deduction in respect of provision for bad and doubtful debts is given below

Amount deductible in respect of provision for bad and doubtful debts

In the case of an Scheduled

Bank or Other Non

Scheduled Banks including

Cooperative Banks

In case of a Public Financial,

State Financial Corporation,

State Industrial Investment

Corporation

In the case of a Foreign

Bank &

NBFC

8.5% of total income

computed before deduction

under this section and before

deduction under chapter VI-A

5% of total income computed

before deduction under this

section and before deduction

under chapter VI-A

5% of total income

computed before deduction

under this section & before

deduction under chapter VI-A

Plus

10% of Aggregate Average

Advances made by rural

branches

_____ _____

KEY POINTS:

1. The deduction for provision for bad and doubtful debt is allowed under section

36(1)(viia) provided the provision is debited to the Profit & Loss A/c.

2. Meaning of Rural Branch - "Rural branch" means a branch of Scheduled bank (or a

non- scheduled branch) situated in a place which has a population of a not more than

10,000 according to the last preceding census.

DEDUCTION FOR ACTUAL BAD DEBTS

1. No deduction is allowed under section 36(1)(vii) in respect of actual bad debts.

2. The actual bad debts should be debited to the provision for bad and doubtful debts

made under section 36(1)(viia).

3. Where the actual bad debts exceed the credits balance in the provision for bad and

doubtful debt account, then deduction under section 36(1)(vii) shall be allowed for such

excess.

Illustration 1:

ABC Bank Ltd., an Scheduled Bank, submits the following information for computation of

its income for financial year ended 31.3.2021:

Profit as per Profit & Loss A/c Rs 1,000 Lakhs

The above profit has been computed after debiting the following items:

(i) Actual bad debts written off Rs 50 Lakhs

(ii) Provision for bad and doubtful debts Rs 160 Lakhs

(iii) Expenses disallowable under section 28 to 44D Rs 20 Lakhs


4.28

You are given that as on 1.4.2020, the credit balance in Provision for bad & doubtful debt is

Rs 40 Lakhs. You are also given that the Aggregate Average Advances made by the rural

branches of ABC Bank Ltd. are Rs 500 Lakhs.

Answer:

The Income of the Bank shall be computed as under:

(Rs. in Lakhs)

Profit as per Profit & Loss A/c 1,000

Add: Expenses disallowable under section 28 to 44D 20

Add: Actual bad debts written off 50

Add: Provision for bad and doubtful debts 160

Gross Total Income 1,230

Less: Deduction under section 36(1)(viia)

(i) 8.5% of Gross Total Income (i.e. 8.5% of 1,230 Lakhs) 104.55

(ii) 10% of Aggregate Average Advances made by the Rural Branches (i.e. 10% of Rs 500 Lakhs) 50

Deduction under section 36(1)(viia) 154.55

Total Income 1075.45

Note : If the actual Bad Debts are Rs 250 instead of Rs. 50, then the answer will be as

follows :

Illustration 2:

The bank has an opening balance as on 1-4-2020 of Rs 40 Lakhs in the provision for bad &

doubtful debts. The Provision for bad & doubtful debts allowable under section 36(1)(viia)

for the year ended 31.3.2021 is Rs 200 Lakhs. The Bank has actually incurred bad debts of

Rs 70 Lakhs during the year ended 31.3.2021.


4.29

Answer:

Provision for Bad & Doubtful Debts A/c

Particulars

Amount

(Rs in Lakhs) Particulars

Amount

(Rs in Lakhs)

To Actual Bad debts 70 By Balance b/d 40

To Balance c/d 170 By Profit & Loss A/c 200

Total 240 Total 240

The bank will be allowed deduction for provision of bad & doubtful debts of Deduction for

bad debts shall not be allowed.

Illustration 3:

Suppose in Illustration 2 above, the bad debts amount to Rs 270 Lakhs.

Answer:

Provision for Bad & Doubtful Debts A/c

Particulars Amount

(Rs in Lakhs)

Particulars Amount

(Rs in Lakhs)

To Actual Bad debts By Balance b/d

To Balance c/d By Profit & Loss A/c

Total Total

Bank shall be allowed deduction as under:

(i) _____ Lakhs under section 36(1)(viia) for provision for bad & doubtful debts,

(ii) Actual bad debts of ____ Lakhs under section 36(1)(vii).

SPECIAL RESERVE UNDER SECTION 36(1)(viii)

WHO CAN CLAIM DEDUCTION

Specified entity Eligible business

1. (a) Financial Corporation specified in

section 4A of the Companies Act,

1956

(b) Financial corporation which is a public

sector company

(c) Banking company

(d) Co-operative bank (other than a

primary agricultural credit society or a

primary co-operative agricultural and

rural development bank)

Business of providing long-term finance

for -

(i) industrial or agricultural

development or

(ii) development of infrastructure

facility in India; or

(iii) development of housing in India.

2. A housing finance company Business of providing long-term finance

for the construction or purchase of

residential house in India.

3. Any other financial corporation including a

public company

Business of providing long-term finance

for development of infrastructure facility

in India.


4.30

Long-Term Finance-The expression "long-term finance" has been defined to mean any loan

or advance, where the terms under which money are loaned or advanced, provide for

repayment along with interest thereof, during a period of not less than 5 years.

AMOUNT OF DEDUCTION

Amount of deduction under section 36(1)(viii) is as follows -

(a) The amount transferred during the previous year to the special reserve account created

for the purpose of section 36(1)(viii); OR

(b) 20% of the profits derived from the business activities mentioned above, which is

computed under section 28 to 44D but before claiming deduction under section

36(1)(viii); OR

(c) 200% of paid up-share capital and general reserve as on the last day of the previous year

minus the balance of the special reserve account on the first day of the previous year;

WHICHEVER IS LOWER.

Illustration 1:

X Ltd. is a financial corporation for the purpose of section 36(1)(viii). Income of the taxpayer

for the previous year 2020-2021 from different sources is as follows -

Rs In

Lakhs

(a) From providing long-term finance for industrial/agriculture or

Development of infrastructure facility (before deduction under Section 36)

1,120

(b) Business income from other activities 105

Compute the amount of deduction under section 36(1)(viii) for the assessment year 2021-

2022 taking into consideration the following data –

1. Paid up capital and general reserve on March 31, 2021: Rs 610 Lakhs

2. Balance standing to the credit of special reserve account as on

April 1, 2020: Rs.1050 lakhs

3. Amount transferred to special reserve account during 2020-2021 is Rs 220 Lakhs.

Answer:

The amount of deduction under section 36(1)(viii) is the least of the following -

(a) ______ Lakhs (being the amount transferred to the special reserve account during

2020-2021);

(b) ______Lakhs (being 20% of the _____Lakhs); or

(c) ______ Lakhs (being 200% of _____Lakhs - _____ Lakhs).

(d) _______ Lakh (being the least out of above 3) is deductible.


4.31

SECTION 41(4A): AMOUNT WITHDRAWN FROM SPECIAL RESERVE

ACCOUNT UNDER SECTION 36(1)(viii)

Where a deduction has been allowed in respect of any special reserve created and maintain

under section 36, and subsequently the amount is withdrawn from such special reserve

then such amount shall be deemed to be the profits and gains of business or profession

and will be chargeable as income of the previous year in which such amount is

withdrawn.

If the amount is withdrawn in a previous year in which the business is no longer in

existence, the taxability would arise in the above manner as though the business is in

existence in that previous year.

Notes: Five more deductions under section 35 are mentioned in compendium.

******************************************************************************

General Deduction u/s 37(1) AJ Education NeXt

5.1

CHAPTER 5. GENERAL DEDUCTION U/S 37(1)

Treatment of Losses under Income Tax Act:-

Badridas Daga v/s CIT(1958) / Calcutta Co. Ltd (1959) (SC)

One has to keep in view the general commercial principles while determining real & true

profits of a business or profession.

There may be loss which is not admissible loss under any of the provisions of the Act and

yet such losses should be allowed in order to determine true and real profits of assessee &

it is the duty of every person who has anything to do with taxing business people to

understand what are the principles of commercial accounting.

Unless one understands the principle of commercial accounting, it is absolutely difficult to

make a proper assessment.

Trading losses which are incidental to the operations of the business must be allowed

even if it is not specially coded anywhere in the Act.

As capital receipts are not chargeable to tax, therefore even capital Losses can’t be allowed

as deduction. [CIT v/s Mysore Sugar Co. Ltd].

Following are the some of the instances which are deductible as losses:-

a. Loss of stock by fire.

b. Loss of stock by Ravages of Ants.

c. Loss of cash by theft.

d. Loss of stock by Act of God.

e. Loss on Account of foreign exchange.

f. Loss due to embezzlement by employee.

SECTION 37(1): GENERAL CLAUSE FOR DEDUCTIONS

Any expenditure other than specifically mentioned in the preceding paragraphs (i.e. sections

30 to 36) shall be allowed as deduction provided the following conditions are satisfied:

1. it is not in the nature of capital expenditure;

2. it is not in the nature of personal expenses of the assessee; and

3. it is laid out wholly and exclusively for the purposes of the business or profession of the

assessee.

EXPLANATION 1 TO SECTION 37(1): ILLEGAL PAYMENTS

"For the removal of doubts, it is hereby declared that any expenditure incurred by an

assessee for any purpose which is an offence or which is prohibited by law shall not be

deemed to have been incurred for the purpose of business or profession and no

deduction or allowance shall be made in respect of such expenditure."


5.2

The above amendment will result in disallowance of claims made by certain assessees in

respect of payments on account of protection money, extortion, hafta, bribes, etc as business

expenditure. It is well decided that unlawful expenditure is not allowable expenditure in

computation of income.

EXPLANATION 2 TO SECTION 37(1): CORPORATE SOCIAL RESPONSIBILITY

EXPENSES

Disallowance of CSR expenditure [Explanation 2 to Section 37(1)]

(i) Section 135 of the Companies Act, 2013 read with Schedule VII thereto and

Companies (Corporate Social Responsibility) Rules, 2014 are the special provisions

under the new company law regime imposing mandatory CSR obligations.

Mandatory CSR obligations under section 135:

Ø Every company, listed or unlisted, private or public, having a -

- net worth of Rs. 500 crores or more [Net worth criterion]; or

- turnover of Rs. 1,000 crores or more [Turnover criterion]; or

- a net profit of Rs. 5 crores or more [Net Profit criterion]

during any financial year to constitute a CSR Committee of the Board;

Ø CSR Committee has to formulate CSR policy and the same has to be approved

by the Board;

Ø Such company to undertake CSR activities as per the CSR Policy;

Ø Such company to spend in every financial year, at least 2% of its average net

profits made in the immediately three preceding financial years, on the CSR

activities specified in Schedule VII to the Companies Act, 2013.

(ii) As per Rule 4 of the Companies (CSR) Rules, 2014, the following expenditure are not

considered as CSR activity for the purpose of section 135:

Ø Expenditure on activities undertaken in pursuance of normal course of business;

Ø Expenditure on CSR activities undertaken outside India;

Ø Expenditure which is exclusively for the benefit of the employees of the

company or their families; and

Ø Contributions to political parties.

(iii) Under section 37(1) of the Income-tax Act, 1961, only expenditure, not covered

under sections 30 to 36, and incurred wholly and exclusively for the purposes of

the business is allowed as a deduction while computing taxable business income.

The issue under consideration is whether CSR expenditure is allowable as deduction

under section 37.

(iv) It has now been clarified that for the purposes of section 37(1), any expenditure

incurred by an assessee on the activities relating to corporate social responsibility

referred to in section 135 of the Companies Act, 2013 shall not be deemed to have

been incurred for the purpose of business and hence, shall not be allowed as

deduction under section 37.

(v) The rationale behind the disallowance is that CSR expenditure, being an application of

income, is not incurred wholly and exclusively for the purposes of carrying on

business.

(vi) However, the Explanatory Memorandum to the Finance (No.2) Bill, 2014 clarifies

that CSR expenditure, which is of the nature described in sections 30 to 36, shall be


5.3

allowed as deduction under those sections subject to fulfillment of conditions, if any,

specified therein.

CIRCULAR NO. 5/2012, DATED 1-8-2012

Section 37(1) of the Income Tax Act, 1961 - Allowability of Business Expenditure -

Inadmissibility of expenses incurred in providing freebees to Medical Practitioner by

pharmaceutical and allied health sector Industry

1. It has been brought to the notice of the Board that some pharmaceutical and allied

health sector Industries are providing freebees (freebies) to medical practitioners and

their professional associations in violation of the regulations issued by Medical Council

of India (the 'Council') which is a regulatory body constituted under the Medical

Council Act, 1956.

2. The council in exercise of its statutory powers amended the Indian Medical Council

(Professional Conduct, Etiquette and Ethics) Regulations, 2002 (the regulations) on 10-

12-2009 imposing a prohibition on the medical practitioner and their professional

associations from taking any Gift, Travel facility, Hospitality, Cash or monetary

grant from the pharmaceutical and allied health sector Industries.

3. Section 37(1) of Income Tax Act provides for deduction of any revenue expenditure

(other than those failing under sections 30 to 36) from the business Income if such

expense is laid out/expended wholly or exclusively for the purpose of business or

profession. However, the Explanation appended to this sub-section denies claim of any

such expense, if the same has been incurred for a purpose which is either an offence or

prohibited by law.

Thus, the claim of any expense incurred in providing above mentioned or similar

freebees in violation of the provisions of Indian Medical Council (Professional

Conduct, Etiquette and Ethics) Regulations, 2002 shall be inadmissible under section

37(1) of the Income Tax Act being an expense prohibited by the law. This disallowance

shall be made in the hands of such pharmaceutical or allied health sector Industries or

other assessee which has provided aforesaid freebees and claimed it as a deductable

expense in its accounts against income.

4. It is also clarified that the sum equivalent to value of freebees enjoyed by the aforesaid

medical practitioner or professional associations is also taxable business income or

income from other sources as the case may be depending on the facts of each case. The

Assessing Officers of such medical practitioner or professional associations should

examine the same and take an appropriate action.

This may be brought to the notice of all the officers of the charge for necessary action.

TREATMENT OF EXPENDITURE ON KEYMAN INSURANCE POLICY:

CBDT Circular no. 762/1998 dated 18.02.1998 clarifies that the premium paid on the

Keyman Insurance Policy is allowable as business expenditure.

Taking into account the Explanation to Section 10(10D) and the CBDT Circular no. 762

dated 18.02.1998, Courts have held that a Keyman Insurance Policy is not confined to

a policy taken for an employee but also extends to an insurance policy taken with respect to

the life of another person who is connected in any manner whatsoever with the business of

the subscriber (assessee).

The High Court of Punjab and Haryana has, in the case of M/s. Ramesh Steels, ITA No.

437 of 2015, vide judgement dated 2.2.2016, reiterating the above view, held that, “the said

policy when obtained to secure the life of a partner to safeguard the firm against a


5.4

disruption of the business is equally for the benefit of the partnership business which

may be effected as a result of premature death of a partner. Thus, the premium on the

Keyman Insurance Policy of partner of the firm is wholly and exclusively for the purpose

of business and is allowable as business expenditure”.

In view of the above, the CBDT has clarified that in case of a firm, premium paid by the

firm on the Keyman Insurance Policy of a partner, to safeguard the firm against a

disruption of the business, is an admissible expenditure under section 37 of the Act.

ILLUSTRATIONS ON SECTION 37(1)

1. Penalties imposed for infraction of law are not deductible. Haji Aziz & Abdul Shakoor

Bros. v. CIT (SC)

2. DR. T.A. QURESHI VS. CIT (SUPREME COURT)

Loss of illegal business shall be allowed to set-off from profits of legal business.

FACTS OF THE CASE:

Subsequent to the recovery and seizure of huge quantity of heroin drugs from the

assessee-doctor's possession, he filed return claiming that since the heroin seized from

him formed part of stock-in-trade, hence, its loss on account of seizure was an

allowable deduction while computing his Profits and Gains from Business &

Profession. The Assessing Officer, however, disallowed the assessee's said claim.

HELD:

On an appeal to the Supreme Court, the Supreme Court held that, no doubt, the assessee

had contended that he was only earning income from his medical profession and was

not doing any illegal activity of manufacturing or selling of heroin. However, the

finding of fact of the Tribunal in its order was that the assessee was engaged in

manufacture and selling of heroin.

The Tribunal held that the heroin seized was the assessee's stock-in-trade, it was

implicit that the Tribunal reiterated the view that the assessee was doing the business of

manufacture and sale of heroin.

In order of Tribunal there was a finding of fact to the effect that the heroin formed part

of stock in trade of the assessee. In view of said finding, the Tribunal allowed the

assessee's claim of deducting the loss of 5 kg of heroin whose value was assessed by

the Tribunal at Rs. 2 lakhs as a business loss. The view taken by the Tribunal was to be

sustained.

The Explanation to section 37 has really nothing to do with the instant case as it was

not a case of a business expenditure, but of business loss. Business losses are allowable

on ordinary commercial principles in computing profits. Once it was found that the

heroin seized form part of stock-in-trade of the assessee, it followed that the seizure and

confiscation of such stock-in-trade had to be allowed as a business loss. Loss of stock-

in-trade has to be considered as a trading loss.

3. CIT V. T. C. REDDY (2013) 356 ITR 516 (ANDHRA)

Where goods have been confiscated by custom authorities in a foreign country due to

certain statutory violation, can the same be treated as a loss of stock-in-trade, and

claimed as deduction`

The High Court held that the loss arising on confiscation of pharmaceutical drugs is

a business loss, based on the Supreme Court's decision in Dr. T. A. Qureshi's case.


5.5

4. Any Penalty/ interest paid under Direct Taxes laws is not deductible.

(a) Expenditure incurred due to failure to deduct TDS is not allowable as a business

expense.

Indian Aluminium Co. Ltd. v. CIT (SC)

Assessee paid foreign collaborators fees without deducting TDS. Then he paid TDS to

government. Subsequently the assessee failed to recover TDS from the collaborator and

w/off the same in books. Held it cannot be treated as business expenditure under

section37(1), since the amount is paid for the default in deducting TDS under the

Income-tax Act. It cannot be claimed as bad debt under section 36(1)(vii) as the

conditions of bad debt are not satisfied.

(b) Interest paid in respect of delayed payment of income-tax is not deductible.

5. Penalty/penal interest under Sales Tax Act.

(a) Interest paid by the assessee to Sales Tax Department on arrears of sales tax is an

admissible deduction.

(b) Penalty levied under the Central Sales Tax Act is not deductible.

6. Demurrage paid to port authorities in connection with release of confiscated goods is

not a fine paid for infraction of law and is thus allowable as business expense.

7. Delayed payments to P.F.

Interest paid under employees Provident Fund & Misc. Provisions Act, 1952 is

allowable if it is compensatory and not penal.

8. Penalty/ Damages paid for breach of contract.

(a) Penalty paid by assessee contractor for non-completion of contract within stipulated

time is allowable.

Reason: Delay in completion of contract work is incidental to the business of contracts.

Therefore, the liability to compensation is contractual and is not in the nature of

penalty.

(b) Penalty for failure to supply goods under a contract are allowable.

SECTION 37(2B): PAYMENTS MADE TO POLITICAL PARTY

Notwithstanding anything contained in section 37(1), no allowance shall be made in respect

of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract

pamphlet or the like published by a political party.

KEY POINTS:

1. Donations to political party and electoral trust are disallowed since such donation can

not be said to be expenditure incurred for the purposes of business or profession.

2. However, donations to political party and electoral trust are allowed as deduction under

section 80GGB and 80GGC of the Income Tax Act.


5.6

Clarification regarding treatment of expenditure incurred for development of

roads/highways in Build-Operate-Transfer (BOT) agreements under the Income-tax

Act, 1961 [Circular No. 09/2014, dated 23.04.2014]

The CBDT has, vide this Circular, clarified the tax treatment of expenditure incurred on

development and construction of infrastructural facilities like roads/highways on Build-

Operate- Transfer (BOT) basis with right to collect toll - whether the same is entitled to

depreciation under section 32(1)(ii) or can be amortized by treating it as an allowable

business expenditure under the relevant provisions of the Income- tax Act, 1961.

Generally, the BOT basis projects are entered into between the developer and the

government or the notified authority, on the following terms:

(i) In such projects, the developer, in terms of concessionaire agreement with

Government or its agencies, is required to construct, develop and maintain the

infrastructural facility of roads/highways which, inter alia, includes laying of road,

bridges, highways, approach roads, culverts, public amenities etc. at its own cost and

its utilization thereof for a specified period.

(ii) The possession of land is handed over to the assessee (i.e., the developer) by the

Government/ notified authority for the purpose of construction of the project without

any actual transfer of ownership. The assessee, therefore, has only a right to develop

and maintain such asset. It also enjoys the benefits arising from the use of asset

through collection of toll for a specified period, without having actual ownership

over such asset. Therefore, the rights in the land remain vested with the

Government/notified agencies.

(iii) Since the assessee does not hold any rights in the project except recovery of toll

fee to recoup the expenditure incurred, it cannot be treated as an owner of the

property, either wholly or partly, for purposes of allowability of depreciation

under section 32(1)(ii). Thus, claim of depreciation on toll ways is not allowable

due to non-fulfillment of ownership criteria in such cases.

(iv) Where the assessee incurs expenditure on a project for development of

roads/highways, it is entitled to recover cost incurred towards development of such

facility (comprising of construction cost and other pre-operative expenses) during

construction period. Further, expenditure incurred by the assessee on such BOT

projects brings to it an enduring benefit in the form of right to collect the toll during

the period of agreement.

The Supreme Court, in Madras Industrial Investment Corporation Ltd. vs. CIT 225 ITR 802,

allowed the spreading over of liability over a number of years on the ground that there was

continuing benefit to the company over a period. Therefore, analogously, expenditure

incurred on an infrastructure project for development of roads/highways under BOT

agreement may be treated as having been made/ incurred for the purposes of business or

profession of the assessee and same shall be allowed to be spread during the tenure of

concessionaire agreement.

In view of the above, the CBDT, in exercise of the powers conferred under section 119,

clarifies that the cost of construction on development of infrastructure facility, being

roads/highways under BOT projects, may be amortized and claimed as allowable business

expenditure under the Act in the following manner:

(i) The amortization allowable may be computed at the rate which ensures that the

whole of the cost incurred in creation of infrastructural facility of road/highway is

amortised evenly over the period of concessionaire agreement after excluding the time

taken for creation of such facility.


5.7

(ii) Where an assessee has claimed any deduction out of initial cost of development of

infrastructure facility of roads/highways under BOT projects in earlier years, the

total deduction so claimed for the assessment years prior to assessment year under

consideration may be deducted from the initial cost of infrastructure facility of

roads/highways and the cost so reduced shall be amortised equally over the

remaining period of toll concessionaire agreement.

The clarification given in this Circular is applicable only to those infrastructure projects for

development of road/highways on BOT basis where ownership is not vested with the

assessee under the concessionaire agreement.

FROM THE JUDICIARY

1. KERALA ROAD LINES (SUPREME COURT)

The assessee has entered into an agreement for purchase of land with buildings thereon.

The buildings standing on the land were demolished and the income from the sale of

scrap material was treated as business income. The assessee had to pay certain interest

on delayed payment for the purchase price and it claimed the same as revenue

expenditure. The Assessing Officer disallowed the claim of the assessee on the ground

that the payment of interest on the purchase of property was in the nature of a capital

expenditure and not a revenue expenditure.

Held, that the sale proceeds of the scrap material after demolishing the structures

standing on the land was treated as business income of the assessee. If that was so,

payment of interest which was the contractual obligation, would also be a business

expenditure. Once the revenue had accepted the sale proceeds of the scrap material of

structures standing on land as business income, then, correspondingly, the assessee

would be entitled to claim the amount of interest paid as revenue expenditure.

2. Is Circular No. 5/2012 dated 01.08.2012 disallowing the expenditure incurred

on freebies provided by pharmaceutical companies to medical practitioners,

in line with Explanation to section 37(1), which disallows expenditure which is

prohibited by law?

CONFEDERATION OF INDIAN PHARMACEUTICAL INDUSTRY (H.P.)

High Court’s Observations: On this issue, the Himachal Pradesh High Court

observed that as per Indian Medical Council (Professional Conduct, Etiquette and

Ethics) Regulations, 2002, every medical practitioner and his or her professional

associate is prohibited from accepting any gift, travel facility, hospitality, cash or

monetary grant from any pharmaceutical and allied health sector industries. This is

a statutory regulation in the interest of the patients and the public, considering

the increase in complaints against the medical practitioners prescribing branded

medicines instead of generic medicines, solely in lieu of gifts and other freebies

granted to them by some particular pharmaceutical industries.

The CBDT, considering the fact that the claim of any expense incurred in providing

freebies to medical practitioners is in violation of the provisions of Indian Medical

Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, has, vide

Circular No.5/2012 dated 1.8.2012, clarified that the expenditure so incurred shall be

inadmissible under section 37(1). The disallowance shall be made in the hands of

such pharmaceutical or allied health sector industry or other assessee which has


5.8

provided aforesaid freebies and claimed it as a deductible expense in its accounts

against income.

High Court’s Decision: The High Court opined that the contention of the assessee

that the above mentioned Circular goes beyond section 37(1) was not acceptable. As

per Explanation to section 37(1), it is clear that any expenditure incurred by an

assessee for any purpose which is prohibited by law shall not be deemed to have

been incurred for the purpose of business or profession. The sum and substance of

the circular is also the same. Therefore, the circular is totally in line with the

Explanation to section 37(1).

However, if the assessee satisfies the assessing authority that the expenditure incurred

is not in violation of the regulations framed by the Medical Council then it may

legitimately claim a deduction, but it is for the assessee to satisfy the Assessing

Officer that the expense is not in violation of the Medical Council Regulations.

3. Can the commission paid to doctors by a diagnostic centre for referring

patients for diagnosis be allowed as a business expenditure under section 37 or

would it be treated as illegal and against public policy to attract disallowance?

CIT V. KAP SCAN AND DIAGNOSTIC CENTRE P. LTD. (2012) (P&H)

High Court’s Observations: On the above mentioned issue, the Punjab and

Haryana High Court observed that the argument of the assessee that giving

commission to the private doctors for referring the patients for various medical

tests was a trade practice which could not be termed to be illegal and therefore, the

same cannot be disallowed under section 37(1), is not acceptable. Applying the

rationale and considering the purpose of Explanation to section 37(1), the assessee

would not be entitled to deduction of payments made in contravention of law.

Similarly, payments which are opposed to public policy being in the nature of

unlawful consideration cannot also be claimed as deduction. The assessee cannot

take a plea that businessmen are entitled to conduct their business even contrary t o

law and claim deduction of certain payments as business expenditure, notwithstanding

that such payments are illegal or opposed to public policy or have pernicious

consequences to the society as a whole.

As per the Indian Medical Council (Professional Conduct, Etiquette and Ethics)

Regulations, 2002, no physician shall give, solicit, receive, or offer to give, solicit

or receive, any gift, gratuity, commission or bonus in consideration of a return for

referring any patient for medical treatment.

High Court’s Decision: The demanding as well as paying of such commission is bad

in law. It is not a fair practice and is opposed to public policy and should be

discouraged. Thus, the High Court held that commission paid to doctors for

referring patients for diagnosis is not allowable as a business expenditure.

4. CIT vs. Khemchand Motilal Jain, Tobacco Products (P.) Ltd. (Madhya Pradesh)

Assessee-company was engaged in manufacturing and sale of bidis. The wholetime

director of assessee-company, had gone on business tour for purchase of tendu leaves

where he was kidnapped for ransom by a dacoit. Police was unsuccessful to recover 'S'

from clutches of dacoits and, ultimately, assessee had to pay ransom money for release


5.9

of its director. Amount of ransom money paid by assessee is allowed as business

expenditure.

5. Can the expenditure incurred on heart surgery of an assessee, being a lawyer by

profession, be allowed as business expenditure under section 31, by treating it

as current repairs considering heart as plant and machinery, or under section 37,

by treating it as expenditure incurred wholly and exclusively for the purpose of

business or profession?

SHANTI BHUSHAN V. CIT (2011) 336 ITR 26 (DELHI)

Facts of the case: In the present case, the assessee is a lawyer by profession. The

assessee argued that the repair of vital organ (i.e. the heart) had directly impacted his

professional competence. He contended that the heart should be treated as plant as it is

used for the purpose of his professional work. He substantiated his contention by

stating that after his heart surgery, his gross receipts from profession increased

manifold. Hence, the expenditure on the heart surgery should be allowed as

business expenditure either under section 31 as current repairs to plant and

machinery or section 37 as an expense incurred wholly and exclusively for the

purpose of profession. The department argued that the said expenditure was

personal in nature and was not incurred wholly and exclusively for the purpose of

business or profession, and therefore, the same should not be allowed as business

expenditure.

High Court’s Observations: On this issue, the Delhi High Court observed that a

healthy and functional human heart is necessary for a human being irrespective of

the vocation or profession he is attached with. Expenses incurred to repair an

impaired heart would thus add to the longevity and efficiency of a human being

which would be reflected in every activity he does, including professional activity.

It cannot be said that the heart is used as an exclusive tool for the purpose of

professional activity by the assessee. Further, the High Court held that: -

(i) To allow the heart surgery expenditure as repair expenses to plant, the heart

should have been first included in the assessee’s balance sheet as an asset in

the previous year and in the earlier years. Also, a value needs to be assigned

for the same. The assessee would face difficulty in arriving at the cost of

acquisition of such an asset for showing in his books of account.

Though the definition of “plant” as per the provisions of section 43(3) is

inclusive in nature, such plant must have been used as a business tool

which is not true in case of heart. Therefore, the heart cannot be said to

be plant for the business or profession of the assessee. Therefore, the

expenditure on heart surgery is not allowable as repairs to plant under

section 31.

(ii) According to the provisions of section 37, inter alia, the said expenditure must

be incurred wholly and exclusively for the purposes of the assessee's

profession. As mentioned above, a healthy heart will increase the efficiency

of human being in every field including its professional work.

High Court’s Decision: There is, therefore, no direct nexus between the expenses

incurred by the assessee on the heart surgery and his efficiency in the professional

field. Therefore, the claim for allowing the said expenditure under section 37 is also

not tenable. Hence, the heart surgery expenses shall not be allowed as a business


5.10

expenditure of the assessee under the Income-tax Act, 1961.

6. Can expenditure incurred on alteration of a dam to ensure adequate supply

of water for the smelter plant owned by the assessee be allowed as revenue

expenditure?

CIT V. HINDUSTAN ZINC LTD. (2010) 322 ITR 478 (RAJ.)

Facts of the case: The assessee company owned a super smelter plant which requires

large quantity of water for its day-to-day operation, in the absence of which it

would not be able to function. The assessee, therefore, incurred expenditure for

alteration of the dam (constructed by the State Government) to ensure sharing of the

water with the State Government without having any right or ownership in the dam or

water. The assessee’s share of water is also determined by the State Government. The

assessee claimed the expenditure as deduction under section 37, which was

disallowed by the Assessing Officer on the ground that it was of capital nature.

Tribunal view: The Tribunal, however, was of the view that since the object and

effect of the expenditure incurred by the assessee is to facilitate its trade operation

and enable the management to conduct business more efficiently and profitably, the

expenditure is revenue in nature and hence, allowable as deduction.

High Court’s Observations & Decision: The High Court observed that the

expenditure incurred by the assessee for commercial expediency relates to

carrying on of business. The expenditure is of such nature which a prudent

businessman may incur for the purpose of his business. The operational expenses

incurred by the assessee solely intended for the furtherance of the enterprise can

by no means be treated as expenditure of capital nature.

7. Is the amount paid by a construction company as regularization fee for violating

building bye-laws allowable as deduction?

MILLENNIA DEVELOPERS (P) LTD. V. DCIT (2010) 322 ITR 401 (KARN.)

Facts of the case: The assessee, a private limited company carrying on business

activity as a developer and builder, claimed the amount paid by way of

regularization fee for the deviations made while constructing a structure and for

violating the plan sanctioned in terms of the building bye-laws, approved by the

municipal authorities as per the provisions of the Karnataka Municipal Corporations

Act, 1976. The assessee’s claim was disallowed by the Assessing Officer and the

disallowance was confirmed by the Tribunal.

High Court’s Observations and Decision: The High Court observed that as per the

provisions of the Karnataka Municipal Corporations Act, 1976, the amount paid to

compound an offence is obviously a penalty and hence, does not qualify for

deduction under section 37. Merely describing the payment as a compounding fee

would not alter the character of the payment.

Note – In this case, it is the actual character of the payment and not its

nomenclature that has determined the disallowance of such expenditure as

deduction. The principle of substance over form has been applied in disallowing an

expenditure in the nature of penalty, though the same has been described as

regularization fee/compounding fee.


5.11

8. Can payment to police personnel and gundas to keep away from the cinema

theatres run by the assessee be allowed as deduction?

CIT V. NEELAVATHI & OTHERS (2010) (KARN)

Facts of the case: The assessee running cinema theatres claimed deduction of the

sum paid to the local police and local gundas towards maintenance of the theatre. The

same was disallowed by the Assessing Officer.

High Court’s Observations: On this issue, the High Court observed that if any

payment is made towards the security of the business of the assessee, such amount

is allowable as deduction, as the amount is spent for maintenance of peace and law

and order in the business premises of the assessee i.e., cinema theatres in this case.

However, the amount claimed by the assessee, in the instant case, was towards

payment made to the police and gundas.

Any payment made to the police illegally amounts to bribe and such illegal

gratification cannot be considered as an allowable deduction. Similarly, any

payment to a gunda as a precautionary measure so that he shall not cause any

disturbance in the theatre run by the assessee is an illegal payment for which no

deduction is allowable under the Act.

High Court’s Decision: If the assessee had incurred expenditure for the purpose of

security, the same would have been allowed as deduction. However, in the instant

case, since the payment has been made to the police and gundas to keep them

away from the business premises, such a payment is illegal and hence, not allowable

as deduction.

9. Can advance given to employees and security deposit paid to the landlord, which

became irrecoverable, be allowed as a business loss ?

CIT V. TRIVENI ENGG. & INDUSTRIES LTD. (2012) 343 ITR 245 (DELHI)

On the above mentioned issue, the Delhi High Court held that advances to employees

were given by the amalgamating company in the ordinary course of business by way of

temporary financial accommodation to be recovered out of the salary paid to the

employees. Therefore, such advances given to persons who had been employed by the

assessee company which have become irrecoverable would be treated as business loss.

However, as regards the allowability of non-recoverable security deposit given to the

landlord for obtaining lease of premises for purposes of business, the High Court

observed that the security deposits were refundable and therefore, were not in the form

of rent. They were given for securing the premises on rent. The assessee had obtained a

right to use the property, i.e., tenancy right, which is a capital asset. Therefore, it is not

allowable as business loss.

10. What is the nature of expenditure incurred on glow-sign boards displayed at

dealer outlets - capital or revenue?

CIT V. ORIENT CERAMICS AND INDUSTRIES LTD. (2013) (DELHI)

High Court’s Observations: On this issue, the Delhi High Court noted the

following observations of the Punjab and Haryana High Court in CIT v. Liberty


5.12

Group Marketing Division [2009] 315 ITR 125, while holding that such expenditure

was revenue in nature -

(i) The expenditure incurred by the assessee on glow sign boards does not bring

into existence an asset or advantage for the enduring benefit of the business,

which is attributable to the capital.

(ii) The glow sign board is not an asset of permanent nature. It has a short life.

(iii) The materials used in the glow sign boards decay with the effect of weather.

Therefore, it requires frequent replacement. Consequently, the assessee has to

incur expenditure on glow sign boards regularly in almost each year.

(iv) The assessee incurred expenditure on the glow sign boards with the object of

facilitating the business operation and not with the object of acquiring asset of

enduring nature.

High Court’s Decision: The Delhi High Court concurred with the above observations

of the P & H High Court and held that such expenditure on glow sign boards

displayed at dealer outlets was revenue in nature.

11. Is interest income from share application money deposited in bank eligible for set-

off against public issue expenses or should such interest be subject to tax under the head

‘Income from Other Sources’?

CIT V. SREE RAMA MULTI TECH LTD. [2018] (SC)

Issue: The issue under consideration is whether the interest income from share application

money is taxable under the head ‘Income from Other Sources’ or can the same be set-off

against public issue expenses.


1. The Supreme Court observed that the assessee-company was statutorily required to

keep share application money in a separate account till the allotment of shares was

completed.

2. The interest earned was inextricably linked with the requirement of raising share

capital.

3. Any surplus money deposited in the bank for the purpose of earning interest is liable

to be taxed as “Income from Other Sources”. Here, the share application money was

deposited with the bank not to make additional income but to comply with the statute.

4. The interest accrued on such deposit is merely incidental. Moreover, the issue of

shares relates to capital structure of the company and hence, expenses incurred in connection

with the issue of shares are to be capitalized. Accordingly, the accrued interest is not liable to

be taxed as “Income from Other Sources”; the same is eligible to be set-off against public

issue expenses.

Supreme Court’s Decision: The Supreme Court concurred with the High Court’s view that

the interest accrued on deposit of share application money with bank is eligible for set off

against the public issue expenses; such interest is, hence, not taxable as “Income from Other

Sources”.

*************************************************************************

Disallowances AJ Education NeXt

6.1

CHAPTER 6. DISALLOWANCES

AS PER SEC 40A(1) THE FOLLOWING DISALLOWANCES SHALL BE MADE

NOTWITHSTANDING ANYTHING CONTAINED IN ANY OTHER PROVISION OF

THE INCOME-TAX ACT:

SECTION 40A(2): PAYMENTS TO SPECIFIED PERSONS NOT DEDUCTIBLE

UNDER CERTAIN CIRCUMSTANCES

Sub-section (2) of section 40A provides that where the assessee incurs any expenditure in

respect of which a payment has been or is to be made to a specified person [See

column (2) of Table below) so much of the expenditure as is considered to be excessive

or unreasonable shall be disallowed by the Assessing Officer. While doing so he shall have

due regard to:

(a) the fair market value of the goods, service of facilities for which the payment is made;

or

(b) the legitimate needs of the business or profession carried on by the assessee; or

(c) the benefit derived by or accruing to the assessee from such a payment.

Assessee Specified Person

(1) (2)

Individual 1. Any relative of the individual assessee

2. Any person who carries on a business or profession, if

• the individual has a substantial interest in the business of that

person or

• any relative of the individual has a substantial interest in the

business of that person

Company,

Firm, HUF

or AOP

1. Any director, partner of the firm or member of the

family or association or any relative of such director,

partner or member or

2. Any person who carries on a business or profession, in

which the Company/Firm/HUF/AOP or director of the

company, partner of the firm or member of the family or

association or any relative of such director, partner or

member has substantial interest

All assessees The following are specified persons:

Person who has

substantial interest in

the assessee’s

business

Other related persons of such

person, who has a substantial

interest in the assessee’s

business

Any individual • Any relative of such

individual

Company / AOP / Firm /

HUF • Any director of such

company, partner of such

firm or the member of such

family or association or


6.2

• any relative of such

director, partner or member

or

• Any other company carrying

on business or profession

in which the first

mentioned company has a

substantial interest

a director, partner or

member • Company/Firm/AOP/HUF of

which he is a director,

partner or member or

• Any other director / partner /

member of the such

Company / Firm / AOP /

HUF or

• Any relative of such

director, partner or member

Relative in relation to an Individual means the spouse, brother or sister or any

lineal ascendant or descendant of that individual [Section 2(41)].

Substantial interest in a business or profession

A person shall be deemed to have a substantial interest in a business or profession if -

- in a case where the business or profession is carried on by a company, such person

is, at any time during the previous year, the beneficial owner of equity shares

carrying not less than 20% of the voting power and

- in any other case, such person is, at any time during the previous year,

beneficially entitled to not less than 20% of the profits of such business or

profession.

SECTION 40A(3) & (3A): PAYMENTS MADE OTHERWISE THAN BY ACCOUNT

PAYEE CHEQUE OR ACCOUNT PAYEE BANK DRAFT OR OTHER MODE

According to section 40A(3), where the assessee incurs any expenditure, in respect of

which payment or aggregate of payments made to a person in a day otherwise than by an

account payee cheque drawn on a bank or by an account payee bank draft or use of

electronic system through bank account or such other electronic mode as may be

prescribed exceeds Rs. 10,000, such expenditure shall not be allowed as a deduction.


The provision applies to all categories of expenditure involving payments for goods or

services which are deductible in computing the taxable income.

Example:

If, in respect of an expenditure of Rs. 32,000 incurred by X Ltd., 4 cash payments of Rs.

8,000 are made on a particular day to one Mr. Y – one in the morning at 10 a.m., one at 12

noon, one at 3 p.m. and one at 6 p.m., the entire expenditure of Rs. 32,000 would be

disallowed under section 40A(3), since the aggregate of cash payments made during a day

to Mr. Y exceeds Rs. 10,000.


6.3

Cash Payment made in excess of Rs. 10,000 deemed to be the income of the subsequent

year, if an expenditure has been allowed as deduction in any previous year on due

basis:

In case of an assessee following mercantile system of accounting, if an expenditure has

been allowed as deduction in any previous year on due basis, and payment has been made

in a subsequent year otherwise than by account payee cheque or account payee bank draft

or use of electronic clearing system through a bank account or such other electronic mode

as may be prescribed, then the payment so made shall be deemed to be the income of the

subsequent year if such payment or aggregate of payments made to a person in a day

exceeds Rs. 10,000 [Section 40A(3A)].


Rule 6ABBA:

The following shall be the other electronic modes for the purposes of clause (d) of first

proviso to section 13A, clause (f) of sub-section (8) of section 35AD, sub-section (3),

sub-section (3A), proviso to sub-section (3A) and sub-section (4) of section 40A, second

proviso to clause (1) of Section 43, sub-section (4) of section 43CA, proviso to sub-

section (1) of section 44AD, second proviso to sub-section (1) of section 50C, second

proviso to sub-clause (b) of clause (x) of sub-section (2) of section 56, clause (b) of first

proviso of clause (i) of Explanation to section 80JJAA, section 269SS, section 269ST

and section 269T, namely:-

(a) Credit Card;

(b) Debit Card;

(c) Net Banking;

(d) IMPS (Immediate Payment Service);

(e) UPI (Unified Payment Interface);

(f) RTGS (Real Time Gross Settlement);

(g) NEFT (National Electronic Funds Transfer); and

(h) BHIM (Bharat Interface for Money) Aadhar Pay;

Increase in limit of cash payment, where payment made to transport operator:

This limit of Rs. 10,000 has been raised to Rs. 35,000 in case of payment made to transport

operators for plying, hiring or leasing goods carriages. Therefore, payment or aggregate of

payments up to Rs. 35,000 in a day can be made to a transport operator otherwise than by

way of account payee cheque or account payee bank draft or use of electronic clearing

system through a bank account or such other electronic mode as may be prescribed. In

all other cases, the limit would continue to be Rs. 10,000.



6.4

Cases and circumstances in which a payment or aggregate of payments exceeding ten

thousand rupees may be made to a person in a day, otherwise than by an account

payee cheque/ account payee bank draft/ use of ECS through a bank account [Rule

6DD]:

As per this rule, no disallowance under section 40A(3) shall be made and no payment

shall be deemed to be the profits and gains of business or profession under section

40A(3A) where a payment or aggregate of payments made to a person in a day,

otherwise than by an account payee cheque drawn on a bank or account payee bank draft

or use of electronic clearing system through a bank account or such other electronic

mode as may be prescribed , exceeds ten thousand rupees in the cases and circumstances

specified hereunder, namely:

(i) Loan transactions: It does not apply to loan transactions because advancing of

loans or repayments of the principal amount of loan does not constitute an

expenditure deductible in computing the taxable income. However, interest payments

of amounts exceeding Rs.10,000 at a time are required to be made by account

payee cheques or drafts or electronic clearing system or such other electronic mode

as may be prescribed, as interest is a deductible expenditure.

(ii) Payment made by commission agents: This requirement does not apply to payment

made by commission agents for goods received by them for sale on commission or

consignment basis because such a payment is not an expenditure deductible in

computing the taxable income of the commission agent.

For the same reason, this requirement does not apply to advance payment made

by the commission agent to the party concerned against supply of goods.

However, where commission agent purchases goods on his own account but not on

commission basis, the requirement will apply. The provisions regarding payments by

account payee cheque or draft or electronic clearing system or such other electronic

mode as may be prescribed, apply equally to payments made for goods purchased

on credit.

Cases and circumstances in which a payment or aggregate of payments exceeding ten

thousand rupees may be made to a person in a day, otherwise than by an account

payee cheque [Rule 6DD]:

As per this rule, no disallowance under section 40A(3) shall be made and no payment

shall be deemed to be the profits and gains of business or profession under section

40A(3A) where a payment or aggregate of payments made to a person in a day,

otherwise than by an account payee cheque drawn on a bank or account payee bank

draft or use of electronic clearing system through a bank account or such other

electronic mode as may be prescribed., exceeds ten thousand rupees in the cases and

circumstances specified hereunder, namely:

(a) where the payment is made to

(i) the Reserve Bank of India or any banking company;

(ii) the State Bank of India or any subsidiary bank;

(iii) any co-operative bank or land mortgage bank;

(iv) any primary agricultural credit society or any primary credit society;

(v) the Life Insurance Corporation of India;

(b) where the payment is made to the Government and, under the rules framed by it,

such payment is required to be made in legal tender;


6.5

(c) where the payment is made by

(i) any letter of credit arrangements through a bank;

(ii) a mail or telegraphic transfer through a bank;

(iii) a book adjustment from any account in a bank to any other account in that or

any other bank;

(iv) a bill of exchange made payable only to a bank;

(v) a credit card;

(vi) a debit card.

(d) where the payment is made by way of adjustment against the amount of any liability

incurred by the payee for any goods supplied or services rendered by the assessee to

such payee;

(e) where the payment is made for the purchase of -

(i) agricultural or forest produce; or

(ii) the produce of animal husbandry (including livestock, meat, hides and skins) or

dairy or poultry farming; or

(iii) fish or fish products; or

(iv) the products of horticulture or apiculture,

to the cultivator, grower or producer of such articles, produce or products;

Note -

(i) The expression ‘fish or fish products’ (iii) above would include ‘other marine

products such as shrimp, prawn, cuttlefish, squid, crab, lobster etc.’.

(ii) The 'producers' of fish or fish products for the purpose of Rule 6DD(e) would

include, besides the fishermen, any headman of fishermen, who sorts the catch

of fish brought by fishermen from the sea, at the sea shore itself and then sells

the fish or fish products to traders, exporters etc.

However, the above exception will not be available on the payment for the purchase

of fish or fish products from a person who is not proved to be a 'producer' of these

goods and is only a trader, broker or any other middleman, by whatever name called.

(f) where the payment is made for the purchase of the products manufactured or

processed without the aid of power in a cottage industry, to the producer of such

products;

(g) where the payment is made in a village or town, which on the date of such payment

is not served by any bank, to any person who ordinarily resides, or is carrying on

any business, profession or vocation, in any such village or town;

(h) where any payment is made to an employee of the assessee or the heir of any such

employee, on or in connection with the retirement, retrenchment, resignation,

discharge or death of such employee, on account of gratuity, retrenchment

compensation or similar terminal benefit and the aggregate of such sums payable to

the employee or his heir does not exceed fifty thousand rupees;

(i) where the payment is made by an assessee by way of salary to his employee after

deducting the income-tax from salary in accordance with the provisions of section

192 of the Act, and when such employee -

(i) is temporarily posted for a continuous period of fifteen days or more in a

place other than his normal place of duty or on a ship; and

(ii) does not maintain any account in any bank at such place or ship;


6.6

(j) where the payment was required to be made on a day on which the banks were closed

either on account of holiday or strike;

(k) where the payment is made by any person to his agent who is required to make

payment in cash for goods or services on behalf of such person;

(l) where the payment is made by an authorised dealer or a money changer against

purchase of foreign currency or travelers cheques in the normal course of his

business.

SECTION 40A(7): EMPLOYER'S CONTRIBUTION TO GRATUITY FUND

No deduction shall be allowed in respect of any provision made by the assessee for the

payment of gratuity to his employees on their retirement or termination of employment.

(Refer Compendium for example)

SECTION 40A(9): EMPLOYER'S CONTRIBUTION TO UNAPPROVED

GRATUITY FUND, UNRECOGNIZED PROVIDENT FUND OR UNAPPROVED

SUPERANNUATION FUND IS DISALLOWED

No deduction shall be allowed in respect of any sum paid by the assessee as an employer

towards setting up or formation of, or as contribution to, any fund, trust, company,

association of persons, body of individuals, society or any institution except where such sum

is required to be paid under any law in force or where such sum is paid for an approved

gratuity fund, recognised provident fund or approved superannuation fund or pension

scheme referred to in section 80CCD.

AMOUNT SPECIFICALLY NOT DEDUCTIBLE UNDER SECTION 40

NOTWITHSTANDING ANYTHING CONTAINED IN SECTION 30 TO 38, NO

DEDUCTION SHALL BE ALLOWED IN RESPECT OF THE FOLLOWING:

SECTION 40(a)(i): NON-COMPLIANCE OF PROVISIONS OF TDS WHERE

PAYMENT IS MADE TO NON-RESIDENT

Any interest, royalty, fees for technical services or other sum chargeable under this Act,

which is payable, -

(a) outside India;

(b) in India to a non-resident, not being a company or to a foreign company,

on which tax is deductible at source under Chapter XVIIB and such tax has not been

deducted or, after deduction, has not been paid on or before the due date of filing of

return specified under section 139(1).

It is also provided that where in respect of any such sum, where tax has been deducted

in any subsequent year, or has been deducted in the previous year but paid after the due

date of filing of return under section 139(1), such sum shall be allowed as a deduction in

computing the income of the previous year in which such tax has been paid.

Provided further that where an assessee fails to deduct the whole or any part of the tax in

accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to

be an assessee in default under the first proviso to section 201(1), then, for the purpose of


6.7

this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such

sum on the date of furnishing of return of income by the Non Resident payee referred to in

the said proviso.

(Added by Finance Act (No. 2), 2019)

Clarification regarding disallowance of ‘other sum chargeable’ under section 40(a)(i)

[Circular No. 3/2015, dated 12-02-2015]

If there has been a failure in deduction or in payment of tax deducted in respect of any

interest, royalty, fees for technical services or other sum chargeable under the Act either

payable in India to non-corporate non-resident or a foreign company or payable outside

India, then, disallowance of the related expenditure/ payment is attracted under section

40(a)(i) while computing income chargeable under the head “Profits and gains of business

or profession”.

The interpretation of the term ‘other sum chargeable’ in section 195 has been clarified

in this circular i.e. whether this term refers to the whole sum being remitted or only the

portion representing the sum chargeable to income-tax under the Act.

In its Instruction No. 2/2014, dated 26.02.2014, the CBDT has clarified that the Assessing

Officer shall determine the appropriate portion of the sum chargeable to tax as

mentioned in section 195(1), to ascertain the tax liability on which the deductor shall

be deemed to be an assessee in default under section 201, in cases where no application

is filed by the deductor for determining the sum so chargeable under section 195(2).

In this circular, the CBDT has, in exercise of its powers under section 119, clarified that

for the purpose of making disallowance of ‘other sum chargeable’ under section 40(a)(i),

the appropriate portion of the sum which is chargeable to tax shall form the basis of

disallowance. Further, the appropriate portion shall be the same as determined by the

Assessing Officer having jurisdiction for the purpose of section 195(1). Also, where the

determination of ‘other sum chargeable’ has been made under sub-section (2), (3) or (7)

of section 195 of the Act, such a determination will form the basis for disallowance, if

any, under section 40(a)(i).

Illustration :

Date on which

TDS should

have been

deducted

Actual Date of

Deduction

Time limit as per

section 200(1)for

depositing TDS

Date of

payment of

TDS

Previous year in

which

deductible

26.06.2020 26.06.2020 07.07.2020 31.03.2021 2020-21

26.07.2020 26.07.2020 07.08.2020 02.09.2020 2020-21

31.03.2021 31.03.2021 30.04.2021 30.06.2021 2020-21

31.03.2021 31.03.2021 30.04.2021 31.12.2021 2021-22

16.05.2020 16.05.2020 07.06.2020 Not deposited Not deductible

10.06.2020 20.04.2021 07.07.2020 20.07.2021 2021-22


6.8

SECTION 40(a)(ia): NON-COMPLIANCE OF PROVISION OF TDS WHERE

PAYMENT IS MADE TO A RESIDENT

Section 40(a)(ia) provides that 30% of any sum payable to a resident, on which tax is

deductible at source under Chapter XVII-B, shall be disallowed if –

(i) such tax has not been deducted; or

(ii) such tax, after deduction, has not been paid on or before the due date specified in

section 139(1).

If in respect of such sum, tax has been deducted in any subsequent year or has been

deducted during the previous year but paid after the due date specified in section 139(1),

30% of such sum shall be allowed as deduction in computing the income of the previous

year in which such tax has been paid.

For instance, tax on royalty paid to Mr. A, a resident, has been deducted during the

previous year 2020-21, the same has to be paid by 31st July/ 30th September 2021, as the

case may be. Otherwise, 30% of royalty paid would be disallowed in computing the

income for A.Y. 2021-22. If in respect of such royalty, tax deducted during the P.Y.2020-

21 has been paid after 31st July/ 30th September 2021, 30% of such royalty would be

allowed as deduction in the year of payment.

Provided further that where an assessee fails to deduct the whole or any part of the tax

in accordance with the provisions of Chapter XVII-B on any such sum but is not

deemed to be an assessee in default under the first proviso to section 201(1), then, for

the purpose of this sub-clause, it shall be deemed that the assessee has deducted and

paid the tax on such sum on the date of furnishing of return of income by the resident

payee referred to in the said proviso.

(Second Proviso added by Finance Act, 2012)

ANALYSIS OF AMENDMENT IN SECTION 40(a)(ia) BY FINANCE ACT, 2012 AND

IN SECTION 40(a)(i) BY FINANCE ACT ( NO. 2) 2019:

1. Section 201(1) provides that if an assessee:

(a) fails to deduct TDS; or

(b) after deduction, fails to pay the TDS, then he shall be deemed to be an assessee in

default under section 220 & 221. Consequently, he is liable to pay:

(i) Penalty under section 221 which can be up to the amount of TDS not

deducted/not paid.

(ii) Interest under section 220 @ 1% p.m. from the date the tax was deductible /

payable till the date of passing of an order under section 201.

2. It is well established law laid down by various courts that the deductor shall be treated

as an assessee in default only if:

• Deductor has failed to deduct TDS; and

• Deductee has also failed to pay the tax directly.

Therefore, deductor cannot be treated as an assessee in default where deductor has

failed to deduct TDS but deductee has paid the tax directly.


6.9

The Finance Act, 2012/2019 seeks to incorporate the above provisions in section 201(1) by

inserting Proviso in section 201(1).

3. The amendments are for resident or Non resident deductee.

4. The amendment to section 201(1) i.e. First proviso to section 201(1) provides as under:

- If the deductor fails to deduct the whole or any part of tax in accordance with the

Chapter of TDS.

- on the sum paid to a resident or Non resident; or

- on the sum credited to the account of a resident or Non resident,

- then such deductor shall not be deemed to be an assessee in default in respect

of such TDS if:

• the resident or Non resident payee has furnished his return of income under

section 139.

• the resident or Non resident payee has taken into account such sum for computing

income in such return of income; and

• the resident or Non resident payee has paid the tax due on income declared by

him in such return of income.

The deductor has to furnish a certificate to this effect from a Chartered Accountant in the

prescribed form. (Rule 31ACB and Form 26A)

5. The amendment also provides that deductor shall have to pay interest under section

201(1A) @ 1% per month or part of the month from the date the tax was so deductible

to the date of furnishing of return of income by the resident or Non resident payee. The

interest shall be levied on the amount of TDS not deducted / short deducted by the

deductor.

6. Section 40(a)(ia)/ 40(a)(i) has been amended by Finance Act, 2012/2019 to provide

that:

- where assessee has failed to deduct TDS in accordance with Chapter of TDS

- and he is not treated as an assessee in default under the first proviso to

- section 201(1)

- then, for the purpose of section 40(a)(ia) /40(a)(i)

- it shall be deemed that the assessee has deducted and paid the tax on such sum

- on the date of furnishing of return of income by the resident or Non Resident

payee

- and deduction of such expenditure shall be allowed accordingly.

ILLUSTRATON

A company A Ltd. whose due date of filing of return is 30th September pays the following

sums without deduction of TDS:

(i) Rs 2,00,000 to Mr. X, a resident, as rent (Due date of filing of return for Mr. X is 31st

July)

(ii) Rs 5,00,000 to Y Ltd., a resident company, as professional fees (Due date of filing of

return for Y Ltd. is 30th

Nov.)

The above sums were paid on 1st

July, 2020 without deduction of TDS.


6.10

For previous year 31.03.2021, X and Y Ltd have included the above sums in their respective

return of income and have paid tax thereon. Returns have been filed by X and Y Ltd. on 31st

August, 2021 and 30th

Nov, 2021 respectively.

Company A Ltd has taken certificate from Chartered Accountant to the above effect. Now

following are the consequences:

(i) Company A Ltd. shall not be treated as an assessee in default for payment of Rs.

2,00,000 made to Mr. X without deducting TDS. Company A Ltd. shall pay interest @

1% p.m. from 1st

July, 2020 to 31st

August, 2021 on TDS of Rs. 20,000. The

expenditure of Rs. 2,00,000 shall be allowed to company A Ltd. in previous years

31.03.2021 as per provision of section 40(a)(ia).

(ii) Company A Ltd. shall not be treated as an assessee in default for payment of Rs.

5,00,000 to Y Ltd. without deducting TDS. Company A Ltd shall pay interest @ 1%

p.m. from 1st

July, 2020 to 30th

Nov, 2021 on TDS of Rs. 50,000. 30% of expenditure

of Rs. 5,00,000 shall be allowed to Company A Ltd. in previous year 31.03.2022 as per

provisions of section 40(a)(ia). 30% of the said expenditure shall be disallowed in

previous 31.03.2021 since deduction and payment of TDS is deemed to be made on

30.11.2021 i.e. after the due date 30.09.2021 of company A Ltd.

Whether section 40(a)(ia) is attracted when amount is not ‘payable’ to a sub-contractor

but has been actually paid?

PALAM GAS SERVICE V. CIT [2017] (SC)

Facts of the case: The assessee, Palam Gas Service, is engaged in the business of purchase

and sale of LPG cylinders. The assessee had arranged for the transportation to be

done through three sub-contractors within the meaning of section 194C. During the

relevant assessment year, when the assessee made freight payments of Rs.20,97,689 to

the sub- contractors, it did not deduct tax at source. The Assessing Officer disallowed the

freight expenses as per section 40(a)(ia) on account of failure to deduct tax. The assessee

contended that section 40(a)(ia) did not apply as the amount was not ‘payable’ but had been

actually paid.

Issue: Whether the provisions of Section 40(a)(ia) would be attracted when the amount is

not 'payable' to a sub-contractor but has been actually paid? Would the obligation to

deduct tax depend on the method of accounting followed by an assessee?

Supreme Court’s Observations: The Supreme Court noted the difference in opinion

amongst the various High Courts. On the one hand, the High Courts of Punjab &

Haryana, Madras, Calcutta and Gujarat held that Section 40(a)(ia) extended to amounts

actually paid. The Allahabad High Court had, however, held otherwise. The Supreme Court

agreed with the observations of the majority High Courts and held that section 40(a)(ia)

covers not only those cases where the amount is payable but also when it is paid.

Accordingly, the judgment of the Allahabad High Court in CIT v. Vector Shipping

Services (P.) Ltd. [2013] 357 ITR 642 stands overruled.

The Supreme Court reaffirmed that the obligation to deduct tax at source is mandatory

and applicable irrespective of the method of accounting adopted. If the assessee follows

the mercantile system of accounting, then, the moment amount was credited to the


6.11

account of the payee on accrual of liability, tax was required to be deducted at source. If

the assessee follows cash system of accounting, then, tax is required to be deducted at

source at the time of making payment.

Supreme Court’s Decision: The Supreme Court, accordingly, upheld the decision of the

majority High Courts that section 40(a)(ia) would be attracted for failure to deduct tax in

both cases i.e., when the amount is payable or when the amount is paid, as the case may

be, depending on the system of accounting followed by the assessee.

SECTION 40(a)(ii): INCOME TAX

1. Income-tax payable under Income-tax Act is not deductible. Even the income-tax paid

under the tax laws of a foreign country is not allowable as deduction. For such tax,

relief can be claimed under section 90 or section 90A or section 91, as the case may be.

2. Service tax/GST is allowable as deduction under section 37(1), subject to section 43B.

SECTION 40(a)(iia): WEALTH TAX

Any sum paid on account of wealth tax chargeable under the Wealth tax Act, 1957 or similar

statute outside India.

KEY POINT:

Valuation fees paid for valuation of assets does not represent wealth tax and is allowable as

deduction.

SECTION 40(a)(iib): FEE OR CHARGES PAID BY STATE GOVERNMENT

UNDERTAKING

Any amount—

(A) paid by way of royalty, licence fee, service fee, privilege fee, service charge or any

other fee or charge, by whatever name called, which is levied exclusively on; or

(B) which is appropriated, directly or indirectly, from,

a State Government undertaking by the State Government.

ANALYSIS

State Government undertakings are liable to Income Tax. If they pay dividends to the State

Government then, such dividend is not deductable as an expense and such dividend is also liable

to Dividend Distribution Tax. State Governments instead of taking dividends, started taking out

money from these undertakings in form of royalty, licence fee, service fee, privilege fee, service

charge or any other fee or charge, which were exclusive levies on such undertakings. This was

done so that such payments were allowed as deduction and State Government gets the money

without any payment of dividend distribution tax by such undertakings.

In order to levy tax on such withdrawals by State Governments from such undertakings, the

amendment has been bought by Finance Act, 2013, wherein any exclusive payments in form

of royalty, licence fee, service fee, privilege fee, service charge or any other fee or charge to

State Government by such undertakings has been specifically disallowed.


6.12

It may be noted that disallowance will be attracted if:

(i) Levy is by State Government. No disallowance shall be attracted if levy is by Central

Government

(ii) It should be exclusive on the State Government undertakings. If levy is non-exclusive,

i.e., applicable to others also, disallowance shall not be attracted.

SECTION 40(a)(iii): TDS ON SALARY PAYABLE OUTSIDE INDIA OR TO A

NON-RESIDENT

Any sum which is chargeable under the head ‘Salaries’ if it is payable outside India or to

a non - resident and if the tax has not been paid thereon nor deducted therefrom under

Chapter XVII -B.

SECTION 40(a)(iv): EMPLOYER'S CONTRIBUTION TOWARDS PROVIDENT

FUND OR ANY OTHER FUND

Any payment to a provident fund or other fund established for the benefit of employees of the

assessee, unless the assessee has made effective arrangements to secure that the tax shall be

deducted at source from any payments made from the fund which are chargeable to tax under

the head "Salaries". (To be discussed later)

SECTION 40(a)(v): PAYMENT OF TAX ON BEHALF OF EMPLOYEE

In case of an employee, deriving income in the nature of perquisites (other than monetary

payments), the amount of tax on such income paid by his employer is exempt from tax in

the hands of that employee.

Correspondingly, such payment is not allowed as deduction from the income of the

employer. Thus, the payment of tax on perquisites by an employer on behalf of employee

will be exempt from tax in the hands of employee but will not be allowable as deduction in

the hands of the employer.

SECTION 43B: CERTAIN DEDUCTIONSALLOWED ON ACTUAL PAYMENT

Notwithstanding anything contained in any other provisions of the Income Tax Act, a

deduction otherwise allowable under the Act in respect of -

(a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name

called, under any law for the time being in force, or

(b) any sum payable by the assessee as an employer by way of contribution to any

provident fund or superannuation fund or gratuity fund or any other fund for the

welfare of the employees, or (To be discussed later)

(c) any bonus or commission payable to the employees, or

(d) any sum payable by the assessee as interest on any loan or borrowing from any

public financial institution or a State Financial Corporation or a State Industrial

Investment Corporation, in accordance with the terms and conditions of the agreement

governing such loan or borrowing, or

(da) any sum payable by the assessee as interest on any loan or borrowing from a

deposit taking NBFC or systematically important non-deposit taking NBFC, in

accordance with the terms and conditions of the agreement governing such loan or

borrowing, or {See Note Below}


6.13

(e) any sum payable by the assessee as interest on any LOAN OR ADVANCE from a

scheduled bank in accordance with the terms and conditions of the agreement

governing such loan or advance, {"Scheduled bank" includes a cooperative bank}.

(f) any sum payable by the assessee as an employer in lieu of any leave to the credit of his

employee, (i.e. provision for leave encashment)

(g) any sum payable by the assesse to the Indian Railways for the use of railway

assets.

shall be allowed as deduction only in the previous year in which such sum is actually

paid by him. This is irrespective of the previous year in which the liability to pay such

sum was incurred by the assessee according to the method of accounting employed by

him.

Systemically important non-deposit taking NBFC – It means a non-banking financial

company (NBFC) which is not accepting or holding public deposits and is having total assets

of not less than Rs. 500 crores as per the last audited balance sheet and is registered with RBI

under the provisions of the Reserve Bank of India Act.

Deposit taking NBFC - “Deposit taking NBFC” means a non-banking financial

company which is accepting or holding public deposits and is registered with RBI under

the provisions of the Reserve Bank of India Act.

Further where deduction i.r.o of clause (da) is already claimed on accrual basis till PY 2018-

2019, then no deduction shall be allowed on actual payment if paid in PY 2019-2020 or

subsequent years. {Explanation 3AA to Sec 43B}

KEY POINTS:

1. The provisions of section 43B shall not apply in relation to any sum which is actually

paid by the assessee on or before the due date applicable in his case for furnishing the

return of income under section 139(1) in respect of the previous year in which

liability to pay such sum was incurred by the assessee.

2. Conversion of interest into a loan or borrowing or advance or payable in other

manner

Explanation 3C, 3CA & 3D clarifies that if any sum payable by the assessee as

interest on any such loan or borrowing or advance referred to in (d), (da) and (e)

above, is converted into a loan or borrowing or advance, the interest so converted

and not “actually paid” shall not be deemed as actual payment, and hence would not

be allowed as deduction. The clarificatory explanations only reiterate the rationale

that conversion of interest into a loan or borrowing or advance does not amount to

actual payment.

The manner in which the converted interest will be allowed as deduction has been

clarified in Circular No.7/2006 dated 17.7.2006. The unpaid interest, whenever

actually paid to the bank or financial institution, will be in the nature of revenue

expenditure deserving deduction in the computation of income. Therefore,

irrespective of the nomenclature, the deduction will be allowed in the previous year

in which the converted interest is actually paid.


6.14

Illustration:

Case I: INCLUSIVE ACCOUNTING:

Following entries have been made in the books of account of the assessee:

1. Bank A/c Dr. 2,00,000

To Sales 2,00,000

2. Sales Tax Dr. 10,000

To Sales Tax Payable 10,000

Profit and Loss Account

Sales Tax 10,000 Sales 2,00,000

Net Profit 1,90,000

2,00,000 2,00,000

Assume that sales tax payable has not been paid till due date of filing of return of income.

Computation of Total Income

Net Profit as per P&L A/c 1,90,000

Add: Sales Tax disallowed u/s 43B 10,000

Total Income 2,00,000

Case II: EXCLUSIVE ACCOUNTING

If in the above case, following entry is passed in the books of account of the assessee:

Bank A/c Dr. 2,00,000

To Sales 1,90,000

To Sales Tax Payable 10,000

- As per Supreme Court in CHOWRINGEE SALES BUREAU, sales tax should be routed

through Profit and Loss Account. It is the duty of the Assessing Officer to route sales tax

through Profit and Loss Account.

Therefore, Computation of Total Income in Case II:

Net Profit as per P&L A/c 1,90,000

Add: Sales Tax disallowed u/s 43B 10,000



6.15

CONTRARY DECISIONS OF SEVERAL HIGH COURT’S

COMMISSIONER OF INCOME-TAX VS. AIMIL LTD. (DELHI HIGH COURT)

Employees' contribution towards provident fund and ESI would qualify for deduction

even if paid after due date prescribed under Provident Fund Act/ESI Act but before

due date of filing of return.

Delhi High Court held that section 2(24) enumerates different components of income. It, inter

alia, stipulates that income includes any sum received by the assessee from his employees as

contributions to any provident fund or superannuation fund or any fund set up under the

provisions of the Employees' State Insurance Act, 1948, or any other fund for the welfare of

such employees. It is clear from the above that as soon as employees' contribution towards

provident fund or ESI is received by the assessee-employer by way of deduction or otherwise

from the salary/wages of the employees, it will be treated as 'income' at the hands of the

assessee. It clearly follows therefrom that if the assessee does not deposit this contribution

with provident fund/ESI authorities, it will be taxed as income in the hands of the assessee.

However, on making deposit with the concerned authorities, the assessee becomes entitled to

deduction under the provisions of section 36(1)(va). Section 43B(b), however, stipulates that

such deduction would be permissible only on actual payment. This is the scheme of the Act

for making an assessee entitled to get deduction from income insofar as employees'

contribution is concerned.

If the employees' contribution is not deposited by the due date prescribed under the

relevant Acts and is deposited late, the employer not only pays interest on delayed

payment but can incur penalties also, for which specific provisions are made in the

Provident Fund Act as well as in the ESI Act. Therefore, the Act permits the employer

to make the deposit with some delay, subject to the aforesaid consequences. Insofar as

the Income-tax Act is concerned, the assessee can get the benefit if the actual payment is

made before due date of filing of return under section 139(1).

CIT V. KICHHA SUGAR CO. LTD. (UTTARAKHAND)

Can the amount of employees' contribution towards provident fund, deducted and credited to

the employee's PF account by the employer-assessee after the "due date" under the EPF &

Miscellaneous Provisions Act, 1952, but before the due date of filing return of income under the

Income-tax Act, 1961, be allowed as deduction while computing business income of the

employer-assessee?

The High Court observed that the "due date" referred to in section 36(1)(va) must be read in

conjunction with the "due date" referred to in the first proviso to section 43B. A combined reading of

both the sections would make it clear that the due date referred to in section 36(1)(va) is the due date as mentioned in section 43B i.e., the due date of filing of return of income.

Therefore, any amount of employees' contribution paid by the employer-assessee to the

provident fund authorities after the due date under the Employees Provident Fund &

Miscellaneous Provisions Act, 1952 (EPF & MP Act) but before the due date of filing the return

for the previous year, shall be allowable as deduction in the hands of the employer-assessee.

ALTERNATE VIEW:

Can employees contribution to Provident Fund and Employee’s State Insurance be

allowed as deduction where the assessee-employer had not remitted the same on or

before the “due date” under the relevant Act but remitted the same on or before

the due date for filing of return of income under section 139(1)?


6.16

CIT V. GUJARAT STATE ROAD TRANSPORT CORPN (2014) (GUJ)

Facts of the case: The assessee collected employees’ contribution to Provident Fund and

ESI which were remitted, after the due date under the relevant Acts but before the ‘due

date’ for filing the return specified in section 139(1). The assessing authority held that the

amount collected by way of employees’ contribution to PF and ESI are income under

section 2(24)(x) and their remittance is governed by section 36(1)(va). The time limit

prescribed for remitting the contribution is the ‘due date’ prescribed under the Provident

Funds Act, Employees’ State Insurance Act, rule, order or notification issued thereunder or

under any standing order, award, contract or service or otherwise.

Issue: The issue under consideration is whether extended time limit upto the due date of

filing the return contained in section 43B would be available in respect of remittances

which are governed by section 36(1)(va).

High Court’s Observations: The High Court noted that section 43B(b) pertaining to

employer’s contribution cannot be applied with respect to employees’ contribution which

is governed by section 36(1)(va). So far as the employee’s contribution is concerned, the

Explanation to section 36(1)(va) continues to remain in the statute and there is no

provision for applying the extended time limit provided under section 43B for remittance

of employee’s contribution. The amount of employee’s contribution to PF and ESI is an

income upon recovery from salary and its remittance within the ‘due date’ as specified in

Explanation to section 36(1)(va) makes it eligible for deduction. Employees’ contribution

recovered by the employer is not eligible for extended time limit upto the due date of filing

of return, which is available under section 43B in the case of employer’s own contribution.

High Court’s Decision: The High Court, accordingly, held that the delayed remittance

of employees’ contribution beyond the ‘due date’ prescribed in section 36(1)(va), is not

deductible while computing the business income, even though such remittance has

been made before the due date of filing of return of income under section 139(1).

Note: A contrary view was expressed by Uttrakhand High Court in the case of CIT v.

Kichha Sugar Co. Ltd. (2013) 356 ITR 351 holding that the employees' contribution to

provident fund, deducted from the salaries of the employees of the assessee, shall be

allowed as deduction from the income of the employer-assessee, if the same is deposited

by the employer- assessee with the provident fund authority on or before the due date of

filing the return for the relevant previous year.

**********************************************************************************

Recovery of Expenditure & Remission and Cessation of Trading Liability AJ Education NeXt

7.1

CHAPTER 7. RECOVERY OF

EXPENDITURE & REMISSION AND

CESSATION OF TRADING LIABILITY

SEE COMPENDIUM FOR THE DISCUSSION

KEY POINT:

"Successor in business" means -

(i) Where there has been an amalgamation of a company with another company, the

amalgamated company.

(ii) Where a firm carrying on business or profession is succeeded by another firm, the other

firm.

(iii) Where the first mentioned person is succeeded by any other person in the business or

profession, the other person.

(iv) Where there has been a demerger, the resulting company.

1. SECTION 41(1) APPLIES TO TRADING LIABILITIES ONLY

The assessee took a personal loan from Mr. A of Rs. 1,00,000. Subsequently the

assessee and Mr. A decided that the loan need not be repaid and therefore the assessee

wrote off the loan to the credit of profit and loss account. Held that section 41(1) is

attracted when there is a remission or cessation of trading liability. In the present case,

the loan is not a trading liability and therefore section 41(1) is not attracted. Section

56(2)(vii) shall be attracted if assessee is an individual or HUF and the loan so waived

shall be taxable in his hands as Income from other sources.

However, Supreme Court in the case of T.V. Sundaram lyenger & Sons held that where

the assessee transfers unclaimed advances from the trade parties to Profit & Loss

Account, then the assessee has become richer by the amount transferred to Profit &

Loss Account. The said amount is not taxable under section 41(1) but shall be taxable

under section 28. Supreme Court held that such amounts though not allowed as

deduction earlier and transferred to Profit & Loss Account would constitute trading

receipts taxable under section 28. Therefore, on the basis of this Supreme Court

judgement if trade advances are written off to the credit of Profit & Loss account, then although

section 41(1) is not attracted but the said sum shall be taxable under section 28.

2. POLYFLEX INDIA (P) LTD. v. CIT (SC)

The assessee company paid excise duty on certain goods in the year 1986 and was

allowed as deduction. The assessee challenged the levy of excise duty and the High

Court on 01.01.2008 decided in favour of the assessee and held that excise duty was not

payable by it. The excise duty was refunded to the assessee on 20.01.2008. The

Department filed a SLP in Supreme Court against the order of High Court and the SLP

was still pending in Supreme Court. The Assessing Officer invoked section 41(1) in

Assessment Year 2008-09 and taxed the excise duty refunded in Assessment Year

2008-09. The assessee contented that there was no remission/ cessation of trading

liability within the meaning of section 41(1) so long as the issue was pending

determination by Supreme Court.

Recovery of Expenditure & Remission and Cessation of Trading Liability AJ Education NeXt

7.2

Section 41(1) is attracted if in the assessment of any year an allowance or deduction has

been made in respect of any loss, expenditure or trading liability and subsequently the

assessee:

(i) has obtained any amount in respect of such loss or expenditure, or

(ii) obtained any benefit in respect of such trading liability by way of remission or

cessation thereof.

If either of the above two happens, the deeming section 41(1) comes into play. The

Supreme Court held that no doubt the remission or cessation of trading liability takes

place only if the matter is not pending in any litigation and has been finally decided in

favour of the assessee. If the matter of remission/ cessation of liability is pending before

any Court, then it will not amount to remission or cessation of trading liability.

The Supreme Court held that in the present case, the question was not of remission or cessation of the trading liability since there was no trading liability as the assessee has

already paid the excise duty. As per Supreme court, in the present case the first part of

section 41(1) is attracted namely:

(iii) has obtained any amount in respect of such loss or expenditure

As per Supreme Court, section 41(1) is a deeming fiction and it comes into play as soon

as assessee receives any amount in respect of such loss or expenditure. It is irrelevant

that such receipt has been disputed by the Department in future appeal. The deeming

fiction of section 41(1) comes into play as soon as the amount is received and therefore

in the present case, the Assessing Officer was justified in invoking section 41(1) in

Assessment Year 2008-09.

3. ROLLATAINERS LTD. V. CIT (DEL)

Can the provisions of section 41(1) be invoked both in respect of waiver of

working capital loan utilized for day-to-day business operations and in respect of

waiver of term loan taken for purchasing a capital asset ?

The provisions of section 41(1) are attracted in respect of waiver of the working capital

loan utilized for day-to-day business operations, since it amounted to remission of a

trading liability. However, in the case of waiver of term loan for purchasing capital

assets, the provisions of section 41(1) are not attracted since it cannot be treated as

remission or cessation of a trading liability.

4. CIT V. SOFTWORKS COMPUTERS P. LTD. (BOM.)

Can waiver of loan or advance taken for the purpose of relocation of office

premises be treated as a revenue receipt liable to tax?

The Bombay High Court held that since the advance taken by the assessee-company

was utilized by it for the purpose of relocating its office premises i.e., for acquisition of

a capital asset, namely, a new office, the waiver of the same cannot be said to be waiver

or remission of trading liability to attract taxability under the Act. Waiver of such

advance, being capital in nature, is not taxable under the Act.

***************************************************************************

Miscellaneous issues AJ Education NeXt

8.1

CHAPTER 8. MISCELLANEOUS ISSUES

SECTION 14A: EXPENDITURE INCURRED IN RELATION TO INCOME NOT

INCLUDIBLE IN TOTAL INCOME

(1) For the purposes of computing the total income under Chapter IV (i.e. the five heads of

income), no deduction shall be allowed in respect of expenditure incurred by the assessee

in relation to income which does not form part of total income under the Income-tax Act.

(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to

such income which does not form part of the total income under this Act in accordance

with such method as may be prescribed, if the Assessing Officer, having regard to the

accounts of the assessee, is not satisfied with the correctness of the claim of the

assessee in respect of such expenditure in relation to income which does not form part

of the total income under this Act.

(3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee

claims that no expenditure has been incurred by him in relation to income which does

not form part of the total income.

RULE 8D: METHOD FOR DETERMINING AMOUNT OF EXPENDITURE IN

RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME

(1) Where the Assessing Officer, having regard to the accounts of the assessee of a

previous year, is not satisfied with -

(a) the correctness of the claim of expenditure made by the assessee; or

(b) the claim made by the assessee that no expenditure has been incurred

in relation to income which does not form part of the total income under the Act , he shall

determine the amount of expenditure in relation to such income in accordance with the

provisions of sub-rule (2).

(2) The expenditure in relation to income which does not form part of the total income

shall be the aggregate of following amounts, namely :—

(i) the amount of expenditure directly relating to income which does not form part of

total income;

(ii) an amount equal to one percent of the annual average of the monthly averages of

the opening and closing balances of the value of investment, income from which

does not or shall not form part of total income:

Provided that the amount referred to in clause (i) and clause (ii) shall not exceed

the total expenditure claimed by the assesse.


8.2

Clarification regarding disallowance of expenses under section 14A in cases where

corresponding exempt income has not been earned during the financial year [Circular

No. 5/2014, dated 11.2.2014]

Section 14A provides that no deduction shall be allowed in respect of expenditure incurred

relating to income which does not form part of total income. A controversy has arisen as to

whether disallowance can be made by invoking section 14A even in those cases where no

income has been earned by an assessee, which has been claimed as exempt during the

financial year.

The CBDT has, through this Circular, clarified that the legislative intent is to allow only that

expenditure which is relatable to earning of income. Therefore, it follows that the expenses

which are relatable to earning of exempt income have to be considered for disallowance,

irrespective of the fact whether such income has been earned during the financial year or not.

The above position is clarified by the usage of the term “includible” in the heading to

section 14A [Expenditure incurred in relation to income not includible in total income]

and Rule 8D [Method for determining amount of expenditure in relation to income not

includible in total income], which indicates that it is not necessary that exempt income

should necessarily be included in a particular year’s income, for triggering disallowance.

Also, the terminology used in section 14A is “income under the Act” and not “income of the

year”, which again indicates that it is not material that the assessee should have earned such

income during the financial year under consideration.

In effect, section 14A read along with Rule 8D provides for disallowance of expenditure even

where the taxpayer has not earned any exempt income in a particular year.

Whether section 14A is applicable in respect of deductions, which are permissible and

allowed under Chapter VI-A?

CIT V. KRIBHCO (2012) (DELHI)

The High Court observed that section 14A is not applicable for deductions, which are

permissible and allowed under Chapter VIA. Section 14A is applicable only if an income is

not included in the total income as per section 10 of the Income-tax Act, 1961. Deductions

under Chapter VIA are different from the exclusions/exemptions provided under Section 10.

Section 14A of the Income-tax Act, 1961 ['Act'] provides for disallowance of expenditure in

relation to income not "includible" in total income.

SECTION 43D: INTEREST INCOME ON BAD AND DOUBTFUL DEBTS

(i) In the case of

- a public financial institution or

- a scheduled bank or

- a co-operative bank other than primary agricultural credit society or a primary

co-operative agricultural and rural development bank or

- a State financial corporation or

- a State industrial investment corporation or

- a deposit taking NBFC or

- a systematically important non-deposit taking NBFC {FA 2019}


8.3

the income by way of interest on such categories of bad and doubtful debts, as

may be prescribed having regard to the guidelines issued by the Reserve Bank of

India in relation to such debts, shall be chargeable to tax in the previous year in which

it is credited to the profit and loss account by the said institutions etc. for that year or

in the previous year in which it is actually received by them, whichever is earlier. [Sub-

clause (a)].

(ii) In the case of a public company, the income by way of interest in relation to such

categories of bad and doubtful debts as may be prescribed having regard to the

guidelines issued by the National Housing Bank established under the National

Housing Bank Act, 1987 in relation to such debts shall be chargeable to tax in the

previous year in which it is credited to the profit and loss account by the said public

company for that year or in the previous in which it is actually received by it,

whichever is earlier. [Sub-clause (b)].

SECTION 44AA: MAINTENANCE OF ACCOUNTS BY CERTAIN PERSONS

CARRYING ON PROFESSION OR BUSINESS

(Refer Compendium for the provision)

1. Sec 44AA(1) provides that every person carrying on the legal, medical, engineering

or architectural profession or accountancy or technical consultancy or interior

decoration or any other profession as has been notified by the Central Board of

Direct Taxes in the Official Gazette must statutorily maintain such books of

accounts and other documents as may enable the Assessing Officer to compute

his total income in accordance with the provisions of the Income-tax Act, 1961.

Notified professions: The professions notified so far are as the profession of

authorised representative; the profession of film artist (actor, camera man, director,

music director, art director, dance director, editor, singer, lyricist, story writer, screen

play writer, dialogue writer and dress designer); the profession of Company Secretary;

and information technology professionals.

SECTION 271A: PENALTY FOR FAILURE TO KEEP OR MAINTAIN BOOKS OF

ACCOUNTS, DOCUMENTS, ETC.

If any person fails to keep and maintain any such books of account and other documents as

required by section 44AA, in respect of any previous year, then the Assessing Officer or CIT

(Appeals) may direct that such person shall pay, by way of penalty, a sum of Rs. 25,000.

SECTION 44AB: AUDIT OF ACCOUNTS OF CERTAIN PERSONS CARRYING

ON BUSINESS OR PROFESSION

(i) Who are required to get the accounts audited? It is obligatory in the following

cases for a person carrying on business or profession to get his accounts audited

before the “specified date” by a Chartered Accountant:

(1) if the total sales, turnover or gross receipts in business exceeds Rs.100 lakh in

any previous year; or

(2) if the gross receipts in profession exceeds Rs. 50 lakhs in any previous year; or

(3) where the assessee is covered under section 44AE, (44BB or 44BBB) and

claims that the profits and gains from business are lower than the profits and


8.4

gains computed on a presumptive basis. In such cases, the normal monetary

limits for tax audit in respect of business would not apply.

(4) where the assessee is carrying on a notified profession under section 44AA,

and he claims that the profits and gains from such profession are lower than

the profits and gains computed on a presumptive basis under section 44ADA

and his income exceeds the basic exemption limit.

(5) where the assessee is covered under section 44AD(4) and his income

exceeds the basic exemption limit.


Rationalisation of provisions relating to tax audit in certain cases.

Under section 44AB of the Act, every person carrying on business is required to get

his accounts audited, if his total sales, turnover or gross receipts, in business exceed

or exceeds one crore rupees in any previous year. In case of a person carrying on

profession he is required to get his accounts audited, if his gross receipt in profession

exceeds, fifty lakh rupees in any previous year.

In order to reduce compliance burden on small and medium enterprises, it is proposed

to increase the threshold limit for a person carrying on business from one crore rupees

to five crore rupees in cases where,-

(i) aggregate of all receipts in cash during the previous year does not exceed five per

cent of such receipt; and

(ii) aggregate of all payments in cash during the previous year does not exceed five

per cent of such payment.

Further, the due date for filing return of income under sub-section (1) of section 139 is

proposed to be amended by:-

(A) providing 31st October of the assessment year (as against 30th September) as

the due date for an assessee referred to in clause (a) of Explanation 2 of sub-

section (1) of Section 139 of the Act;

(ii) Audit Report: The person mentioned above would have to furnish by the specified

date a report of the audit in the prescribed forms. For this purpose, the Board has

prescribed under Rule 6G, Forms 3CA/3CB/3CD containing forms of audit report

and particulars to be furnished therewith.

(iii) Accounts audits under other statutes are considered: In cases where the accounts

of a person are required to be audited by or under any other law before the specified

date, it will be sufficient if the person gets his accounts audited under such other law

before the specified date and also furnish by the said date the report of audit in the

prescribed form in addition to the report of audit required under such other law.

Thus, for example, the provision regarding compulsory audit does not imply a

second or separate audit of accounts of companies whose accounts are already

required to be audited under the Companies Act, 2013. The provision only requires

that companies should get their accounts audited under the Companies Act, 2013

before the specified date and in addition to the report required to be given by the


8.5

auditor under the Companies Act, 2013 furnish a report for tax purposes in the form

to be prescribed in this behalf by the CBDT.

(iv) Non-applicability:

(1) The requirement of audit under section 44AB does not apply to a person

who declares profits and gains on a presumptive basis under section 44AD

and his total sales, turnover or gross receipts does not exceed Rs. 2 crores.

(2) Further, the requirement of audit under section 44AB does not apply to a

person who derives income of the nature referred to in (sections 44B and

44BBA).

(v) Specified date: "specified date", in relation to the accounts of the assessee of the

previous year relevant to an assessment year, means date one month prior to the due

date for furnishing the return of income under sub-section (1) of section 139. (FA 2020)

(vi) Penal provision: It may be noted that under section 271B, penal action can be taken

for not getting the accounts audited and for not filing the audit report by the specified

date.

Note - The Institute has brought out a Guidance Note dealing with the various aspects of

tax audit under section 44AB. Students are advised to read the same carefully.

SECTION 271B: PENALTY FOR FAILURE TO GET ACCOUNTS AUDITED

UNDER SECTION 44AB

If any person

(i) fails to get his accounts audited under section 44AB in respect of any previous year, or

(ii) fails to furnish a report of such audit by the specified date as defined in section 44AB,

then the Assessing Officer shall direct that such person shall pay, the way of penalty, a

sum equal to 1/2 % of the total sales, turnover or gross receipts in the business, or of the

gross receipts in profession, in such previous year, or a sum of Rs. 1,50,000, whichever is

less.

EXPENDITURE ON ISSUE OF SHARES AND DEBENTURES

1. PUNJAB STATE INDUSTRIAL DEVELOPMENT CORPORATION LTD.

(SUPREME COURT) 1997

The fees paid to the Registrar of Companies for expansion of authorised capital of the

company is directly related to the Capital expenditure incurred by the company and although

incidentally that would certainly help in the business of the company and also in profit

making, but still it retains the nature of capital expenditure since the expenditure was directly

related to the expansion of the capital base of the company. Therefore, the amount paid to

ROC as filing fees for enhancement of capital, is not a revenue expenditure and is not

deductible.


8.6

2. BROOKE BOND INDIA LTD. (SUPREME COURT) 1997

Expenditure incurred by a company in connection with issue of shares with a view to increase

its share capital, is directly related to the expansion of capital base of the company and is

capital expenditure, even though it may incidentally help in the business of the company and

its profit making. The expenditure is not deductible as revenue expenditure and is a capital

expenditure which has no tax treatment.

3. CIT V. GENERAL INSURANCE CORPORATION [SUPREME COURT]

Issuance of bonus shares does not result in any inflow of fresh funds or increase in the capital

employed; the capital employed remains the same. Issuance of Bonus share by capitalisation

of reserves is merely a reallocation of company's fund. If that be so, then it cannot be held

that the company has acquired a benefit or advantage of enduring nature. The total funds

available with the company will remain the same and issue of bonus shares will not result in

any change in the capital structure of the company. Issue of bonus shares does not result in

the expansion of capital base of the company.

Thus, the expenditure incurred in connection with issuance of bonus shares is a revenue

expenditure. However, expenditure incurred to increase the authorised capital is a capital

expenditure, which is not allowed as deduction.

4. INDIA CEMENTS LIMITED (SUPREME COURT)

As per Supreme Court in India Cements Ltd., any expenditure incurred for raising loans or

debentures is fully allowed as deduction. Therefore, expenses on issue of non-convertible as

well as convertible bonds/ debentures is allowed as deduction as per Supreme Court in India

Cements Ltd.

5. MADRAS INDUSTRIAL INVESTMENT CORPORATION LTD. (SC)

FACTS:

The appellant-company issued debentures in September, 2014, at a discount. The total

discount on the issue of Rs. 15 crores amounted to Rs. 30 lakhs. For the assessment year

2015-16, the appellant-company wrote off Rs. 1,25,000 out of the total discount of Rs. 30

lakhs being the proportionate amount of discount for the period of six months ending with

31st

March, 2015, taking into account the period of 12 year which was the period of

redemption and dividing the discount of Rs. 30 lakhs over the period of 12 years.

DECISION:

When a company issues debenture at a discount, it incurs a liability to pay a larger amount

than what it has borrowed. The liability to pay the discounted amount over and above the

amount received for the debentures, is a liability which has been incurred by the company for

the purposes of its business in order to generate funds for its business activities. The amounts

so obtained by issue of debentures are used by the company for the purposes of its business.

This would, therefore, be expenditure.

Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of

business must be allowed in its entirety in the year in which it is incurred. It cannot be spread

over a number of years even if the assessee has written it off in his books, over a period of

years. However, the facts may justify an assessee who has incurred expenditure in a particular

year to spread and claim it over a period of ensuing years. In fact, allowing the entire


8.7

expenditure in one year might give a very distorted picture of the profits of a particular year.

Issuing debentures is an instance where, although the assessee has incurred the liability to pay

the discount in the year of issue of debentures, the payment is to secure a benefit over a

number of years. There is a continuing benefit to the business of the company over the entire

period. The liability should, therefore, be spread over the period of the debentures.

The Supreme Court held that the liability to pay the discounted amount over and above the

amount received for the debentures was a liability incurred by the company for the purposes

of its business in order to generate funds for its business activities. It was, therefore,

expenditure. The appellant-company had, in its return, correctly claimed a deduction only in

respect of the proportionate part of discount of Rs. 1,25,000 over the relevant accounting

period in question. This was also in conformity with the accounting practice of showing the

discount in the "discount on debentures account" which was written off over the period of the

debentures. The appellant-company was entitled to deduct a sum of Rs. 1,25,000 out of the

discount of Rs. 30,00,000 in the relevant assessment year. Balance shall be deducted in the

balance number of years.

6. CIT V. KODAK INDIA LTD. (SUPREME COURT) [2001]

Expenditure incurred for public issue of shares is capital expenditure.

The assessee had acted to increase its share capital because it had been directed by the

Reserve Bank of India so to do. This was because it had to reduce its non-residential holding

to forty percent. It was submitted that the only way in which the assessee could do business

after the Reserve Bank directive was to issue share capital to comply with it.

Held that whichever way one looked at it, the object of the assessee was to increase its share

capital, whether it did so to continue to do business after the Reserve Bank directive or otherwise.

The expenditure incurred for the public issue of shares was capital expenditure.

7. CIT V. S.M. HOLDING & FINANCE (P.) LTD. (BOM.) [2003]

Where assessee-company had issued zero-interest unsecured redeemable convertible

debentures of Rs. 100 each redeemable after 10 years at a premium of 100%, 10% of the total

premium payable by assessee after 10 years was deductible in assessment year in question

FACTS OF THE CASE:

The assessee-company had issued zero-interest unsecured redeemable convertible debentures

of Rs. 100 each redeemable after 10 years at a premium of 100 %. The assessee claimed that

the premium payable by it was Rs. 5,47,50,000 after the expiry of 10 years. However, the

assessee claimed deduction of Rs. 54,75,000 per annum. The Assessing Officer added back

that figure to the income of the assessee on the ground that the liability was not ascertainable

during the accounting year ending 31.03.2013 and that it was a contingent liability.

HELD:

Held that in the annual reports of the company and also in the audit reports given by the

auditors, it had been certified that zero-interest unsecured redeemable convertible debentures

of Rs. 100 each redeemable after 10 years at a premium of 100% had been issued during the

assessment year in question. There was no reason to discard this note of the auditor. In view

thereof the assessee's claim was to be allowed.


8.8

8. CIT V. ITC HOTELS LTD. (KAR.) [2011]

Would the expenditure incurred for issue of convertible debentures be treated as

revenue expenditure or capital expenditure?

Held that the expenditure incurred on the issue of debentures shall be treated as revenue

expenditure even in case of convertible debentures, i.e. the debentures which had to be

converted into shares at a later date.

9. MASCON TECHNICAL SERVICES LTD. V. CIT (2013) (MAD.)

Can share issue expenses incurred by a company be treated as capital in nature, if the

public issue could not ultimately materialize on account of non-clearance by SEBI?

Facts of the case:

The assessee-company incurred share issue expenses of Rs.35.39 lakh for its proposed public

issue, which could not ultimately materialize due to non-clearance by the SEBI. It claimed

such expenses as revenue in nature, on the ground that the same was incurred for augmenting

its working capital. The claim of the assessee was, however, rejected by the Assessing

Officer.

High Court's Decision:

The High Court noted that the assessee-company had taken steps to go in for a public

issue and incurred share issue expenses for the same. However, it could not go in for the

public issue by reason of the orders issued by the SEBI just before the proposed issue.

Though the efforts were aborted, the fact remains that the expenditure incurred was

only for the purpose of expansion of the capital base. The capital nature of the

expenditure would not be lost on account of the abortive efforts. The expenditure,

therefore, constitutes a capital expenditure.


Income from construction and service contracts [Section 43CB]

The profits and gains arising from a construction contract or a service contract shall be

computed on the basis of percentage of completion method (POCM) in accordance with

the notified ICDS i.e., ICDS III: Construction Contracts.

However, the profits and gains arising from a service contract shall be computed on the

basis of

Method Condition

Project completion method If the duration of the contract is not more than 90 days

Straight line method If the contract involves indeterminate number of acts

over a specific period of time

For the purpose of percentage of completion method, project completion method or

straight- l ine method –

(i) the contract revenue shall include retention money;

(ii) the contract cost shall not be reduced by any incidental income in the nature of interest,

dividends or capital gains.

***************************************************************************

Presumptive Income AJ Education NeXt

9.1

CHAPTER 9. PRESUMPTIVE INCOME

SECTION 44AD: SPECIAL PROVISION FOR COMPUTING PROFITS AND GAINS

OF BUSINESS ON PRESUMPTIVE BASIS

1. Notwithstanding anything to the contrary contained in sections 28 to 43C,

- in case of an eligible assessee

- engaged in an eligible business

- a sum equal to 8% of the total turnover or gross receipts of the assessee in the

previous year on account of such business,

- or as the case may be, a sum higher than the aforesaid sum claimed to have been

earned by the eligible assessee,

- shall be deemed to be the income under the head "Profits and gains of Business

or Profession".

The existing rate of deemed total income of eight per cent will become six per cent in respect

of the amount of such total turnover or gross receipts received by an account payee cheque or

account payee bank draft or use of electronic clearing system through a bank account or such

other electronic mode as may be prescribed during the previous year or before the due date

specified in sub-section (1) of section 139 in respect of that previous year. However, the

existing rate of deemed profit of 8% referred to in section 44AD of the Act, shall continue to

apply in respect of total turnover or gross receipts received in any other mode.


(i) Eligible business: The presumptive taxation scheme under section 44AD covers all

small businesses with total turnover/gross receipts of up to Rs. 200 lakhs (except

the business of plying, hiring and leasing goods carriages covered under section

44AE).

(ii) Eligible assessee: Resident individuals, HUFs and partnership firms (but not LLPs)

and who has not claimed deduction under any of the section 10AA or deduction

under any provisions of Chapter VIA under the heading “C.—Deductions in respect

of certain incomes” in the relevant assessment year would be covered under this

scheme.

(iii) Presumptive rate of tax: The presumptive rate of tax would be 8% of total turnover

or gross receipts.

However, the presumptive rate of 6% of total turnover or gross receipts will be

applicable in respect of amount which is received

¨ by an account payee cheque or

¨ by an account payee bank draft or

¨ by use of electronic clearing system through a bank account

¨ by such other electronic mode as may be prescribed {Finance Act (No. 2)}.


9.2

during the previous year or on or before the due date of filing of return under section

139(1) in respect of that previous year.

However, the assessee has the option to declare in his return of income, an amount

higher than the presumptive income so calculated, claimed to have been actually

earned by him.

(2) No further deduction would be allowed: All deductions allowable under sections

30 to 38 shall be deemed to have been allowed in full and no further deduction shall

be allowed.

(3) Written down value of the asset: The WDV of any asset of such business shall be

deemed to have been calculated as if the assessee had claimed and had been

actually allowed the deduction in respect of depreciation for each of the relevant

assessment years.

(4) Relief from maintenance of books of accounts and audit: The intention of

widening the scope of this scheme is to reduce the compliance and administrative

burden on small businessmen and relieve them from the requirement of maintaining

books of account. Such assessees opting for the presumptive scheme are not

required to maintain books of account under section 44AA or get them audited under

section 44AB.

(5) Higher threshold for non-audit of accounts for assessees opting for presumptive

taxation under section 44AD: Section 44AB makes it obligatory for every person

carrying on business to get his accounts of any previous year audited if his total

sales, turnover or gross receipts exceed Rs. 1 crore.

However, if an eligible person opts for presumptive taxation scheme as per section

44AD(1), he shall not be required to get his accounts audited if the total turnover or

gross receipts of the relevant previous year does not exceed Rs. 2 crores.

(6) Advance tax: Further, since the threshold limit of presumptive taxation scheme

has been enhanced to Rs. 2 crores, the eligible assessee is now required to pay

advance tax by 15th March of the financial year.

(7) Persons not eligible for presumptive taxation scheme: The following persons are

specifically excluded from the applicability of the presumptive provisions of section

44AD -

(a) a person carrying on profession as referred to in section 44AA(1) ; or

(b) a person earning income in the nature of commission or brokerage; or

(c) a person carrying on any agency business.

(8) Not eligible to opt for presumptive taxation under this section for 5 assessment

years: Where an eligible assessee declares profit for any previous year in

accordance with the provisions of this section and he declares profit for any of the


9.3

five consecutive assessment years relevant to the previous year succeeding such

previous year not in accordance with the provisions of sub-section (1), he shall not

be eligible to claim the benefit of the provisions of this section for five assessment

years subsequent to the assessment year relevant to the previous year in which the

profit has not been declared in accordance with the provisions of sub-section (1).

[Section 44AD(4)].

Example:

Let us consider the following particulars relating to a resident individual, Mr. A,

being an eligible assessee whose gross receipts do not exceed Rs. 2 crore in any

of the assessment years between A.Y. 2021-22 to A.Y. 2023-24-

Particulars A.Y.2021-22 A.Y.2022-23 A.Y.2023-24

Gross receipts (Rs.) 1,80,00,000 1,90,00,000 2,00,00,000

Income offered for taxation (Rs.) 14,40,000 15,20,000 10,00,000

% of gross receipts 8% 8% 5%

Offered income as per presumptive

taxation scheme u/s 44AD

Yes Yes No

In the above case, Mr. A, an eligible assessee, opts for presumptive taxation under

section 44AD for A.Y. 2021-22 and A.Y. 2022-23 and offers income of Rs.14.40

lakh and Rs.15.20 lakh on gross receipts of Rs.1.80 crore and Rs.1.90 crore,

respectively.

However, for A.Y. 2023-24, he offers income of only Rs. 10 lakhs on turnover

of Rs. 2 crores, which amounts to 5% of his gross receipts. He maintains books

of account under section 44AA and gets the same audited under section 44AB.

Since he has not offered income in accordance with the provisions of section

44AD(1) for five consecutive assessment years, after A.Y. 2021-22, he will not

be eligible to claim the benefit of section 44AD for next five assessment years

succeeding A.Y. 2023-24 i.e., from A.Y.2024-25 to 2028-29.

(9) Books of accounts and Audit if sub-section (4) attracted: An eligible assessee to

whom the provisions of sub-section (4) are applicable and whose total income

exceeds the basic exemption limit has to maintain books of account under section

44AA and get them audited and furnish a report of such audit under section 44AB.

[Section 44AD(5)].

SECTION 44ADA: SPECIAL PROVISION FOR COMPUTING PROFITS AND

GAINS OF PROFESSION ON PRESUMPTIVE BASIS

(INSERTED BY FINANCE ACT 2016)

(1) Eligible Profession: The presumptive taxation scheme under section 44ADA for

estimating the income of an assessee:

• who is engaged in any profession referred to in section 44AA(1) such as legal,

medical, engineering or architectural profession or the profession of

accountancy or technical consultancy or interior decoration or any other

profession as is notified by the Board in the Official Gazette; and


9.4

• whose total gross receipts does not exceed Rs. 50 lakhs rupees in a previous year,

(2) Presumptive rate of tax: Presumptive rate of tax would be a sum equal to 50% of

the total gross receipts, or, as the case may be, a sum higher than the aforesaid sum

claimed to have been earned by the assessee.

(3) Eligible Assessee

(4) No further deduction would be allowed: Under the scheme, the assessee will be

deemed to have been allowed the deductions under section 30 to 38. Accordingly,

no further deduction under those sections shall be allowed.

(5) Written down value of the asset: The written down value of any asset used for the

purpose of the profession of the assessee will be deemed to have been calculated as

if the assessee had claimed and had actually been allowed the deduction in respect

of depreciation for the relevant assessment years.

(6) Relief from maintenance of books of accounts and audit: The eligible assessee

opting for presumptive taxation scheme will not be required to maintain books of

account under section 44AA(1) and get the accounts audited under section 44AB in

respect of such income.

(7) Option to claim lower profits: An assessee may claim that his profits and gains

from the aforesaid profession are lower than the profits and gains deemed to be

his income under section 44ADA(1); and if such total income exceeds the maximum

amount which is not chargeable to income-tax, he has to maintain books of account

under section 44AA and get them audited and furnish a report of such audit under

section 44AB.

(8) Advance Tax: Further, since the presumptive taxation regime has been extended for

professionals also, the eligible assessee is now required to pay advance tax by 15th

March of the financial year.


9.5

SECTION 44AE: SPECIAL PROVISION FOR COMPUTING PROFITS AND

GAINS OF BUSINESS OF PLYING, HIRING OR LEASING GOODS CARRIAGES

(1) Eligible business: This section provides for estimating business income of an

owner of goods carriages from the plying, hire or leasing of such goods carriages;

(2) Eligible assessee: The scheme applies to persons owning not more than 10 goods

vehicles at any time during the previous year;

(3) Presumptive Income: The estimated income from each goods vehicle, being a

heavy goods vehicle or other than heavy goods vehicle would be

Goods Carriage Presumptive Income

Heavy goods vehicle Rs. 1,000 per ton of gross

vehicle weight or unladen weight,

as the case may be, for every

month or part of a month

during which such

vehicle is owned by the

assessee for the

previous year. Other than heavy goods

vehicle

Rs. 7,500 for every month or part of a month

The assessee can also declare a higher amount in his return of income. In such case,

the latter will be considered to be his income;

(4) All other deduction deemed to be allowed: The assessee will be deemed to have

been allowed the deductions under sections 30 to 38. Accordingly, the written

down value of any asset used for the purpose of the business of the assessee will

be deemed to have been calculated as if the assessee had claimed and had actually

been allowed the deduction in respect of depreciation for each of the relevant

assessment years.

(5) Salary and interest to partners is allowed: Where the assesse is a firm, the

salary and interest paid to its partner are allowed to be deducted subject to the

conditions and limit specified under section 40(b).

(6) Not requirement to maintain books of accounts and get the accounts audited:

The assessee joining the scheme will not be required to maintain books of account

under section 44AA and get the accounts audited under section 44AB in respect of

such income.

(7) Option to claim lower profits: An assessee may claim lower profits and gains

than the deemed profits and gains subject to the condition that the books of account

and other documents are kept and maintained as required under section 44AA and

the assessee gets his accounts audited and furnishes a report of such audit as

required under section 44AB.


9.6

(8) Meaning of certain terms

S. No Term Meaning

(1) Heavy goods

vehicle

any goods carriage, the gross vehicle weight of which

exceeds 12,000 kilograms.

(2) Gross vehicle

weight

total weight of the vehicle and load certified and registered

by the registering authority as permissible for that vehicle.

(3) Unladen weight the weight of a vehicle or trailer including all

equipment ordinarily used with the vehicle or trailer when

working but excluding the weight of driver or attendant

and where alternative parts or bodies are used the unladen

weight of the vehicle means the weight of the vehicle

with the heaviest such alternative body or part.

Special provisions for computing profits and gains on presumptive basis: A summary

Particulars Section 44AD Section 44ADA Section 44AE

(1) Eligible

Assessee

Resident individual,

HUF or Partnership

firm (but not LLP)

engaged in eligible

business and who has

not claimed deduction

under section 10AA

or Chapter VIA under

the heading “C –

Deductions in respect

of certain incomes”

Non-applicability of

section 44AD in

respect of the

following persons:

- A person carrying

on profession

specified u/s

44AA(1);

- A person earning

income in the

nature of

commission or

brokerage;

- A person carrying

on any agency

business.

Resident assessee

engaged in any

profession specified

u/s 44AA(1),namely,

legal, medical,

engineering,

architectural

profession or

profession of

accountancy or

technical

consultancy or

interior decoration

or notified

profession

(authorized

representative, film

artist, company

secretary, profession

of information

technology)

An assessee

owning not more

than 10 goods

carriages at any

time during the

P.Y.

(2) Eligible

business/

profession

Any business, other

than business referred

to in section 44AE,

whose total turnover/

Any profession

specified under section 44AA(1), whose total gross

Business of

plying, hiring or

leasing goods

carriages


9.7

gross receipts in the

P.Y. ≤ Rs. 200 lakhs

receipts ≤ Rs. 50 lakhs in the relevant

P.Y.

(3) Presumptive

rate/

Presumptive

income

8% of total turnover/

sales/ gross receipts or

a sum higher than the

aforesaid sum claimed

to have been earned

by the assessee.

6% of total

turnover/gross receipts

in respect of the

amount of total

turnover/ sales/ gross

receipts received by

A/c payee cheque/

bank draft/ ECS

during the P.Y. or

before due date of

filing of return u/s

139(1) in respect of

that P.Y.

50% of total gross

receipts of such

profession or a sum

higher than the

aforesaid sum

claimed to have

been earned by the

assessee.

For each heavy

goods vehicle Rs.

1,000 per ton of

gross vehicle

weight or unladen

weight, as the case

may be, for every

month or part of a

month and for

other than heavy

goods vehicle, Rs.

7,500 per month or

part of a month

during which such

vehicle is owned

by the assessee or

an amount claimed

to have been

actually earned

from such vehicle,

whichever is

higher.

(4) Non-

allowability

of

deductions

while

computing

presumptive

income

Deductions allowable under sections 30 to 38 shall be deemed

to have been given full effect to and no further deduction shall be

allowed.

Even in case of a

firm, salary and

interest paid to

partners is not

deductible.

Even in case of a

firm, salary and

interest paid to

partners is not

deductible.

In case of a firm,

salary and interest

paid to partners is

deductible subject

to the conditions

and limits in

section 40(b)

(5) Written

down value

of asset

WDV of any asset of an eligible business/profession shall be

deemed to have been calculated as if the eligible assessee had

claimed and had been actually allowed depreciation for each of

the relevant assessment years.

(6) Requirement

of

maintenance

of books of

account u/s

44AA and

audit u/s

44AB

After declaring profits

on presumptive basis

u/s 44AD, say, for

A.Y.2021-22, non-

declaration of profits

on presumptive basis

for any of the 5

successive A.Y.s

thereafter (i.e., from

A.Y.2022-23 to

If the assessee

claims his profits to

be lower than the

profits computed by

applying the

presumptive rate, he

has to maintain

books of account

and other documents

u/s 44AA(1) and

If the assessee

claims his profits

to be lower than

the profits

computed by

applying the

presumptive rate,

he has to maintain

books of account

u/s 44AA(2) and


9.8

A.Y.2026-27), say,

for A.Y. 2023-24,

would disentitle the

assessee from

claiming profits on

presumptive basis for

five successive AYs

subsequent to the AY

relevant to the PY of

such non- declaration

(i.e., from A.Y. 2024-

25 to A.Y.2028-29).

In such a case, the

assessee would have

to maintain books of

account and other

documents u/s

44AA(2) and get his

accounts audited u/s

44AB, if his total

income > basic

exemption limit in

those years.

get his accounts

audited u/s 44AB, if

his total income >

basic exemption

limit for that year.

get his accounts

audited u/s 44AB.

Note - If a person is not covered under presumptive tax provisions mentioned above,

audit of books of account u/s 44AB is mandatory, if, in a case where he carries on

business, his total sales, turnover or gross receipts in business > Rs. 1 crore in that

P.Y. and in a case where he carries on profession, his gross receipts in profession >

Rs. 50 lakh in that P.Y.

***************************************************************************

Taxation of various entities AJ Education NeXt

10.1

CHAPTER 10. TAXATION OF

VARIOUS ENTITIES

TAX RATES APPLICABLE FOR A.Y. 2021-2022

(A) INDIVIDUALS, HINDU UNDIVIDED FAMILIES, AOP’S, BOI’S, ETC -

The rates applicable for the assessment year 2021-22 are as follows:

ü For Individuals / HUFs / AOPs / BOIs etc.:

S

L

A

B

S

Senior Citizens Super Senior Citizens Others Basic Tax Rate

(%) of Net

Taxable

Income

Resident Individuals

of 60 Years but not

more than 80 years at

any time during the PY

Resident Individuals

of 80 Years and Above

at any time during the

PY

Other Individuals,

HUFs, AOPs, BOIs

etc.

(R and NR)

Up to 3,00,000 Up to 5,00,000 Up to 2,50,000 NIL

3,00,001 to 5,00,000 2,50,001 to 5,00,000 5%

5,00,001 to 10,00,000 5,00,001 to 10,00,000 5,00,001 to 10,00,000 20%

Above 10,00,000 Above 10,00,000 Above 10,00,000 30%

The rates of surcharge applicable for A.Y.2021-22 are as follows:

Individual/HUF/AOP/BOI/Artificial juridical person

Particulars

Rate of

surcharge on

income- tax

Example

Components of total

income

Applicable rate of

surcharge

(i) Where the total income

(including income under

section 111A ,112A &

Dividend) > Rs. 50

lakhs but is ≤ Rs. 1 crore

10% • STCG u/s 111A

Rs. 10 lakhs;

• LTCG u/s 112A

Rs. 5 lakhs; and

• Other income Rs.

40 lakhs

Surcharge would be

levied@10% on

income-tax computed

on total income of Rs.

55 lakhs.

(ii) Where total income



Dividend) > Rs. 1 crore

but is ≤ Rs. 2 crores

15% • STCG u/s 111A

Rs. 20 lakhs;

• LTCG u/s 112A

Rs. 25 lakhs; and


80 lakhs

Surcharge would be

levied@15% on

income-tax computed


1.25 crores.

(iii) Where total income

(excluding income under

section 111A , 112A &


but is ≤ Rs. 5 crore

25% • STCG u/s 111A

Rs. 24 lakhs;

• LTCG u/s 112A

Rs. 25 lakhs; and


3 crores

Surcharge would be

levied @15% on

income-tax on:

• STCG of Rs. 24

lakhs chargeable to

tax u/s 111A; and

• LTCG of Rs. 25

Rate of surcharge on the

income-tax

15%


10.2

payable on the portion of

income chargeable to tax

under section 111A and

112A

lakhs chargeable to

tax u/s 112A.

Surcharge@25% would

be leviable on income-

tax computed on other

income of Rs. 3 crores

included in total income

(iv) Where total income

(excluding income under



37% • STCG u/s 111A

Rs. 40 lakhs;

• LTCG u/s 112A

Rs. 55 lakhs; and


6 crores

Surcharge@15% would

be levied on income-tax

on:

• STCG of Rs. 40

lakhs chargeable to

tax u/s 111A; and

• LTCG of Rs. 55

lakhs chargeable to

tax u/s 112A.

Surcharge@37% would

be leviable on the

income-tax leviable on

other income included

in total income.

Rate of surcharge on the

income-tax payable on

the portion of income

chargeable to tax under

section 111A and 112A

15%

(v) Where total income


section 111A, 112A &


in cases not covered

under (iii) and (iv) above

15% • STCG u/s 111A

Rs. 40 lakhs;

• LTCG u/s 112A

Rs. 55 lakhs; and


1.30 crore

Surcharge would be

levied@15% on

income-tax computed


2.25 crore.

Þ Health & Education Cess: @ 4% leviable on {tax plus surcharge}

Þ Rebate u/s 87A: In case of Resident Individual, whose income does not exceed

Rs.5,00,000, there shall be allowed a rebate of –

(a) 100% of the Income Tax; or

(b) Rs. 12,500

Whichever is less from the amount of Income Tax.

Note: The above tax rate is one of the options for Individual’s & HUF’s. The second option is

given in sec 115BAC which is introduced by Finance Act 2020. We shall see sec 115BAC

later on with illustrations on it.


10.3

REFER SUMMARY FOR PROVISIONS:

ILLUSTRATIONS.

ILLUSTRATION 1:

The profit as per P & L account of an AOP is Rs. 5,80,000. The salaries and interest paid to

the members are as under:

Members Salaries Interest A 20,000 Nil

B 30,000 10,000

C 10,000 20,000

Expenses of Rs. 40,000 debited in Profits Loss Account are disallowable under section 43B.

Mr. A, Mr. B & Mr. C are the members and the following data is given:

Members Other Incomes Share in AOP

A 2,40,000 20%

B 2,30,000 30%

C 2,20,000

50%

ANSWER:

Since the total income of all the members excluding the share of income of AOP is below

taxable limit and none of the member is assessable at a rate higher than Maximum marginal

rate, the tax shall be levied on the AOP at the normal rates applicable to an individual, as per

section 167B.

Total Income of AOP

Profit as per P&L Account 5,80,000

Add: Expenses disallowed under section 43B 40,000

Add: Salaries & Interest disallowed under section 40(ba) 90,000


Tax thereon 54,500

Add: Health & education cess @ 4% 2,180

Total Tax payable 56,680

Income to be allocated to the members in profit sharing ratio

Taxable Income of AOP/ BOI 7,10,000

Less: Salaries & Interest paid to members 90,000

Amount to be allocated to members in profit sharing ratio 6,20,000

ALLOCATION OF TOTAL INCOME OF AOP TO MEMBERS AS PER SECTION

67A

Mr. A Mr. B Mr. C

Rs. 6,20,000 in Profit sharing ratio 1,24,000 1,86,000 3,10,000

Add: Salary 20,000 30,000 10,000

Add: Interest NIL 10,000 20,000

Income from AOP assessable under the head

P/G/B/P

1,44,000

2,26,000

3,40,000

TOTAL INCOME OF MEMBERS


10.4

Share in income of AOP 1,44,000 2,26,000 3,40,000

Other Incomes 2,40,000 2,30,000 2,20,000

Total Income 3,84,000 4,56,000 5,60,000

Tax

Less: Rebate under section 86

Less: Rebate under section 87A

TAX PAYABLE

Add: Health & Education Cess @ 4%

TOTAL TAX PAYABLE

ROUND OFF

ILLUSTRATION 2:

Total Income of AOP is = Rs. 80,000


A (Individual) 140,000 50%

B (Individual) 80,000 30%

C (Foreign Co.) 90,000 20%

ANSWER:

Since, C is assessable at a rate higher than maximum marginal rate, i.e. ________%, tax on

the income of AOP shall be leviable as under:

(i) on the share of C @ _________%

(ii) on balance income @ ________%

TOTAL INCOME OF AOP Rs. 80,000

Tax thereon

- On Rs. 16,000 @ ______% Rs. _______

- On Rs. 64,000 @ ______% Rs.

Total Rs.

Round off Rs.

The share of income from AOP shall not be included while computing the total income of the

members.


Mr. A Mr. B C

Total Income 140,000 80,000 90,000

TAX PAYABLE NIL NIL ________

__


10.5

ILLUSTRATION 3:

Total Income of AOP is = Rs. 1,00,000


A (Individual) 2,90,000 50%

B (Individual) 1,00,000 50%

ANSWER:

Since the income of Mr. A, excluding his share of income from the AOP is more than the

maximum amount not chargeable to tax and none of the members of the AOP is assessable at

a rate higher than the maximum marginal rate, tax shall be levied on the AOP at the

maximum marginal rate, i.e. ___________%.

TOTAL INCOME OF AOP Rs. 1,00,000

Tax thereon @ _______% Rs. _______

The share of income from AOP shall not be included while computing the total income of the

members.

TOTAL INCOME OF MEMBERS Mr. A Mr. B

Total Income 2,90,000 1,00,000

TAX PAYABLE NIL NIL

ILLUSTRATION 4:

Total Income of AOP is = Rs. 60,000


A (Individual) 90,000 40%

B (Individual) 80,000 10% C (Indian Co.) Nil 20% D (Foreign Co.) Nil 30%

ANSWER:

Since D is assessable at a rate higher than the marginal rate, tax on the total income of the

AOP shall be levied as under:

(i) on the share of A&B @ _______%

(ii) on the share of C @ _______%

(iii) on the share of D @ _______%

Total Income of AOP Rs. 60,000

Tax thereon

- on Rs. 30,000 @ ________%

- on Rs. 12,000 @ ________% - on Rs. 18,000 @ ________%

TOTAL TAX PAYABLE

ROUND OFF


10.6

The share of income from AOP shall not be included in the total income of the members.


Mr. A Mr. B C D

Total Income Rs. 90,000 Rs. 80,000 Nil Nil

Tax thereon Nil Nil Nil Nil

TAXATION OF FIRMS

SECTION 184: ASSESSMENT AS A FIRM

A firm shall be assessed as a firm for the purposes of the Act if:

(i) the partnership is evidenced by an instrument, and

(ii) the individual shares of the partners are specified in the instrument.

OTHER CONDITIONS:

(a) A certified copy of the instrument of partnership referred above should accompany

the return of income of the previous year relevant to assessment year in respect of

which assessment as a firm is first sought.

(b) The copy of instrument of partnership shall be certified in writing by all the partners

not being minors, or, where the return is made after the dissolution of the firm, by all

persons (not being minors) who were partners in the firm immediately before its

dissolution and by the legal representative of any such partner who is deceased.

(c) Where the firm is assessed as such for any assessment year, it shall be assessed in the

same capacity for every subsequent year if there is no change in the constitution of the

firm or the shares of the partners as evidenced by the instrument of partnership on the

basis of which the assessment as a firm was first sought.

(d) Where any change in constitution had taken place in the previous year, the firm shall

furnish a certified copy of the revised instrument of partnership along with the return

of income for the assessment year relevant to such previous year.

(e) Notwithstanding anything contained in any other provisions of this Act, where, in

respect of any assessment year, there is on the part of a firm any such failure as is

mentioned in section 144, the firm shall be so assessed that no deduction by way of

any payment of interest, salary, bonus, commission or remuneration, by whatever

name called, made by such firm to any partner of such firm shall be allowed in

computing the income chargeable under the head "Profits and gains of business or

profession" and such interest, salary bonus, commission or remuneration shall not be

chargeable to income-tax under section 28(v) in the hands of partners. [Section

184(5)]

SECTION 185: ASSESSMENT WHEN SECTION 184 NOT COMPLIED WITH

Notwithstanding anything contained in any other provision of this Act, where a firm does not

comply with the provisions of section 184 for any assessment year, the firm shall be so

assessed that no deduction by way of any payment of interest, salary, bonus, commission or

remuneration by whatever name called, made by such firm to any partner of such firm shall


10.7

be allowed in computing the income chargeable under the head "Profits and gains of business

or profession" and such interest, salary, bonus, commission or remuneration shall not be

chargeable to income-tax under section 28(v) in the hands of the partners.

CAN SALARY AND INTEREST PAID TO PARTNERS BE DISALLOWED EVEN IF

CONDITIONS OF 40(b) ARE SATISFIED

In the following cases, the salary and interest paid by a firm to its partners shall be disallowed

even if the conditions of section 40(b) are satisfied.

1. Where Section 184(5) applies: If there is a failure on part of the firm as referred to in

section 144, then salary and interest paid by the firm to its partners shall be

disallowed. Such salary and interest shall not be taxable in hands of the partners.

2. Where Section 185 applies: Where a firm does not comply with the technical

requirements of section 184, then the salary and interest paid by the firm to its

partners shall be disallowed. Such salary and interest shall not be taxable in hands of

partner.

SECTION 187: CHANGE IN CONSTITUTION OF FIRM

Where at the time of making an assessment under section 143 or section 144 or section 147

or section 153A it is found that a change has occurred in the constitution of a firm, the

assessment shall be made on the firm as constituted at the time of making the assessment.

KEY NOTE :

(a) if one or more partners cease to be partners or one or more new partners are admitted,

in such circumstances that one or more of the persons who were partners of the firm

before the change, continue as partner or partners after the change or

(b) Where all the partners continue with a change in the respective shares or in the shares

of some of them.

However, nothing in clause (a) shall apply where the firm is dissolved on the death of any of

its partners.

Illustration:

In the partnership firm M/s ABCD, Mr. A, Mr. B, Mr. C and Mr. D were partners during the

previous year ended 31.03.2021. Mr. D retires on 30.04.2021. Therefore, if the Assessing

Officer makes an assessment under section 143(3) on the firm for the previous year ended

31.03.2021 on 31.12.2021, he shall make the assessment on the reconstituted firm M/s ABC.

However as per section 188A, all the partners namely Mr. A, Mr. B, Mr. C and Mr. D shall

be liable for the taxes, interest and penalty of the firm for Assessment Year 2021-2022.

SECTION 188: SUCCESSION OF ONE FIRM BY ANOTHER FIRM

Where a firm carrying on a business or profession is succeeded by another firm, and the case

is not one covered by section 187, separate assessment shall be made on the predecessor firm

and the successor firm. The predecessor firm shall be assessed in respect of the income of the

previous year in which succession took place up to the date of succession. The successor firm

shall be assessed in respect of the income of the previous year after the date of succession.


10.8

Illustrations:

1. From the firm M/s ABC, Mr. C retires on 30.06.2020 ® Section 187 shall apply.

Assessment for previous year 31.03.2021 shall be made on the reconstituted firm M/s

AB. However, the liabilities of the partners shall be governed by section 188A.

2. From the firm M/s ABC, Mr. A, Mr. B and Mr. C retire on 30.06.2020 and Mr. D, Mr.

E and Mr. F are admitted ® Section 188 shall apply. Separate assessment shall be

made on M/s ABC for the period 01.04.2020 to 30.06.2020 and on M/s DEF for the

period 01.07.2020 to 31.03.2021.

3. M/s ABC becomes M/s DBC on 30.06.2020.

M/s DBC becomes M/s DEC on 30.09.2020.

M/s DEC becomes M/s DEF on 31.12.2020.

® This is a case of change in constitution of the firm and section 187 shall apply.

Assessment for the previous year ended 31.03.2021 shall be made on the reconstituted

firm M/s DEF. However, the liabilities of the partners shall be governed by section

188A.

4. In firm M/s ABC, Mr. B dies on 30.06.2020 and the partnership deed is silent about

the death of the partner. ® This will result in dissolution of firm and section 187 shall

not apply. Section 189 shall apply.

5. In firm M/s ABC, Mr. B dies on 30.06.2020 and the partnership deed provides that

the firm shall continue on the death of any partner. ® This is a change in the

constitution of the firm and section 187 shall apply. The assessment for previous year

ended 31.03.2021 shall be made on firm M/s AC. However, the liabilities of the

partners/ legal heirs shall be governed by section 188A.

6. From firm M/s AB, Mr. A retires ® This is a case of dissolution of firm to which

section 189 shall apply.

7. Firm M/s ABC is converted into a private limited company ® This is a case of

dissolution of firm to which section 189 shall apply.

SECTION 188A: JOINT & SEVERAL LIABILITY OF PARTNERS FOR TAX

PAYABLE BY FIRM

Every person who was, during the previous year, a partner of a firm, and the legal

representative of any such person who is deceased, shall be jointly and severally liable along

with the firm for the amount of tax, penalty or other sum payable by the firm for the

assessment year to which such previous year is relevant.

Illustration 1:

A partnership firm consisted of partners A, B, C & D during the previous year ended on 31st

March, 2015 Partner D retired on 2nd April, 2015. The cases of the firm for assessment years

2015-2016 to 2019-2020 are reopened under section 147 on 1.1.2021. Now, the taxes, penalty

and interest for assessment years 2015-2016 and 2016-2017 can be recovered either from the

firm or from A or B or C or D or from any of them jointly. The taxes, penalty and interest of


10.9

assessment years 2017-2018 to 2019-2020 can be recovered either from the firm or from A or

B or C or any of them jointly.

Illustration 2:

Mr. A was a partner in the firm M/s. XYZ only for a month in the previous year 31st March,

2021. Mr. A along with other partners and the firm is jointly and severally liable for the taxes,

interest and penalty of the firm for the previous year 31st March, 2021. If Assessing Officer is

unable to recover the taxes, interest and penalty from the firm for the said year, then he can

recover the taxes, penalty and interest of the firm for the said year from Mr. A.

SECTION 189: FIRM DISSOLVED OR BUSINESS DISCONTINUED

1. Every person who was at the time of such discontinuance or dissolution a partner of

the firm, and the legal representative of any such person who is deceased, .shall be

jointly and severally liable for the amount of tax, penalty or any other sum payable

under the Act. "

Illustration:

A partnership firm formed on 1.4.2009 consisted of partners P, Q, R & S up to 31st March,

2013. Partner P retired on 15th April, 2013 and Mr. X was taken in as a partner on that date.

Mr. Q retired on 15th May, 2017. Mr. R retired on 31st December, 2019 and on that date Mr.

Y was taken in as partner. The firm is dissolved on 4th January, 2021.

Now, Mr. P, Q, R & S are jointly and severally liable for the taxes, interest and penalty of the

firm from assessment year 2010-2011 to assessment year 2014-2015. Mr. X is also jointly

and severally along with Mr. P, Q, R & S liable for the taxes, interest and penalty of the firm

for assessment year 2014-2015. Mr. X, Q, R & S are jointly and severally liable for the taxes,

interest and penalty of the firm for assessment years 2015-2016 to 2018-2019. Mr. X, R & S

are jointly severally liable for the taxes, interest and penalty of the firm for assessment years

2019-2020 and 2020-2021. Mr. Y is also liable jointly and severally with Mr. X, R & S for

assessment year 2020-2021. Mr. X, Mr. Y and Mr. S are jointly severally liable for the taxes,

interest and penalty of the firm for Assessment Year 2021-2022. (Provisions of section

188A)

Mr. X, Y & S are the partners at the time of dissolution and therefore they are jointly

and severally liable for the taxes, interest and penalty of firm from assessment year

2010-2011 to assessment year 2021-2022 as per the provision of section 189. They are

liable along with the persons referred to in section 188A.

TAXATION OF FIRMS AND ITS PARTNERS: PROVISIONS IN BRIEF

1. Income of the partnership firm is assessed at a flat tax rate of 30% (+ 12% surcharge

where total income exceeds Rs. 1 crore + 4% Health & education cess.

LTCG are taxed under section 112/112A and STGG are taxed under section 111A.

2. Shares of partners in the total income of the firm is EXEMPT in the hands of partners

under section 10(2A).

3. Remuneration and interest paid to the partners is allowed as deduction to the firm

subject to the limits and conditions specified in section 40(b).


10.10

4. Remuneration and interest received by the partners shall be taxed in their hands as

P/G/B/P under section 28(v). However, salaries and interest which have not been

allowed under section 40(b) or section 184(5) or section 185 shall not be added to the

income of the partners under section 28(v).

5. Losses of the firm shall be carried forward by the firm and shall not be allocated to

the partners.

SECTION 40(b): PAYMENT OF INTEREST, SALARY, BONUS, COMMISSION OR

REMUNERATION MADE BY FIRM TO ITS PARTNERS

Interest and remuneration paid to the partners by a firm are not deductible. However, the

interest and remuneration paid to partners by a firm are deductible if all the following

conditions are satisfied:

(i) Payment of salary, bonus, commission or remuneration, by whatever name called

(hereinafter referred as remuneration) is to a working partner. If it is paid to a non-

working partner, the same shall be disallowed.

Explanation: Working Partner means an individual who is actively engaged in

conducting the affairs of the business or profession of the firm of which he is a

partner.

(ii) The payment of remuneration to a working partner and payment of interest to any

partner should be authorised by and should be in accordance with the terms of the

partnership deed.

CBDT CIRCULAR

It has been observed that the assessees are incorporating the following kind of clause

in the partnership deed:

“The amount of remuneration to the working partner will be as mutually

agreed upon between partners at the end of the year”.

The Assessing Officers are now disallowing the deduction on the basis of such

clauses for the reason that they neither specify the amount of remuneration to each

partner nor lay down the manner of quantifying the remuneration.

In cases where neither the amount of remuneration has been quantified nor even the

limit of total remuneration has been specified but the same has been left to be

determined by the partners at the end of the year, the remuneration to the partners will

not be allowed as deduction in computation of firm's income. The remuneration

shall be admissible only if the partnership deed either specifies the amount of

remuneration payable to each individual working partner or lays down the

manner of quantifying such remuneration.

(iii) The payment of remuneration and interest should relate to a period falling after the

date of partnership deed. That means, the partnership deed should not provide for

payment of remuneration and interest from retrospective effect (i.e. any earlier period

prior to the date of partnership deed).

Illustration 1:

The partners entered into a partnership agreement on 1.4.2020 and no salary was

provided in the deed. On 31.1.2021, the partners entered into an agreement to amend


10.11

the above deed with retrospective effect from 1.4.2020 to provide a salary of Rs.

3,000 each per month to each partner.

Answer:

Salary paid to partners for the period 01.04.2020 to 31.01.2021 shall not be allowed as

a deduction to the firm.

Salary paid to partners for the period 01.02.2021 to 31.03.2021 shall be allowed as a

deduction to the firm, subject to the limit specified under section 40(b).

Illustration 2:

A & B enters into partnership on 1.4.2020. The partnership deed provides salary of

Rs. 3000 per month to A and Rs. 4000 per month to B. On 1.7.2020, an agreement is

entered to amend the above deed retrospectively from 1.4.2020 and provide salary of

Rs. 6,000 per month to A and Rs. 7,000 per month to B.

Answer:

For the period 01.04.2020 to 30.06.2020, salary paid to A & B shall be allowed as a

deduction to the firm to the tune of Rs. 3,000 per month to A and Rs. 4,000 per month

to B. Thereafter, the enhanced salary paid shall be allowed as deduction. But, the

above deduction shall be limited to the amount specified under section 40(b).

(iv) The payment of interest to a partner should not exceed the amount calculated at the

rate of 12% per annum simple interest (any amount in excess will be disallowed).

NOVEL DISTRIBUTING ENTERPRISES [2001] (KER.)

Where interest paid to partners on current account was not authorised under partnership deed,

in view of the provisions in section 40(b)(iv) impugned interest was rightly disallowed,

notwithstanding fact that assessee-firm had recorded said transaction in its books of account

and partners had included said amount in their return of income and paid tax thereon.

The petitioner-firm claimed deduction of interest paid to the partners both in respect of

capital account and also the current account. The Assessing Officer disallowed the claim in

respect of interest on current account on the ground that the partnership deed did not

authorise it. The petitioner took up the matter in revision before the Commissioner under

section 264 but the same was rejected.

Held that clause 10 of the partnership deed which dealt with payment of interest stated that

the net profit or loss after making 12% interest on the capital contribution of the partners, for

each year, shall be shared. Since the petitioners had no case that interest related to the capital

contribution, the said amount could not be allowed as a deduction in view of the provisions of

sub-clause (iv) of clause (b) of section 40. The fact that the assessee-firm had paid interest on

current account and recorded it in the books of account and further that the partners had

included the said amount in their individual returns and paid tax would not alter the situation.

The authorities could act only in accordance with the provisions of section 40(b). In the

instant case, the CIT had rejected the claim for deduction of interest paid on current account

only because there was no provision in the partnership deed enabling such payment. The

disallowance was justified.


10.12

(v) The payment of remuneration should not exceed the following amounts (Any

amount in excess will be disallowed).

(a) On the first Rs. 3,00,000 of book

profit or in case of a loss

Rs.1,50,000 or at the rate of 90% of

the book profit, whichever is more

(b) On the balance of book profits. At the rate of 60%

Explanation: "Book Profit" means the net profit as shown in the profit and loss

account for the relevant previous year, computed in the manner laid down in sections

28 to 44D as increased by the aggregate of the remuneration paid or payable to all

partners of the firm if such amount has been deducted while computing the net profit.

Analysis of Section 40(b)

The following aspects may be noted while computing book profits:

(i) Only the income under the head P/G/B/P is to be taken,

(ii) Current year and brought forward depreciation is to be deducted. (Section 32)

(iii) Brought Forward Business Losses will not be deducted. (Section 72)

(iv) Chapter VI-A deductions are also not to be deducted,

(v) Remuneration is to be added back if it is debited to Profit & Loss Account,

(vi) Interest paid to the partners to the extent it is deductible shall not be added

back.

CONDITIONS FOR ALLOWABILITY OF REMUNERATION AND INTEREST

PAID BY THE FIRM TO ITS PARTNERS

Allowability of Remuneration Allowability of Interest

1. To a working partner. 1. To a working/ non-working partner.

2. To an individual only. 2. To any partner.

3. Should be authorised by partnership

deed.

3. Should be authorised by partnership

deed.

4. In the partnership deed: 4. Rate of interest should be specified in

the partnership deed. - either specify the amount of

remuneration payable to each

partner, or

- lay down the manner of

quantification of remuneration to

each partner.

5. Remuneration should not be

retrospective.

5. Interest should not be retrospective.

KEY NOTES:

1. If a firm pays interest to a partner and the partner pays interest to the firm on his

drawings, then the interest shall not be netted off. The interest received by the firm

from the partners on their drawings is taxable in the hands of the firm as income under

the head Profits & Gains of Business or Profession. The interest paid by the firm to

the partners is allowable as per section 40(b).


10.13

2. Interest paid by the firm to its partners on their fixed capital account, current capital

account and loan account is allowable as deduction to the firm provided the

partnership deed specifically authorizes the payment of interest on fixed capital

account, current capital account and loan account. If the partnership deed authorizes

the payment of interest on fixed capital account, then interest on current capital

account and loan account shall not be allowed as deduction to the firm.

EXPLANATION 1 TO SECTION 40(b)

Where an individual is a partner in a firm on behalf of or for the benefit, of any other person

(partner in a representative capacity), then

(a) interest paid by the firm to such individual otherwise than as partner in a

representative capacity, shall not be taken into account for the purposes of

section 40(b).

(b) Interest paid by the firm to such individual as partner in a representative

capacity and interest paid by the firm to the person so represented shall be

taken into account for the purposes of section 40(b).

Illustration:

Mr. X is a partner in a firm on behalf of his HUF i.e. partner in a representative capacity. Mr.

X has given a loan to the firm out of his self acquired funds and the firm pays interest of Rs.

10,000 to Mr. X. The firm also pays interest of Rs. 15,000 to Mr. X on the capital of HUF.

In this case section 40(b) will not be applicable to the interest payment of Rs. 10,000. Rs.

10,000 interest is allowable under section 36(1)(iii) subject to section 40A(2). The interest

payment of Rs. 15,000 is however subjected to the provisions of section 40(b).

EXPLANATION 2 TO SECTION 40(b)

Where an individual is a partner in a firm otherwise than as partner in a representative

capacity, interest paid by the firm to such individual shall not be taken into account for the

purposes of section 40(b), if such interest is received by him on behalf, or for the benefit of

any other person.

Illustration:

Mr. X is a partner in a firm in his individual capacity. He is also the karta of a HUF. The firm

pays interest of Rs. 10,000 to Mr. X on the loan given by HUF to the firm. The firm also pays

Rs. 15,000 to Mr. X on his capital in the firm.

In this case, section 40(b) will not be applicable to the interest of Rs. 10,000. The said

interest is deductible under section 36(1)(iii) subject to the provisions of section 40A(2). The

interest payment of Rs. 15,000 will however be subjected to the provisions of section 40(b).

SECTION 28(v): PROFITS AND GAINS OF BUSINESS OR PROFESSION

Any interest, salary, bonus, commission or remuneration due to or received by a partner of a

firm from such firm shall be assessable under the head P/G/B/P.

Provided that where any interest, salary, bonus, commission or remuneration has not been

allowed to be deducted under section 40(b), the amount not so allowed to be deducted shall

not be added to the income of the partners.


10.14

WHETHER REMUNERATION PAID TO THE PARTNER CAN BE DISALLOWED

UNDER SECTION 40A(2)

Can remuneration paid to working partners as per the partnership deed be

considered as unreasonable and excessive for attracting disallowance under section

40A(2)(a) even though the same is within the statutory limit prescribed under section

40(b)(v)?

CIT V. GREAT CITY MANUFACTURING CO. (2013) (ALL)

Facts of the case: In this case, the Assessing Officer contended that the remuneration

paid by the firm to its working partners was highly excessive and unreasonable, on the

ground that the remuneration to partners (Rs. 39.31 lakh) was many times more than the

total payment of salary to all the employees (Rs. 4.87 lakh). Therefore, he disallowed

the excessive portion of the remuneration to partners by invoking the provisions of

section 40A(2)(a).

High Court’s Observations: On this issue, the High Court observed that section

40(b)(v) prescribes the limit of remuneration to working partners, and deduction is

allowable up to such limit while computing the business income. If the remuneration paid

is within the ceiling limit provided under section 40(b)(v), then, recourse to provisions of

section 40A(2)(a) cannot be taken.

The Assessing Officer is only required to ensure that the remuneration is paid to the

working partners mentioned in the partnership deed, the terms and conditions of the

partnership deed provide for payment of remuneration to the working partners and the

remuneration is within the limits prescribed under section 40(b)(v). If these conditions are

complied with, then the Assessing Officer cannot disallow any part of the remuneration on

the ground that it is excessive.

High Court’s Decision: The Allahabad High Court, therefore, held that the question of

disallowance of remuneration under section 40A(2)(a) does not arise in this case, since

the Tribunal has found that all the three conditions mentioned above have been satisfied.

Hence, the remuneration paid to working partners within the limits specified under

section 40(b)(v) cannot be disallowed by invoking the provisions of section 40A(2)(a).

SECTION 10(2A): INCOME EXEMPT FROM TAX

In case of a partner of a firm, his share in the total income of the firm shall not be included in

the total income of the partner.

KEY NOTES:

The share of a partner in the total income of the firm shall be computed as under:

Total Income of the firm X Share of profits of the firm as per the partnership deed

Profits of the firm as per partnership deed.


10.15

SECTION 10(2A) OF THE INCOME-TAX ACT, 1961 - FIRM - SHARE OF PROFITS

TO PARTNER OF FIRM - CLARIFICATION ON INTERPRETATION OF

PROVISIONS OF SECTION 10(2A) IN CASES WHERE INCOME OF FIRM IS

EXEMPT

CIRCULAR NO. 8/2014, DATED 31-3-2014

1.A reference has been received in the Board in connection with the interpretation of

provisions of section 10(2A) of the Income tax Act, 1961 ('Act') seeking clarification as to

what will be the amount exempt in the hands of the partners of a partnership firm in cases

where the firm has claimed exemption/deduction under Chapter III or VI A of the Act.

2. A firm is assessed as such and is liable to pay tax on its total income. A partner is not liable

to tax once again on his share in the said total income.

3. It is clarified that 'total income' of the firm for section 10(2A) of the Act, as interpreted

contextually, includes income which is exempt or deductible under various provisions of the

Act. It is, therefore, further clarified that the income of a firm is to be taxed in the hands of

the firm only and the same can under no circumstances be taxed in the hands of its partners.

Accordingly, the entire profit credited to the partners' accounts in the firm would be exempt

from tax in the hands of such partners, even if the income chargeable to tax becomes NIL in

the hands of the firm on account of any exemption or deduction as per the provisions of the

Act.

For example:

Total income for the firm before deduction under Chapter VI-A 100 lakh

Less: Deduction under section 80-IA 100 lakh

Taxable Income Nil

Let's say profits as per books of account are also Rs. 100 lakh. There are two partners of the

firm sharing profits equally. Now Rs. 50 lakhs is credited to capital account of each partner.

CBDT has clarified that although total income of the firm is Nil, yet each partner's capital

account is exempt under section 10(2A).

LOSSES ETC. OF FIRMS

The losses and unabsorbed depreciation can be carried forward by a firm only.

SECTION 78(1): CARRY FORWARD AND SET OFF OF LOSSES IN CASE OF

CHANGE IN CONSTITUTION OF FIRM

Where a change has occurred in the constitution of a firm, then nothing shall entitle the firm

to have carried forward and set off so much of the loss proportionate to the share of a retired

or deceased partner as exceeds his share of profits, if any, in the firm in respect of the

previous year.

ANALYSIS OF SECTION 78(1)

Section 78(1) provides that where a change in constitution of firm takes place on account of

retirement of partner or death of the partner then, the firm shall not carry forward and set

off the following brought forward losses:


10.16

Share of the retired/ deceased partner in the brought

forward losses of the firm

X

Less: Share of the retired/ deceased partner in the

current year profit

Y

(x - y) can not be carried forward by the firm or its

partners.

x - y

Illustration:

A firm furnishes you the following data for the previous year ended 31.3.2021:

P/G/B/P before setting off brought forward depreciation and brought forward

losses

8,00,000

Brought forward losses of Assessment Year 2015-2016 3,00,000

Brought forward Depreciation of Assessment Year 2015-2016 1,00,000

There were four partners A, B, C and D sharing profits and losses equally. On 30th June,

2020, the partner A had retired from the firm. Compute the total income of the firm.

Answer:

By virtue of Section 78(1), the firm shall not carry forward and set off the following loss:

Share of retired partner in brought forward losses 75,000

Less: Share of the retired partner in the current profits (2,00,000 ´ 3/12) 50,000

25,000

Therefore, Rs. 25,000 cannot be carried forward and set off by the firm. It may be noted

that section 78(1) is not applicable for brought forward depreciation. Now, the income of

the firm for Assessment Year 2021-2022 is as under:

Current Year P/G/B/P = 8,00,000

Less: Brought Forward Losses

(3,00,000 - 25,000) = 2,75,000

Less: Brought Forward Depreciation = 1,00,000

4,25,000

ILLUSTRATIONS

Illustration 1:

A partnership firm submits the following information for Assessment Year 2021-2022:

(i) Profit as per P & L A/c. 3,60,000

(ii) Depreciation as per books of Account 20,000

(iii) Depreciation as per Income-Tax Act (Current Year) 40,000

(iv) Brought forward Depreciation 3,50,000

(v) Bought forward loss 13,000

(vi) Expenditure not allowable as per Income-tax Act debited in P & L

A/c

30,000

(vii) Interest paid to the partners debited in P & L A/c

Partner A (24%) 10,000

Partner B (24%) 16,000

(viii) Remuneration paid to the partners

debited in P & L A/c.


10.17

Partner A 1,40,000

Partner B 1,10,000

(ix) Other incomes of Partners:

Partner A 2,20,000

Partner B 2,30,000

The Partners A & B share profits and losses equally. Compute the taxable income of the firm

and its partners.

Answer:

Computation of Book Profit under section 40(b)

Net Profit as per P & L A/c 3,60,000

Add: Depreciation as per books 20,000

Add: Expenditure not allowable as per I. T. Act 30,000

Add: Interest to partners disallowed u/s 40(b) 13,000

Add: Remuneration to partners 2,50,000

6,73,000

Less: C/Y Depreciation as per I. T. Act 40,000

6,33,000

Less: B/f Depreciation 3,50,000

Book Profits 2,83,000

Therefore, allowable remuneration as per section 40(b) is Rs. 2,54,700. Since remuneration

paid is Rs. 2,50,000, Rs. 2,50,000 is allowed as deduction under section 40(b).

Computation of the Total Income of the firm





4,23,000


3,83,000

Less: B/f Losses 13,000


Total Income 20,000

Taxable income of partners:

P/G/B/P as per section 28(v):

(i) Salaries

Partner A

1,40,000

Partner B

1,10,000

(ii) Interest to the extent allowed 5,000 8,000

P/G/B/P

Other Incomes

1,45,000

2,20,000

1,18,000

2,30,000

Taxable Income 3,65,000 3,48,000

Tax thereon

Less: Rebate under section 87A

_____

_____

{ Amendment by Finance Act ( no.1 ) 2019}

Add: Health & Education Cess @ 4 %


10.18

Tax payable

Round Off

________

________

_______

_______

Illustration 2:

Smart, Happy and Lucky are three partners of Small & Co., a partnership firm engaged in

trading, sharing profits and losses in the ratio of 1:2:3. The Profit & Loss Account of the firm

for the year ended 31.3.2021 is as under:

SMALL & CO.

Profit & Loss Account for the year ended 31.3.2021

Dr. Cr.

PARTICULARS AMOUNT

Rs.

PARTICULARS AMOUNT

Rs.

Cost of Sales 25,20,000 Sales 54,60,000

Staff Salaries 6,54,000 Long-term Capital gains 11,40,000

Depreciation 12,30,000 Interest Income 1,50,000

Other Expenses 1,50,000

Other business income 60,000

Remuneration to Partners:

S 3,24,000

H 1,62,000

L 2,16,000 7,02,000

Interest on Capital to Partners:

S 1,80,000

H 6,00,000

L 1,80,000 9,60,000

Net Profit:

S 99,000

H 1,98,000

L 2,97,000 5,94,000

68,10,000 68,10,000

Other information:

(1) The firm has been assessed as firm up to assessment year 2020-2021.

(2) The firm has completed all formalities and will be assessable as a firm for the

assessment year 2021-2022.

(3) The partnership deed of the firm was amended on 30th June 2020 with retrospective

effect from 1st April 2020 to provide remuneration and interest to partners as follows:

Remuneration Interest on Capital

Smart (working partner) 27,000 p.m. Simple interest @ 20% p.a

Happy (sleeping partner) 13,500 p.m. Simple interest @ 24% p.a

Lucky (working partner) 18,000 p.m. Simple interest @ 20% p.a

As per the earlier partnership deed the salary was as under:

Smart Rs. 15,000 p.m.

Happy Rs. 12,000 p.m.


10.19

Lucky Rs. 9,000 p.m.

Interest was provided in the earlier partnership deed at the same rates.

(4) Depreciation as per Income-tax Act amounts to Rs. 9,60,000

(5) Expenses of Rs. 1,05,000 are not allowable under section 43B.

(6) The firm has a carried forward loss of Rs. 60,000.

(7) The other incomes of the partners are:

Smart Rs. 1,20,000

Happy Rs. 3,00,000

Lucky Rs. 2,70,000

You are required to compute the tax payable by the firm and its partners.

Answer: Computation of Book Profit under section 40(b)


Add: Depreciation as per books 12,30,000

Add: Expenditure disallowable u/s 43B 1,05,000

Add: Interest to partners (in excess of allowed limit)

Smart 1,80,000 ´ 8/20 = 72,000

Happy 6,00,000 ´ 12/24 = 3,00,000

Lucky 1,80,000 ´ 8/20 = 72,000 4,44,000


Less: Long Term Capital Gains assessable under 30,75,000

Capital Gains 11,40,000

Less: Interest Income 1,50,000

Less: Depreciation as per I. T. Act 9,60,000

Book Profits as per section 40(b) 8,25,000

Allowable Remuneration as per section 40(b):

On First 3,00,000 of book profits @ 90% 2,70,000

On Balance 5,25,000 of book profits @ 60% 3,15,000

5,85,000

Remuneration allowable as per section 40(b):

Smart: Rs. 15,000 ´ 3 Months+ Rs. 27,000 ´ 9 Months = 2,88,000

Happy: Not a working partner = NIL

Lucky: Rs. 9,000 ´ 3 Months + Rs. 18,000 ´ 9 Months = 1,89,000

4,77,000

Therefore, allowable remuneration is Rs. 4,77,000.

COMPUTATION OF THE TOTAL INCOME OF THE FIRM

P/G/B/P


Add: Depreciation as per books 12,30,000

Add: Expenditure disallowable u/s 43B 1,05,000

Add: Interest to partners (in excess of allowed limit)

Smart 1,80,000 ´ 8/20 = 72,000


10.20

Happy 6,00,000 ´ 12/24 = 3,00,000

Lucky 1,80,000 ´ 8/20 = 72,000

4,44,000


25,98,000

Less: Long Term Capital Gains assessable under

Capital Gains 11,40,000

Less: Interest Income 1,50,000

Less: Depreciation as per I. T. Act 9,60,000

3,48,000

Less: Brought forward losses P/G/B/P 60,000

P/G/B/P 2,88,000

Capital Gains

Long Term Capital Gain 11,40,000

Income from other sources

Interest Income 1,50,000


Tax thereon:

- on Rs. 4,38,000 @ 30% 1,31,400

- on Rs. 11,40,000 @ 20% 2,88,000

Tax Payable 4,19,400

Add: Health & Education cess @ 4%

Total Tax

Round off

TAXABLE INCOME OF PARTNERS:

P/G/B/P as per section 28(v):

Smart Happy Lucky

(i) Salaries allowed as deduction u/s 40(b) 2,88,000 NIL 1,89,000

(ii) Interest to the extent allowed u/s 40(b) 1,08,000 3,00,000 1,08,000

P/G/B/P 3,96,000 3,00,000 2,97,000

Other Incomes 1,20,000 3,00,000 2,70,000

Taxable Income 5,16,000 6,00,000 5,67,000

Tax thereon


10.21

TAXATION OF CO-OPERATIVE SOCIETIES

FOR PROVISION ON COOPERATIVE SOCIETY REFER COMPENDIUM

QUESTIONS FROM PAST EXAMINATIONS

Question 1:

XYZ consumer Co-operative Society furnishes the following particular of its income in

respect of financial year 2020-2021. You are required to work out the taxable income of the

Co-operative Society:

Rs. Rs.

Income from business 2,50,000

Interest on deposits with bank 10,000

Dividend on investments: Rs.

Investments in share of other Co-operative societies 4,000

Other investments 4,000

Income from letting of godowns for storage of commodities 20,000

Give reason for your answer.

Answer:

Computation of taxable income for the assessment year 2021-2022

Rs.


Income from house property 20,000

Income from other sources:

Interest on deposit with bank 10,000

Dividend on investments in share of other co-operative society 4,000

Dividend on other investments 4,000 18,000

Gross Total Income 2,88,000

Less: Deduction under section 80P

Deduction under section 80P in respect of dividend from other co-

operative societies

4,000

Deduction under section 80P on account of Income from letting of

godowns for storage of commodities

20,000

General Deduction under section 80P 1,00,000 1,24,000

Net Income 1,64,000

Question 2:

Calcutta Suburban Co-operative Society is engaged in processing agricultural produce of its

members without the aid of power, and its marketing, furnish the following particulars:

(i) Income from processing of agricultural produce Rs.17,000

(ii) Income from marketing agricultural produce Rs.3,000

(iii) Dividends from another co-operative society Rs.55,000

(iv) Income from letting of godowns Rs.10,000; and

(v) Income from agency business Rs.85,000.

Determine its total income for the assessment year 2021-2022. (HOME WORK)


10.22

Answer:

Calcutta Suburban Co-operative Society


Computation of taxable income

Rs.

Income from letting of godowns 10,000

Business income-

From processing of agricultural produce 17,000

From marketing of agricultural produce 3,000

From agency business 85,000 1,05,000

Dividend income 55,000


Less: Deduction under section 80P

(a) Processing of agricultural produce 17,000

(b) marketing of agricultural produce 3,000

(c) Dividend from co-operative society 55,000

(d) letting of godown (Assuming that godowns are let out for

storage etc. Of commodities)

10,000 1,35,000

(e) General Deduction 50,000

Total Income 35,000

TAXATION OF MUTUALITY / MUTUAL CONCERNS

Examples of Mutual Concerns: Resident Welfare Associations, Social Clubs, Sports Clubs,

Bar Association, Shop Owners Association, FICCI, Bombay Chartered Accountants Society,

PHD Chambers, etc.

1. The first principle of mutuality is that no person can trade with himself or make

income out of himself. A mutual association arise when a group of persons associate

together with a common object and contribute monies for achieving that object and

divide the surplus amongst themselves. The objective should not be profit. The

objective should be social security, entertainment, professional development, etc.

2. The principle of mutual association is that all the contributors to the common fund are

entitled to participate in the surplus and all the participators to the surplus must be the

contributors to the common fund.

3. It is not necessary for the mutual concern to distribute the surplus immediately. The

participation in the surplus may be by way of reduction in future contributions or

division of surplus on dissolution.

4. The fact that the mutual concern is incorporated as a company does not make any

difference because incorporation does not destroy the identity of the contributors and

participators.

5. The income of a mutual concern is exempt from tax as far as it is derived from

activities of mutual nature, i.e., income received from members is exempt. The

income from trading so far as it is confined to own members is also exempt. Where a

mutual concern derives income from an activity with an outsider, then tax exemption

will not apply to such income, i.e., income received from non-members is taxable.


10.23

6. Income of a mutual concern is taxable in the following circumstances:

(a) Where the mutual concern is a trade, professional or similar association, then

the income derived from specific services performed for its members is

taxable as Profits & Gains of Business or Profession under section 28.

However, if mutual concern is a resident welfare association, sports club, etc.

then income derived from specific services performed for its members is not

taxable.

(b) Income received from non-members.

Trade & Professional Association

1. Trade and professional association means an association of traders or professionals

for the protection or advancement of their common interest.

2. Any surplus arising to the trade or professional association from general activities i.e.,

entrance fees, etc. will not be taxable. Therefore, the concerned general expenditure

shall also be not allowed as deduction from taxable income. Only the income arising

from performing specific services to members is taxable and the expenditure to earn

such income is deductible.

3. Special Provision contained in Section 44A for Trade & Professional Association.

(a) Applicable only to that trade, professional or similar association, the income

of which is not distributed to its members.

(b) Amount Received by the association from its members by way of contribution

or otherwise (other than amount received from performing specific services),

i.e., General receipts from members

Less: Expenditure incurred for the purposes of protection or advancement of

interest of members (other than expenditure which is otherwise deductible

under the Act and other than capital Expenditure), i.e., General expenditure

on member

If negative - call it deficiency

If positive - surplus exempt from tax

(c) such deficiency will be allowed as a deduction in computing the income under

the head P/G/B/P,

(d) If deficiency is greater than income under the head P/G/B/P, then the balance

deficiency will be allowed as deduction in computing income under other

heads of income.

(e) Before setting off the deficiency effect shall be first given to the deductions

under this Act and brought forward losses and allowances.

(f) The total deficiency which can be set off shall not exceed 50% of the Total

income computed before giving deduction of deficiency.


10.24

KEYNOTE:

The tax rate applicable to a mutual concern shall be the same as applicable to an individual

except where the mutual concern is incorporated as a company.

ILLUSTRATIONS

1. The assessee is a club and has income from letting out its rooms to its members. The

ITO want to tax the same Examine.

Answer:

The income of the club is exempt on grounds of mutuality (Cawnpore Club Ltd.).

2. A social club furnishes you the following data:

(a) Receipts by way of entrance fees and annual

membership fees from members

Rs.3,00,000

(b) Expenditure on members Rs. 50,000

(c) Bank Interest Rs. 1,00,000

(d) Receipts from members for specific services. Rs.3,00,000

(e) Expenditure incurred on (d) above Rs.2,50,000

Compute the income of the club.

Answer: SURPLUS/INCOME EXEMPT ON GROUND OF MUTUALITY

1. Receipts from members by way of entrance fees and

annual membership fees

3,00,000

Less: Expenditure on members 50,000 2,50,000

Receipts from members for specific services (taxable only

in case of trade, professional or similar associations)

3,00,000

Less: Expenditure on above 2,50,000 50,000

Exempt Income 3,00,000

TAXABLE INCOME

INCOME FROM OTHER SOURCES

Bank Interest 1,00,000


3. A trade Association furnishes you the following data:

(a) General Receipts from members Rs. 2,00,000

(b) General Expenditure on members Rs. 4,50,000

(c) Receipts from specific services performed. Rs. 3,00,000

(d) Expenditure on specific services. Rs. 1,60,000

(e) Bank Interest Rs. 3,00,000

(f) B/f Depreciation Rs. 60,000


10.25

Answer: SURLUS / INCOME EXEMPT ON GROUND OF MUTUALITY

General receipts from members 2,00,000

Less: General Expenditure on members 4,50,000

Deficiency to be dealt with as per section 44A 2,50,000

TAXABLE INCOME ON TRADE ASSOCIATION

Profit and Gains of Business or Profession

Receipts from performing specific services 3,00,000

Less: Expenditure on specific services 1,60,000

1,40,000

Less: B/F Depreciation 60,000

P/G/B/P before setting off deficiency 80,000

Less: Deficiency as per section 44A 80,000* Nil

Income from other sources

Bank Interest 3,00,000

Less: Deficiency as per section 44A 1,10,000* 1,90,000

1,90,000

* The maximum deficiency, which can be set off as per section 44A is 50% of (80,000 +

3,00,000) = Rs. 1,90,000

Note: The balance deficiency of Rs. 60,000 (= Rs. 2,50,000 – Rs. 1,90,000) shall have no tax

treatment and shall not be carried forward.

FROM THE JUDICIARY

1. BANKIPUR CLUB LTD. (SUPREME COURT)

The question arose before the Supreme Court as to whether the club is entitled to

exemption for the receipts or surplus arising from the sales of drinks, refreshments,

etc., or amounts received by way of rent for letting out the buildings or amounts

received by way of admission fees, periodical subscriptions and receipts of a similar

nature from its members. The Tribunal as also the High Court had found that the

amounts received by the club were for supply of drinks, refreshments or other goods

as also the letting out of building for rent or by way of admission fees, periodical

subscription, etc., from the members of the clubs were only for/towards charges for

the privileges, conveniences and amenities provided to the members, which they were

entitled to, as per the rules and regulations of the club. It had also been found that club

realised various sums on the above counts only to afford to their members, the usual

privileges, advantages, conveniences and accommodation. In other words, the

services offered on the above counts were not done with any profit motive, and were

not tainted with commerciality. The facilities were offered only as a matter of

convenience for the use of the members (and their friends, if any, availing of the

facilities occasionally).

The Supreme Court held that in the light of the findings of fact the receipts for the

various facilities extended by the clubs to its members, as part of the usual privileges,

advantages and conveniences, attached to the membership of the club, could not be


10.26

said to be "a trading activity." The surplus-excess of receipts over the expenditure - as

a result of mutual arrangement, could not be said to be "income" for the purpose of

the Act.

Where a number of persons combine together and contribute to a common fund for

the financing of some venture or object and not with a view to earn profits and in this

respect have no dealings or relations with any outside body, then any surplus returned

to those persons cannot be regarded in any sense as profit. There must be complete

identity between the contributors and the participators. If these requirements are

fulfilled, it is immaterial what particular form the association takes. Trading between

persons associating together in this way does not give rise to profit which are

chargeable to tax.

If the object of the assessee-company claiming to be a "mutual concern" or "club", is

to carry on a particular business and money is realised both from the members and

from non-members, for the same consideration by giving the same or similar facilities

to all alike the dealings as a whole, disclose profit-earning motive and are alike

tainted with commerciality. In other words, the activity carried on by the assessee in

such cases, claiming to be a "mutual concern" or "members' club" is a trade or an

adventure in the nature of trade and the transactions entered into with the members or

non-members alike is a trade/business/transaction and the resultant surplus is profit-

income liable to tax.

2. SIND CO-OPERATIVE HOUSING SOCIETY V. ITO (BOM.)

Can transfer fees received by a co-operative housing society from its incoming

and outgoing members be exempt on the ground of principle of mutuality?

High Court observed that under the bye-laws of the society, charging of transfer fees

had no element of trading or commerciality. Both the incoming and outgoing

members have to contribute to the common fund of the assessee. The amount paid

was to be exclusively used for the benefit of the members as a class. The High Court,

therefore, held that transfer fees received by a co-operative housing society, whether

from outgoing or from incoming members, is not liable to tax on the ground of

principle of mutuality since the predominant activity of such co- operative society is

maintenance of property of the society and there is no taint of commerciality, trade or

business.

TAXATION OF FILM PRODUCER & FILM DISTRIBUTOR

DEDUCTION IN RESPECT OF EXPENDITURE ON PRODUCTION OF FEATURE

FILMS INCASE OF FILM PRODUCER

1. "Cost of production", in relation to a feature film, means the expenditure incurred on

the production of the film, not being—

(a) the expenditure incurred for the preparation of the positive prints of the film; and

(b) the expenditure incurred in connection with the advertisement of the film after it

is certified for release by the Board of Film Censors:

Note: Expenditure referred in (a) and (b) above are allowable as revenue

expenditure in the year of release of film.


10.27

2. The cost of production of a feature film, shall be reduced by the subsidy received by the

film producer, under any scheme framed by the Government.

Deduction in respect of cost of production allowable under section 37 in the case of

Abandoned Feature Films [Circular No. 16, dated 6.10.2015]

The deduction in respect of the cost of production of a feature film certified for release by

the Board of Film Censors in a previous year is provided in Rule 9A.

In the case of abandoned films, however, since certificate of Board of Film Censors is

not received, in some cases no deduction was allowed by applying Rule 9A of the Rules

or by treating the expenditure as capital expenditure.

The CBDT has examined the matter in light of judicial decisions on this subject. The order

of the Hon’ble Bombay High Court dated 28.1.2015 in ITA 310 of 2013 in the case of

Venus Records and Tapes Pvt. Ltd. on this issue has been accepted and the aforesaid

disputed issue has not been further contested.

Consequently, it is clarified that Rule 9A does not apply to abandoned feature films and

that the expenditure incurred on such abandoned feature films is not to be treated as a

capital expenditure. The cost of production of an abandoned feature film is to be treated as

revenue expenditure and allowed as per the provisions of section 37 of the Income-tax Act,

1961.

REFER COMPENDIUM FOR RULE 9A & RULE 9B

**************************************************************************

Filing of return of Income AJ Education NeXt

11.1

CHAPTER 11. FILING OF RETURN OF

INCOME

SECTION 139(1): OBLIGATION TO FILE RETURN OF INCOME

The Income-tax Act, 1961 contains provisions for filing of return of income. Return of

income is the format in which the assessee furnishes information as to his total income

and tax payable. The format for filing of returns by different assessees is notified by the

CBDT. The particulars of income earned under different heads, gross total income,

deductions from gross total income, total income and tax payable by the assessee are

generally required to be furnished in a return of income. In short, a return of income is

the declaration of income by the assessee in the prescribed format.

COMPULSORY FILING OF RETURN OF INCOME [SECTION 139(1)]

(1) As per section 139(1), it is compulsory for companies and firms to file a return of

income or loss for every previous year on or before the due date in the prescribed

form.

(2) In case of a person other than a company or a firm, filing of return of income on or

before the due date is mandatory, if his total income or the total income of any other

person in respect of which he is assessable under this Act during the previous year

exceeds the basic exemption limit.

(3) A return of income or loss for the previous year in the prescribed form and

verified in the prescribed manner on or before the due date, has to be filed by every

person, being a resident other than not ordinarily resident in India within the meaning

of section 6(6), who is not required to furnish a return under section 139(1) if such

person, at any time during the previous year –

(a) holds, as a beneficial owner or otherwise, any asset (including any financial

interest in any entity) located outside India or has a signing authority in any

account located outside India; or

(b) is a beneficiary of any asset (including any financial interest in any entity)

located outside India.

However, an individual being a beneficiary of any asset (including any financial

interest in any entity) located outside India would not be required to file return of

income, where, income, if any, arising from such asset is includible in the income of

the person referred to in (a) above in accordance with the provisions of the Income-

tax Act, 1961.


11.2

Meaning of “beneficial owner” and “beneficiary” in respect of an asset for the

purpose of section 139:

Illustration on 4th & 5th Proviso to section 139(1):

Illustration 1 :-

Suppose Mr. A is R & OR in India has black money of Rs. 10 Cr, transfers to Mr. B in Dubai

through Hawala transaction. Mr. B creates a trust in Dubai whose beneficiary is Mr. A. Mr. B

transfers to trust Rs. 10 Cr in the form of donation and trust buys the bonds of Rs. 10 cr. Mr.

A is the sole beneficiary of this trust & he does not have any taxable income in India.

Prior to F.A. 2015, Mr. A was not filing the return, !" he does not hold any asset outside

India in his name.

Explanation 5 to Sec 139(1) inserted by FA 2015 provides that beneficiary of an asset means

an individual who derives benefits from such asset during P.Y. and consideration is provided

by any other person.

\ Now, Mr. A who is beneficiary of asset has to file IT Returns and has to declare assets for

which he is beneficiary.

Illustration 2 :-

Mr. A gifts his agricultural land to mother of Mr. B who lives in Mumbai worth Rs. 20 cr.

Mr. B is a permanent resident in Dubai and N.R. In India.

Mr. B buys house of Rs. 20 cr in Dubai in his name. Mr. B gives a power of attorney to Mr.

A to lease such house. Also, a deal is entered between the two to transfer the house after 10

years to Mr. A or to his wife.

Prior to FA 2015, Mr. A was not filing ROI as he does not own any assets outside India in his

name.

F.A. 2015 has inserted “Beneficial owner” in respect of an asset means “an individual who

has provided, directly / indirectly, consideration for the asset for the immediate / future

benefit direct / indirect of himself or any other person.” [Explanation 4 to Sec 139(1)].


11.3

Although the home in Dubai is not in the name of Mr. A still he is a beneficial owner, " he

has provided consideration indirectly, for the house which is for immediate or future benefit,

direct or indirect of Mr. A or his wife. He has to file ROI.

Illustration 3 :-

Mr. A has income greater than taxable limit whereas Mrs. A does not have taxable income.

Mr. A opens an A/c in Dubai in the name of Mrs. A and transfers Rs. 1 crore out of his

taxable income to his wife account. Mrs. A purchases house in Singapore out of bank balance

in her name.

Mr. A is the beneficial owner whereas Mrs. A is a beneficiary.

As per the 5th proviso to section 139(1) introduced by F.A. 2015 Mrs. A will not be under an

obligation to file ROI if income from house property in Dubai is clubbed with income of Mr.

A.

Requirement of filing of return of income as per the fourth and fifth proviso to section

139(1)

(4) All such persons mentioned in (1), (2) & (3) above should, on or before the due date,

furnish a return of his income or the income of such other person during the

previous year in the prescribed form and verified in the prescribed manner and

setting forth such other particulars as may be prescribed.


11.4

(5) SIXTH PROVISO TO SEC 139(1):

Further, every person, being an individual or a HUF or an AOP or BOI or an

artificial juridical person -

– whose total income or the total income of any other person in respect of

which he is assessable under this Act during the previous year

– without giving effect to the provisions of Chapter VI-A or exemptions u/s 54,

54B, 54D, 54EC, 54F, 54G, 54GA and 54GB (FA 2019)

– exceeded the basic exemption limit.

is required to file a return of his income or income of such other person on or before

the due date in the prescribed form and manner and setting forth the prescribed

particulars.

For the A.Y.2021-2022, the basic exemption limit is Rs. 2,50,000 for

individuals/HUFs/AOPs/BOIs and artificial juridical persons, Rs. 3,00,000 for

resident individuals of the age of 60 years but less than 80 years and Rs. 5,00,000

for resident individuals of the age of 80 years or more at any time during the

previous year. These amounts denote the level of total income, which is arrived at

after claiming the admissible deductions under Chapter VI-A. However, the level of

total income to be considered for the purpose of filing return of income is the

income before claiming the admissible deductions under Chapter VI-A.

AMENDMENT MADE BY FINANCE ACT (NO.2 ) 2019

Mandatory furnishing of return of income by certain persons

Currently, a person other than a company or a firm is required to furnish the return of

income only if his total income exceeds the maximum amount not chargeable to tax,

subject to certain exceptions. Therefore, a person entering into certain high value

transactions is not necessarily required to furnish his return of income. In order to

ensure that persons who enter into certain high value transactions do furnish their return

of income, it is proposed to amend section 139 of the Act so as to provide that a person

shall be mandatorily required to file his return of income, if during the previous year,

he-

(i) has deposited an amount or aggregate of the amounts exceeding one crore rupees

in one or more current account maintained with a banking company or a co-

operative bank; or

(ii) has incurred expenditure of an amount or aggregate of the amounts exceeding two

lakh rupees for himself or any other person for travel to a foreign country; or

(iii) has incurred expenditure of an amount or aggregate of the amounts exceeding one

lakh rupees towards consumption of electricity; or

(iv) fulfils such other prescribed conditions, as may be prescribed.

Further, currently, a person claiming rollover benefit of exemption from capital gains

tax on investment in specified assets like house, bonds etc., is not required to furnish a

return of income, if after claim of such rollover benefits, his total income is not more

than the maximum amount not chargeable to tax . In order to make furnishing of return


11.5

compulsory for such persons, it is proposed to amend the sixth proviso to section 139 of

the Act to provide that a person who is claiming such rollover benefits on investment in

a house or a bond or other assets, under sections 54, 54B, 54D, 54EC, 54F, 54G, 54GA

and 54GB of the Act, shall necessarily be required to furnish a return, if before claim of

the rollover benefits, his total income is more than the maximum amount not

chargeable to tax.

These amendments will take effect from 1st April, 2020 and will, accordingly apply in

relation to assessment year 2020-2021 and subsequent assessment years.

(6) Meaning of due date : ‘Due date’ means -

Assessee Due Date

(i) Where the assessee, other than an assessee referred

to in clause (ii), is -

(a) a company,

(b) a person (other than a company) whose accounts

are required to be audited under the Income-

tax Act, 1961 or any other law in force; or

(c) a working partner of a firm whose accounts

are required to be audited under the Income-

tax Act, 1961 or any other law for the time

being in force.

30th September of

assessment year

(ii) in the case of an assessee who is required to furnish a

report referred to in section 92E.

30th November of the

assessment year

(iii) in the case of any other assessee. 31st July of the assessment

year


The due date for filing return of income under sub-section (1) of section 139 is proposed to

be amended by:-

(A) providing 31st October of the assessment year (as against 30th September) as the

due date for an assessee referred to in clause (a) of Explanation 2 of sub-section (1) of

Section 139 of the Act;

(B) removing the distinction between a working and a non-working partner of a firm with

respect to the due date as mentioned in sub-clause (iii) of clause (a) of Explanation 2

of sub-section (1) of Section 139 of the Act.

These amendments will take effect from 1st April, 2020 and will, accordingly, apply in



11.6

ELECTRONIC FILING OF RETURN:

It is mandatory for the following assessees to file the return electronically. (Electronic

Returns are paperless returns):

(i) All Companies (With Digital Signatures)

(ii) Partnership Firms, Individual and HUFs subject to tax audit under section

44AB (With Digital Signatures)

(iii) An individual or HUF whose total income exceeds Rs 5 lakhs (Digital

Signatures are optional)

CONDITIONS FOR CLAIMING PROFIT LINKED DEDUCTIONS :

Section 80AC provides that in computing the total income of an assessee of the previous year

relevant to any assessment year, if any deduction is admissible under section 80-IA, 80-IAB,

80-IAC, 80-IB, 80-IBA, 80-IC, 80-ID, 80-IE, 80JJA, 80JJAA, 80LA, 80P, 80PA, 80QQB

and 80RRB, no such deduction shall be allowed to him unless he furnishes a return of his

income for such assessment year on or before the due date specified under section 139(1).

SECTION 139(3) READ WITH SECTION 80: LOSS RETURN

Section 139(3): If a person has sustained a loss under the head "Profits and gains of business

or profession" or under the head "Capital Gains" and claims that such loss should be carried

forward under section 72 or section 73 or SECTION 73A or section 74 or section 74A, then

he may furnish a return of loss within the time prescribed under section 139(1) and all

provisions of the Income-tax Act shall apply as if it were a return furnished under section

139(1).

Section 80: Notwithstanding anything contained in Chapter VI, the loss which has not been

determined in pursuance of a return filed in accordance with the provisions of section 139(3),

shall not be allowed to be carried forward and set-off under section 72 or section 73 or

SECTION 73A or section 74 or section 74A.

ANALYSIS

(1) This section requires the assessee to file a return of loss in the same manner as in the

case of return of income within the time allowed under section 139(1).

(2) Section 80 requires mandatory filing of return of loss under section 139(3) on or before

the due date specified under section 139(1) for carry forward of the following losses

(a) Business loss under section 72(1)

(b) Speculation business loss under section 73(2)

(c) Loss from specified business under section 73A(2)

(d) Loss under the head “Capital Gains” under section 74(1)

(e) Loss from the activity of owning and maintaining race horses under section

74A(3)

(3) Consequently, section 139(3) requires filing of return of loss mandatorily within the

time allowed under section 139(1) for claiming carry forward of the losses mentioned

in (2) above.


11.7

(4) However, loss under the head “Income from house property” under section 71B and

unabsorbed depreciation under section 32 can be carried forward for set-off even

though return of loss has not been filed before the due date.

(5) A return of loss has to be filed by the assessee in his own interest and the non-

receipt of a notice from the Assessing Officer requiring him to file the return cannot

be a valid excuse under any circumstances for the non-filing of such return.

(6) Unabsorbed depreciation can be carried forward even if no return has been filed by the

assessee.

Can unabsorbed depreciation be allowed to be carried forward in case the

return of income is not filed within the due date?

CIT v. Govind Nagar Sugar Ltd. (2011) (Delhi)

High Court’s Observations: On this issue, the Delhi High Court observed that, the

provisions of section 80 and section 139(3), requiring the return of income claiming

loss to be filed within the due date, applies to, inter alia, carry forward of business

loss and not for the carrying forward of unabsorbed depreciation. As per the

provisions of section 32(2), the unabsorbed depreciation becomes part of next

year’s depreciation allowance and is allowed to be set-off as per the provisions of

the Income-tax Act, 1961, irrespective of whether the return of earlier year was filed

within due date or not.

High Court’s Decision: Therefore, in the present case, the High Court held that the

unabsorbed depreciation will be allowed to be carried forward to subsequent year even

though the return of income of the current assessment year was not filed within the

due date.

CONDONATION OF DELAY IN FILING REFUND CLAIM AND CLAIM OF

CARRY FORWARD LOSSES

CIRCULAR 9/2015, DATED 9-6-2015

1. This Circular deals with the applications for condonation of delay in filing returns

claiming refund and returns claiming carry forward of loss and set-off thereof.

(a) The Commissioners of Income-tax shall be vested with the powers of

acceptance/rejection of such applications/claims if the amount of such claims

is not more than Rs.10 lakhs for any one assessment year.

(b) The Chief Commissioners of Income-tax shall be vested with the powers of

acceptance/rejection of such applications/claims if the amount of such claims

exceeds Rs.10 lakhs but is not more than Rs. 50 lakhs for any one assessment

year.

(c) The applications/claims for amount exceeding Rs.50 lakhs shall be

considered by the Board.


11.8

2. No condonation application for claim of refund/loss shall be entertained beyond six

years from the end of the assessment year for which such application/claim is made.

This limit of six years shall be applicable to all authorities having powers to condone

the delay as per the above prescribed monetary limits, including the Board. A

condonation application should be disposed of within six months from the end of the

month in which the application is received by the competent authority, as far as

possible.

3. On 1-1-2021, assessee can make application to Commissioner of Income-tax/ Chief

Commissioner of Income-tax / Board for Assessment Year 2014-2015 and future

assessment years if he has not filed the returns for these assessment years and there is a

claim of refund in such returns or there is a claim of carry forward of losses in such

returns. He cannot file any application for Assessment Year 2013-2014 or earlier

Assessment Years on 1-1-2021 as period of 6 years from end of relevant Assessment

Year has elapsed.

4. The powers of acceptance/rejection of the application will be subject to following

conditions:

i. At the time of considering the case, it shall be ensured that the income/loss

declared and/or refund claimed is correct and genuine and also that the case is of

genuine hardship on merits.

ii. The Commissioner of Income-tax/ Chief Commissioner of Income-tax dealing

with the case shall be empowered to direct the jurisdictional Assessing Officer to

make necessary inquiries or scrutinize the case in accordance with the provisions

of the Act to ascertain the correctness of the claim.

iii. No interest shall be granted on the belated refunds.

SECTION 139(4): BELATED RETURN

If a person has not furnished the return of income within the time allowed under section

139(1) then he may furnish the return of income at any time before the end of the relevant

Assessment Year or before the completion of assessment, whichever is earlier.

KEY NOTES:

1. "Assessment" referred to in section 139(4) means the assessment under section 144.

2. "Completion of assessment" means the date of passing/ signing the assessment order

and not the date of service of assessment order.

Issue No.1: (a) For Assessment Year 2021-2022, no return of income has been filed and

no assessment has been made under section 144. Upto what time can the

assessee file return of income?

Answer:

_______________________________________________________________

(b)For Assessment Year 2021-2022, no return of income has been filed. The

Assessing Officer makes a best judgement assessment under section 144 on


11.9

31.01.2022. Upto what time the assessee could have filed the return of

income?

Answer:

_______________________________________________________________

Issue No.2: For Assessment Year 2021-2022, no return of income has been filed. The

Assessing Officer passes an assessment order under section 144 on

31.12.2021. The said order is issued on 2.1.2022 and is received by the

assessee on 5.1.2022. The assessee has filed a return of income for

Assessment Year 2021-2022 on 1.1.2022. Comment.

Answer:

______________________________________________________________

SECTION 139(5): REVISED RETURN

If any person having furnished a return under section 139(1) or under section 139(4),

discovers any omission or wrong statement therein, then he may furnish a revised return at

any time before the expiry of the relevant Assessment Year or before the completion of

assessment, whichever is earlier.

Issue No.1: Dhampur Sugar Mills Limited

The revised return substitutes the original return from the date the

original return was filed. Once a revised return is filed, the original return is

deemed to have been withdrawn and the revised return is deemed to have been

filed on the date the original return was filed. The revised return steps into the

shoes of the original return.

Issue No. 2: How many times can a return be revised?

As per decision in Dr. N. Srivastava, an assessee can revise a return any

number of times provided that the revised return is filed within the time

prescribed under section 139(5).

Issue No. 3: If income is increased in a revised return furnished after the receipt of the

notice under section 143(2) but before the completion of assessment, then the

revised return is a valid return provided it is furnished before the end of the

relevant Assessment Year. However, penalty for concealment of income

shall be levied on the additional income declared in the revised return.

SECTION 139(9): DEFECTIVE RETURN (REDUNDANT NOW)

(1) Under this sub-section, the Assessing Officer has the power to call upon the assessee

to rectify a defective return.

(2) Where the Assessing Officer considers that the return of income furnished by the

assessee is defective, he may intimate the defect to the assessee and give him an

opportunity to rectify the defect within a period of 15 days from the date of such

intimation. The Assessing Officer has the discretion to extend the time period

beyond 15 days, on an application made by the assessee.


11.10

(3) If the defect is not rectified within the period of 15 days or such further extended

period, then the return would be treated as an invalid return. The consequential

effect would be the same as if the assessee had failed to furnish the return.

(4) Where, however, the assessee rectifies the defect after the expiry of the period of 15

days or the further extended period, but before assessment is made, the Assessing

Officer can condone the delay and treat the return as a valid return.

(5) A return of income shall be regarded as defective unless all the following conditions

are fulfilled, namely:

(i) The annexures, statements and columns in the return of income relating to

computation of income chargeable under each head of income, computations

of gross total income and total income have been duly filled in.

(ii) The return of income is accompanied by the following, namely:

(a) a statement showing the computation of the tax payable on the basis of

the return.

(b) the report of the audit obtained under section 44AB (If such report has

been furnished prior to furnishing the return of income, a copy of such

report and the proof of furnishing the report should be attached).

(c) the proof regarding the tax, if any, claimed to have been deducted or

collected at source and the advance tax and tax on self-assessment, if any,

claimed to have been paid. (However, the return will not be regarded as

defective if (a) a certificate for tax deducted or collected was not

furnished under section 203 or section 206C to the person furnishing his

return of income, (b) such certificate is produced within a period of 2

years).

(d) the proof of the amount of compulsory deposit, if any, claimed to have

been paid under the Compulsory Deposit Scheme (Income-tax Payers)

Act, 1974;

(iii) Where regular books of account are maintained by an assessee, the return of

income is accompanied by the following -

(a) copies of manufacturing account, trading account, profit and loss account

or income and expenditure account, or any other similar account and

balance sheet;

(b) the personal accounts as detailed below -

(1) Proprietary business or

profession

The personal account of the

proprietor

(2) Firm, association of persons

or body of individuals

personal accounts of partners or

members

(3) Partner or member of a firm,

association of persons or

body of individuals

partner’s personal account in firm,

member’s personal account in the

association of persons or body of


11.11

individuals

(iv) Where the cost accounts of an assessee have been audited under section

233B of Companies Act, 1956, the return should be accompanied by such

report.

(v) Where regular books of account are not maintained by the assessee, the return

should be accompanied by -

(a) a statement indicating the amount of turnover or gross receipts, gross

profit, expenses and net profit of the business or profession;

(b) the basis on which such amounts mentioned in (1) above have been

computed,

(c) the amounts of total sundry debtors, sundry creditors, stock-in-trade and

cash balance as at the end of the previous year.

It may be noted that a return which is otherwise valid would not be treated as defective

merely because self-assessment tax and interest payable in accordance with the

provisions of section 140A has not been paid on or before the date of furnishing the return.

Notes:

(i) Many of these particulars are now required to be incorporated as part of the relevant return

form, for example, details of tax deducted at source, advance tax paid, self-assessment tax

paid, amount of turnover/gross receipts etc.

(ii) Section 292B provides that no return of income, order of assessment, notice, summons or

other proceedings furnished or made or taken or purported to have been furnished or made

in pursuance of any of the provisions of the Income-tax Act, 1961 shall be invalid or shall

be deemed to be invalid merely by reason of any mistake, defect or omission in such

return of income, assessment, notice, summons or other proceeding, if they are in

substance and effect in conformity with or according to the intent and purposes of the

Income-tax Act, 1961. The provision, thus, enables tax authorities to accept returns and

other documents and tax payers to accept orders, notice, etc., received from tax

authorities even in cases where there are a few typographical, arithmetical or other

mistakes which do not materially affect the objects with which the document was

submitted by the assessee or order was issued by the department.

SECTION 139B: SCHEME FOR SUBMISSION OF RETURNS THROUGH TAX

RETURN PREPARERS (TRPs)

(Not in Summary, do from here)

(1) This section provides that, for the purpose of enabling any specified class or classes of

persons to prepare and furnish their returns of income, the CBDT may notify a

Scheme to provide that such persons may furnish their returns of income through a

Tax Return Preparer authorised to act as such under the Scheme.

(2) The Tax Return Preparer shall assist the persons furnishing the return in a manner

that will be specified in the Scheme, and shall also affix his signature on such return.


11.12

(3) A Tax Return Preparer can be an individual, other than

(i) any officer of a scheduled bank with which the assessee maintains a current

account or has other regular dealings.

(ii) any legal practitioner who is entitled to practice in any civil court in India.

(iii) a chartered accountant.

(iv) an employee of the ‘specified class or classes of persons’.

(4) The “specified class or classes of persons” for this purpose means any person

other than a company or a person whose accounts are required to be audited under

section 44AB (tax audit) or under any other existing law, who is required to furnish

a return of income under the Act.

(5) The Scheme notified under the said section may provide for the following -

(i) the manner in which and the period for which the Tax Return Preparers shall

be authorised,

(ii) the educational and other qualifications to be possessed, and the training

and other conditions required to be fulfilled, by a person to act as a Tax

Return Preparer,

(iii) the code of conduct for the Tax Return Preparers,

(iv) the duties and obligations of the Tax Return Preparers,

(v) the circumstances under which the authorisation given to a Tax Return

Preparer may be withdrawn, and

(vi) any other relevant matter as may be specified by the Scheme.

(6) Accordingly, the CBDT has, in exercise of the powers conferred by this section,

framed the Tax Return Preparer Scheme, 2006, which came into force from

1.12.2006.

Particulars Contents

Applicability of the

scheme

The scheme is applicable to all eligible persons.

Eligible person Any person being an individual or a Hindu undivided family.

Tax Return

Preparer

Any individual who has been issued a "Tax Return Preparer

Certificate" and a "unique identification number" under this

Scheme by the Partner Organisation to carry on the profession

of preparing the returns of income in accordance with the

Scheme.

However, the following person are not entitled to act as Tax

Return Preparer:

(i) any officer of a scheduled bank with which the assessee

maintains a current account or has other regular dealings.

(ii) any legal practitioner who is entitled to practice in any

civil court in India.


11.13

(iii) an accountant.

Educational

qualification for

Tax Return

Preparers

An individual, who holds a bachelor degree from a

recognised Indian University or institution, or has passed the

intermediate level examination conducted by the Institute of

Chartered Accountants of India or the Institute of Company

Secretaries of India or the Institute of Cost Accountants of

India, shall be eligible to act as Tax Return Preparer.

Preparation of and

furnishing the

Return of Income

by the Tax Return

Preparer

An eligible person may, at his option, furnish his return of

income under section 139 for any assessment year after

getting it prepared through a Tax Return Preparer:

However, the following eligible person (an individual or a

HUF) cannot furnish a return of income for an assessment year

through a Tax Return Preparer:

(i) who is carrying out business or profession during the

previous year and accounts of the business or profession

for that previous year are required to be audited under

section 44AB or under any other law for the time being

in force; or

(ii) who is not a resident in India during the previous year.

An eligible person cannot furnish a revised return of income

for any assessment year through a Tax Return Preparer unless

he has furnished the original return of income for that

assessment year through such or any other Tax Return

Preparer.

Note - It may be noted that as per section 139B(3), an employee of the “specified class

or classes of persons” is not authorized to act as a Tax Return Preparer. Therefore, it

follows that employees of companies and persons whose accounts are required to be

audited under section 44AB or any other law for the time being in force (since they are

not falling in the category of specified class or classes of persons), are eligible to act as

Tax Return Preparers.

POWER OF CBDT TO DISPENSE WITH FURNISHING DOCUMENTS

ETC. WITH THE RETURN AND FILING OF RETURN IN ELECTRONIC

FORM [SECTIONS 139C & 139D]

(1) Section 139C provides that the CBDT may make rules providing for a class or

classes of persons who may not be required to furnish documents, statements,

receipts, certificate, reports of audit or any other documents, which are otherwise

required to be furnished along with the return under any other provisions of this

Act.

(2) However, on demand, the said documents, statements, receipts, certificate, reports of

audit or any other documents have to be produced before the Assessing Officer.


11.14

(3) Section 139D empowers the CBDT to make rules providing for –

(a) the class or classes of persons who shall be required to furnish the return of

income in electronic form;

(b) the form and the manner in which the return of income in electronic form may be

furnished;

(c) the documents, statements, receipts, certificates or audited reports which

may not be furnished along with the return of income in electronic form but

have to be produced before the Assessing Officer on demand;

(d) the computer resource or the electronic record to which the return of income in

electronic form may be transmitted.

ANALYSIS

It is mandatory for the companies and Individuals, HUFs and Partnership firms subject to tax

audit under section 44AB to file return of income electronically i.e., E-return. E-return is a

PAPERLESS RETURN and it is not accompanied by TDS certificates, balance sheet, profit

& loss account, tax audit report and other documents referred to in section 139(9). Therefore,

the assessee filing E-return is exempted from the filing of documents referred to in section

139(9) and other provisions of the Income-tax Act. Even the assessees filing paper return are

exempted from the condition of filing the documents etc. referred to in section 139(9) and

other provisions of Income tax Act. All returns whether electronic returns or physical returns

are paperless returns.

SECTION 140: WHO SHALL VERIFY THE RETURN

(Not in Summary, do from here)

This section specifies the persons who are authorized to verify the return of income under

section 139 of the Act.

Assessee Circumstance Authorised Persons

1. Individual (i) In circumstances not

covered under (ii), (iii) &

(iv) below

- the individual himself

(ii) where he is absent from

India

- the individual himself; or

- any person duly authorised by

him in this behalf holding a

valid power of attorney from

the individual (Such power of

attorney should be attached to

the return of income)

(iii) Where he is mentally

incapacitated from

attending to his affairs

- his guardian; or

- any other person competent to

act on his behalf


11.15

(iv) where, for any other

reason, it is not possible

for the individual to verify

the return

- any person duly authorised by

him in this behalf holding a

valid power of attorney from

the individual (Such power of

attorney should be attached to

the return of income)

2. Hindu

Undivided

Family

(i) in circumstances not

covered under (ii) and (iii)

below

- the karta

(ii) where the karta is absent

from India

- any other adult member of the

HUF

(iii) where the karta is mentally

incapacitated from

attending to his affairs

- any other adult member of the

HUF

3. Company (i) in circumstances not

covered under (ii) to (v)

below

- the managing director of the

company

(ii) (a) where for any

unavoidable reason

such managing

director is not able to

verify the return; or

(b) where there is no

managing director

- any director of the

company/any other person as

may be prescribed for this

purpose. (Amended by

Finance Act 2020)

(iii) Where the company is not

resident in India

- a person who holds a valid

power of attorney from such

company to do so (such power

of attorney should be attached

to the return).

(iv) (a) Where the company

is being wound up

(whether under the

orders of a court or

otherwise); or

(b) where any person has

been appointed as the

receiver of any assets

of the company

- Liquidator

- Liquidator


11.16

(v) Where the management of

the company has been

taken over by the Central

Government or any State

Government under any law

- the principal officer of the

company

(vi) Where an application for

corporate insolvency

resolution process has

been admitted by the

Adjudicating Authority

under the Insolvency and

Bankruptcy Code, 2016.

- insolvency professional

appointed by such

Adjudicating Authority

4. Firm (i) in circumstances not

covered under (ii) below

- the managing partner of the

firm


unavoidable reason

such managing

partner is not able to



managing partner.

- any partner of the firm, not

being a minor

- any partner of the firm, not

being a minor

5. LLP (i) in circumstances not

covered under (ii) below

- Designated partner


unavoidable reason

such designated

partner is not able to



designated partner.

- any partner of the LLP/ any

other person as may be

prescribed for this purpose.

(Amended by Finance Act

2020)

6. Local

authority - - the principal officer

7. Political party

[referred to in

section

139(4B)]

- - the chief executive officer of

such party (whether he is

known as secretary or by any

other designation)

8. Any other

association - - any member of the association

or the principal officer of such

association


11.17

9. Any other

person - - that person or some other

person competent to act on his

behalf.

RETURN OF INCOME IS FILED UNDER THE FOLLOWING SECTIONS

(i) Section 139(1)

(ii) Section 139(3)

(iii) Section 139(4)

(iv) Section 139(4A)

(v) Section 139(4B)

(vi) Section 139(4C)

(vii) Section 139(4D)

(viii) Section139(4E)/(4F)

(ix) Section 139(5)

(x) Section 142(1)(i)

(xi) Section 148

(xii) Section 153A

***************************************************************************

Assessment Procedures AJ Education NeXt

12.1

CHAPTER 12. ASSESSMENT

PROCEDURES

NOTICE UNDER SECTION 142(1)

Section 142(1)(i): If the assessee has not furnished the return of income within the time

specified under section 139(1) then the Assessing Officer may issue a notice requiring him to

furnish the return of income within the time specified in the notice.

KEY NOTES:

1. If the due date under section 139(1) has expired and the assessee has not furnished the

return of income and the Assessing Officer wants to make a best judgement

assessment under section 144, then it is not mandatory for the Assessing Officer to

issue notice under section 142(1)(i). (See later with section 144)

2. A return under section 142(1) cannot be filed belatedly under section 139(4). Further

it cannot be revised under section 139(5).

Section 142(1)(ii): For the purpose of making an assessment, by issuing this notice the

Assessing Officer can require the assessee to furnish accounts, documents, various other

information and also a statement of assets and liabilities, whether included in the accounts or

not.

KEY NOTES:

1. The Assessing Officer shall obtain the previous approval of the Joint Commissioner

before requiring the assessee to furnish a statement of assets and liabilities not

included in the accounts.

2. The Assessing Officer shall not require the production of any accounts relating to a

period more than three years prior to the previous year.

3. Notice under section 142(1)(ii) can be issued whether the assessee has filed return of

income or not.

4. By issuing a notice under section 142(1)(ii) alone, the Assessing Officer cannot make

an assessment.

SECTIONS 142(2A) TO 142(2D): SPECIAL AUDIT

(1) Basis for direction to get accounts audited: 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 Principal Chief

Commissioner or Chief Commissioner or the Principal Commissioner or

Commissioner, direct the assessee to get his accounts audited by an accountant and to

furnish a report of such audit.

The expression ‘accountant’ for this purpose means a ‘chartered accountant’ within the

meaning of the Chartered Accountants Act, 1949.


12.2

(2) Special Audit to be conducted by the accountant nominated by the Principal

Chief Commissioner / Chief Commissioner / Principal Commissioner /

Commissioner - The accountant by whom the audit should be carried out would be

nominated by the Principal Chief Commissioner or Chief Commissioner or Principal

Commissioner or Commissioner of Income- tax specifically for the purpose and the

auditor is required to furnish the report of his audit in the prescribed form duly

signed and verified by him and setting forth such other particulars as may be

prescribed and also giving details in regard to such additional particulars as the

Assessing Officer may require in respect of each individual case. The report of the

auditor should be furnished in Form No.6B prescribed under Rule 14A of the

Income-tax Rules, 1962. The accountant appointed for carrying out the audit

becomes liable to carry out the requirements of audit as directed by Assessing Officer

and it is the Principal Commissioner or Commissioner and not the assessee who would

be his client for this purpose.

(3) Opportunity of being heard to be given before issuing directions for special

audit - The Supreme Court in Rajesh Kumar & Ors. v. DCIT (2006) 287 ITR 91

observed that the order under section 142(2A) is a quasi judicial order. Therefore,

the principles of natural justice have to be applied and the assessee has to be given

an opportunity of being heard before directing the special audit. The principles of

natural justice are based on two principles, namely, (i) nobody shall be condemned

unheard; (ii) nobody shall be a judge of his own cause. Once it is held that the

assessee suffers civil consequences and any order passed would be prejudicial to

him, the principles of natural justice must be held to be implicit. If the principles of

natural justice were to be excluded, the Parliament could have said so expressly.


12.3

Accordingly, to give effect to the observation of the Supreme Court, it has been

provided that the Assessing Officer is required to give the assessee an opportunity

of being heard before issuing directions for special audit under section 142(2A).

(4) Special audit may be directed even if accounts are audited under any other

law - The Assessing Officer is empowered to direct the audit to be carried out in the

case of any particular assessee even if the accounts of the assessee have already been

audited under any other law for the time being in force or otherwise.

(5) Time limit - The report of the auditor after conducting the audit must be furnished to

Assessing Officer by the assessee within the period specified by the Assessing

Officer in his order. The Assessing Officer is, however, entitled, suo motu on

receipt of an application made in this behalf by the assessee for any good any

sufficient reason to extend the time-limit by such further period or periods as he

deems fit. Further, the aggregate of the period originally fixed and the period or

periods so extended should not exceed 180 days in any case. This time of 180 days

must be reckoned from the date on which the Assessing Officer’s direction to get the

accounts audited is received by the assessee.

(6) Expenses of special audit to be paid by the Central Government - Where the

direction for special audit is issued by the Assessing Officer, the expenses of, and

incidental to, such special audit, including remuneration of the Accountant, shall be

determined by the Principal Chief Commissioner or Chief Commissioner or

Principal Commissioner or Commissioner in accordance with the prescribed

guidelines. The expenses so determined shall be paid by the Central Government.

Rule 14B lays down the guidelines for the purposes of determining expenses for

audit under section 142(2A). The said Rule is applicable when the audit under

section 142(2A) is directed by an Assessing Officer on or after 1st June, 2007. The

expenses of, and incidental to, audit (including the remuneration of the accountant,

qualified assistants, semi-qualified and other assistants who may be engaged by

such Accountant) should not be less than Rs. 3,750 and not more than Rs. 7,500 for

every hour of the period as specified by the Assessing Officer under section

142(2C). Such period shall be specified in terms of the number of hours required for

completing the report.

(7) Assessee to be given an opportunity of being heard - The assessee should,

however, be given an opportunity of being heard in respect of any material gathered

on the basis of –

(i) any inquiry under section 142(2); or

(ii) any audit under section 142(2A)


12.4

which is proposed to be utilized for the purposes of the assessment. If, however, the

assessment is in nature of a best judgment assessment under section 144, it is not

obligatory for the Assessing Officer to give the assessee an opportunity to be heard,

before passing the assessment order on the basis of the report of the auditor.

Illustration:

For Assessment Year 2021-2022, the assessee filed a return of income under section 139(1)

and his case was picked up for scrutiny under section 143(3). He was accordingly issued a

notice under section 143(2). During the assessment proceedings, the Assessing Officer

directed the assessee to get his accounts audited under section 142(2A). The report of the

special audit is received by the Assessing Officer within the prescribed time. The Assessing

Officer requires further information from the assessee through a notice under section 143(2).

The assessee is not able to furnish the information as required by the notice within the time

given in the notice.

The Assessing Officer issues a show cause notice to the assessee under section 144 to show

cause as to why a best judgment assessment should not be made on him for non-compliance

with the notice under section 143(2).

CASE-I: Assessee replies to the show cause notice under section 144 and the Assessing

Officer considers that the reply is satisfactory.

CASE-II: Assessee does not reply to the show cause notice or the reply given to the show

cause notice by the assessee is not considered satisfactory by the Assessing Officer.

COMMENT.

Answer:

CASE I: Since the reply to the show cause notice under section 144 is satisfactory, the

Assessing Officer shall drop the proceedings under section 144 and will complete the

assessment under section 143(3). If the Assessing Officer wants to use any material gathered

from the report of Chartered Accountant under section 142(2A), then the assessee shall be

given an opportunity of being heard as to show cause why the material in the audit report

should not be used against him.

CASE II: Since the reply to show cause notice under section 144 is not given or is not

satisfactory, the Assessing Officer shall proceed to make a best judgment assessment under

section 144. The Assessing Officer may utilise for the purposes of assessment under section

144, any material gathered on the basis of audit under section 142(2A). in this case the

assessee shall not be given an opportunity of being heard as to show cause why the material

in the audit report should not be used against him.

(8) Consequence of failure to get special audit done - In any case, where the

assessee is directed to get audit done and the assessee fails to do so, the Assessing

Officer is entitled to make a best judgment assessment under section 144 in addition

to imposing penalty or taking such steps as may be necessary under the law.

In a case where a Principal Chief Commissioner or Chief Commissioner or

Principal Commissioner or Commissioner issued instructions under section 142(2A)


12.5

nominating a Chartered Accountant for auditing the assessee’s accounts and though

the concerned assessee was willing to produce the records, the concerned Chartered

Accountant refused to audit the accounts, a question arose as to whether there was a

failure on the assessee’s part to comply with the directions under section 142(2A)

and consequently the best judgement assessment could be made under section

144(b).

The Supreme Court held that if for a frivolous reason the Chartered Accountant

declined to undertake the audit of the assessee’s accounts, the assessee could not be

held responsible. In such a case, there was no default or failure to comply with the

direction issued under section 142(2A) on the asssessee’s part so as to attract the

provisions of section 144(b). The best judgement made by the Assessing Officer was

set aside with the directions to appoint another Chartered Accountant within one

month to get the accounts audited [Swadeshi Polytex Ltd. v. ITO [1983] 144 ITR 171

(SC)].

(9) If Assessing Officer issues direction under section 142(2A) without giving a show

cause notice to the assessee, then assessee can file a WRIT PETITION in High Court

against such direction and High Court shall quash such direction issued under section

142(2A).

FOR YOUR KNOWLEDGE:

No appeal can be filed against direction issued under section 142(2A) or any notice issued by

Assessing Officer under the Income tax Act. The assessee has a constitutional remedy in case

he wants to challenge the direction under section 142(2A) or any other notice of Assessing

Officer. The assessee can file a WRIT PETITION in the High Court challenging the validity

of the direction under section 142(2A) or any other notice issued by Assessing Officer.

Thereafter the assessee can file a Special Leave Petition (SLP) to the Supreme Court.

WRIT PETITION & SLP can be filed only if there is no remedy in law.

CONSEQUENCES OF NON-COMPLIANCE WITH A NOTICE ISSUED UNDER

SECTION 142(1) (i) OR UNDER SECTION 142(1)(ii) OR 143(2) OR A DIRECTION

UNDER SECTION 142 (2A)

1. It may result in a best judgement assessment under section 144 and/ or

2. Penalty under section 272A - Penalty of Rs. 10,000 for each such failure and/ or

3. Prosecution under section 276D - Imprisonment with or without fine.

KEY NOTE:

Before making a best judgement assessment and before levying penalty/ launching

prosecution, the assessee shall be given an opportunity of being heard. If the assessee proves

that there was a reasonable cause for the failure, for e.g. negligence of the CA in submitting

the report under section 142(2A), death in the family, some major illness, etc., the Assessing

Officer shall not make the best judgement assessment. The penalty and prosecution

proceedings shall be dropped. (Where a notice under section 142(1)(i) has been issued to the

assessee and he has not complied with it, then opportunity of being heard shall NOT be given

before making best judgement assessment).


12.6

SECTION 142A: ESTIMATION OF VALUE OF ASSETS BY VALUATION

OFFICER

(1) The Assessing Officer may, for the purposes of assessment or reassessment, make a

reference to a Valuation Officer to estimate the value, including fair market value, of

any asset, property or investment and submit a copy of report to him.

(2) The Assessing Officer may make a reference to the Valuation Officer under sub-

section (1) whether or not he is satisfied about the correctness or completeness of the

accounts of the assessee.

(3) The Valuation Officer shall, estimate the value of the asset, property or investment

after taking into account such evidence as the assessee may produce and any other

evidence in his possession gathered, after giving an opportunity of being heard to the

assessee.

(4) The Valuation Officer may estimate the value of the asset, property or investment to

the best of his judgment, if the assessee does not co-operate or comply with his

directions.

(5) The Valuation Officer shall send a copy of the report of the estimate made under

subsection (3) or sub-section (4), as the case may be, to the Assessing Officer and the

assessee, within a period of six months from the end of the month in which a

reference is made under sub-section (1).

(6) The Assessing Officer may, on receipt of the report from the Valuation Officer, and

after giving the assessee an opportunity of being heard, take into account such report

in making the assessment or reassessment.

ANALYSIS

1. Certain courts have held that reference to Valuation Officer can be made only for the

purposes of capital gains. Section 142A over rules this view and reference to

Valuation Officer can be made for purposes of making assessment/ reassessment. For

example, valuation of assets under section 56(2)(x)/ (viib). Also where assessee does

not co-operate in assessment and Assessing Officer wants to make additions on the

basis of assessment to the best of his judgement, Assessing Officer can refer to the

Valuation Officer to determine the FMV of assets acquired by the assessee in the

previous year.

2. Certain courts held that Assessing Officer must reject books of accounts to exercise

the power of reference to Valuation Officer. The Courts held that Assessing Officer, if

he is not satisfied with correctness or completeness of books, should first reject the

books of account and then make a reference to Valuation Officer. Newly substituted

section 142A provides that Assessing Officer can make reference to the Valuation

Officer whether or not he is satisfied with completeness or correctness of books of

account.

SECTION 143(1): NEW SCHEME OF PROCESSING OF RETURNS

(i) Section 143(1) provides for computation of the total income of an assessee

after making the following adjustments to the returned income:-

(a) any arithmetical error in the return; or

(b) an incorrect claim, if such incorrect claim is apparent from any information

in the return.


12.7

(c) Disallowance of loss claimed, if return is filed beyond due date u/s

139(1)

(d) Disallowance of expenditure indicated in the audit report but not taken

into account in computing the total income in the return

(e) Disallowance of deduction u/s 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-

ID or 80-IE, if return is filed beyond due date u/s 139(1)

However, before making any such adjustments, in the interest of natural justice,

intimation has to be given to the assessee requiring him to respond to such

adjustments. Such intimation may be in writing or through electronic mode. The

response received, if any, has to be duly considered before effecting any

adjustment. However, if no response is received within 30 days of issue of such

intimation, the processing shall be carried out incorporating the adjustments.

(ii) The term “an incorrect claim apparent from any information in the return” shall

mean such claim on the basis of an entry, in the return, –

(a) of an item, which is inconsistent with another entry of the same or some

other item in such return;

(b) in respect of which, information required to be furnished to substantiate

such entry, has not been furnished under this Act; or

(c) in respect of a deduction, where such deduction exceeds specified

statutory limit which may have been expressed as monetary amount or

percentage or ratio or fraction.

(iii) Tax, interest and fee should be computed on the basis of the total income

computed after making the adjustments in (i) above.

(iv) The sum payable by, or the amount of refund due to, the assessee shall be

determined after adjustment of such tax, interest and fee, if any, so computed

by any tax deducted at source, any tax collected at source, any advance tax

paid, any relief allowable under an agreement under section 90 or section

90A, or any relief allowable under section 91 any tax paid on self-assessment

and any amount paid otherwise by way of tax, interest or fee.

(v) Based on the above adjustments, an intimation shall be prepared or generated

and sent to the assessee within a period of one year from the end of the

financial year in which the return was made. The intimation shall specify the

sum determined to be payable by, or the amount of refund due to, the

assessee.

(vi) If any amount of refund is due to the assessee, the same shall be granted to the

assessee.

(vii) An intimation shall also be sent to the assessee in a case where the loss

declared in the return by the assessee is adjusted but no tax, interest or fee is

payable by, or no refund is due to, him.


12.8

(viii) On the other hand, where there is neither any adjustment nor any tax due from

or refund payable to the assessee, the acknowledgement of the return shall be

deemed to be the intimation under section 143(1).

(ix) The scheme contemplates avoiding human interface and therefore, provides

for computerised processing of returns for making the above adjustments i.e.,

the software will be designed to detect arithmetical inaccuracies and internal

inconsistencies and make appropriate adjustments in the computation of the

total income/fringe benefits.

Provided further that no intimation under this sub-section shall be sent after the expiry

of one year from the end of the financial year in which the return is made.

The acknowledgment of the return shall be deemed to be the intimation in a case where

no sum is payable by, or refundable to, the assesse.

ANALYSIS OF SECTION 143(1)

1. ADJUSTMENTS TO BE MADE IN THE RETURNED TOTAL INCOME

UNDER SECTION 143(1),-

(a) An incorrect claim apparent from any information in the return shall mean a

claim on the basis of an entry, in the return of an item, which is inconsistent with

another entry of the same or some other item in such return;

Illustrations: In the return filed manually, Depreciation schedule as per Income tax Act in

the return states depreciation as per Income tax Act to be Rs. 20,30,000 but

assessee had claimed depreciation of Rs. 24,30,000 while computing income

from profits and gains of business or profession. Now, under section 143(1),

Rs. 4,00,000 shall be added to the returned income.

(b) An incorrect claim apparent from any information in the return shall mean a

claim on the basis of an entry, in the return in respect of which, information

required to be furnished to substantiate such entry, has not been furnished

under this Act;

Illustrations: (i) Assessee has claimed deduction under section 80G. The PAN of donee is

not given in the ROI. The deduction under section 80G shall be disallowed

by software under section 143(1).

(ii) A charitable trust has claimed exemption under section 11(2) of Rs.

5,00,000. But the trust has not been attached Form 10A with the return

which is necessary to claim exemption under section 11(2). Now software

under section 143(1) shall disallow exemption under section 11(2).

(c) An incorrect claim apparent from any information in the return shall mean a

claim on the basis of an entry, in the return in respect of a deduction, where such

deduction exceeds specified statutory limit which may have been expressed as

monetary amount or percentage or ratio or fraction.


12.9

Illustrations: (i) If under section 24(1)(i) the deduction in respect of repairs is claimed in

excess of 30% of the rental income, excess shall be disallowed as an

apparent incorrect claim under section 143(1).

(ii)Similarly, if the deduction under section 80C is claimed more than the

maximum permissible deduction under section 80C i.e., Rs. 1,50,000, the

excess shall be disallowed under section 143(1).

(d) Assessee files a return of income for Assessment year 2021-2022 on 30.09.2021 as

under :

Current year income 20,00,000

Less: B/F Loss of A/Y 2020-2021 13,00,000

Returned Income 7,00,000

The return of income was filed for Assessment Year 2020-21 on 31.12.2020 i.e. after

the due date.

The software while processing the return for Assessment Year 2021-22 under section

143(1) will disallow the Loss of Rs. 13,00,000 and will compute the income at Rs.

20,00,000. Before making the adjustment of Rs. 13,00,000 an intimation shall be sent to

the assessee for proposed disallowance. If assessee has taken condonation of delay for

Assessment Year 2020-21 from Chief Commissioner of Income-tax for carry forward

of loss, then he can respond to the intimation informing about such condonation and

enclosing a copy thereof. In such a case, the adjustment of Rs. 13,00,000 shall not be

made.

(e) The assessee filed a return of income for Assessment Year 2021-22 disclosing an

income of Rs. 25,00,000. In the tax audit report, the tax auditor has mentioned that

personal expenses of Rs. 2,00,000 have been debited to Profit & Loss Account and has

also mentioned that prior period expenses debited to Profit & Loss Account are Rs.

3,00,000. However, assessee has not disallowed both the expenses since as per

assessee, personal expenses are related to business and prior period expenditure

crystallised during the Previous Year 31.03.2021 and are, therefore, allowable.

According to assessee, both the expenses are allowable.

Now under section 143(1), the software while processing the return will disallow

expenses of Rs. 5,00,000 indicated in the tax audit report. But before making addition

of Rs. 5,00,000, an intimation shall be sent to the assessee informing about proposed

disallowances. Assessee can respond to the intimation that tax audit report is wrong and

expenses are allowable. But practically, after considering the response of the assessee,

the software will disallow expenses of Rs. 5,00,000. Now assessee can file appeal to


12.10

Commissioner of Income-tax (Appeals) against the intimation made under section

143(1).

(f) For Assessment Year 2021-22, the due date of filing of return is 30.09.2021. Assessee

files a return on 30.11.2021 declaring Nil income. He has claimed deduction of Rs.

50,00,000 under section 10AA/80IA/80IB/80IAB/80IC/80ID/80IE.

The software while processing the return under section 143(1) shall disallow the

deduction of Rs. 50,00,000 and shall compute the income at Rs. 50,00,000.

An intimation of proposed disallowance shall be sent to be assessee before making such

disallowance.

2. Intimation under section 143(1) shall be sent in the following three cases only:

(i) Where tax or interest is found payable on the basis of the return, after making the

adjustments referred to in section 143(1) and after giving credit to the taxes and

interest paid; or

(ii) Where any tax or interest is found refundable on the basis of the return, after making

the adjustments referred to in section 143(1) and after giving credit to the taxes and

interest paid; and

(iii) Where adjustments referred to in section 143(1) have been made resulting in increase

/ reduction of loss declared by the assessee and no tax or interest is payable by the

assessee and no tax or interest is refundable to the assessee.

3. If there is no tax or interest payable or refundable on the basis of the return, or no

adjustment is made resulting in reduction / increase in loss, then an intimation under

section 143(1) shall not be sent to the assessee. In such a case, acknowledgement of

filing of return of income is deemed as an intimation under section 143(1).

4. Notice under section 143(2) can be issued if an intimation under section 143(1) has

been issued to the assessee. Even in cases where acknowledgement is deemed as an

intimation under section 143(1), notice under section 143(2) can be issued to the

assessee.

5. Section 143(1) is not an assessment but is an intimation/ deemed intimation.

Intimation/deemed intimation under section 143(1) is not an assessment order.

6. Appeal to CIT(Appeals) can be filed against the order of Assessing Officer. Similarly

revision application under section 264 can be made to CIT for revising the order of

Assessing Officer. As per Finance Act, 2012, appeal is possible to CIT(Appeals)

against the intimation/ deemed intimation under section 143(1). However, no revision

application under section 264 can be made to CIT for revising an intimation/ deemed

intimation under section 143(1).

7. Under section 263, the CIT can revise the order of Assessing Officer. Since, 143(1) is

not an order, the CIT under section 263 cannot revise the intimation or deemed

intimation under section 143(1).


12.11

8. As per the provisions of section 154, the Assessing Officer with a view to rectify any

mistake apparent from record may:

(i) Amend any order passed by him under the provisions of Income-tax Act.

(ii) Amend any intimation or deemed intimation under section 143(1).

As per section 154, the Assessing Officer shall make the amendment under section

154 on his own motion or where the mistake is brought to his notice by the assessee.

The amendment under section 154 is done by passing a rectification order under

section 154.

Therefore, under section 154 the Assessing Officer has the power to rectify a mistake

apparent from record in the intimation/ deemed intimation under section 143(1).

Assessee can also seek rectification under section 154 of any mistake apparent from

record in the intimation/deemed intimation under section 143(1).

9. A return can be revised under section 139(5) even after the receipt of intimation under

section 143(1) since 143(1) is not an assessment. Therefore, return can be revised

under section 139(5) even if there is an intimation/ deemed intimation under section

143(1) subject to the conditions and time limits of section 139(5).

10. The demand in the intimation issued under section 143(1) should be paid within 30

days from the date of receipt of such intimation. If the assessee fails to pay the

demand within said 30 days, then he shall be deemed to be an assessee in default and

interest under section 220 and penalty under section 221 shall be levied.

11. As per section 143(1), the intimation for tax payable/ refundable shall not be sent after

the expiry of one year from the end of the financial year in which return is filed.

However, the limitation of one year shall not apply to issue of cheque of refund.

Therefore, the cheque of refund can be granted at any time.

SECTION 143(1D): PROCESSING OF RETURN IN CASE OF SCRUTINY

(i) Section 143(1) requires processing of return of income filed under section 139(1)

or in response to a notice issued under section 142(1).

(ii) An intimation has to be prepared or generated and sent to the assessee specifying

the sum payable or the refund due, to the assessee.

(iii) No intimation can be sent after the expiry of one year from the end of the financial

year in which the return is made. This is provided in the second proviso to section

143(1).

(iv) In respect of returns furnished for A.Y.2017-18 or thereafter, processing of a return

under section 143(1) is necessary even where a notice has been issued to the assessee


(v) However, to address the concern of recovery of revenue in doubtful cases, new section

241A provides that, for the returns furnished for A.Y.2017-18 or thereafter, where refund

of any amount becomes due to the assessee under section 143(1) and the Assessing

Officer is of the opinion that grant of refund may adversely affect the recovery of revenue,

he may, for the reasons recorded in writing and with the previous approval of the Principal


12.12

Commissioner or Commissioner, withhold the refund upto the date on which the

assessment is made.

SECTION 143(2): NOTICE FOR MAKING SCRUTINY ASSESSMENT UNDER

SECTION 143(3)

Where a return has been made under section 139, or in response to a notice under sub section

(1) of section 142, the Assessing Officer or the prescribed Income Tax Authority, as the

case may be, if considers it necessary or expedient to ensure that the assessee has not

understated the income or has not computed excessive loss or has not under-paid the tax in

any manner, serve on the assessee a notice requiring him, on a date to be specified therein,

either to attend his office or to produce, or cause to be produced there, any evidence on which

the assessee may rely in support of the return :

Provided that no notice under this sub-section shall be served on the assessee after the expiry

of six months from the end of the Financial Year in which the return is furnished.

(Also Refer section 292BB on Page no._________)

Illustration - 1: For Assessment Year 2021-2022, ROI was filed on:

(i)30.9.2021

(ii)31.3.2022

In both cases, notice under section 143(2) i.e., for scrutiny assessment can be served upto

30.9.2022.

Illustration - 2: For Assessment Year 2021-2022, the due date of filing of ROI is 30.9.2021.

ROI is filed on 31.3.2022. Now notice under section 143(2) can be served on the assessee on

or before 30.9.2022.

Illustration - 3: For previous year ended 31.03.2021 i.e. Assessment Year 2021-2022, the

due date of filing ROI is 31.07.2021. ROI is filed on 12.11.2021.

Notice under section 143(2) must be served on the assessee on or before 30.09.2022.

Illustration - 4: Suppose in Illustration 3 above, the notice under section 143(2) is issued on

30.09.2022 and is received by the assessee on 02.10.2022.

Notice issued under section 143(2) is time barred and thus, invalid.

Illustration - 5: For Assessment Year: 2021-2022, the ROI was filed on 30.09.2021. Notice

under section 143(2) served on 30.09.2022 asking for personal appearance & book of

accounts. Another notice under section 143(2) served on 31.12.2022 asking for purchase

ledger & sales ledger.

2nd Notice is continuation of 1st notice and therefore valid. If 1st notice served in time, then

subsequent notices are in continuation of first notice and are valid.


12.13

Is non-issuance of notice under section 143(2) by the Assessing Officer a defect not

curable under section 292BB inspite of participation by the assessee in assessment

proceedings?

CIT V. LAXMAN DAS KHANDELWAL (2019) (SC)


1. The law on the point as regards applicability of the requirement of issue of notice

under section 143(2) is quite clear.

2. According to section 292BB, if the assessee had participated in the proceedings,

by way of legal fiction, notice issued would be deemed to be valid even if there

be infractions as detailed in the said section.

3. The scope of the provision is to make service of notice having certain

infirmities to be proper and valid if there was requisite participation on the

part of the assessee.

4. It is, however, to be noted that the section does not save complete absence of

issue of notice.

5. For section 292BB to apply, the notice must have emanated from the

Department. It is only the infirmities in the manner of service of notice that the

section seeks to cure. The section is not intended to cure complete absence of notice

itself.

Supreme Court’s Decision: The Supreme Court held that non - issuance of notice under

section 143(2) is not a curable defect under section 292BB inspite of participation by

the assessee in assessment proceedings.

SECTION 143(3): REGULAR/ SCRUTINY ASSESSMENT

On the day specified in the notice issued under sub-section (2), or as soon as afterwards as

may be, after hearing such evidence as the assessee may produce and such other evidence as

the Assessing Officer may require on specified points, and after taking into account all

relevant material which he has gathered, the Assessing Officer shall, by an order in writing,

make an assessment of the total income or loss of the assessee, and determine the sum

payable by him or refund of any amount due to him on the basis of such assessment.

Provided that in case of an assessee who is required to furnish the return of income under

section 139(4C), no order making an assessment of the total income or loss, shall be made by

the Assessing Officer, without giving effect to the provisions of section 10, unless -

(i) the Assessing Officer has intimated the Central Government or the prescribed

authority the contravention of the provisions of section 10, where in his view

such contravention has taken place; and

(ii) the approval granted to such institution has been withdrawn or notification

issued in respect of such institution has been rescinded.

Provided further that where the Assessing Officer is satisfied that the activities of the

university, college or other institution referred to in section 35(1)(ii)/(iii) are not being carried

out in accordance with all or any of the conditions subject to which such university, college

or other institution was approved, he may after giving a reasonable opportunity of showing

cause against the proposed withdrawal to the concerned university, college or other


12.14

institution, recommend to the Central Government to withdraw the approval and that

Government may by order, withdraw the approval and forward a copy of the order to the

concerned university, college or other institution and the Assessing Officer.

AMENDMENTS BY FINANCE ACT 2012

Amendment has been carried out in section 10(23C) and section 13 which provides that

exemption under section 10(23C) or 11 or 12 shall not be available for the Assessment

Year in which first proviso to section 2(15) becomes applicable even if Government/

Commissioner of Income-tax has not cancelled the approval granted for such previous

year.

The amendment provides that exemption under section 10(23C) or 11 or 12 shall not be

available for the previous year in which commercial receipts exceeds 20% of total

receipts, whether or not the approval granted, or notification issued for such institutions

has been cancelled. Exemption shall not be available even if Government/

Commissioner of Income-tax has not cancelled the approval/ notification granting

exemption under section 10(23C) or 11 or 12.

Following amendment has been made by Finance Act, 2012:

- Assessing Officer shall not give exemption under section 10(23C) or under

section 11 & 12 in case of a trust or institution for the previous year

- in which First Proviso to section 2(15) becomes applicable i.e. commercial /

business receipts exceeds 20% of total receipts

- whether or not approval granted to such trust or institution has been cancelled

under section 12AA or under section 10(23C)

- Assessing Officer will disallow exemption under section 10(23C) or 11 & 12 by

operation of law.

ANALYSIS OF SECTION 143(2) AND SECTION 143(3)

1. Where the assessee has not furnished his return of income, then notice under section

143(2) cannot be issued to him and consequently assessment under section 143(3) is

not possible. This is because notice under section 143(2) can be issued only if the

assessee has filed return under section 139 or in response to a notice issued under

section 142(1).

2. If the assessment under section 143(3) is made without serving a notice under section

143(2), then the assessment is void-ab-initio.

3. If the assessment under section 143(3) is made in pursuance of a notice under section

143(2) served after the expiry of 6 months from the end of the Financial Year in

which ROI is filed, then such assessment is void-ab-initio.

4. As per the guidelines issued by CBDT only 3% to 5% cases can be taken for an

assessment year in SCRUTINY under section 143(3).

5. For making scrutiny assessment under section 143(3), the Assessing Officer is not

required to possess any reasons to believe. He can issue notice under section 143(2) to

ensure that assessee –

- has not understated the income or

- has not computed excessive loss or


12.15

- has not underpaid the tax in any manner.

6. CBDT has clarified that since under section 143(3), refund can be granted to the

assessee, the Assessing Officer can reduce the income below the returned income and

can assess the loss higher than the returned loss under section 143(3).

7. GOETZE (INDIA) LTD. VS. COMMISSIONER OF INCOME-TAX [2006]

(SUPREME COURT)-IMPORTANT

FACTS OF THE CASE:

For the assessment year 2013-14 the assessee filed its return on September 30, 2013

and on November 12, 2015 sought to claim a deduction by way of a letter addressed

to the Assessing Officer. The Assessing Officer disallowed it on the ground that there

was no provision in the Income-tax Act, 1961 allowing an amendment in the return

without a revised return. The Tribunal confirmed this, as did the High Court.

HELD:

The Supreme Court held that a claim can be made before the Assessing Officer in the

assessment proceedings only through a revised return and not through a letter.

Therefore, if a deduction has not been claimed in the return and the assessee wants to

claim the said deduction in the assessment proceedings then he can do so, only by

filing a revised return. The Assessing Officer cannot entertain such claim made by the

assessee through a letter. The Supreme Court also observed that in this case they were

dealing with the power of Assessing Officer and not with the power of ITAT which

has the power to entertain a new ground of appeal not raised earlier as held in

National Thermal Power Supply Co.

Can an assessee revise the particulars filed in the original return of income by

filing a revised statement of income?

Orissa Rural Housing Development Corpn. Ltd. v. ACIT (2012) (Orissa)

High Court’s Decision: On this issue, the Orissa High Court held that the assessee can

make a fresh claim before the Assessing Officer or make a change in the originally

filed return of income only by filing revised return of income under section 139(5).

There is no provision under the Income-tax Act, 1961 to enable an assessee to

revise his income by filling a revised statement of income. Therefore, filling of

revised statement of income is of no value and will not be considered by the

Assessing Officer for assessment purposes.

The High Court, relying on the judgement of the Supreme Court in Goetze (India)

Ltd. v. CIT (2006) ITR 323, held that the Assessing Officer has no power to entertain

a fresh claim made by the assessee after filing of the original return except by way of

filing a revised return.

8. Section 153(1) - Time limit to pass the order under section 143(3)

No order of assessment under section 143(3) or 144 shall be made after the expiry of

12 months from the end of the relevant Assessment Year. (To be discussed later)


12.16

9. First Proviso to section 143(3)

Exemptions under section 10(21), section 10(22B), section 10(23A), section 10(23B)

and section 10(23C)(iv)(v)(vi)(via) are available to the specified institutions by

notification issued by the Central Government/ prescribed authority. These sections

have been amended by the Finance Act, 2002 and the Central Government/ prescribed

authority has been given the power to rescind the notification of exemption and

forward a copy of the order rescinding the notification to the specified institution and

to the Assessing Officer. The amendment provides that the Central Government/

prescribed authority shall rescind the notification if it is satisfied that the specified

institution has not satisfied the requirements contained in the respective sections and/

or has not satisfied the conditions subject to which exemption was granted.

Section 139(4C) has been also introduced by Finance Act, 2002 which makes it

mandatory for such specified institutions to file return of income. The objective of

inserting section 139(4C) is that the Assessing Officer can check from the return of

income as to whether the conditions specified in respective section/ notification has

been satisfied or not.

In case the conditions specified in respective section/ notification have been

contravened, then the Assessing Officer shall intimate such contraventions to the

Central Government/ prescribed authority who shall withdraw the exemption by

rescinding the notification.

First Proviso to section 143(3) provides that Assessing Officer cannot himself

disallow the exemption under section 10(21)/ 10(22B)/ 10(23A)/ 10(23B)/

10(23C)(iv)(v)(vi)(via) while making an assessment under section 143(3). He can

under section 143(3) disallow the exemption under the said sections only if the

Government/ prescribed authority has rescinded the notification withdrawing the

exemption.

Section 153 has been correspondingly amended and the time limit for making

assessment under section 143(3) shall be increased where the Assessing Officer

intimates the contravention to Central Government/ prescribed authority.

10. Second Proviso to section 143(3)

Second Proviso has been inserted to section 143(3) and simultaneously section

139(4D) has been inserted. Section 139(4D) makes it mandatory for the university,

college or other institution referred to in section 35(1)(ii) /35(1)(iii) to file the return.

Second proviso to section 143(3) empowers the A.O. to recommend to the Central

Government to withdraw the approval under section 35(1)(ii)/ 35(1)(iii) in case the

A.O. finds that such institution is not complying with the conditions subject to which

approval was granted to it.


A new scheme for the purpose of making assessments has been coined so as to impart

greater transparency and accountability,

(i) by eliminating the interface between the Assessing Officer and the assessee,

(ii) optimal utilization of the resources, and

(iii) introduction of team-based assessment.


12.17

For this purpose, a new sub-section (3A) has been inserted (with effect from

April 1, 2018) which would enable the Central Government to prescribe the

aforementioned new scheme for scrutiny assessments, by way of notification in

the Official Gazette.

Further, sub-section (3B) has been inserted which empowers the Central

Government to direct (by notification in the Official Gazette) that any of the

provisions relating to assessment shall not apply, or shall apply with such

exceptions, modifications and adaptations as may be specified therein.

However, no such direction shall be issued after March 31, 2020.


Modification of e-assessment scheme.

1. Section 143 of the Act provides the manner for processing and assessment of

return of income (ITR) where a return has been made under section 139, or in

response to a notice under sub-section (1) of section 142 of the Act.

2. Sub-section (3A) of section 143 provides that the Central Government may make a

scheme, by notification in the Official Gazette, for the purposes of making

assessment of total income or loss of the assessee under sub-section (3) of section

143 so as to impart greater efficiency, transparency and accountability by certain

means specified therein. Accordingly, E-assessment Scheme, 2019 was notified under

sub-section (3A) of Section 143 of the Act.

3. It is proposed to amend sub-section (3A) of section 143 of the Act to, -

(i) expand the scope so as to include the reference of section 144 of the Act relating

to best judgement assessment in the said sub-section;

(ii) provide that Central Government may issue any direction under sub-section (3B)

of the said section upto 31st March 2022.

This amendment will take effect from 1st April 2020.

Notice under section 142(1) Notice under section 143(2)

1.Notice to call for ROI/ books of

Accounts/other information.

1.Notice for making assessment under section.

143(3).

2.By issuing notice under section. 142(1)(ii)

alone, assessment is not possible.

2.Assessment under section. 143(3) is possible

only if the notice under section. 143(2) has

been issued.

3.Notice can be issued even if the assessee

has not filed the ROI.

3.Notice can be issued only if the assessee has

filed ROI.

4.No time limit prescribed in law for issue

of this notice.

4.Time limit of 6 months prescribed for service

of notice.


12.18

5.Prior approval of JC required in certain

cases

5.No such approval is required.

6.Books of Accounts can be asked for a

limited period (3 years).

6.No such restriction,

SECTION 144: BEST JUDGEMENT ASSESSMENT

If any person

(a) fails to furnish a return of income under section 139(1) and has not furnished the

return under section 139(4) up to the date of issue of show cause notice under

section 144, or

(b) fails to comply with all terms of a notice issued under section 142(1)(i) or section

142(1)(ii), or

(c) fails to comply with a direction for special audit issued under section 142(2A), or

(d) fails to comply with all terms of a notice issued under section 143(2),

then the Assessing Officer after taking into account all relevant material which he has

gathered, shall make an assessment to the best of his judgement and determine the tax

payable by the assessee.

KEY NOTES:

1. The Assessing Officer shall not make the assessment unless he gives an opportunity

of being heard to the assessee. The opportunity of being heard shall be given by

serving a notice upon the assessee in which he shall be asked to show cause as to why

a best judgement assessment should not be made on him. [Show cause notice under

section 144]

2. This show cause notice is not required to be issued where a notice under section

142(l)(i)(ii) has already been issued to the assessee and assessee has not complied

with the notice under section 142(1)(i)(ii).

ANALYSIS OF SECTION 144

1. If an assessment under section 144 is made without giving a show cause notice under

section 144 [except where a notice has been issued under section 142(l)(i)(ii)], then

the assessment is void-ab-initio.

2. The words "or refund of any amount due to him" were deleted from section 144. As

per the clarification issued by CBDT, the Assessing Officer under section 144 cannot

assess the income below the returned income and cannot assess the loss higher than

the returned loss.

3. The assessment under section 144 cannot be made in an arbitrary manner or on adhoc

basis. The assessment must be based on the material which the Assessing Officer

collects, e.g. last year's ROI, current year's ROI, growth rate of industry etc. The

Assessing Officer must specify the basis of computation of income under section 144

and the basis must be a rational and scientific basis. The order under section 144

should be a SPEAKING ORDER.

4. Section 153(1) - Time limit to pass the order under section 144

No order of assessment under section 143(3) or 144 shall be made after the expiry of

12 months from the end of the relevant Assessment Year.


12.19

Illustration:

For Assessment Year 2021-2022 the due date is 30.09.2021 and the ROI is not filed till 31st

December, 2021. On 31.12.2021, the A.O. issues a show cause notice under section 144 to

the assessee to show cause as to why a best judgement assessment should not be made on him

for failure to file ROI under section 139(1) and 139(4). In the said show cause notice the

assessee is asked to file his reply by 30th January, 2022.

Case 1: The assessee files a reply to the show cause notice on 15.1.2022 stating that

because of a death in the family, he was not able to file the ROI. Along with

the reply he files a ROI on 15.1.2022.

Case 2: The assessee does not reply to the show cause notice or his reply is not

satisfactory (i.e. he gives no valid reasons for failure to file ROI). The assessee

files a return on 25.1.2022.

Answer:

Case 1: The return filed on 15.1.2022 is a valid return under section 139(4). Since

there is a reasonable cause for the failure to file ROI, the Assessing Officer

shall drop the proceeding under section 144.

Case 2: The return filed on 25.1.2022 is a valid return under section 139(4). Since the

assessee does not reply to the show cause notice or his reply is not

satisfactory, the A.O. shall make a best judgement assessment under section

144. While making the best judgement assessment under section 144, the

Assessing Officer shall gather information from the return filed on 25.1.2022.

SECTION 144A: POWERS OF THE JOINT COMMISSIONER TO ISSUE

DIRECTIONS IN CERTAIN CASES

1. A Joint Commissioner may,

(a) on his own motion, or

(b) on a reference made to him by the Assessing Officer, or

(c) on the application of an assessee,

call for and examine the record of any proceeding in which an assessment is pending.

2. If he considers that having regard to the nature of the case or the amount involved or

for any other reason, it is necessary to issue directions, then he may issue such

directions as he thinks fit for the guidance of the Assessing Officer to enable him to

complete the assessment.

3. Such directions shall be binding on the Assessing Officer.

4. No directions prejudicial to the assessee shall be issued before an opportunity of being

heard is given to the assessee.


12.20

ANALYSIS OF SECTION 144A

1. The Directions under section 144A can be issued only if the case is pending in an

assessment/ reassessment.

2. The Directions under section 144A can be issued by the Joint Commissioner to the

Assistant Commissioner/ Deputy Commissioner/ Income Tax Officer.

3. The Directions under section 144A can be in favour of assessee or can be against the

assessee.

4. No appeal can be filed against the Directions issued under section 144A. If the

Directions issued under section 144A are prejudicial to the assessee then AC/ DC/

ITO will disallow the deduction or tax the receipt, in accordance with Directions of

Joint Commissioner under section 144A. The assessee can file an appeal to CIT

(Appeal) against the assessment order of DC/ AC/ ITO.

***************************************************************************

Income Escaping Assessment AJ Education NeXt

13.1

CHAPTER 13. INCOME ESCAPING

ASSESSMENT

SECTION 147: ASSESSMENT OR REASSESSMENT OF INCOMES

ESCAPING ASSESSMENT

Where the Assessing Officer has reasons to believe that any income chargeable to tax for

any Assessment Year has escaped assessment, then he may subject to the provisions of

section 148 to section 153, assess or reassess such income and also any other income which

has escaped assessment and which comes to his notice subsequently during the course of

proceedings under this section.*

Provided that the Assessing Officer may assess or reassess such income, other than the

income involving matters which are the subject-matter of any appeal or revision, which

is chargeable to tax and has escaped assessment.

(Proviso inserted by Finance Act, 2008)

* Without issuing a fresh notice under section 148 provided that the income which comes to his notice subsequently during the course of proceedings under section 147 is of the same Assessment Year for which

notice under section 148 has already been issued.

Analysis of Proviso to section 147 inserted by Finance Act, 2008

Doctrine of Partial Merger

As per this doctrine, the order of Assessing Officer merges with the order of appellate

authority. The judicial controversy centered around the question as to whether the entire order

of assessment passed by the Assessing Officer gets merged with the order of appellate

authority or the merger is in respect of that part of order of Assessing Officer which relates to

matters considered and decided in an appeal.

One view of the judiciary was that there is a complete/ total merger of the order of Assessing

Officer with the order of appellate authority, once an appeal is decided on one or two points

alone.

The other view of the judiciary was that there is a "partial merger" and only that part of order

of Assessing Officer which relates to matters considered and decided in an appeal gets

merged with the order of appellate authority.

The proviso to section 147 introduced by Finance Act, 2008 affirms the concept of partial

merger and overrules the concept of total merger. For example:

Assessing Officer order under

section 143(3)

Appeal to Commissioner of Income-tax (Appeals)

or Revision under section 264 to Commissioner of

Income-tax

Expense A – Allowed

Expense B – Allowed

Expense C – Allowed

Expense D – Disallowed

Made on Expense D and Commissioner of Income-

tax (Appeals) or Commissioner of Income-tax under

section 264 allows expense D.


13.2

As per the concept of total merger, the entire order of Assessing Officer merges with the

order of appellate authority/ Commissioner of Income-tax. As per this concept, now

Assessing Officer cannot re-open any matter under section 147 and cannot disallow even

expenses A, B & C.

As per partial merger, only part of order of Assessing Officer i.e., expense D has merged with

the order of Commissioner of Income-tax (Appeals) / Commissioner of Income-tax. And as

per this concept, the Assessing Officer can re-open the assessment under section 147 and

disallow A, B and C. The concept of partial merger has been affirmed in section 147.

Assessing Officer can re-open assessment under section 147 to disallow A, B, & C.

Assessing Officer cannot re-open assessment under section 147 to disallow expense D which

has been a subject matter of appeal/ revision. Therefore, the matters which have gone for

appeal or revision cannot be re-opened under section 147.

EXPLANATION TO SECTION 147: DEEMED ESCAPED INCOME

Case When income is deemed to have escaped

assessment

(i) Where the assessee’s total income or the

total income of any other person in respect

of which he is assessable under this Act

during the previous year exceeded the

maximum amount, which is not

chargeable to income-tax.

No return of income has been furnished by

the assessee

(ii) Where a return of income has been

furnished by the assessee but no

assessment has been made

It is noticed by the Assessing Officer that

the assessee has understated the income or

has claimed excessive loss, deduction,

allowance or relief in the return.

(iii) Where the assessee is required to furnish a

report in respect of any international

transaction under section 92E.

The assessee has failed to furnish such

report

(iv) Where an assessment has been made (a) income chargeable to tax has been

under-assessed

(b) such income has been assessed at too

low a rate

(c) such income has been made the

subject of excessive relief under this

Act

(d) excessive loss or depreciation or any

other allowance under this Act has

been computed.

(v) where a return of income has not been

furnished by the assesse

On the basis of information or document

received from the prescribed income-tax


13.3

authority, under section 133C(2), it is

noticed by the Assessing Officer that the

income of the assessee exceeds the basic

exemption limit

(vi) where a return of income has been

furnished by the assessee

On the basis of information or document

received from the prescribed income-tax

authority, under section 133C(2), it is

noticed by the Assessing Officer that the

assessee has understated the income or has

claimed excessive loss, deduction,

allowance or relief in the return

In addition, income chargeable to tax has escaped assessment, where a person is found to

have any asset (including financial transaction in any entity) located outside India.

Note - The CBDT has, vide Circular No.40/2016 dated 9.12.2016, clarified that reopening

of cases under section 147 is feasible only when the Assessing Officer "has reason to

believe that any income chargeable to tax has escaped assessment for any assessment

year" and not merely on the basis of any reason to suspect. Mere increase in turnover,

because of use of digital means of payment or otherwise, in a particular year cannot be

a sole reason to believe that income has escaped assessment in earlier years. Hence,

past assessments cannot be reopened merely on the ground that the current year's turnover

has increased.

EXPLANATION 3 TO SECTION 147: NEW REASONS FOR INCOME

ESCAPING ASSESSMENTS

For the purpose of assessment or reassessment under this section, the Assessing Officer

may assess or reassess the income in respect of any issue, which has escaped assessment,

and such issue comes to his notice subsequently in the course of the proceedings under

this section, notwithstanding that the reasons for such issue have not been included in

the reasons recorded under sub-section (2) of section 148.

Illustration:

The Assessing Officer issues notice under section 148 to the assessee for the Assessment

Year 2014-2015 on 1.1.2020. The Assessing Officer has found business income in Mumbai

which has not been disclosed by the assessee in the return. The Assessing Officer has

recorded the reasons for re-opening the case under section 148 to be the concealed income of

Mumbai business. While Assessing Officer is making assessment under section 147, he also

comes across income of the Pune business which was not disclosed by assessee in ROI and

for which reasons were not recorded by Assessing Officer while issuing notice under section

148. Assessing Officer assesses under section 147 income from Mumbai Business as well as

income from Pune Business. Assessee contends that assessment under section 147 is invalid

since reasons for assessing the income from Pune Business have not been recorded by

Assessing Officer while issuing notice under section 148.


13.4

Answer:

The contention of assessee is incorrect. It has been clarified that for the purpose of

assessment or reassessment under this section, the Assessing Officer may assess or reassess

the income in respect of any issue, which has escaped assessment, and such issue comes to

his notice subsequently in the course of the proceedings under this section, notwithstanding

that the reasons for such issue have not been included in the reasons recorded under sub-

section (2) of section 148.

SECTION 148: SERVICE OF NOTICE WHERE INCOME HAS ESCAPED

ASSESSMENT

1) Before making an assessment or reassessment under section 147, the Assessing

Officer shall serve on the assessee a notice requiring him to furnish the return of

income within the time specified in the notice

2) The Assessing Officer shall before issuing a notice under this section, record his

reasons for doing so.

ANALYSIS

1. "Reasons to believe" includes matters arising out of CAG Audit Party Report which

indicates that the income has escaped assessment. However, opinion of CAG Audit

party does not amount to reason to believe. If CAG Audit party give concrete

evidence that income has escaped assessment, then concrete evidence amounts to

'Reason to Believe'.

2. If the Assessing Officer allowed an expense & later on, he wants to disallow the

expense by invoking section 147 because of change in his personal opinion, the

Assessing Officer cannot invoke section 147. Mere change in personal opinion does

not amount to "Reasons to believe".

CIT V. KELVINATOR OF INDIA LTD. (SUPREME COURT)

The Supreme Court held that power to re-open the case under section 147 is much

wider, yet that does not mean that the section gives arbitrary powers to the Assessing

Officer to reopen assessments on the basis of 'mere change of opinion'. The apex court

laid emphasis on the conceptual difference between power to review and power to

reassess. It further held that the Assessing Officer has power to reopen, provided there

is 'tangible material' to come to conclusion that there is escapement of income from

assessment.

Review means taking second view, if two views are possible. If Assessing Officer has

taken a view in assessment, then he cannot change his view under section 147 on the

basis of his personal opinion.

3. The Assessing Officer cannot invoke the provisions of section 147 on the basis of

rumours, gossips and suspicion. Rumours, gossips and suspicion does NOT amount to

"Reasons to believe".

4. RANBAXY LABORATORIES LTD.V. CIT (DELHI)

Can the Assessing Officer reassess issues other than the issues in respect of which

proceedings were initiated under section 147 when the original "reason to

believe" on basis of which the notice was issued ceased to exist?


13.5

As per section 147, the Assessing Officer may assess or reassess such income and

also any other income chargeable to tax which has escaped assessment, and which

comes to his notice in the course of proceedings under this section. The Delhi High

Court observed that the words "and also" used in section 147 are of wide amplitude.

The assessment or reassessment must be in respect of the income, in respect of which

the Assessing Officer has formed a reason to believe that the same has escaped

assessment and also in respect of any other income which comes to his notice

subsequently during the course of the proceedings as having escaped assessment. If

the income, the escapement of which was the basis of the formation of the "reason to

believe" is not assessed or reassessed, it would not be open to the Assessing Officer to

independently assess only that income which comes to his notice subsequently in the

course of the proceedings under the section as having escaped assessment. If he

intends to do so, a fresh notice under section 148 would be necessary.

5. CIT VS. JET AIRWAYS (I) LTD. [2010] (BOM.)

Section 147 has the effect that the Assessing Officer has to assess or reassess the

income ('such income') which escaped assessment and which was the basis of

formation of belief and if he does so, he can also assess or reassess any other income

which has escaped assessment and which comes to his notice during the course of the

proceedings. However, if after issuing a notice under section 148, he accepts the

contention of the assessee and holds that the income for which he had initially

formed a reason to believe that it had escaped assessment, has, as a matter of

fact, not escaped assessment, it is not open to him to independently assess some

other income, and if he intends to do so, a fresh notice under section 148 would

be necessary, the legality of which would be tested in the event of a challenge by

the assessee.

6. AVENTIS PHARMA LTD. V. ACIT (2010) (BOM.)

Can the Assessing Officer reopen an assessment on the basis of merely a change

of opinion?

The power to reopen an assessment is conditional on the formation of a reason to

believe that income chargeable to tax has escaped assessment. The existence of

tangible material is essential to safeguard against an arbitrary exercise of this power.

In this case, the High Court observed that there was no tangible material before the

Assessing Officer to hold that income had escaped assessment within the meaning of

section 147 and the reasons recorded for reopening the assessment constituted a mere

change of opinion. Therefore, the reassessment was not valid.

7. The following constitutes "Reasons to believe" for invoking section 147: -

(i) A later Supreme Court Judgement disallowing an expense/ taxing a receipt.

(ii) Retrospective Amendment in Law disallowing an expense/ taxing a receipt.

(iii) Evidence in possession of Assessing Officer that the Assessee has understated

the income.

(iv) Evidence in possession of Assessing Officer that the Assessee has claimed

excessive loss/ deductions, allowances, reliefs.

(v) Mistake apparent from records.

8. For making an assessment or reassessment under section 147, a separate notice under

section 148 is required to be issued for each Assessment Year whose income is to be

assessed or reassessed under section 147.


13.6

Illustration 1: The Assessing Officer issues a notice under section 148 to assess the income

under the head "Profits and gains of business or profession". During the course

of the assessment proceedings under section 147, he notices that income under

the head "Capital gains" has also escaped assessment. Can he assess the

income under the head "Capital gains" also?

Answer: As per the provisions of section 147, the Assessing Officer can assess the

income under the head P/G/B/P as well as capital gains. He is not required to

issue a fresh notice under section 148 to assess the income under the head

capital gains.

Illustration 2: For Assessment Year 2016-2017, the Assessing Officer issued a notice under

section 148 on 01.01.2021 to assess the income under the head "Profits and

gains of business or profession". In the course of proceedings under section

147, he finds that:

Case I: Income under the head Capital Gains of Rs. 2,00,000 has also escaped assessment for


Case II: Income under the head Capital Gains of Rs. 2,00,000 has also escaped assessment

for Assessment Year 2015-2016.

Whether Assessing Officer is required to give a fresh notice under section 148?

Answer: Case I: Income under the head Capital Gains can be assessed along with

P/G/B/P. The Assessing Officer is NOT required to issue a fresh notice under

section 148.

Case II: A separate notice under section 148 is required to be issued for

Assessment Year 2015-2016 to assess the capital gains under section 147.

9. The assessee is required to file the ROI under section 148 even if he has filed the ROI

earlier in the normal course. Return filed under section 148 cannot be revised.

Illustration: For Assessment Year 2015-2016, ROI is filed under section 139(1)

declaring an income of Rs. 2,00,000. The assessee receives a notice under section 148

on 01.01.2020 and:

Case I: Assessee complies with the notice and files a return under section 148

declaring an income of Rs. 15,00,000.

Case II: Assessee does not comply with the notice under section 148.

Answer:

Case I: Assuming that the Assessing Officer assesses the income under section 147 at

Rs. 15,00,000, he shall levy penalty for concealment on Rs. 13,00,000. Assessing

Officer will be lenient in levying penalty for concealment of income.

Case II: The Assessing Officer shall assess the income under section 147 to the best

of his judgement. Assuming that the Assessing Officer assesses the income under

section 147 at Rs. 15,00,000, he will levy maximum penalty for concealment of

income on Rs. 13,00,000.


13.7

10. H. K. Buildcon Ltd. v. Income-tax Officer (Guj.)

In case of change of incumbent of an office, can the successor Assessing Officer

initiate reassessment proceedings on the ground of change of opinion in relation

to an issue which the predecessor Assessing Officer, who had framed the original

assessment, had already applied his mind and come to a conclusion?

On this issue, the Gujarat High Court referred to the ruling of the Apex Court in CIT

v. Kelvinator of India Ltd. (2010) 320 ITR 561, wherein it was held that the Assessing

Officer has the power only to reassess and not to review.

Reassessment is not possible if there is a change in opinion of the successor Assessing

Officer. Change in opinion does not amount to reasons to believe.

11. The Assessing Officer is duty bound to supply to the assessee the reasons

recorded by him for issue of notice under section 148, after the assessee has filed

the ROI (Reasons are supplied on the request of the assessee).

JAWAHARLAL GUPTA (HIGH COURT)

The assessment of Assessment Year 2011-2012 was reopened by a notice under

section 148. The assessee demanded in writing for supply of a copy of the reasons

recorded by the Assessing Officer on the basis of which reassessment proceedings

were launched. The assessee contended that the notice under section 148 is invalid

since he was not supplied with a copy of the reasons recorded by the Assessing

Officer for reopening the assessment. The department contended that, by a letter the

assessee was informed that he could make inspection of the reasons recorded for

issuing notice under section 148 after he had filed the return. The Court gave the

direction that before the Assessing Officer proceeds further with the assessment in

pursuance of a notice under section 148, he shall confront the assessee with the

substance of the reasons recorded by him and supply him a certified copy of the

reasons.

12. Is recording of satisfaction and quantification of escaped income a pre-

condition for issuing notice under section 148 after 4 years from the end of the

relevant assessment year?

Amarnath Agrawal v. CIT (2015) (All)

Facts of the case: The assessee along with four others had obtained a lease of land and

was in possession of the same from 1953. Subsequently, the State Government

introduced a policy for conversion of lease-hold to free-hold. The assessee applied

for conversion before the District Magistrate in 1997 and a sale deed was

executed. The assessee deposited the necessary charges as demanded by the State

Government and a freehold sale deed dated 25th March, 1998 was executed. The

assessee sold a portion of the land during the F.Y. 1999-2000 and admitted the same

as long-term capital gain taking into account the lease hold period also. In the

assessment, the admission of income as long-term capital gain was accepted. However,

after the expiry of four years from the end of the relevant assessment year,

proceeding for reassessment of such income as short-term capital gains was resorted

to by the Revenue on the ground that the lease hold period should not be considered

for determining the period of holding of freehold land transferred. The assessee filed


13.8

a writ challenging the validity of notice issued under section 148 stating that the

requirements of section 149 read with section 151 were not considered by the

Revenue.

High Court’s Opinion and Decision:

The High Court observed that two distinct conditions must be satisfied for assuming

jurisdiction to issue a notice under section 148 after a period of 4 years viz. (i)

escapement of income; and (ii) omission or failure on the part of the assessee to

disclose fully and truly all material facts necessary for his assessment.

Under section 149(1)(b), it is imperative for the Assessing Officer, in his reasons, to

state that the escaped income is likely to be Rs. 1 lakh or more. This is an

essential ingredient for seeking approval and the basis on which satisfaction is to be

recorded by the competent authority under section 151. If the condition precedent to

substantiate the satisfaction of escapement of income is not made, the issuance of

notice would be invalid.

In this case, since no reasons were recorded that the escaped income is likely to be

Rs. 1 lakh or more so that the Chief Commissioner or Commissioner may record

his satisfaction under section 151, the initiation of reassessment proceedings after

four years was barred by time. The reasons recorded by the Assessing Officer were

that the assessee had computed long- term capital gains tax liability, whereas he

was liable to pay short-term capital gains tax, since he had sold a portion of the

property within 3 years from the date of conversion of leasehold land into a

freehold land.

The High Court observed that the property was held for more than 3 years and the

conversion from leasehold to freehold being an improvement of the title did not

have any effect on the taxability of profits. The reasons recorded by the Assessing

Officer did not indicate any failure on the part of the assessee to disclose fully and

truly all material facts at the time of assessment; it also did not indicate that the

quantum of escapement of income exceeds Rs. 1 lakh. Accordingly, the High Court

held that, in this case, the issue of notice under section 148 after the four-year time

period was not valid.

13. Is the notice for reassessment issued under section 148 on the basis of tax evasion

report received from the Investigation Unit of the Income-tax department valid, if

such notice has been issued erroneously in the name of the erstwhile company

which has now been converted into an LLP?

SKY LIGHT HOSPITALITY LLP V. ASSISTANT CIT [2018] (DEL)

Facts of the Case: Sky Light Hospitality (SH) LLP, a Limited Liability Partnership, had

acquired the rights and liabilities of Sky Light Hospitality Private Limited (SHPL) upon

conversion under the Limited Liability Partnership Act, 2008. The return for the relevant

assessment year filed by SHPL was processed under section 143(1) and was not subjected to


13.9

scrutiny assessment. However, upon further receipt of a tax evasion report, a reassessment

notice had been issued under section 148. The petitioner-LLP has filed a writ petition to

quash the notice and the reassessment proceedings.

Issue: The issue under consideration is whether a notice for reassessment issued under

section 148 on the basis of tax evasion report received from the Investigation Unit of the

Income-tax department can be treated as valid, if such notice has been issued erroneously in

the name of the erstwhile company which has now been converted into an LLP.

Delhi High Court’s Observations:

1. The High Court dismissed the contentions of the petitioner. Firstly, as long as there is

“reason to believe” and not mere “reason to suspect”, Courts should not interject to stop the

adjudication process.

2. Secondly, there is clear evidence that the notice was erroneously addressed to SHPL

instead of SH LLP. The error or mistake was that the notice did not record the conversion of

SHPL into SH LLP. However, it is clearly evident that the notice was meant for the assessee-

LLP and no one else.

Delhi High Court’s decision:

3. The Delhi High Court held that the notice issued under section 148 on the basis of tax

evasion report received from the Investigation unit of the Income-tax department is valid,

since there was reason to believe on the basis of the said report that income had escaped

assessment, even though the notice was erroneously issued in the name of the erstwhile

company which has now been converted into LLP.

4. The Court clarifies that it has passed no opinion on the merits of the case which will be

duly dealt with, by the Assessing Officer. The petitioner-LLP is required to appear before

the Assessing Officer to deal with the merits of the issues pertaining to the notice.

Note - The special leave petition filed against the aforementioned decision of the Delhi High

Court was dismissed by the Supreme Court.

14. If the assessee demands the reasons recorded by Assessing Officer for issue of notice

under section 148 after filing of ROI, and the Assessing Officer does not supply the

reasons, then the Assessing Officer cannot proceed further under section 147.

15. If the reasons recorded by the Assessing Officer for issue of notice under section 148

are invalid, then the assessee can file a WRIT PETITION in the High Court

challenging the issue of notice under section 148. If the High Court is satisfied that

there were no Valid Reasons, then the High Court shall quash the notice issued under

section 148.

16. The notice under section 148 is valid if it is issued within the time limits prescribed

under section 149(1). As per section 148, the Assessing Officer shall ensure that

before he makes assessment/ reassessment under section 147, the notice has been

served on the assessee. Assessment/ Reassessment made under section 147, without

the service of notice under section 148 is void-ab-initio. The service of notice under

section 148 can take place after the time prescribed under section 149(1).

17. The Finance Act, 2006 provides that if:


13.10

- a notice under section 148 has been served on the assessee

- and the assessee files a return in response to a notice under section 148

- then the Assessing Officer should serve the notice under section 143(2) within 6

months from the end of the Financial Year in which the return was filed under section

148.

- If a notice under section 143(2) is served after 6 months from the end of the Financial

Year in which return was filed under section 148, then proceedings under section 147

shall be INVALID.

ANALYSIS

• Practically what happens is that the Assessing Officer issues a notice under section

148 and asks the assessee to furnish the return of income. Thereafter, for getting the

evidence and books of account and the personal attendance of the assessee, the

Assessing Officer issues a notice under section 143(2).

• What happened practically was that although the notice under section 148 was issued

within the prescribed time of section 149(1), the notice under section 143(2) was

served on the assessee after the expiry of 6 months from the end of the Financial Year

in which return was filed under section 148.

• The Tribunals held that the assessment/ reassessment made under section 147 are

invalid because the notice under section 143(2) has been served after 6 months from

the end of the Financial Year in which return under section 148 was filed.

• THEREFORE, IT HAS BEEN PROVIDED IN LAW THAT FOR A RETURN

FILED IN RESPONSE TO A NOTICE UNDER SECTION 148, THE NOTICE

UNDER SECTION 143(2) MUST BE SERVED WITHIN 6 MONTHS FROM

THE END OF THE FINANCIAL YEAR IN WHICH RETURN WAS FILED.

OTHERWISE ASSESSMENT/ REASSESSMENT UNDER SECTION 147

SHALL BE VOID.

18. Section 153(2) -Time Limit for passing the order under section 147

No order of assessment or reassessment under section 147 shall be made after the

expiry of 12 months from the end of the Financial Year in which notice under section

148 was served on the assessee.


13.11

SECTION 149(1): TIME LIMITS FOR ISSUE OF NOTICE UNDER SECTION 148

Notice under section 148 must be issued within the following time limit:

As per section 149(3), if the person on whom a notice under section 148 is to be

served is a person treated as an agent of a non-resident under section 163 and the

assessment, reassessment or re- computation in pursuance of the notice is to be

made on him as the agent of such non-resident, there is a time limit of 6 years from

the end of the relevant assessment year, beyond which such notice cannot be issued.

Illustration:

(i) Assessing Officer finds that assessee has deposited the following amounts in an bank

account in Switzerland:

Date of deposit Assessment Year Amount Notice under issued

upto section 148 can be

On 1.1.1999 1999-2000 Rs.2 cr 31-3-2016

On 1.1.2001 2001-2002 Rs.3 cr 31-3-2018

On 1.1.2004 2004-2005 Rs.5 cr 31-3-2021

The assessee does not give any explanation or explanations offered by him are not

satisfactory regarding the source of deposit. It shall be deemed that income of assessee has

escaped assessment and Assessing Officer can issue notice under section 148 as above.

(ii) Section 149(2) provides that the provisions of section 149(1) as to issue of notice

shall be subject to the provisions of section 151.


13.12

(iii) Would the words "shall be issued" used in section 149 means 'mere signing of

notice by the Assessing Officer or 'handing over of the notice in the hands of the

proper officer for serving it to the assessee to constitute a valid notice issued

within the prescribed time limit?

Kanubhai M. Patel (HUF)(2011) (Guj.)

In the present case, the assessee filed a return of income for the assessment year 2013-

2014. The assessee did not received any notice under section 143(2). On 8th April,

2020, the assessee received a notice under section 148 dated 31st March, 2020 for the

assessment of income relating to assessment year 2013-2014 under section 147. The

assessee, on inquiry from the post office, found out that the department had sent the

covers for issuing notice to the speed post centre (for booking) only 7th April, 2020

and not on 31st March, 2020 and the Revenue also did not challenge this finding of

the assessee.

The assessee, therefore challenged the legality and validity of the notice dated 31st

March, 2020 issued by the department under section 148 as being time barred

contending that the impugned notice has been issued beyond the time limit prescribed

under the provision of section 149 i.e. after a period of six years from the end of the

relevant assessment year. The assessee contended that the date of issue of the notice

under section 148 would be the date on which the same have been dispatched by

registered post i.e., 7th April, 2020 and not the date of signing of the notice by the

Assessing Officer i.e. 31st March, 2020.

In the present case, the notice has been signed on 31st March, 2020. Whereas the same

were sent to the speed post centre for booking only on 7th April, 2020. Held, that mere

signing of notice on 31st March, 2020 cannot tantamount to issuance of notice as

contemplated under section 149. The date of issue would be the date on which the

same were handed over for service to the proper officer, which in the facts of the

present case, would be the date on which the said notices were actually handed over to

the post office for the purpose of effecting service on the assessee.

Hence, the date of issue of the said notice would be 7th April, 2020 and not 31st

March, 2020. Therefore, the aforesaid notice under section 148 in relation to the

assessment year 2013-2014, having been issued on 7th April 2020, is beyond the

period of six years from the end of the relevant assessment year and clearly barred by

limitation.

SECTION 151: SANCTIONS FOR ISSUE OF NOTICE UNDER SECTION 148

(i) Section 151 requires the Assessing Officer to obtain sanction from certain

authorities before issue of notice for reassessment of income under section 148,

under certain specified circumstances.

(ii) The simplified approval regime with effect from 1.6.2015 for issue of notice for

reassessment is given hereunder –


13.13

Time limit

(from the end

of the relevant

A.Y.)

Issue of Notice under

section 148 by

Competent authority who has

to be satisfied on the reasons

recorded by the A.O., that it is a

fit case for the issue of such

notice

(1) Up to 4 years Assessing Officer below

the rank of Joint

Commissioner

Joint Commissioner

(2) After 4 years Assessing Officer Principal Chief Commissioner/

Chief Commissioner/Principal

Commissioner/ Commissioner

It is further clarified that in the above cases, the Principal Chief Commissioner or Chief

Commissioner or the Principal Commissioner or Commissioner or the Joint

Commissioner, as the case may be, has to be satisfied on the reasons recorded by the

Assessing Officer about fitness of a case for the issue of notice under section 148.

However, these authorities are not required to issue the notice themselves.

R.K. UPADHYAYA VS. SHENEBHAI P. PATEL (SUPREME COURT)

There is a clear distinction between the words "issue" and "serve". Section 149(1) lays down

the time limits for issue of notice. Therefore, if a notice is issued within the time limit

prescribed under section 149(1) but is served after that date, it will be a valid notice.

EXCEPTIONS TO THE TIME LIMITS GIVEN IN SECTION 149(1)

1. FIRST PROVISO TO SECTION 147

Where an assessment has been made earlier under section 143(3) or under section

147, then the notice under section 148 shall not be issued after the expiry of 4 years

from the end of the relevant assessment year if both the following conditions are

satisfied.

(i) Assessee has filed return of income which he was required to furnish under

any provision of Income Tax Act, AND


13.14

(ii) Assessee has disclosed fully and truly all material facts necessary for

assessment.

KEY NOTE:

This is possible only when income has escaped assessment because of mistake of

Assessing Officer. (Refer Compendium for Example)

SECOND PROVISO TO SECTION 147

Provided further that nothing contained in the first proviso shall apply in a case

where any income in relation to any asset (including financial interest in any

entity) located outside India, chargeable to tax, has escaped assessment for any

assessment year.

2. SECTION 150 - NO TIME LIMIT FOR ISSUE OF NOTICE

Notwithstanding anything contained in section 149, a notice under section 148 may be

issued at any time for the purposes of making an assessment or reassessment in

consequence of or in order to give effect to the finding or direction contained in an

order under section 250, 254, 260A, 262, 263 or 264 of the Income-tax Act or the

ORDER OF A COURT UNDER ANY OTHER LAW.

SECTION 152: OTHER PROVISIONS

1) Income escaping assessment to be charged to tax at rates applicable for

respective years [Section 152(1)]

In the case of any assessment or reassessment made under section 147, the income

escaping assessment would be chargeable to tax at the rate applicable to the

respective years in which such income is liable to be taxed.

(2) Assessee entitled to claim dropping of proceedings under section 147 in certain

cases [Section 152(2)]

- Where an assessment is reopened under section 147,

- the assessee may,

- if he has not disputed any part of the original assessment order for that year

either before the CIT(Appeals) under section 246A or before the CIT under

section 264,

- claim that the proceedings under section 147 shall be dropped

- on his showing that

- he had been assessed on an amount not lower than what he would be rightly

liable for even if the income alleged to have escaped assessment had been

taken into account,

- or the assessment had been properly made.

SUN ENGINEERING PRIVATE LIMITED (SUPREME COURT)

The assessee filed a return of income for Assessment Year 2013-2014 declaring the income

of Rs 20 lakhs. The Assessing Officer under section 143(3) made on 31.12.2015 disallowed

expense A of Rs 15 lakhs, although Supreme Court has held in some other case that expense

A is allowable. The Assessing Officer assessed the income at Rs 35 lakhs under section

143(3). The assessee did not file any appeal to Commissioner of Income-tax (Appeals) /


13.15

revision application under section 264/ rectification application under section 154 and the

time for filing appeal/ revision / rectification have all expired.

Assessing Officer finds income escaping assessment of Rs 25 lakhs for Assessment Year

2013-2014 on 31.1.2020 and issues a notice under section 148 to assess the escaped income

of Rs 25 lakh. Assessee files Return of Income under section 148 as under:

Original assessed income 35 lakhs

Add: Escaped income 25 lakhs

Less: Expense wrongly disallowed under section 143(3) 15 lakhs

45 lakhs

HELD

(a) Since the assessee has not appealed against the original order of the Assessing Officer

passed under section 143(3), it has become final. On re-assessment under section 147,

the original assessment is not wiped off and the original order does not cease and it

remains.

(b) The assessee cannot seek the reopening of the entire assessment and cannot claim

credit in respect of items finally concluded in the original assessment. The assessee

cannot claim re-computing of the income or redoing of an assessment and can not be

allowed a claim which he either failed to make or which was otherwise rejected at the

time of original assessment, which has since acquired finality.

(c) The assessee cannot re-agitate in the reassessment proceedings, the matter which he

had lost during the original assessment proceedings. The re-assessment does not wipe

off the original assessment.

(d) A matter not agitated in the concluded original assessment proceedings cannot be

permitted to be agitated in the reassessment proceedings unless it relates to the item

sought to be taxed as escaped income. In the reassessment proceedings for bringing to

tax items which had escaped assessment, it would be open to the assessee to put

forward claims for deduction of any expenditure in respect of that income or the non-

taxability of the said income. The reassessment proceedings are for the benefit of the

revenue and not for the benefit of the assessee and an assessee cannot be permitted to

convert the reassessment proceedings into appeal or revision and seek relief in respect

of items rejected earlier or in respect of items not claimed in the assessment

proceedings.

(e) Re-assessment cannot result in reduction of income beyond the income originally

assessed. In the present case, the assessee cannot be allowed Expense A of Rs 15

lakhs since the issue of expense A has acquired finality.

SUN ENGINEERING PVT. LTD. AND SECTION 152(2)

The assessee file return of income for Assessment Year 2015-2016 declaring an income of Rs

2 Lakhs. The Assessing Officer made an order under section 143(3) on 31.12.2015 as under:


Add: Expense P disallowed inspite of the fact that Supreme

Court has held Expense P to be allowable

8,00,000

Assessed Income 10,00,000

Had the assessee filed an appeal to Commissioner of Income-tax (Appeals) / rectification

application under section 154 / Revision application to Commissioner of Income-tax under

section 264, then Expense P would have been allowed.


13.16

But the assessee did not file any appeal / rectification application/ revision application and the

time limits for filing the same have all expired.

On 1.1.2021, the Assessing Officer finds escaped income for Assessment Year 2015-2016

amounting to:

Case-I: Rs. 17,00,000

Case-II Rs. 7,00,000

Case – I:

Since the assessee has not filed an appeal against expense P, the order of Assessing Officer

under section 143(3) has become final. As per Supreme Court in SUN ENGINEERING (P)

LTD. the assessee cannot raise the issue of allow/ability of deduction P in 147 proceedings.

The Assessing Officer shall reassess the income under section 147 at Rs 10 Lakhs + Rs 17

Lakhs = Rs 27 Lakhs. Section 152(2) has no application here.

Case-II:

Section 152(2) shall apply here. The assessee proves that even if the income escaping

assessment been taken into account, his correct income is Rs 2 Lakhs + Rs 7 Lakhs = Rs 9

Lakhs. And he has already been assessed at Rs 10 Lakhs under section 143(3) and therefore

proceedings under section 147 shall be dropped. The case of SUN ENGINEERING (P) LTD.

shall not apply here since Assessing Officer is not making reassessment under section 147.

The said case applies if Assessing Officer makes reassessment under section 147.

***************************************************************************

Time limit for completion of Assessments AJ Education NeXt

14.1

CHAPTER 14. TIME LIMITS FOR

COMPLETION OF ASSESSMENT OR

REASSESSMENT

SECTION 153(1): TIME LIMIT FOR COMPLETION OF ASSESSMENT UNDER

SECTION 143(3) OR 144

No order of assessment under section 143(3) or 144 shall be made after the expiry of 12

months from the end of the relevant Assessment Year.

Illustration 1:

For assessment year 2021-2022, the assessment order under section 143(3)/ 144 can be made

up to _____________. The service of the order under section 143(3)/ 144 may take place

after _____________but the order must be made (i.e. signed) on or before _____________.

Illustration 2:

For assessment year 2021-2022, the due date of filing of return was 30.9.2021. The assessee

filed the return on 31.03.2022. The Assessing Officer issued notice under section 143(2) and

the said notice is served on the assessee on 30.9.2022.

In the above case, the assessment under section 143(3) should be completed on or before

_______________.

PURSHOTAMDAS T. PATEL

In this case, the Assessing Officer passed assessment order under section 143(3) on 31.3.2023

for Assessment Year 2021-2022. The said order was served on the assessee on 2.4.2023. The

demand notice under section 156 was prepared on 3.4.2023 and was served on the assessee

on 4.4.2023.

The Court observed that section 153(1) provides that no order of assessment under section

143(3)/144 shall be made after the expiry of 12 months from the end of the relevant

Assessment Year. The Court held that "Assessment" is an integrated process involving not

only the determination of total income but also the determination of tax. Therefore, unless the

total income is determined and tax thereon is also levied, it cannot be said that the process of

assessment is complete. The assessment can be said to be complete when income is

determined and tax is levied thereon through a notice of demand under section 156. In the

present case, since the notice of demand is prepared on 3.4.2023, the assessment can be said

to be completed on 3.4.2023 and is thus time-barred and invalid.

SECTION 153(2): TIME LIMIT FOR COMPLETION OF ASSESSMENT OR

REASSESSMENT UNDER SECTION 147

No order of assessment or reassessment under section 147 shall be made after the expiry of

12 months from the end of the Financial Year in which notice under section 148 was served

on the assessee.


14.2

SECTION 153(3): TIME LIMIT FOR COMPLETION OF ASSESSMENT WHERE

THE ASSESSMENT IS CANCELLED OR SET ASIDE UNDER SECTION 254, 263

OR 264

Notwithstanding anything contained in sub-sections (1) and (2), an order of fresh assessment

in pursuance of an order under section 254 or 263 or 264 , setting aside or cancelling an

assessment, may be made at anytime before the expiry of 12 months from the end of the

Financial Year in which order under section 254 is received by the Principal Chief

Commissioner or Chief Commissioner or Principal Commissioner or Commissioner or as the

case may be, the order under section 263 or 264 is passed by Principal Commissioner or

Commissioner. (To be discussed later)

KEY NOTES:

1. W.e.f. 01-06-2001, the CIT (Appeals) cannot cancel/ set-aside the assessment and

refer it back to the Assessing Officer for fresh assessment. [Amendment in section

251(1)(a) made by Finance Act, 2001]

2. If by an order under section 254, 263 or 264, the assessment is cancelled/ set-aside

and a direction is given to make a fresh assessment then, the Assessing Officer shall

make the fresh assessment under the same section under which the original

assessment, which is cancelled/ set-aside, was made.

3. For making a fresh assessment to give effect to the order under section 254, 263 or

264, notice under section 143(2)/ 144/ 148 is not required to be issued again as the

previous notice issued for making the original assessment is still valid.

SEC 153(4): INCREASED TIME LIMIT ON REFERENCE TO TPO

Where a reference has been made to the Transfer Pricing Officer under section 92CA to

determine the arm's length price, the time period for completion of assessment/

reassessment shall be increased by 1 year. (See after Sec 92CA in Transfer Pricing)

NOTES:

1. Where, by an order referred to in section 153(3), any income is excluded from the

total income of the assessee for an Assessment Year, then, an assessment of such

income for another Assessment Year shall, for the purpose of section 150 and this

section, be deemed to be one made in consequence of or to give effect to any finding

or direction contained in the said order.

2. Where, by an order referred to in section 153(3), any income is excluded from the

total income of one person and held to be the income of another person, then, an

assessment of such income on such other person shall, for the purposes of section 150

and this section, be deemed to be one made in consequence of or to give effect to any

finding or direction contained in the said order, provided such other person was given

an opportunity of being heard before the said order was passed.

3. The following time periods are to be excluded while computing the period of

limitation relating to assessment or reassessment referred to in section 153.

(i) the time taken in reopening the whole or any part of the proceeding or in

giving an opportunity to the assessee to be reheard under proviso to section

129. [Discussed in Chapter of Penalties]

(ii) the period during which the assessment proceeding is stayed by an order or

injunction of any court.


14.3

(iii) the period commencing from the date on which the Assessing Officer

intimates the Central Government or the prescribed authority, the

contravention of the provisions of section 10, under clause (i) of the proviso to

sub-section (3) of section 143 and ending with the date on which the copy of

the order withdrawing the approval or rescinding the notification is received

by the Assessing Officer;

(iv) the period commencing from the date on which the Assessing Officer

makes a reference to the Valuation Officer under sub-section (1) of

section 142A and ending with the date on which the report of the

Valuation Officer is received by the Assessing Officer. (Added by Finance Act, 2014)

(v) the period commencing from the date on which the Assessing Officer directs

the assessee to get his accounts audited under section 142(2A) and

(a) ending with the last date on which assessee is required to furnish a

report of audit under section 142(2A); or

(b) where such direction is challenged before a Court, ending with the

date on which the order setting aside such direction is received by

the Commissioner of Income-tax. (Amendment by Finance Act, 2013)

(vi) the period (not exceeding sixty days) commencing from the date on which the

Assessing Officer received the declaration under section 158A and ending

with the date on which order under sub-section (3) of section 158A is made by

him (order of accepting or rejecting the declaration).

(vii) the period commencing from the date on which an application is made before

the Authority for Advance Rulings under sub-section (1) of section 245Q and

ending with the date on which the order rejecting the application is received

by the Commissioner under sub-section (3) of section 245R. [Discussed in the

Chapter of Advance Rulings]

(viii) the period commencing from the date on which an application is made before

the Authority for Advance Rulings under sub-section (1) of section 245Q. and

ending with the date on which the advance ruling pronounced by it is received

by the Commissioner under sub-section (7) of section 245R. [Discussed in the

Chapter of Advance Rulings]

(ix) the period commencing from the date on which a reference or first of the

references for exchange of information is made by an authority competent

under an agreement referred to in section 90 or section 90A and ending

with the date on which the information so requested is last received by the

Commissioner or a period of 1 year, whichever is less.

KEY NOTES:

In all the above cases, where immediately after excluding the above time periods, the period of limitation available to the Assessing Officer for making an assessment or reassessment is less than

60 days, then such remaining period shall be extended to sixty days and the above said periods shall be deemed to be extended accordingly.

***************************************************************************

Miscellaneous Provisions AJ Education NeXt

15.1

CHAPTER 15. MISCELLANEOUS

PROVISIONS

SECTION 154: RECTIFICATION OF MISTAKE

(1) Manner of rectification of a mistake apparent from the record - With a view to

rectifying any mistake apparent from the record, an income tax authority referred to

in section 116 may:

(2) Mistake apparent from the record - The jurisdiction of any authority under the

Act to make an order under section 154 depends upon the existence of a mistake

apparent on the face of the record.

(i) Mistake apparent from the record may be a mistake of fact as well as

mistake of law - For instance, the treatment of non-agricultural income as

agricultural income and granting exemption in respect of such income is an

obvious mistake of law which could be rectified under section 154.

(ii) Mere change of opinion cannot be basis for rectification - A mere

change of opinion, however, cannot be the basis on which the same or the

successor Assessing Officer can treat a case as one of rectification of mistake.

A mistake is one apparent from the record in case, where it is a glaring,

obvious, patent or self-evident. Mistake, which has to be discovered by a long-

drawn process of reasoning or examination or arguments on points, where

there may be two opinions, cannot be said to be mistake or error apparent from

the record.


15.2

(iii) Subsequent decision of Supreme Court - A mistake arising as a result of

subsequent interpretation of law by the Supreme Court would also constitute

error apparent from the record.

(iv) Retrospective amendment of law - could also lead to rectification if an

order is plainly and obviously inconsistent with the specific and clear

provision, as amended retrospectively.

(3) Doctrine of Partial Merger - Where any matter has been considered and decided

in any proceeding by way of appeal or revision relating to a rectifiable order, the

authority passing such order may, amend the order in relation to any matter other

than the matter which has been so considered and decided.

Assessing Officer Order

Expense A Allowed

Expense B Disallowed

Expense C Disallowed Appeal to Commissioner of Income-tax

(Appeals) made on Expense C & D Expense D Disallowed

Now if it is found later that expense B, C & D are allowable then Assessing Officer under

section 154 can pass rectification order only for expense B. He cannot rectify under section

154 expense C and D which can be allowed by Commissioner of Income-tax (Appeals) only.

Illustration

The Assessing Officer has disallowed deductions A, B, C, D and E. The assessee has gone for

an appeal to CIT(Appeals) and in the appeal he has raised matters A, B and C. The appeal has

been decided for those three items. Now the Assessing Officer can amend the order only in

respect of items D and E. He cannot amend the order in respect of items A, B and C, which

have been considered and decided in appeal.

(4) Amendment may be suo motu or the same may be brought to notice by the

assessee or deductor - The concerned authority may make an amendment on its

own motion. However, he should mandatorily make the amendment for rectifying

any such mistake which has been brought to its notice by the assessee or the

deductor. Where the authority concerned is the Deputy Commissioner (Appeals) or

the Commissioner (appeals), the mistake can be pointed out by the Assessing

Officer also.

(5) Opportunity of being heard to be given to the assessee or deductor before

enhancing an assessment or reducing a refund - An amendment which has the

effect of enhancing an assessment or reducing a refund or otherwise increasing the

liability of the assessee or the deductor, shall not be made unless the authority

concerned has given notice to the assessee or the deductor of its intention so to do

and has allowed the assessee or the deductor a reasonable opportunity of being

heard.


15.3

(6) Action to be taken by the Assessing Officer depending upon the effect of the

amendment made

Case Action to be taken by A.O.

(i) Where an amendment is made under

this section

An order shall be passed in writing by

the authority concerned

(ii) Where any such amendment has the

effect of reducing the assessment, or

otherwise reducing the liability of the

assessee or the deductor

The Assessing Officer shall make any

refund due to such assessee or the

deductor

(iii) Where any such amendment has the

effect of enhancing the assessment or

reducing the refund already made or

otherwise increasing the liability of

the assessee or the deductor

The Assessing Officer shall serve on the

assessee or the deductor, as the case may

be a notice of demand in the prescribed

form specifying the sum payable

(7) Section 154(7)

No amendment shall be made under this section after the expiry of four years from the

end of the Financial Year in which the order sought to be amended was passed.

[Please refer Circulars given in point 10 & 11]

KEY NOTES:

The rectification order under section 154 for rectification of intimation / deemed

intimation under section 143(1) should be passed within 4 years from the end of the

financial year in which intimation / deemed intimation under section 143(1) was

passed. [Deemed intimation under section 143(1) is passed on date of filing of ROI].

Illustration:

For Assessment Year 2015-2016, the assessment under section 143(3) was completed

on 31.3.2017. The order under section 143(3) was received by the assessee on

2.4.2017. There was a mistake apparent from record in the order passed under section

143(3).

The rectification order under section 154 can be passed upto 31.03.2021.

(8) SECTION 154(8)

Without prejudice to the provisions of sub-section (7), where an application for

amendment under this section is made by the assessee to an Income-tax authority, the

Income-tax authority shall pass an order, within a period of six months from the end

of the month in which the application is received by it -

(a) making the amendment or

(b) refusing to allow the claim.

If order under section 154 is not passed within passed within 6 months as said

above making the amendment or refusing to allow the claim, then the

rectification application of the assessee shall be deemed to be allowed in favour

of the assessee.


15.4

CBDT CIRCULAR NO. 14/2001

The overall time limit of four years provided in the section for passing any rectification order

shall however continue to apply. In other words, the period of six months mentioned in the

new sub-section (8) cannot extend, under any circumstances, beyond the overall time limit of

four years from the end of the Financial Year in which order sought to be rectified was

passed.

Illustration:

For Assessment Year 2015-2016, the order under section 143(3) was passed on 31.3.2017.

There was a mistake apparent from record in the order passed under section 143(3). The

assessee files a rectification application under section 154 on: -

(i) 20.07.2019

Rectification order under section 154 should be passed by 31.01.2020 as per section 154(8).

If rectification order is not passed by 31.01.2020, it shall be deemed that the rectification

application of the assessee is deemed to be allowed in favour of the assessee.

(ii) 31.1.2021/31.3.2021

Rectification order under section 154 should be passed by 31.03.2021. After 31.03.2021,

rectification under section 154 is possible only to the benefit of the assessee. Section 154(8)

shall not apply since six months were not available to the Assessing Officer for making

rectification. Now assessee is at the mercy of Assessing Officer and there is no time limit for

passing the order under section 154. Board's Circular given in point 11 shall apply.

9. HIND WIRE INDUSTRIES LIMITED (SC)

In this case, the assessee was assessed for Assessment Year 2007-2008 under section

143(3) by an assessment order dated 30.1.2010. In the said assessment, the Assessing

Officer allowed depreciation on buildings @ 5% whereas the correct rate of

depreciation was 10%. The Assessing Officer also did not allow deduction under

section 43B although it was clearly allowable. The assessee filed a rectification

application under section 154 on 12.7.2013 claiming the deductions under section

43B. However, the assessee did not claim the issue of depreciation in the said

application. The Assessing Officer passed the rectification order on 31.12.2013 and

allowed deductions under section 43B. The assessee filed another rectification

application under section 154 on 4.7.2015 claiming that depreciation should have

been allowed to him @ 10% instead of 5%. The issue arose before the Supreme Court

as to whether the rectification application is valid since it was made after the expiry of

4 years from the end of Financial Year in which the order under section 143(3) was

passed.

The Supreme Court held that section 154 provides that rectification can be made

before the expiry of 4 years from the end of the Financial Year in which the order

sought to be amended was passed. The order sought to be amended will not

necessarily mean the original order but also the rectified order. The Assessing

Officer should have rectified both the mistakes in his rectification order passed

under section 154 on 31.12.2013. Since he has rectified only one mistake, there is

a mistake in the order passed under section 154. Therefore, the rectification

application made on 4.7.2015 was valid and the same could have been made upto

31.3.2018. Therefore, the Assessing Officer should have considered the rectification

application and allowed depreciation @ 10%.


15.5

10. CBDT Circular: The application for rectification under section 154 can be filed

before the expiry of 4 years from the end of the Financial Year in which the order

sought to be amended was passed.

11. CBDT Circular: If the Assessee has made the rectification application within the

prescribed period of 4 years and the concerned Income-tax authority could not pass

the rectification order within the said 4 years, then it is permitted that the Income-tax

authority can make a belated rectification (after the said four years) TO THE

ADVANTAGE OF THE ASSESSEE.

SECTION 156: NOTICE OF DEMAND

When any tax, interest, penalty, fine or any other sum is payable in consequence of any order

passed under the Act, then the Assessing Officer shall serve upon the assessee a notice of

demand specifying the sum so payable.

Provided that where any sum is determined to be payable by the assessee under section

143(1) or under section 200A(1), the intimation under these sections shall be deemed to

be a notice of demand for the purposes of this section.


Where the income of the assessee of any assessment year, beginning on or after the 1st day of

April, 2021, includes income of the nature specified in clause (vi) of sub-section (2) of section

17 and such specified security or sweat equity shares referred to in the said clause are

allotted or transferred directly or indirectly by the current employer, being an eligible start-

up referred to in section 80-IAC, the tax or interest on such income included in the notice of

demand referred to in sub-section (1) shall be payable by the assessee within fourteen days––

(i) after the expiry of forty-eight months from the end of the relevant assessment year; or

(ii) from the date of the sale of such specified security or sweat equity share by the assessee;

or

(iii) from the date of the assessee ceasing to be the employee of the employer who allotted or

transferred him such specified security or sweat equity share,

whichever is the earliest.

PROTECTIVE ASSESSMENT

Though there is no provision in the Income-tax Act authorizing the levy of Income-tax on a

person other than by whom the Income-tax is payable, yet it is open to Income-tax authorities

to make a protective or alternative assessment if it is not ascertainable who is really liable to

pay the tax among a few possible persons.

Examples of cases where Protective Assessment can be made are:

(i) Litigation between two parties concerned in Civil Courts:

Suppose there is a dispute between Mr. A and Mr. B over the ownership of a house

property and both of them claim to be the owner of the property. Now the Assessing

Officer can make a protective assessment of the income from such property. In doing

the protective assessment, he will assess the income from house property in hands of

both Mr. A and Mr. B and will write in the assessment order, that one of the

assessments will be annulled as and when it is decided as who is the real owner.


15.6

Suppose, the Civil Court decides that Mr. A is the real owner, then the protective

assessment in the hands of Mr. A is sustainable and the protective assessment in the

hands of Mr. B will be declared as void-ab-initio.

(ii) Possibility of Benami Transaction but still not totally clear:

If the Assessing Officer suspects that the property which is registered in the name of

Mr. X really belongs to Mr. Y, i.e., Mr. Y is the benami holder, then he can make a

protective assessment in the hands of Mr. X and Mr. Y till such time he ascertains as

to who is the real owner.

(iii) Possibility of Diversion of Income to close Kith & Kin but still not totally clear:

If the Assessing Officer suspects that the assessee has diverted his income to his

relatives, then pending investigation, he can make a protective assessment.

In short, where it appear to Income-tax authorities that certain income has been

received during the relevant Assessment Year but it is not clear who has received that

income and prima facie it appears that income may have been received by one party

or another or by both it would be open to authorities to take appropriate proceedings

against both. As and when the final assessment is made, the department must recover

the tax from the person in whose hands the income is finally assessed.

It must, however, be noted that while protective assessment is permissible, a

protective order for recovery is not permissible. In making a protective

assessment, the authorities are merely making an assessment and leaving it as a

paper assessment until the matter is decided one way or another. Furthermore, a

protective order of assessment can be passed but not a protective order of

penalty.

SECTION 139A: PERMANENT ACCOUNT NUMBER

(TO BE DONE BY STUDENTS THEMSELVES, IF TIME

PERMIT WHICH YOU WILL NEVER GET)

(1) Sub-section (1) requires the following persons, who have not been allotted a

permanent account number (PAN), to apply to the Assessing Officer within the

prescribed time for the allotment of a PAN -

(i) Every person whose total income or the total income of any other person in

respect of which he is assessable under this Act during any previous year

exceeded the basic exemption limit; or

(ii) Every person carrying on any business or profession whose total sales, turnover

or gross receipts exceeds or is likely to exceed Rs. 5 lakhs in any previous

year; or

(iii) Every person who is required to furnish a return of income under section

139(4A).

(iv) Every person, being a resident, other than an individual, which enters into a

financial transaction of an amount aggregating to Rs. 2,50,000 or more in a

financial year.


15.7

(v) Every person who is the managing director, director, partner, trustee, author,

founder, karta, chief executive officer, principal officer or office bearer of the

person mentioned in (iii) above or any person competent to act on behalf of

such person.

(2) The Central Government is empowered to specify, by notification in the Official

Gazette, any class or classes of persons by whom tax is payable under the Act or any

tax or duty is payable under any other law for the time being is force. Such persons

are required to apply within such time as may be mentioned in that notification to

the Assessing Officer for the allotment of a PAN [Sub-section (1A)].

(3) For the purpose of collecting any information which may be useful for or

relevant to the purposes of the Act, the Central Government may notify any class or

classes of persons, and such persons shall within the prescribed time, apply to the

Assessing Officer for allotment of a PAN [Sub-section (1B)].

(4) The Assessing Officer, having regard to the nature of transactions as may be

prescribed, may also allot a PAN to any other person (whether any tax is payable by

him or not) in the manner and in accordance with the procedure as may be

prescribed [Sub-section (2)].

(5) Any person, other than the persons mentioned in (1) to (5) above, may apply to the

Assessing Officer for the allotment of a PAN and the Assessing Officer shall allot a

PAN to such person immediately.

(6) Such PAN comprises of 10 alphanumeric characters.

(7) Quoting of PAN is mandatory in all documents pertaining to the following prescribed

transactions:

(a) in all returns to, or correspondence with, any income-tax authority;

(b) in all challans for the payment of any sum due under the Act;

(c) in all documents pertaining to such transactions entered into by him, as may be

prescribed by the CBDT in the interests of revenue. In this connection,

CBDT has notified the following transactions, namely:

S.

No.

Nature of transaction Value of transaction

1. Sale or purchase of a motor vehicle or vehicle, as

defined in the Motor Vehicles Act, 1988 which

requires registration by a registering authority

under that Act, other than two wheeled vehicles.

All such transactions

2. Opening an account [other than a time-deposit

referred to at SI. No.12 and a Basic Savings Bank

Deposit Account] with a banking company or a

co-operative bank to which the Banking

Regulation Act, 1949 applies (including any bank

or banking institution referred to in section 51 of



15.8

that Act).

3. Making an application to any banking company or

a co- operative bank to which the Banking

Regulation Act, 1949, applies (including any bank

or banking institution referred to in section 51 of

that Act) or to any other company or institution,

for issue of a credit or debit card.


4. Opening of a demat account with a depository,

participant, custodian of securities or any other

person registered under section 12(1A) of the

SEBI Act, 1992.


5. Payment to a hotel or restaurant against a bill or

bills at any one time.

Payment in cash of an

amount exceeding Rs.

50,000.

6. Payment in connection with travel to any foreign

country or payment for purchase of any foreign

currency at any one time.



50,000.

7. Payment to a Mutual Fund for purchase of its

units

Amount exceeding Rs.

50,000.

8. Payment to a company or an institution for

acquiring debentures or bonds issued by it.


50,000.

9. Payment to the Reserve Bank of India for

acquiring bonds issued by it.


50,000.

10. Deposit with

- a banking company or a co-operative bank to

which the Banking Regulation Act, 1949,

applies (including any bank or banking

institution referred to in section 51 of that

Act); or

- post office

Cash deposits

exceeding Rs. 50,000

during any one day.

11. Purchase of bank drafts or pay orders or banker’s

cheques from a banking company or a co-

operative bank to which the Banking Regulation

Act, 1949 applies (including any bank or banking

institution referred to in section 51 of that Act).



50,000 during any one

day.

12. A time deposit with, -

(i) a banking company or a co-operative bank to

which the Banking Regulation Act, 1949

applies (including any bank or banking

institution referred to in section 51 of that

Act);


50,000 or aggregating

to more than Rs. 5

lakhs during a

financial year.


15.9

(ii) a Post Office;

(iii) a Nidhi referred to in section 406 of the

Companies Act, 2013; or

(iv) a non-banking financial company which

holds a certificate of registration under

section 45-IA of the Reserve Bank of India

Act, 1934, to hold or accept deposit from

public.

13. Payment for one or more pre-paid payment

instruments, as defined in the policy guidelines

for issuance and operation of pre-paid payment

instruments issued by Reserve Bank of India

under the Payment and Settlement Systems Act,

2007, to a banking company or a co- operative

bank to which the Banking Regulation Act, 1949,

applies (including any bank or banking institution

referred to in section 51 of that Act) or to any

other company or institution.

Payment in cash or by

way of a bank draft or

pay order or banker’s

cheque of an amount

aggregating to more

than Rs. 50,000 in a

financial year.

14. Payment as life insurance premium to an insurer

as defined in the Insurance Act, 1938.

Amount aggregating to

more than Rs. 50,000

in a financial year.

15. A contract for sale or purchase of securities (other

than shares) as defined in section 2(h) of the

Securities Contracts (Regulation) Act, 1956.


1 lakh per transaction

16. Sale or purchase, by any person, of shares of a

company not listed in a recognised stock

exchange.


1 lakh per transaction.

17. Sale or purchase of any immovable property. Amount exceeding Rs.

10 lakh or valued by

stamp valuation

authority referred to in

section 50C at an


10 lakhs

18. Sale or purchase, by any person, of goods or

services of any nature other than those specified at

SI. No. 1 to 17 of this Table, if any.


2 lakh per transaction:


15.10

Minor to quote PAN of parent or guardian

Where a person, entering into any transaction referred to in this rule, is a minor and who

does not have any income chargeable to income-tax, he shall quote the PAN of his father

or mother or guardian, as the case may be, in the document pertaining to the said transaction.

Declaration by a person not having PAN

Further, any person who does not have a PAN and who enters into any transaction

specified in this rule, shall make a declaration in Form No.60 giving therein the

particulars of such transaction.

Non-applicability of Rule 114B

Also, the provisions of this rule shall not apply to the following class or classes of

persons, namely: -

(i) the Central Government, the State Governments and the Consular Offices;

(ii) the non-residents referred to in section 2(30) in respect of the transactions other

than a transaction referred to at SI. No. 1 or 2 or 4 or 7 or 8 or 10 or 12 or 14 or 15

or 16 or 17 of the Table.

Meaning of certain phrases:

Phrase Inclusion

(i) Payment in

connection with

travel

Payment towards fare, or to a travel agent or a tour operator, or to

an authorized person as defined in section 2(c) of the Foreign

Exchange Management Act, 1999

(ii) Travel agent or tour

operator

A person who makes arrangements for air, surface or maritime

travel or provides services relating to accommodation, tours,

entertainment, passport, visa, foreign exchange, travel related

insurance or other travel related services either severally or in

package

(iii) Time deposit Any deposit which is repayable on the expiry of a fixed period.

(8) Every person who receives any document relating to any transaction cited above

shall ensure that the PAN is duly quoted in the document.

(9) If there is a change in the address or in the name and nature of the business of a

person, on the basis of which PAN was allotted to him, he should intimate such

change to the Assessing Officer.

(10) Intimation of PAN to person deducting tax at source

Every person who receives any amount from which tax has been deducted at source

shall intimate his PAN to the person responsible for deducting such tax [Sub-section

(5A)].


15.11

(11) Quoting of PAN in certain documents

Where any amount has been paid after deducting tax at source, the person deducting

tax shall quote the PAN of the person to whom the amount was paid in the following

documents:

(i) in the statement furnished under section 192(2C) giving particulars of

perquisites or profits in lieu of salary provided to any employee;

(ii) in all certificates for tax deducted issued to the person to whom payment is

made;

(iii) in all returns made to the prescribed income-tax authority under section 206;

(iv) in all statements prepared and delivered or caused to be delivered in accordance

with the provisions of section 200(3)[Sub-section (5B)].

(12) Requirement to intimate PAN and quote PAN not to apply to certain persons

The above sub-sections (5A) and (5B) shall not apply to a person who –

(i) does not have taxable income or

(ii) who is not required to obtain PAN

if such person furnishes a declaration under section 197A in the prescribed form and

manner that the tax on his estimated total income for that previous year will be nil.

(13) Intimation of PAN to person collecting tax at source

Likewise, every buyer or licensee or lessee referred to in section 206C shall intimate

his PAN to the person responsible for collecting tax.

(14) Quoting of PAN in certain documents

Every person collecting tax in accordance with section 206C shall quote PAN of

every buyer or licensee or lessee referred to therein –

(i) in all certificates furnished in accordance with the provisions of section

206C(5);

(ii) in all returns prepared and delivered or caused to be delivered in accordance

with the provisions of section 206C(5A) or section 206C(5B) to an income-tax

authority;

(iii) in all statements prepared and delivered or caused to be delivered in accordance

with the provisions of section 206C(3).

(15) Power to make rules

The CBDT is empowered to make rules with regard to the following:

(a) the form and manner in which an application for PAN may be made and the

particulars to be given there;

(b) the categories of transactions in relation to which PAN is required to be

quoted on the related documents;

(c) the categories of documents pertaining to business or profession in which

PAN shall be quoted by every person;


15.12

(d) the class or classes of persons to whom the provisions of this section shall not

apply;

The following classes of persons are exempt from the provisions of section

139A:

(i) the Central Government, the State Governments and the Consular Offices;

(ii) the non-residents referred to in section 2(30) of the Act in respect of the

transactions other than a transaction referred to at SI. No. 1 or 2 or 4 or 7

or 8 or 10 or 12 or 14 or 15 or 16 or 17 of the Table in point (7).

(e) the form and manner in which a person who has not been allotted a PAN

shall make a declaration;

(f) the manner in which PAN shall be quoted for transactions cited in (b) above;

(g) the time and manner in which such transactions shall be intimated to the

prescribed authority.

**********************************************************************

Income Tax authorities & Their powers AJ Education NeXt

16.1

CHAPTER 16. INCOME – TAX AUTHORITIES &

THEIR POWERS

SECTION 116: INCOME TAX AUTHORITIES

(a) Central Board of Direct Taxes.

(b) Directors General of Income-tax or Principal Director General of Income-tax or

chief Commissioner of Income-tax or Principal Chief Commissioner of Income-

tax.

(c) Directors of Income-tax or Principal Director of Income-tax or Commissioners of

Income-tax or CIT (Appeals) or Principal Commissioner of Income-tax.

(cc) Additional Directors of Income-tax or Additional Commissioners of Income-tax.

(cca) Joint Directors of Income tax or Joint Commissioners of Income tax.

(d) Deputy Directors of Income-tax or Assistant Directors of Income-tax or Deputy

Commissioner of Income-tax or Assistant Commissioners of Income-tax.

(e) Income-tax Officers.

(f) Tax Recovery Officers.

(g) Inspectors of Income-tax.

POWERS REGARDING DISCOVERY, PRODUCTION OF EVIDENCE, ETC.

(SECTION 131)

SECTION 131(1): POWER TO SUMMON

(i) Income-tax Authorities to have powers vested in a Civil Court in certain matters

[Section 131(1)]: The Assessing Officer, Deputy Commissioner (Appeals), Joint

Commissioner, Commissioner (Appeals), the Principal Chief Commissioner or

Chief Commissioner and the Dispute Resolution Panel referred to in section 144C

have the powers vested in a Civil Court under the Code of Civil Procedure, 1908

while dealing with the following matters:

(a) discovery and inspection;

(b) enforcing the attendance of any person, including any officer of a banking

company and examining him on oath;

(c) compelling the production of books of account and documents; and

(d) issuing commissions [Section 131(1)]


16.2

The powers aforementioned are normally those exercisable by a Court when it is

trying a suit. While exercising these powers, the authorities act in a quasi-judicial

capacity and ought to conform to the principles of judicial procedure.

(ii) Powers under section 131(1) to be exercised in certain cases, even if no proceeding

is pending [Section 131(1A)/(2)]:

(a) If the Principal Director General or Director General or Principal Director or

Director or Joint Director or Assistant Director or Deputy Director or the

authorized officer referred to in section 132(1), before he takes action under

the said sub-section, has reason to suspect that any income has been

concealed, or is likely to be concealed, by any person or class of persons,

within his jurisdiction, then for the purposes of making an enquiry or

investigation relating thereto, it shall be competent for him to exercise the

powers conferred in section 131(1) on the income-tax authorities referred to

therein, even if no proceedings with respect to such person or class of persons

are pending before him or any other income-tax authority [Section 131(1A)].

(b) For facilitating quick collection of information on request from tax authorities

outside India, notified income-tax authorities (not below the rank of Assistant

Commissioner of Income- tax), as may be notified by the Board, to now have

powers under section 131(1) for making an inquiry or investigation in respect

of any person or class of persons relating to an agreement for exchange of

information under section 90 or 90A, even if no proceeding is pending before it

or any other income-tax authority with respect to the concerned person or class

of persons [Section 131(2)].

(iii) Power to impound or retain books of accounts [Section 131(3)]: The income-

tax authority is vested with the power to impound or retain in its custody for such

period as it may think fit, any books of account or other documents produced before it

in any proceeding under this Act.

The powers are unrestricted in the case of all the authorities except the Assessing

Officer or an Assistant Director or Deputy Director whose powers are subjected to two

restrictions;

(a) he must record his reasons for impounding books of account or other documents;

and

(b) if he desires to retain in his custody any such books or documents for a

period exceeding 15 days (excluding holidays), he must obtain the prior

approval of the Principal Chief Commissioner or Chief Commissioner or

Principal Director General or Director General or Commissioner or Principal

Commissioner or Principal Director or Director, as the case may be, for the

purpose.


16.3

POWER TO CALL FOR INFORMATION AND CONDUCT SURVEY

SECTION 133: POWER TO CALL FOR INFORMATION

(REQUISITION UNDER SECTION 133)

The Assessing Officer, the Deputy Commissioner (Appeals), the Joint Commissioner

or the Commissioner (Appeals)] may call for following information for the purposes

of this Act-

S. No. Person Information to be furnished

(a) Firm The names and addresses of the partners of the firm

and their respective shares.

(b) Hindu undivided

family

The names and addresses of the manager and the members

of the family.

(c) A trustee,

guardian or agent

The names of the persons for or of whom he is

trustee, guardian or agent, and of their addresses.

(d) Any assessee A statement of the names and addresses of all persons to

whom he has paid in any previous year rent, interest,

commission, royalty or brokerage, or any annuity, not

being any annuity taxable under the head "Salaries"

amounting to more than one thousand rupees, or such

higher amount as may be prescribed], together with

particulars of all such payments made.

(e) Any dealer, broker

or agent or any

person concerned

in the

management of a

stock or

commodity

exchange

A statement of the names and addresses of all persons to

whom he or the exchange has paid any sum in

connection with the transfer, whether by way of sale,

exchange or otherwise, of assets, or on whose behalf or

from whom he or the exchange has received any such

sum, together with particulars of all such payments and

receipts.

(f) Any person,

including a

banking company

or any officer

thereof

Information in relation to such points or matters, or

statements of accounts and affairs verified in the manner

specified by the Assessing Officer, the Deputy

Commissioner (Appeals), the Joint Commissioner or the

Commissioner (Appeals), giving information in relation

to such points or matters as, in the opinion of the

Assessing Officer, the Deputy Commissioner

(Appeals)], the Joint Commissioner or the Commissioner

(Appeals)], will be useful for, or relevant to, any

enquiry or proceeding under this Act.


16.4

(ii) Exercise of power by the Income-tax authorities: Under the existing provisions

of section 133(6), the prescribed authorities have the power to call for any

information from any person which will be useful for or relevant to any

proceedings under the Act. Such powers may also be exercised by the Director-

General, the Principal Chief Commissioner or Chief Commissioner, the Principal

Director or Director or the Principal Commissioner or Commissioner or the Joint

Director or Deputy Director or Assistant Director. Further, the power in respect of

an inquiry, in a case where no proceeding is pending, shall not be exercised by

any income-tax authority below the rank of Principal Director or Director or

Commissioner or Principal Commissioner other than the Joint Director or Deputy

Director or Assistant Director without the prior approval of the Principal Director

or Director or as the case may be, the Commissioner or Principal Commissioner.

For facilitating quick collection of information on request from tax authorities outside India,

notified income-tax authorities (not below the rank of Assistant Commissioner of Income-

tax) to have powers under section 131(1) for making an inquiry or investigation in respect of

any person or class of persons relating to an agreement for exchange of information under

section 90 or 90A, even if no proceeding is pending before it or any other income- tax

authority with respect to the concerned person or class of persons. Such notified authorities

are also empowered, for the purposes of an agreement referred to in section 90 or section

90A, to exercise the powers conferred under section 133 to call for information,

irrespective of whether any proceedings are pending before it or any other income-tax

authority.

SECTION 133B: POWER TO COLLECT INFORMATION

(i) Under this section, an income-tax authority may enter any building or place (at

which a business or profession is carried on) within its jurisdiction or any

building or place (at which a business or profession is carried on) which is

occupied by any person in respect of whom the said authority exercises

jurisdiction for the purpose of collecting any information which may be useful

for or relevant for the purposes of the Act. It is not necessary that such a

place should be the principal place of the business or profession.

(ii) The authority may require any proprietor, employee or any other person who

may at the time and place be attending in any manner to or helping in carrying

on such business or profession to furnish such information as may be

prescribed.

(iii) An income-tax authority may enter any place of business or profession referred

to above only during the hours at which such place is open for business.

(iv) Such authority shall on no account remove or cause to be removed from the

building or place wherein he has entered any books of account or other valuable

articles or things.

(v) In this section, income-tax authority means a Joint Commissioner, an Assistant

Director or Deputy Director or an Assessing Officer, and includes an Inspector

of Income-tax who has been authorised by the Assessing Officer to exercise the


16.5

power conferred under this section in relation to the area in respect of which the

Assessing Officer exercises jurisdiction or any part thereof.

SECTION 133C: POWER TO CALL FOR INFORMATION BY PRESCRIBED

INCOME-TAX AUTHORITY

(i) Section 133C enables the prescribed income-tax authority to verify the

information in its possession relating to any person.

(ii) Under this section, for the purposes of verification of information in its

possession relating to any person, prescribed income-tax authority, may, issue

a notice to such person requiring him,

- on or before a date to be therein specified,

- to furnish information or documents,

- verified in the manner specified therein

- which may be useful for, or relevant to, any inquiry or proceeding under

the Act.

(iii) The prescribed income-tax authority may process such information or documents

received from the assessee and make available the outcome of such processing

to the Assessing Officer.

(iv) The CBDT may make a scheme for centralised issuance of notice and for

processing of information or documents and making available the outcome of

the processing to the Assessing Officer

(v) The term “proceeding” means any proceeding under the Act in respect of any

year which may be pending on the date on which the powers under this

section are exercised or which may have been completed on or before such

date. The term “proceeding” also includes all proceedings under the Income-tax

Act, 1961 which may be commenced after such date in respect of any year.

SECTION 133A: POWER OF SURVEY

(i) Power to enter a place within jurisdiction to inspect books of account, to verify

cash, stock etc. [Section 133A(1)]: An income-tax authority may enter any place:

(a) within the limits of the area assigned to him, or

(b) any place occupied by any person in respect of whom he exercises

jurisdiction, or

(c) any place in respect of which he is authorised for the purposes of this

section by such income-tax authority, who is assigned the area within

which such place is situated or who exercises jurisdiction in respect of

any person occupying such place

at which a business or profession or an activity for charitable purpose is

carried on, whether such place be the principal place or not of such business or


16.6

profession or of such activity for charitable purpose, and require any proprietor,

trustee, employee or any other person who may at that time and place be

attending in any manner to, or helping in, the carrying on of such business or

profession or such activity for charitable purpose. This power may be

exercised:

(a) to afford him the necessary facility to inspect such books of account or

other documents as he may require and which may be available at such

place;

(b) to afford him the necessary facility to check or verify the cash, stock or

other valuable articles or things which may be found therein; and

(c) to furnish such information as he may require as to any matter which may

be useful for or relevant to any proceeding under the Income-tax Act,

1961.

This power may be exercised in respect of any place with which the assessee is

connected, whether or not such place is the principal place of business or

profession or activity for charitable purpose. It will also include any other

place, whether any business or profession or activity for charitable purpose is

carried on therein or not, in which the person carrying on the business or

profession or activity for charitable purpose states that any of his books of

account or other valuable article or thing relating to his business or profession

or activity for charitable purpose are kept.

(ii) Permitted time for conduct of survey [Section 133A(2)]: The income-tax

authority may enter any place of business or profession mentioned above only

during the hours at which such place is open for the conduct of business or

profession and in the case of any other place, only after sunrise and before

sunset.

(iii) Powers of an income-tax authority while conducting survey [Section

133A(3)]: The income-tax authority exercising this power of survey may:

(a) place marks of identification, if he finds it necessary, on the books of

account or other documents inspected by him and make or cause to be

made extracts or copies therefrom;

(b) impound and retain in his custody for such period as he thinks fit any book

of account or other documents inspected by him after recording reasons

for doing so.

However, the income tax authority cannot retain in his custody such books

of account etc. for a period exceeding 15 days (excluding holidays)

without obtaining the approval of the Principal Chief Commissioner or

Chief Commissioner or Principal Director General or Director General or

the Principal Commissioner or Commissioner or Principal Director or

Director, as the case may be.


16.7

(c) make an inventory of any cash, stock or valuable article or thing checked

or verified by him; and

(d) record the statements of any person which may be useful for or relevant

to any proceedings under the Income-tax Act, 1961.

However, the income-tax authority cannot remove or cause to be removed from

the place where he has entered, any cash, stock or other valuable article or thing

[Section 133A(4)].

(iv) Exercise of power of survey for verification of TDS/TCS [Section

133A(2A)]: An income-tax authority may, for the purpose of verifying that

tax has been deducted or collected at source in accordance with the

provisions of Chapter XVII-B or Chapter XVII- BB, as the case may be, enter-

(a) any office, or a place where business or profession is carried on, within the

limits of the area assigned to him, or

(b) any such place in respect of which he is authorised for the purposes of this

section by such income-tax authority who is assigned the area within

which such place is situated, where books of account or documents are

kept.

The income-tax authority may for this purpose enter an office, or a place where

business or profession is carried on after sunrise and before sunset. Further,

such income-tax authority may require the deductor or the collector or any

other person who may at the time and place of survey be attending to such

work,—

(a) to afford him the necessary facility to inspect such books of account or

other documents as he may require and which may be available at such

place, and

(b) to furnish such information as he may require in relation to such matter.

(v) Permissible and impermissible acts while conducting survey [Section

133A(3)]: An income-tax authority may -

(a) place marks of identification on the books of account or other documents

inspected by him and take extracts and copies thereof;

(b) record the statement of any person which may be useful for, or relevant

to, any proceeding under the Act.

However, while acting under sub-section (2A), the income-tax authority shall

not impound and retain in his custody, any books of account or documents

inspected by him or make an inventory of any cash, stock or other valuable

articles or thing checked or verified by him.

(vi) Power to collect information and record statements [Section 133A(5)]: The

income- tax authorities would also have the power to collect information and

record the statements of any of the persons concerned at any time after any

function, ceremony or event even before the stage of commencement of


16.8

assessment proceedings for the following year for which the information may

be relevant, if they are of the opinion that having due regard to the nature, scale

and extent of the expenditure incurred, it is necessary to do so. This provision

is intended to help in collecting evidence about ostentatious expenditure

immediately after the event to be used at the time of the assessment.

(vii) Power to enforce compliance [Section 133A(6)]: If any person who is

required to provide facility to the income-tax authority to inspect the books of

account or the other documents or to check or verify any cash, stock or other

valuable articles or to furnish any information or to have his statement recorded,

either refuses or evades do so, the income- tax authority would be entitled to use

all the powers vested in it under section 131(1) for enforcing proper compliance

with the requirements. However, no action under sub-section (1) shall be taken

by the Assistant Director or a Deputy Director or an Assessing Officer or a Tax

Recovery Officer or an Inspector of Income-tax except with the prior approval

of the Joint Director or the Joint Commissioner, as the case may be.


Providing check on survey operations under section 133A of the Act.

Under the existing provisions of section 133A of the Act, an income-tax authority as

defined therein is empowered to conduct survey at the business premises of the

assessee under his jurisdiction. To prevent the possible misuse of such powers, vide

Finance Act 2003, a proviso to sub-section (6) in the said section was inserted to

provide that no income-tax authority below the rank of Joint Director or Joint

Commissioner, shall conduct any survey under the said section without prior

approval of the Joint Director or the Joint Commissioner, as the case may be.

It is proposed to substitute the proviso to sub-section (6) of section 133A to provide

that,-

(A) in a case where the information has been received from such authority, as may

be prescribed, no action under sub-section (1) shall be taken by an Assistant Director

or a Deputy Director or an Assessing Officer or a Tax Recovery Officer or an Inspector

of Income-tax without obtaining the approval of the Joint Director or the Joint

Commissioner, as the case may be;

(B) in any other case, no action under sub-section (1) shall be taken by a Joint

Director or a Joint Commissioner or an Assistant Director or a Deputy Director or an

Assessing Officer or a Tax Recovery Officer or an Inspector of Income-tax without

obtaining the approval of the Director or the Commissioner, as the case may be.”.

This amendment will take effect from 1st April, 2020.


16.9

(viii) Meaning of ‘proceeding’: For the purpose of this section, “proceeding"

means any proceeding under this Act in respect of any year which may be

pending on the date on which the powers under this section are exercised or

which may have been completed on or before such date and includes also all

proceedings under this Act which may be commenced after such date in

respect of any year.

CERTAIN CONCEPTS RELATED TO

ASSESSMENTS, APPEALS, ETC.

SECTION 281: CERTAIN TRANSFERS TO BE VOID

As a safeguard against non-realisation of revenue due to fraudulent transfers of assets by a

defaulting assessee, it is provided under this Section that, certain transfers specified therein

are deemed to be void. Accordingly, in cases where, during the pendency of any proceeding

under the Income-tax Act or after the completion thereof, any assessee creates a charge on, or

parts with, the possession (by way of sale, mortgage, gift, exchange, or any other mode of

transfer whatsoever) of any of his assets in favour of any other person, such a charge or

transfer will be deemed to be void as against any claim in respect of any tax, penalty, interest

or fine payable by the assessee as a result of the completion of the proceedings or otherwise.

However, the charge or transfer made by the assessee would not be void in case where it is

made

(a) for adequate consideration and without any notice of the pendency of such proceeding

or, as the case may be, without any notice of such tax or other monies remaining

payable by the assessee; or

(b) with the previous permission of the Assessing Officer.

This section applies to all cases where the amount of tax or other sum of money which is

payable or likely to be payable exceeds Rs.5,000 and the assets which are charged or

transferred by the assessee exceeds Rs. 10,000 in value. For this purpose, the term

'assets' should be taken to mean land, buildings, machinery, plant, shares, securities and

fixed deposits in bank to the extent to which any of these assets do not form part of the

stock-in-trade of the business carried on by the assessee. In other words, if these items

represent the stock-trade of the assessee's business, their transfer would not be treated

as void.

SECTION 281B: PROVISIONAL ATTACHMENT TO PROTECT THE

INTEREST OF THE REVENUE IN CERTAIN CASES

(1) Where, during the pendency of any proceeding for the assessment of any income or

for the assessment or reassessment of any income which has escaped assessment, the

Assessing Officer is of the opinion that, for the purpose of protecting the interest of

the Revenue, it is necessary to do so, he may, by an order in writing, attach

provisionally any property belonging to the assessee.

However, before passing an order, the Assessing Officer is required to take the prior

permission of the Chief Commissioner of Income-tax or Commissioner of Income-

tax.

Explanation—for the purposes of this sub-section, proceedings under section 132

shall be deemed to be proceedings for the assessment of any income or for the

assessment or reassessment of any income which has escaped assessment.


16.10

(2) Every provisional attachment would cease to be effective after the expiry of a period

of six months from the date on which order for the attachment is passed by the

Assessing Officer.

Provided that the Chief Commissioner, Commissioner, Director General or

Director may, for reasons to be recorded in writing, extend the aforesaid period

by such further period or periods as he thinks fit, so, however, that the total

period of extension shall not in any case exceed two years or sixty days after the

date of order of assessment or reassessment, whichever is later.

(3) Where the assessee furnishes a guarantee from a scheduled bank for an amount

not less than the fair market value of the property provisionally attached under

sub-section (1), the Assessing Officer shall, by an order in writing, revoke such

attachment:

Provided that where the Assessing Officer is satisfied that a guarantee from a

scheduled bank for an amount lower than the fair market value of the property is

sufficient to protect the interests of the revenue, he may accept such guarantee and

revoke the attachment.

(4) The Assessing Officer may, for the purposes of determining the value of the

property provisionally attached under sub-section (1), make a reference to the

valuation Officer referred to in section 142A, who shall estimate the fair market

value of the property in the manner provided under that section and submit a

report of the estimate to the Assessing Officer within a period of thirty days from

the date of receipt of such reference.

(5) An order revoking the provisional attachment under sub-section (3) shall be made

–

(i) Within forty-five days from the date of receipt of the guarantee, where a

reference to the Valuation officer has been made under sub-section (4); or

(ii) within fifteen days from the date of receipt of guarantee in any other case.

(6) Where a notice of demand specifying a sum payable is served upon the assessee

and the assessee fails to pay that sum within the time specified in the notice of

demand, the Assessing Officer may invoke the guarantee furnished under sub-

section (3), wholly or in part, to recover the amount.

(7) The Assessing Officer shall, in the interests of the revenue, invoke the bank

guarantee, if the assessee fails to renew the guarantee referred to in sub-section

(3), or fails to furnish a new guaranteed from a scheduled bank for an equal

amount, fifteen days before the expiry of the guarantee referred to in sub-section

(3).

(8) The amount realized by invoking the guarantee referred to in sub-section (3) shall

be adjusted against the existing demand which is payable by the assessee and the

balance amount, if any, shall be deposited in the Personal Deposit Account of the


16.11

Principal Commissioner or Commissioner in the branch of the Reserve Bank of

India or the State Bank of India or of its subsidiaries.

(9) Where the Assessing Officer is satisfied that the guarantee referred to in sub-

section (3) is not required anymore to protect the interests of the revenue, he shall

release that guarantee forthwith.

SECTION 292BB: NOTICE DEEMED TO BE VALID IN CERTAIN

CIRCUMSTANCES

Where an assessee has appeared in any proceeding or cooperated in any inquiry relating to an

assessment or reassessment, it shall be deemed that any notice under any provision of this

Act, which is required to be served upon him, has been duly served upon him in time in

accordance with the provisions of this Act and such assessee shall be precluded from taking

any objection in any proceeding or inquiry under this Act that the notice was—

(a) not served upon him; or

(b) not served upon him in time; or

(c) served upon him in an improper manner:

Provided that nothing contained in this section shall apply where the assessee has raised such

objection before the completion of such assessment or reassessment.

OBLIGATION TO FURNISH STATEMENT OF FINANCIAL TRANSACTION

OR REPORTABLE ACCOUNT [SECTION 285BA]

(1) Section 285BA imposes an obligation on specified persons to furnish statement of

financial transaction or reportable account. Thus, the section also provides for

furnishing of statement by a prescribed reporting financial institution in respect of a

specified financial transaction or reportable account to the prescribed income-tax

authority.

(2) As per section 285BA(1), the following persons, who are responsible for registering

or maintaining books of account or other document containing a record of any

specified financial transaction or any reportable account as may be prescribed under

any law for the time being in force, are required to furnish a statement in respect of

such specified financial transaction or reportable account which is registered or

recorded or maintained by him and information relating to which is relevant and

required for the purposes of the Income-tax Act, 1961 to the income-tax authority or

such other authority or agency as may be prescribed -

(a) an assessee;

(b) a prescribed person in the case of an office of Government;

(c) a local authority or other public body or association; or

(d) the Registrar or Sub-Registrar appointed under the Registration Act, 1908; or

(e) the registering authority empowered to register motor vehicles under the Motor

Vehicles Act, 1988; or

(f) the Postmaster General referred to in the Indian Post Office Act, 1898; or


16.12

(g) the Collector referred to in the Right to Fair Compensation and Transparency

in Land Acquisition, Rehabilitation and Resettlement Act, 2013; or

(h) the recognised stock exchange referred to in the Securities Contracts

(Regulation) Act, 1956; or

(i) an officer of the Reserve Bank of India; or

(j) a depository referred to in the Depositories Act, 1996; or

(k) a prescribed reporting financial institution.

(3) “Specified financial transactions” means any of the following transactions which may

be prescribed -

(a) transaction of purchase, sale or exchange of goods or property or right or

interest in a property; or

(b) transaction for rendering any service; or

(c) transaction under a works contract; or

(d) transaction by way of an investment made or an expenditure incurred; or

(e) transaction for taking or accepting any loan or deposit,

(4) The CBDT may prescribe different values for different transactions in respect of

different persons having regard to the nature of such transaction. Further, the value

or, as the case may be, the aggregate value of such transactions during a financial

year so prescribed shall not be less than Rs. 50,000.

(5) As per Rule 114E, the statement of financial transaction or reportable account shall be

furnished in Form No. 61A and shall be verified in the manner indicated therein.

Accordingly, the statement of financial transactions has to be furnished on or before

31st May, immediately following the financial year in which the transaction is

registered or recorded.

(6) Where the prescribed income-tax authority considers that the statement furnished

under section 285BA(1) is defective, he may intimate the defect to the person who has

furnished such statement and give him an opportunity of rectifying the defect within

a period of 30 days from the date of such intimation. The prescribed income-tax

authority may allow, on an application made in this behalf, a further period of time, at

his discretion.

(7) If the defect is not rectified within the said period of 30 days or, as the case may

be, the further period so allowed, then, notwithstanding anything contained in any

other provision of this Act, such statement shall be treated as an invalid statement.

Consequently, the provisions of this Act shall apply as if such person had failed to

furnish the statement.

(8) Where a person who is required to furnish a statement under section 285BA(1),

has not furnished the same within the specified time, the prescribed income-tax

authority may serve upon such person a notice requiring him to furnish such

statement within a period not exceeding thirty days from the date of service of such


16.13

notice and he shall furnish the statement within the time specified in the notice

[Section 285BA(5)].

(9) If any person, having furnished a statement under section 285BA(1), or in

pursuance of a notice issued under section 285BA(5), comes to know or discovers

any inaccuracy in the information provided in the statement, he shall, within a

period of ten days inform the income- tax authority or other authority or agency

referred to in section 285BA(1), the inaccuracy in such statement and furnish the

correct information in the prescribed manner [Section 285BA(6)]

(10) Under section 285BA(7), the Central Government may, by way of rules, specify —

(i) the persons referred to in section 285BA(1) to be registered with the prescribed

income- tax authority;

(ii) the nature of information and the manner in which such information shall be

maintained by the persons referred to in clause (a); and

(iii) the due diligence to be carried out by the persons for the purpose of

identification of any reportable account referred to in section 285BA(1).

(11) Furnishing of statement of financial transaction [Rule 114E: The statement of

financial transaction required to be furnished under section 285BA(1) of the Income-

tax Act, 1961 shall be furnished by every person mentioned in column (3) of the

Table below in respect of all the transactions of the nature and value specified in the

corresponding entry in column (2) of the said Table, which are registered and

recorded by him on or after 1st April, 2016.

S.

No.

Nature and value of transaction Class of person (reporting person)

1. (a) Payment made in cash for

purchase of bank drafts or pay

orders or banker’s cheque of an

amount aggregating to Rs. 10 lakh

or more in a financial year.

(b) Payments made in cash aggregating

to Rs. 10 lakh or more during the

financial year for purchase of pre-

paid instruments issued by Reserve

Bank of India under the Payment

and Settlement Systems Act, 2007.

(c) Cash deposits or cash withdrawals

(including through bearer’s cheque)

aggregating to Rs. 50 lakhs or more

in a financial year, in or from one or

more current account of a person.

A banking company or a co-

operative bank to which the Banking

Regulation Act, 1949 applies

(including any bank or banking

institution referred to in section 51

of that Act)

2. Cash deposits aggregating to Rs. 10 (i) A banking company or a co-


16.14

lakhs or more in a financial year, in one

or more accounts (other than a current

account and time deposit) of a person.

operative bank to which the

Banking Regulation Act, 1949

applies (including any bank or

banking institution referred to

in section 51 of that Act);

(ii) Postmaster General as referred

to in the Indian Post Office

Act, 1898.

3. One or more-time deposits (other than a

time deposit made through renewal of

another time deposit) of a person

aggregating to Rs. 10 lakhs or more in a

financial year of a person.

(i) A banking company or a co-

operative bank to which the

Banking Regulation Act, 1949

applies (including any bank or

banking institution referred to

in section 51 of that Act);

(ii) Postmaster General as referred

to in the Indian Post Office

Act, 1898;

(iii) Nidhi referred to in section

406 of the Companies Act,

2013;

(iv) NBFC which holds a

certificate of registration under

section 45- IA of the Reserve

Bank of India Act, 1934, to

hold or accept deposit from

public.

4. Payments made by any person of an

amount aggregating to-

(i) Rs. 1 lakh or more in cash; or

(ii) Rs. 10 lakh or more by any other

mode,

against bills raised in respect of one or

more credit cards issued to that person,

i n a financial year.

A banking company or a co-

operative bank to which the Banking

Regulation Act, 1949 applies

(including any bank or banking

institution referred to in section 51

of that Act) or any other company

or institution issuing credit card.

5. Receipt from any person of an amount

aggregating to Rs. 10 lakh or more in

a financial year for acquiring bonds or

debentures issued by the company or

institution (other than the amount

received on account of renewal of the

bond or debenture issued by that

A company or institution issuing

bonds or debentures.


16.15

company).


aggregating to Rs. 10 lakh or more in

a financial year for acquiring shares

(including share application money)

issued by the company.

A company issuing shares

7. Buy back of shares from any person

(other than the shares bought in the

open market) for an amount or value

aggregating to Rs. 10 lakh or more in a

financial year.

A company listed on a recognised

stock exchange purchasing its own

securities under section 68 of the

Companies Act, 2013.


aggregating to Rs. 10 lakh or more in a

financial year for acquiring units of one

or more schemes of a Mutual Fund (other

than the amount received on account of

transfer from one scheme to another

scheme of that Mutual Fund).

A trustee of a Mutual Fund or

such other person managing the

affairs of the Mutual Fund as may

be duly authorised by the trustee in

this behalf.

9. Receipt from any person for sale of

foreign currency including any credit

of such currency to foreign exchange

card or expense in such currency

through a debit or credit card or

through issue of traveler’s cheque or

draft or any other instrument of an

amount aggregating to Rs. 10 lakh or

more during a financial year

Authorised person as referred to in

section 2(c) of the Foreign

Exchange Management Act, 1999.

10. Purchase or sale by any person of

immovable property for an amount of Rs.

30 lakhs or more or valued by the stamp

valuation authority referred to in section

50C at Rs. 30 lakhs or more

Inspector-General appointed under

the Registration Act, 1908 or

Registrar or Sub-Registrar appointed

under that Act

11. Receipt of cash payment exceeding Rs. 2

lakhs for sale, by any person, of goods

or services of any nature (other than

those specified at SI. Nos. 1 to 10 of this

rule, if any).

Any person who is liable for audit

under section 44AB.

Manner of application of threshold limit: The reporting person mentioned in column (3)

of the Table under sub-rule (2) [other than the person at SI.No.10 and 11] shall, while

aggregating the amounts for determining the threshold amount for reporting in respect of

any person as specified in column (2) of the said Table,-


16.16

(a) take into account all the accounts of the same nature as specified in column (2) of

the said Table maintained in respect of that person during the financial year;

(b) aggregate all the transactions of the same nature as specified in column (2) of the

said Table recorded in respect of that person during the financial year;

(c) attribute the entire value of the transaction or the aggregated value of all the

transactions to all the persons, in a case where the account is maintained or

transaction is recorded in the name of more than one person;

(d) apply the threshold limit separately to deposits and withdrawals in respect of

transaction specified in item (c) under column (2), against SI. No.1 of the said Table.

AMENDMENT MADE BY FINANCE ACT (NO.2) 2019

Widening the scope of Statement of Financial Transactions (SFT)

Existing provisions of section 285BA of the Act, inter alia, provide for furnishing of

statement of financial transaction (SFT) or reportable account by person specified therein.

In order to enable pre-filling of return of income, it is proposed to obtain information by

widening the scope of furnishing of statement of financial transactions by mandating

furnishing of statement by certain prescribed persons other than those who are currently

furnishing the same. It is also proposed to remove the current threshold of rupees fifty

thousand on aggregate value of transactions during a financial year, for furnishing of

information, with a view to ensure pre-filling of information relating to small amount of

transactions as well. In order to ensure proper compliance, it is also proposed to amend the

provisions of sub-section (4) of aforesaid section so as provide that if the defect in the

statement is not rectified within the time specified therein, the provisions of the Act shall

apply as if such person had furnished inaccurate information in the statement.

Consequently, it is also proposed to amend the penalty provisions contained in section

271FAA so as to ensure correct furnishing of information in the SFT and widen the scope of

penalty to cover all the reporting entities under section 285BA .

These amendments will take effect from 1st day of September, 2019.

***************************************************************************

Appeals and Revision AJ Education NeXt

17.1

CHAPTER 17. APPEALS AND REVISION

FOR NOTES ON APPEALS REFER CHARTS IN COMPENDIUM.


Provision for e-appeal.

In order to impart greater efficiency, transparency and accountability to the assessment

process under the Act a new e-assessment scheme has already been introduced. With the

advent of the e-assessment scheme, most of the functions/ processes under the Act,

including of filing of return, processing of returns, issuance of refunds or demand

notices and assessment, which used to require person-to-person contact between the

taxpayer and the Income-tax Department, are now in the electronic mode. This is a result

of efforts by the Department to harness the power of technology in reforming the system.

All these processes are now not only faceless but also very taxpayer friendly. Now a taxpayer

can manage to comply with most of his obligations under the Act without any requirement

for physical attendance in the offices of the Department.

The filing of appeals before Commissioner (Appeals) has already been enabled in an

electronic mode. However, the first appeal process under the Commissioner (Appeals),

which is one of the major functions/ processes that is not yet in full electronic mode. A

taxpayer can file appeal through his registered account on the e-filing portal. However, the

process that follows after filing of appeal is neither electronic nor faceless. In order to

ensure that the reforms initiated by the Department to eliminate human interface from the

system reach the next level, it is imperative that an e-appeal scheme be launched on the

lines of e-assessment scheme.

Accordingly, it is proposed to insert sub-section (6A) in section 250 of the Act to provide for

the following: —

• Empowering Central Government to notify an e-appeal scheme for disposal of

appeal so as to impart greater efficiency, transparency and accountability.

• Eliminating the interface between the Commissioner (Appeals) and the appellant in the

course of appellate proceedings to the extent technologically feasible.

• Optimizing utilization of the resources through economies of scale and functional

specialisation.

• Introducing an appellate system with dynamic jurisdiction in which appeal shall be

disposed of by one or more Commissioner (Appeals).

It is also proposed to empower the Central Government, for the purpose of giving effect to

the scheme made under the proposed sub-section, by notification in the Official Gazette, to

direct that any of the provisions of this Act relating to jurisdiction and procedure of disposal

of appeal shall not apply or shall apply with such exceptions, modifications and adaptations

as may be specified in the notification. Such directions are to be issued on or before 31st

March 2022. It is proposed that every notification issued shall be required to be laid before

each House of Parliament.



17.2

REVISION BY COMMISSIONER

SECTION 263: REVISION OF ORDERS PREJUDICIAL TO REVENUE

(i) Under section 263(1), if the Principal Commissioner or Commissioner considers that

any order passed by the Assessing Officer is erroneous in so far as it is prejudicial

to the interests of the Revenue, he may, after giving the assessee an opportunity of

being heard and after making an enquiry, pass an order enhancing or modifying the

assessment made by the Assessing Officer or cancelling the assessment and directing

fresh assessment.

(ii) An order passed by the Assessing Officer shall be deemed to be erroneous in so far

as it is prejudicial to the interests of the Revenue, if, in the opinion of the Principal

Commissioner or Commissioner, —

(a) the order is passed without making inquiries or verification which should have

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 or

instruction issued by the CBDT under section 119;

(d) the order has not been passed in accordance with any decision which is

prejudicial to the assessee, rendered by the jurisdictional High Court or

Supreme Court in the case of the assessee or any other person.

(iii) The term ‘record’ shall include and shall be deemed always to have included all records

relating to any proceedings under the Act available at the time of examination by the

Principal Commissioner or Commissioner.

(iv) Where any order referred to in section 263(1) passed by the Assessing Officer had

been the subject-matter of any appeal, the powers of the Principal Commissioner or

Commissioner under section 263(1) shall extend and shall be deemed always to have

extended to such matters as had not been considered and decided in such appeal.

(v) No order shall be made after the expiry of 2 years from the end of the financial year

in which the order sought to be revised was passed.

(vi) In computing the period of 2 years, the time taken in giving an opportunity to the

assessee to be reheard under section 129 and any period during which the revision

proceeding is stayed by an order or injunction of any court shall be excluded.

(vii) The time limit, however, does not apply in case where the Principal Commissioner or

Commissioner has to give effect to a finding or direction contained in the order of the

Appellate Tribunal, High Court or the Supreme Court.


17.3

CIT V. ICICI BANK LTD. (BOM.)

Would the period of limitation for an order passed under section 263 be reckoned from

the original order passed by the Assessing Officer under section 143(3) or from the

order of reassessment passed under section 147, where the subject matter of revision is

different from the subject matter of reassessment under section 147?

In the present case, an order of assessment for Assessment Year 2011-2012 was passed under

section 143(3) on 30.1.2013 allowing the deductions under section 36(1)(vii), 36(1)(viia) and

foreign exchange rate difference. Further, on 10-2-2015 notice of reassessment was issued

under section 148 and an order of reassessment was passed under section 147 on 31-12-2015

which did not deal with the above deductions. Certain incomes not shown by assessee were

assessed under section 147.

Later, the Commissioner passed an order under section 263 on 31-3-2017 for disallowing the

deduction under section 36(1)(vii), 36(1)(viia) and in respect of foreign exchange rate

difference which have not been taken up in the reassessment proceedings under section 147

but which was decided in the original order of assessment passed under section 143(3).

Held, period of limitation in respect of the order of Commissioner under section 263 in

respect of a matter which does not form the subject matter of reassessment shall be

reckoned from the date of the original order under section 143(3) and not from the date

of the reassessment order under section 147. Therefore, Commissioner of Income-tax

could have passed the order under section 263 up to 31-3-2015 and order passed by

Commissioner of Income-tax on 31-3-2017 is time barred and invalid.

DOCTRINE OF PARTIAL MERGER

As per this doctrine, the order of Assessing Officer merges with the order of appellate

authority. The judicial controversy centered around the question as to whether the entire order

of assessment passed by the Assessing Officer gets merged with the order of appellate

authority or the merger is in respect of that part of order of Assessing Officer which relates to

matters considered and decided in an appeal.

One view of the judiciary was that there is a complete/ total merger of the order of Assessing

Officer with the order of appellate authority, once an appeal is decided on one or two points

alone.

The other view of the judiciary was that there is a "partial merger" and only that part of order

of Assessing Officer which relates to matters considered and decided in an appeal gets

merged with the order of appellate authority.

The doctrine of total merger has been overruled in section 263, section 154 and section 147

by amendments in law. In section 263, 154 and 147, the doctrine of PARTIAL MERGER

has been affirmed.

The doctrine of TOTAL MERGER has been affirmed in section 264 wherein the doctrine

of partial merger has been overruled.

Illustration 1:

The Assessing Officer in an assessment under section 143(3) allowed deductions A and B

and disallowed C, D and E. The assessee filed an appeal to CIT (Appeals) on deduction C, D

and E. The CIT (Appeals) allows deductions C, D and E. It is later on found by CIT that

deductions A, B, C and E are not allowable to the assessee. Can the CIT invoke section 263

and disallow the deductions?


17.4

Answer:

CIT can disallow deduction A &B under section 263. He cannot disallow deduction C & E

under section 263.

Illustration 2:

The Assessing Officer in an assessment under section 143(3) allowed deductions P and Q and

disallowed deductions X, Y and Z. The assessee filed an appeal to the CIT (Appeals) on

deductions X and Y only. The CIT (Appeals) suo-moto also allows deduction Z and also

confirms the allowance of deduction P. It is later on found by the CIT that deductions P, Q,

X, Y and Z are not allowable to the assessee. Can the CIT invoke section 263 and disallow

the deductions?

Answer:

CIT can disallow deduction Q only, under section 263.

SECTION 264: REVISION OF OTHER ORDERS

1. In case of any order other than an order to which section 263 applies, passed by an

authority subordinate to the Commissioner, he may, either of his own motion or on an

application by the assessee for revision, call for the record of any proceeding under this

Act in which such order has been passed and may make further inquiries.

Meaning of "Any order other than an order to which Section 263 applies"

An order of Assessing Officer which has been revised under Section 263 cannot be

revised under Section 264. Therefore, after revision under section 263, revision under

section 264 is not possible. However, after revision under Section 264, revision under

Section 263 is possible.

Illustration 1: Assessing Officer in his order:

Allows Deduction A Disallows Deduction D

Allows Deduction B Disallows Deduction E

Allows Deduction C

Commissioner under Section 263 makes a revision of order of A.O. and disallows

Deduction A & B. Now Revision under section 264 is not possible on any issue.

Illustration 2: Assessing Officer in his order:

Allows Deduction A Disallows Deduction D

Allows Deduction B Disallows Deduction E

Allows Deduction C

Commissioner under section 264 makes a revision and allows deduction D & E. Now

Commissioner under section 263 can revise the order of A.O. and disallow deduction

A, B and C.

2. Thereafter, the Commissioner may pass an order not being an order prejudicial to the

assessee.


17.5

Key Notes:

(i) Under section 264, only the order of Assessing Officer can be revised.

(ii) Intimation or deemed intimation under section 143(1) is not an order and

therefore cannot be revised under section 264.

(iii) CIT under section 264 can declare the assessment to be void ab-initio.

(iv) CIT under section 264 can cancel/set aside the order of assessment of the

Assessing Officer and direct him to make a fresh assessment and such directions

shall not be prejudicial to the assessee.

3. The Commissioner shall not of his own motion any order if the order has been made

more than one year previously.

4. In case an application for revision is made by the assessee, the application must be

within one year from the date on which the order was communicated to him.

5. However, if the Commissioner is satisfied that the assessee was prevented by sufficient

cause from making the application in the said one year, he may admit the application

after the expiry of one year.

6. In the following cases, the Commissioner shall not revise the order:

(i) Where an appeal against the order lies to the CIT (Appeals) but has not been

made and

(a) the time within which such an appeal may be made has not expired, or

(b) the assessee has not waived his right of appeal.

(ii) Where the order has been made the subject of an appeal to the CIT (Appeals).

Note 1: Revision under section 264 is not possible if an appeal has been filed to CIT(A)

on any issue.

Note 2: Revision under section 264 is possible if the assessee has not filed an appeal to

CIT(A) and

(i) The time period for filing an appeal to CIT(A) has expired or

(ii) Where the time for filing appeal to CIT(A) has not expired, the assessee

has waived his right to appeal to CIT(A).

7. The application for revision filed by an assessee shall be accompanied by a fee of Rs.

500.

8. An order by the Commissioner under this section whereby he declines to interfere shall

not be deemed to be an order prejudicial to the assessee.

9. On a revision application made by the assessee under section 264, an order shall

be passed by the CIT within one year from the end of the financial year in which

such application under section 264 is made by the assessee.

Key Note:

In computing the period of limitation, the time taken in giving an opportunity to

the assessee to be reheard under the proviso to section 129 and any period during


17.6

which any proceeding under section 264 is stayed by an order or injunction of any

Court, shall be excluded.

Illustration: Application under section 264 is made on 27.03.2021 - Revision order under

section 264 can be passed up to 31.03.2022

If revision order under section 264 is not passed up to 31.03.2022 then it shall be deemed that

the reliefs claimed by the assessee in the application under section 264 have been allowed.

KEY NOTES:

1. No appeal is possible against an order under section 264. No appeal is possible against

the order under section 264 whether the CIT has totally rejected the application by

passing an order under section 264 or has granted a relief partially. Order under section

264 can be challenged in the High Court through a WRIT PETITION and thereafter in

the Supreme Court through a SPECIAL LEAVE PETITION.

2. No appeal can be filed against the order under section 264 either by the assessee or the

Assessing Officer.

3. If there is a mistake apparent from record in the order passed under section 264, then

the CIT can rectify the mistake in the order under section 264 by passing a rectification

order under section 154.

4. Where appeal has been preferred to CIT (Appeals), no revision under section 264 is

possible even on the matters not raised in the appeal.

Illustration: Whether revision under Section 264 can be made in the following cases:

(i) Assessing Officer has made the order and no appeal has been filed to

CIT(Appeals) and the time period of filing the appeal has not expired. - Revision

under section 264 is hot possible.

(ii) Assessing Officer has made the order and no appeal has been filed to

CIT(Appeals) and the time period for filing the appeal has not expired and the

assessee waives his right of appeal to CIT(Appeals). - Revision under section

264 can be made.

(iii) Assessing Officer has made the order and appeal has been filed to CIT(Appeals).

- Revision under section 264 is not possible.


17.7

JUDICIAL PRONOUNCMENTS:

1. Does the Appellate Tribunal have the power to review or re-appreciate the

correctness of its earlier decision under section 254(2)?

CIT v. Earnest Exports Ltd. (2010) (Bom.)

High Court’s Observations: In this case, the High Court observed that the power

under section 254(2) is limited to rectification of a mistake apparent on record and

therefore, the Tribunal must restrict itself within those parameters. Section 254(2) is not a

carte blanche for the Tribunal to change its own view by substituting a view which it

believes should have been taken in the first instance. Section 254(2) is not a mandate to

unsettle decisions taken after due reflection.

High Court’s Decision: In this case, the Tribunal, while dealing with the application

under section 245(2), virtually reconsidered the entire matter and came to a different

conclusion. This amounted to a reappreciation of the correctness of the earlier decision

on merits, which is beyond the scope of the power conferred under section 254(2).


17.8

2. Can revision under section 263 be made on the ground that the order is passed

without making inquiries or verification which should have been made?

CIT v. Amitabh Bachchan (2016) (SC)

Facts of the case: The assessee filed his return of income and subsequently, filed a revised

return in which he claimed 30% of gross professional receipts amounting to Rs.3.17 crore as

expenditure towards his personal security. When the Assessing Officer asked for the details

of expenditure, the assessee replied that the expenses were for security for the personal

safety of the assessee and the payments were made out of cash balances. Thereafter, by

way of a letter, the assessee informed the Assessing Officer that the claim was made on a

belief that it was allowable but as it is not feasible to substantiate the claim, the revised

return may be taken to be withdrawn. The Assessing Officer had proposed to treat the

expenditure claim as unexplained expenditure under section 69C but after considering the

assessee’s reply, did not pursue the matter.

After the assessment was finalized, the Commissioner issued show cause notice under

section 263 containing the grounds on which the assessment order was proposed to be

revised. On getting the replies to the show cause notice, the Commissioner set aside the

order of assessment and directed a fresh assessment on the principal ground that requisite

and due enquiries were not made by the Assessing Officer prior to finalization of the

assessment. On this basis, the Commissioner came to the conclusion that the assessment

order in question was erroneous and prejudicial to the interests of the Revenue warranting

exercise of power under section 263. In his order, the Commissioner of Income-tax did not

record any finding on the several issues mentioned in the show cause notice whereas he

recorded conclusions adverse to the assessee in respect of issues which were not

specifically mentioned in the show cause notice. However, few of the issues, including

the claim of additional expenses in the revised return were common to the show cause

notice as well as the revisionary order.

Appellate Authorities’ view: The Tribunal opined that in respect of the issues not

mentioned in the show-cause notice, the findings as recorded in the revisional order under

section 263 would be considered as breach of principles of natural justice, since the

Commissioner of Income-tax cannot go beyond the issues mentioned in the show-cause

notice. Accordingly, the Tribunal reversed the order of the suo motu revision of order under

section 263.

The High Court also dismissed the appeal of the Revenue holding that as the

Commissioner had gone beyond the scope of the show cause notice and had dealt with

issues not covered or mentioned in the notice the revisional order which was in violation

of the principles of natural justice. The Court also observed that the question whether the

Assessing Officer had made sufficient enquiries about the assessee’s claim made in the

revised return was a pure question of fact and cannot be examined under section 260A.

Supreme Court’s Observations: The Apex Court noted that to exercise jurisdiction

under section 263 the requirement is that the order passed by the assessing authority is

erroneous and prejudicial to the interests of the revenue. Section 263 does not require any

specific show cause notice to be served on the assessee. What is required is granting of

opportunity to the assessee of being heard before making the revision order. Failure to give

such an opportunity would render the revisionary order legally fragile not on the ground of

lack of jurisdiction but on the ground of violation of principles of natural justice.


17.9

The Supreme Court observed that the Tribunal had not recorded any finding that in course of

the suo moto revisionary proceedings, the opportunity of hearing was not afforded to the

assessee and that the assessee was denied an opportunity to contest the facts on the basis of

which the Commissioner had come to the conclusions as recorded in the order under section

263.

In the course of revision, the documents and books of accounts overlooked in the

assessment proceedings were considered and at every stage of revisionary proceeding,

the authorized representative of the assessee had appeared and had full opportunity to

contest the basis on which the revisionary authority was proceeding in the matter.

Where the Commissioner had come its conclusions on the basis of the record of the

assessment proceedings which was open for scrutiny by the assessee and available to his

authorized representative at all times, there is no breach of the requirement to give a

reasonable opportunity of being heard as required under section 263.

Further, it also observed that when the Assessing Officer has dropped the investigation of

the claim of expenses, it does not preclude the Commissioner of Income-tax from looking

in to the same. Making a claim which would prima facie disclose that the expenses in

respect of which deduction had been claimed had been incurred and thereafter, withdrawing

the claim gave rise to the necessity of further enquiry in the interests of the Revenue. The

notice issued under section 69C of the Act could not have been simply dropped on the

ground that the claim had been withdrawn.

Supreme Court’s Decision: The Apex Court, accordingly, held that the order of the

Tribunal setting aside the revisional order on the ground that it went beyond the show

cause notice was not sustainable. It further held that the High Court having failed to

fully deal with the matter, its order was not tenable.

Note – As per Explanation 2 to section 263(1), inserted by the Finance Act, 2015, with

effect from 01.06.2015, an order passed by the Assessing Officer shall be deemed to be

erroneous in so far as it is prejudicial to the interest of the revenue, if in the opinion

of the Principal Commissioner or Commissioner, the order is passed without making

inquiries or verification which should have been made. The rationale of the above court

ruling is, thus, also in line with Explanation 2 to Section 263(1).

3. Does the CIT (Appeals) have the power to change the status of assessee?

Mega Trends Inc. v. CIT (2016) (Mad).

Facts of the case: The assessee filed its return of income as a partnership firm for the

relevant assessment year admitting a total income of Rs. 174.36 lakhs. The firm

consisted of thirteen individuals and two firms. The return of income was selected for

scrutiny which led to disallowance of certain deductions to the tune of Rs. 262.50 lakhs.

The assessee preferred an appeal. The CIT (Appeals) invoked section 251 and issued a show

cause notice proposing to change the assessee’s status to AOP on the reasoning that a

partnership firm cannot be a partner in another firm. The assessee filed writ of certiorari to

quash the show cause notice.

Note: ‘Certiorari’ is “a writ issued by a superior court calling up the record of a proceeding in

a lower court for review”.


17.10

High Court’s Observations: The Revenue contended that the CIT(Appeals) has power to

modify assessee’s status, since a partnership firm is a relationship between persons who have

agreed to share the profits of the business carried on by all or any of them acting for all, and

the term persons only connotes natural persons. Since some of the partners are other firms, the

assessment cannot be carried out as a firm. They relied on the Supreme Court’s ruling in

Dhulichand Laxminarayan v. CIT (1956) 29 ITR 535 (SC) to argue this point.

The High Court observed that, under section 251(1), the powers of the first appellate

authority are coterminous with those of the Assessing Officer and the appellate authority

can do what the Assessing Officer ought to have done and also direct him to do what he

had failed to do. If the Assessing Officer had erred in concluding the status of the assessee

as a firm, it could not be said that the Commissioner (Appeals) had no jurisdiction to go

into the issue. The appeal was in continuation of the original proceedings and unless

fetters were placed upon the powers of the appellate authority by express words, the

appellate authority could exercise all the powers of the original authority.

High Court’s Decision: The High Court held that the power to change the status of the

assessee is available to the assessing authority and when it is not used by him, the

appellate authority is empowered to use such power and change the status. The Court relied

on a full bench decision of the Madras High Court in State of Tamil Nadu v. Arulmurugan

and Co. reported in [1982] 51 STC 381 to come to such conclusion.

4. Whether delay in filing appeal under section 260A can be condoned where the stated

reason for delay is the pursuance of an alternate remedy by way of filing an application

before the ITAT under section 254(2) for rectification of mistake apparent on record?

SPINACOM INDIA (P.) LTD. V. CIT [2018] (SC)

Facts of the Case: The appellants have approached the Supreme Court under a special leave

petition. There has been a delay of 439 days in filing the appeal under section 260A for which

reason the appellants requested for a condonation of delay under section 14 of Limitation

Act, 1963. The appellants submitted that the delay was on account of pursuing an alternate

remedy of filing a miscellaneous application before the Income-tax Appellate Tribunal

(ITAT) under section 254(2).

Issue: The issue under consideration is whether delay in filing appeal under section 260A can

be condoned where the stated reason for delay is the pursuance of an alternate remedy by way

of filing an application before the ITAT under section 254(2) for rectification of mistake

apparent on record.


1. The Court refused to accept the submission that the application before the ITAT under

section 254(2) was an alternate remedy to filing of the application under section 260A.

2. The former is an application for rectifying a ‘mistake apparent from the record’ which

is much narrower in scope than the latter. Under section 260A, an order of the ITAT can be

challenged on substantial questions of law.

3. The Court stated that the appellant had the option of filing an appeal under section

260A while also mentioning in the Memorandum of Appeal that its application under section

254(2) was pending before the ITAT.

4. The time period for filing an appeal under section 260A does not get suspended on

account of the pendency of an application before the ITAT under section 254(2) of the Act.


17.11

Supreme Court’s Decision:

5.Since no satisfactory reason has been provided by the Appellant for the extraordinary

delay of 439 days in filing the appeal, the Supreme Court dismissed the application for

condonation of delay.

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Search and Seizure AJ Education NeXt

18.1

CHAPTER 18. SEARCH AND SEIZURE

SECTION 132: SEARCH AND SEIZURE

Under this section wide powers of search and seizure are conferred on the income-tax

authorities. The important points relating to this provision have been briefly summarised

below:

1. WHO CAN AUTHORISE SEARCH & SEIZURE i.e. issue search warrants:

Search and seizure can be authorised by Director General or Director or Chief

Commissioner or Commissioner or Additional Director or Additional

Commissioner or Joint Director or Joint Commissioner.

However, search can be authorized by Additional Director or Additional

Commissioner or Joint Director or Joint Commissioner only if he is empowered

by the CBDT to do so.

2. WHEN CAN SEARCH & SEIZURE BE AUTHORISED:

Such authorisation could take place if the authority on the basis of information in his

possession, has reasons to believe that:

(a) the person to whom a summon or notice was issued to produce books of account

or other documents under section 131 or section 142(1), has omitted or failed to

do so; or

(b) a person to whom a summon or a notice under section 131 or section 142(1) has

been or might be issued, will not or would not, produce any books of account or

other documents which will be useful or relevant to any proceeding under the

Income-tax Act; or

(c) a person is in possession of any articles or things, including money bullion or

jewellery etc. and these assets represents either wholly or partly the income which

has not been, or which would not be disclosed by him.

MEMORANDUM EXPLAINING FINANCE BILL, 2017

Reason to believe to conduct a search, etc. not to be disclosed

Confidentiality and sensitivity are the hallmarks of proceedings under section 132.

However, certain judicial pronouncements have created ambiguity in respect of the

disclosure of 'reason to believe' or 'reason to suspect' recorded by the income-tax

authority to conduct a search under section 132. Therefore, an explanation is inserted

to declare that the 'reason to believe' or 'reason to suspect', as the case may be, shall not

be disclosed to any person or any authority or the Appellate Tribunal.

3. POWERS OF AUTHORISED OFFICER IN COURSE OF SEARCH &

SEIZURE:

(a) The Director General or Director or Chief CIT or CIT may authorise any

Assessing Officer or

(b) the Additional Director or Additional Commissioner or Joint Director or Joint

Commissioner empowered by CBDT, may authorise any Assessing Officer:


18.2

[the officer so authorised is referred as Authorised Officer]

to

(i) enter and search any building, place, vessel, vehicle or aircraft where he has

reasons to suspect that such books of account, other documents, money, bullion,

jewellery and other valuable articles are kept;

(ii) break open the lock of any door, box, locker, safe, almirah or other receptacle

for exercising the powers conferred under (i) above, where the keys thereof are

not available.

(iii) search any person who has got out of, or is about to get into, or is in, the

building, vessel, place, vehicle or aircraft, if the authorised officer has reasons

to suspect that such person has secreted about his person any such books of

account, other documents, money, bullion, jewellery or other valuable article or

thing.

(iv) require any person who is found to be in possession or control of any books

of account or other documents maintained in the form of electronic record,

to afford the authorised officer the necessary facility to inspect such books of

account or other documents. [Section 132(1)(iib)]

(v) seize any such books of account, other documents, money, bullion, jewellery or

other valuable article or thing found as a result of such search.

Provided that bullion, jewellery or other valuable article or thing, being

stock in trade of the business, found as a result of such search shall not be

seized but the authorised officer shall make a note or inventory of such

stock-ln-trade of the business.

(vi) place marks of identification on any books of account or other documents or

make or cause to be made extracts or copies therefrom.

(vii) make a note or an inventory of any such money, bullion, jewellery or other

valuable article or thing.

Note 1: Deemed/ Constructive Seizure: Where it is not possible or practicable to take

physical possession of any valuable article or thing and remove it to a safe place due

to its volume, weight or other physical characteristics or due to its being of a

dangerous nature, the authorised Officer may serve an order on the owner or the

person who is in immediate possession thereof that he shall not remove, part with or

otherwise deal with it except with the previous permission of such authorised Officer

and such action of the authorised Officer shall be deemed to be seizure of such

valuable article or thing. [Second Proviso to section 132(1)]

Note 1A: Nothing contained in Note 1 above [i.e. second Proviso to section 132(1)] shall

apply in case of any article or thing, being stock-in-trade of the business.


18.3

Note 2: Section 132(3): ORDER OF RESTRAINT:

The authorized officer may, where it is not practicable to seize any such books of account,

other documents, money, bullion, jewellery or other valuable article or thing, for reasons

other than mentioned in the Second Proviso to section 132(1), serve an order on the owner or

the person, who is in immediate possession thereof that he shall not remove, part with or

otherwise deal with it except with previous permission of authorised officer. The Explanation

to section 132(3) provides that serving of an order as aforesaid shall not be deemed to be a

seizure of such books of account, other documents, money, bullion, jewellery or other

valuable article or thing. The Finance Act, 2002 provides that such an order under section

132(3) shall not be in force for a period exceeding 60 days from the date of order and

under no circumstances a prohibitory order passed under section 132(3) shall remain in

force beyond a period of 60 days, from the date of order.

For example, the authorised officer when he conducted search on the assessee, found

certain jewellery in the room of the brother of the assessee. The brother has shown the

jewellery in his returns but authorized officer had doubt whether the jewellery in

possession of assessee's brother belonged to the assessee or not, then he can pass a

restraint order under section 132(3) on assessee's brother. Within 60 days of the date of

order he can ask the assessee's brother to handover jewellery to him and in case he does

not do so, the order of restraint will come to an end.

4. Where the building, place, vessel or aircraft in which search is to be conducted is within

the area of jurisdiction of a Chief CIT or CIT but such Chief CIT or CIT has no

jurisdiction over the person on whom raid is to be conducted, and such Chief CIT or

CIT has reasons to believe that delay in getting the authorisation from the Chief CIT or

CIT having jurisdiction over such person may be prejudicial to the interests of the

revenue, then he is competent to authorise the authorised officer to conduct the search.

For example, the raid is to be conducted in a Building in Bombay and the assessee lives

in Delhi, i.e., the jurisdiction on the assessee is with Chief CIT or CIT of Delhi, then

the Chief CIT or CIT of Bombay can authorise the conduct of raid in building in

Bombay on the assessee.

5. Where any Chief Commissioner or Commissioner has reasons to suspect that any books

of account, money, bullion, jewellery or other valuable article or thing in respect of

which an officer has been authorised by any other Chief CIT or CIT, are kept in a

building, place, vessel, vehicle or aircraft not mentioned in the search warrant, then

such Chief CIT or CIT may authorise the said officer to conduct search of such

building, place, vessel or aircraft. In other words, where a search for any books of

account or other documents or assets has been authorised by any authority who is

competent to do so, and some other Chief CIT or Commissioner not having jurisdiction

over the assessee has reasons to suspect that such books of account or the documents of

the assessee are kept in any building, place, vessel, vehicle or aircraft not specified in

the search warrant, he may authorise the authorised officer to search such other

building, place, vessel, vehicle or aircraft.

Accordingly if a search warrant is issued by the Commissioner of Income-tax Bombay,

authorising the search of a premises in Madras and the Authorised Officer finds that the

books of account or other documents and/ or assets have been secreted in a building or

place not specified in the search warrant, he could request the Commissioner or Chief

CIT in Madras to authorise him to search that building or place.


18.4

6. The authorised officer may requisition the services of any police officer or any officer

of the Central Government or both to assist him in search and seizure, and it shall be

the duty of every such officer to comply with such requisition.

7. EXAMINATION ON OATH:

The authorised officer may during the course of search and seizure, examine on oath

any person who is found to be in possession or control of any books of account,

documents, money, bullion, jewellery or valuable article and any statement made by

such person during such examination may thereafter be used in evidence in any

proceeding under the Act. [Section 132(4)]

Note: The examination of any person may not be merely in respect of any books of

account, documents or other assets found as a result of search, but also in respect

of all matters relevant for the purposes of any investigation under the Act.

8. PRESUMPTIONS IN COURSE OF SEARCH AND SEIZURE

Where any books of account, other documents, money, bullion, jewellery and

other valuable article is found in the possession or control of any person in course

of a search, it may be presumed:

(i) That such books of account, other documents, money, bullion, jewellery or

other valuable article or thing belongs to such person.

(ii) That the contents of such books of account and documents are true and

(iii) That the signature and every other part of such books of account and other

documents which purport to be in the handwriting of any particular person

are in that person's handwriting, and in the case of a document stamped,

executed or attested, that it was duly stamped, executed or attested by the

person by whom it purports to have been so executed or attested.

9. PERIOD OF RETENTION OF BOOKS OF ACCOUNT AND OTHER

DOCUMENTS

The books of account or other documents seized under section 132 shall not be retained

by the authorised officer for a period exceeding 30 days from the date of the order of

assessment or reassessment under section 153A unless the reasons for retaining the

same are recorded by him in writing and approval of Chief Commissioner or

Commissioner for such retention is obtained. However, the Chief Commissioner or

Commissioner shall not authorise the retention of books of account and other

documents for a period exceeding 30 days after all proceedings are completed in

respect of the years for which such books of accounts and other documents are relevant

(i.e. proceedings of penalties etc.).

10. The person from whose custody any books of account or other documents are seized,

may make copies thereof, or take extracts therefrom, in the presence of authorized

officer, at such place and time as the authorised officer may appoint in this behalf.

11. Section 132(9A): Where the authorised officer has no jurisdiction over the person

searched by him, the books of account or other documents, or any money, bullion,

jewellery or other valuable article or thing seized shall be handed over by the

authorised officer to the Assessing Officer having jurisdiction over such person

within a period of sixty days from the date on which search was completed and


18.5

thereupon the powers exercisable by the authorised officer shall be exercisable by

such Assessing Officer.


Power of provisional attachment and to make reference to Valuation Officer to

authorised officer

Section 132 of the Act provides the power of search and seizure subject to fulfilment of

conditions specified therein.

In order to protect the interest of revenue and safeguard recovery in search cases, it is proposed

to insert sub-section (9B) and (9C) in the said section, to provide that during the course of a

search or seizure or within a period of sixty days from the date on which the last of the

authorisations for search was executed, the authorised officer on being satisfied that for

protecting the interest of revenue it is necessary so to do, may attach provisionally any property

belonging to the assessee with the prior approval of Principal Director General or Director

General or Principal Director or Director. It has been proposed that such provisional attachment

shall cease to have effect after the expiry of six months from the date of order of such

attachment. (DO WITH SEC 281B)

In order to enable correct estimation and quantification of undisclosed income held in the form

of investment or property by the assessee by the Investigation wing of the Department, it is

further proposed to insert a new sub-section (9D) in the said section to provide that in a case of

search, the authorised officer may, for the purpose of estimation of fair market value of a

property, make a reference to a Valuation Officer referred to in section 142A, for valuation in

the manner provided under that sub-section. It also provides that the Valuation Officer shall

furnish the valuation report within sixty days of receipt of such reference. (DO WITH SEC

142A)

SECTION 132A: POWERS TO REQUISITION BOOKS OF ACCOUNT, ETC.

(1) Where the Director General or Director or the Chief Commissioner or Commissioner,

in consequence of information in his possession, has reason to believe that—

(a) Any person to whom a summon or notice was issued to produce books of account

or other documents under section 131 or section 142(1), has omitted or failed to

do so and the said books of account or other documents have been taken into

custody by any officer or authority under any other law (e.g. seized under the

Customs Act, FEMA, Sales tax Act etc.) or

(b) A person to whom a summon or a notice under section 131 or 142(1) has been or

might be issued, will not or would not, produce any books of account or other

documents which will be useful or relevant to any proceeding under the Income-

tax Act and the said books of account have been taken into custody by any officer

or authority under any other law (e.g. seized under the Customs Act, FEMA, ales

Tax Act etc.) or

(c) Any articles or things including money, bullion or jewellery etc represents either

wholly or partly the income which has not been or which would not be disclosed

by him and the possession or control of such assets has been taken into custody


18.6

by any officer or authority under any other law (e.g. seized under the Customs

Act, FEMA, Sales Tax Act etc.)

then, the Director General or Director or the Chief Commissioner or

Commissioner may authorise any Assessing Officer (hereafter in this section

referred to as the requisitioning officer) to require the officer or authority

referred to in clause (a) or clause (b) or clause (c), as the case may be, to deliver

such books of account, other documents or assets to the requisitioning officer.

(2) On a requisition being made under sub-section (1), the officer or authority referred to in

clause (a) or clause (b) or clause (c), as the case may be, of that sub-section shall

deliver the books of account, other documents or assets to the requisitioning officer

either forthwith or when such officer or authority is of the opinion that it is no longer

necessary to retain the same in his or its custody.

(3) Where any books of account, other documents or assets have been delivered to the

requisitioning officer, the provisions of section 132 and section 132B shall, so far as

may be, apply as if such books of account, other documents or assets had been seized

under section 132 by the requisitioning officer from the custody of the person referred

to in clause (a) or clause (b) or clause (c), as the case may be, of sub-section (1) of this

section.

SECTION 132B: APPLICATION OF SEIZED OR REQUISITIONED ASSETS

(1) The assets seized under section 132 or requisitioned under section 132A may be dealt

with in the following manner, namely: —

(i) - The amount of existing liability under the Income-tax Act, the Wealth-tax Act

and the Gift-tax Act

- The amount of liability determined on completion of assessment or

reassessment under section 153A and the assessment of the assessment

year relevant to the previous year in which search is initiated or

requisition is made (including any penalty levied or interest payable in

connection with such assessment or reassessment) and

- Penalty and interest for being an assessee in default

- Amount of liability arising on an application made before Settlement

Commission under section 245C

(Amended by Finance Act, 2015)

MAY BE RECOVERED OUT OF SUCH ASSETS

Provided that where the person concerned makes an application to the Assessing Officer

within thirty days from the end of the month in which the asset was seized, for release of

asset and the nature and source of acquisition of any such asset is explained to the

satisfaction of the Assessing Officer, the amount of any existing liability referred to in this

clause may be recovered out of such asset and the remaining portion, if any, of the asset may

be released, with the prior approval of the Chief Commissioner or Commissioner, to the

person from whose custody the assets were seized: [For example, out of the cash seized of Rs.

200 Lakhs, the assessee explains to the satisfaction of Assessing Officer that Rs. 50 Lakhs is


18.7

explained cash and existing income tax liabilities are Rs. 35 Lakhs, then the Assessing

Officer shall release 15 Lakhs after paying the existing liabilities of Rs. 35 Lakhs]

Provided further that such asset or any portion thereof as is referred to in the first proviso

shall be released within a period of 120 days from the date on which the search was

completed or the assets/ books of accounts were delivered to the requisitioning officer under

section 132A.

(ii) If the assets consist solely of money, or partly of money and partly of other assets, the

Assessing Officer may apply such money in the discharge of the liabilities referred to in

clause (i) and the assessee shall be discharged of such liability to the extent of the

money so applied;

(iii) The assets other than money may also be applied for the discharge of any such liability

referred to in clause (i) as remains undischarged and for this purpose Assessing Officer

may recover the amount of such liabilities by the sale of such assets.

(2) Nothing contained in sub-section (1) shall preclude the recovery of the amount of

liabilities aforesaid by any other mode laid down in this Act.

(3) Any assets or proceeds thereof which remain after the liabilities referred to in clause (i)

of sub-section (1) are discharged shall be forthwith made over or paid to the persons

from whose custody the assets were seized.

Explanation— For the removal of doubts, it is hereby declared that the "existing

liability" does not include advance tax payable in accordance with the provisions of

Part C of Chapter XVII.

***************************************************************************

Special Procedure of Assessment or Reassessment in Case of Search & Seizure AJ Education NeXt

19.1

CHAPTER 19. SPECIAL PROCEDURE OF

ASSESSMENT OR REASSESSMENT IN CASE

OF SEARCH & SEIZURE

SECTION 153A: ASSESSMENT IN CASE OF SEARCH

Section 153A(1): Notwithstanding anything contained in section 139, section 147, section

148, section 149, section 151 and section 153, in the case of a person where a search is

initiated under section 132, the Assessing Officer shall—

(a) issue notice to such person requiring him to furnish within such period, as may be

specified in the notice, the return of income in respect of each assessment year

falling within six assessment years and relevant assessment years referred to in

clause (b), in the prescribed form and verified in the prescribed manner and

setting forth such other particulars as may be prescribed and the provisions of this

Act shall, so far as may be, apply accordingly as if such return were a return

required to be furnished under section 139;

(b) assess or reassess the total income of six assessment years and relevant

assessment years immediately preceding the assessment year relevant to the

previous year in which such search is conducted:

Provided that the Assessing Officer shall assess or reassess the total income in respect of

each assessment year falling within such six assessment years and relevant assessment

years:

Provided further that assessment or reassessment, if any, relating to any assessment year

falling within the period of six assessment years and relevant assessment years referred to in

this sub section pending on the date of initiation of the search under section 132, shall abate.

Provided also that the Central Government may by rules made by it and published in

the Official Gazette (except in cases where any assessment or reassessment has abated

under the second proviso), specify the class or classes of cases in which the Assessing

Officer shall not be required to issue notice for assessing or reassessing the total income

for six/ten assessment years immediately preceding the assessment year relevant to the

previous year in which search is conducted or requisition is made.

Explanation. —For the removal of doubts, it is hereby declared that,—

(i) in an assessment or reassessment made in respect of an assessment year under this

section, the tax shall be chargeable at the rate or rates as applicable to such assessment

year.


EXTENSION OF SCOPE OF SECTION 153A TO ASSESS INCOME FOR A

PERIOD BEYOND 6 YEARS

The scope of section 153A has been enlarged with effect from April 1, 2017. After this

amendment, the Assessing Officer can issue a notice of assessment under section 153A for a

period beyond 6 years.


19.2

For instance, if search is conducted under section 132 on June 26, 2020, the Assessing

Officer shall issue notice requiring the assessee to furnish return of income in respect of

assessment years 2015-16 to 2020-21.

Amendment- After amendment, the concerned Assessing Officer can issue notice for 6

preceding assessment years and for “the relevant assessment year or years”. For this

purpose, “relevant assessment year” shall mean an assessment year preceding the

assessment year relevant to the previous year in which search is conducted or requisition is

made which falls beyond 6 assessment years but not later than 10 assessment years from the

end of the assessment year relevant to the previous year in which search is conducted or

requisition is made. However, for the “relevant assessment year”, notice can be issued if -

a. the Assessing Officer has in his possession books of account or other documents or

evidence which reveal that the income which has escaped assessment amounts to (or is

likely to amount) to Rs. 50 lakh (or more) in one year or in aggregate in the relevant 4

assessment years (falling beyond the 6th year);

b. such income escaping assessment is represented in the form of asset (for this purpose

“asset" shall include! immovable property being land or building or both, shares and

securities, loans and advances, deposits in bank account);

c. the income escaping assessment or part thereof relates to such year or years; and

d. search under section 132 is initiated or requisition under section 132A is made on or

after April 1, 2017.

Provisions illustrated - Search is conducted on the premises of X Ltd. on May 20, 2020.

The Assessing Officer can issue notice requiring X Ltd. to furnish return of income in

respect of 6 preceding assessment years (i.e., assessment years 2015-16 to 2020-21). The

Assessing Officer has documents in his possession which reveal that X Ltd. has undisclosed

income (represented in the form of asset) pertaining to earlier assessment years as follows -

(Rs. in lakh)

Assessment years Undisclosed income

Situation 1 Situation 2 Situation 3

2014-15 (7th year) 10 5 40

2013-14 (8 th year) 12 12 0

2012-13 (9th year) 13 13 1

2011-12 (10th year) 15 15 9

2010-11 (11th year) 5 10 150

Situation 1 - Notice can also be issued under section 153A for the assessment years 2011-

12 to 2014-15 (as the aggregate undisclosed income for these assessment years is Rs. 50

lakh). However, notice cannot be issued for years earlier than 10th year (ie., assessment year

2010-11 or earlier).


19.3

Situation 2 - Notice cannot be issued for the assessment years 2011-12 to 2014 -15 (as the

aggregate undisclosed income for these assessment years is less than Rs. 50 lakh). Even for

earlier years, notice cannot be issued.

Situation 3 - Notice can also be issued for the assessment years 2011-12, 2012-13 and

2014-15. For earlier years, notice cannot be issued.

SECTION 153B:TIME LIMIT FOR COMPLETION OF ASSESSMENT OR

REASSESSMENT UNDER SECTION 153A

Normal Period of

Assessment/

Reassessment under

section 153B

Period of Assessment/

Reassessment where a

reference has been made to

Transfer Pricing Officer

under section 92CA in course

of proceedings under

For 6/10 Assessment Years

immediately preceding the

Assessment Year relevant to

the Previous Year in which

search is started.

12 months from the end

of the financial year in

which search is

completed.

24 months from the end of the

financial year in which search

is completed.

For Assessment Year relevant

to the Previous Year in which

search is started

Same as above Same as above

TIME LIMIT FOR COMPLETION OF ASSESSMENT OR REASSESSMENT

UNDER SECTION 153A IN CASE OF A PERSON REFFERED TO IN SECTION

153C

Normal Period of Assessment/

Reassessment under section

153B

Period of Assessment/

Reassessment where a reference

has been made to Transfer

Pricing Officer under section

92CA in course of proceedings

under section 153 A

For 6/10 Assessment

Years immediately

preceding the

Assessment Year

relevant to the

Previous Year in

which search is started

(i) 12 months from the end of

the financial year in which

search is completed, or

(ii) 12 months from the end of

the Financial Year in

which books of accounts,

assets etc. are handed over

under section 153C to the

A.O. having jurisdiction

over such other person.

WHICHEVER IS LATER.

(i) 24 months from the end of

the financial year in which

search is completed, or

(ii) 24 months from the end of

the Financial Year in which

books of accounts, assets

etc. are handed over under

section 153C to the A.O.

having jurisdiction over

such other person.

WHICHEVER IS LATER.


19.4

For Assessment Year

relevant to the

Previous Year in

which search was

started

Same as above Same as above

Note: Date of completion of search is the date of completion of search as recorded in the

last panchnama made in case of assessee.

SECTION 153C: ASSESSMENT OF INCOME OF ANY OTHER PERSON

Notwithstanding anything contained in section 139, section 147, section 148, section 149,

section 151 and section 153, where the Assessing Officer is satisfied that, —

(a) any money, bullion, jewellery or other valuable article or thing, seized, belongs to;

or

(b) any books of account or documents, seized, PERTAINS OR PERTAIN TO, OR

ANY INFORMATION CONTAINED THEREIN, RELATES TO,

a person other than the person referred to in section 153A, then, the books of account or

documents or assets, seized shall be handed over to the Assessing Officer having

jurisdiction over such other person and that Assessing Officer shall proceed against

each such other person and issue such other person notice and assess or reassess income

of such other person in accordance with the provisions of section 153A, if the Assessing

Officer is satisfied that the books of accounts or documents or assets seized have a bearing on

the determination of the total income of such other person for the relevant assessment year or

years referred to section 153A(1).

(Amended by Finance Act, 2015 w.e.f. 1-6-2015)

Provided that in case of such other person, the reference to the date of initiation of the search

under section 132 in the second proviso to section 153A(l) shall be construed as reference to

the date of receiving the books of account or documents or assets seized by the Assessing

Officer having jurisdiction over such other person.

Provided further that the Central Government may by rules made by it and published

in the Official Gazette, specify the class or classes of cases in respect of such other

person, in which the Assessing Officer shall not be required to issue notice for assessing

or reassessing the total income for six/ten assessment years immediately preceding the

assessment year relevant to the previous year in which search is conducted except in

cases where any assessment or reassessment has abated.

(Proviso added by Finance Act, 2012)

SECTION 153D: PRIOR APPROVAL NECESSARY FOR ASSESSMENT IN CASES

OF SEARCH OR REQUISITION

No order of assessment or reassessment shall be passed by an Assessing Officer below the

rank of Joint Commissioner in respect of each of the six/ten assessment year referred to in

section 153A or the assessment year relevant to previous year in which search was

conducted, except with the prior approval of the Joint Commissioner.


19.5

ANALYSIS

1. The Finance Act, 2003 has done away with the procedure of Block Assessment. For

search initiated under section 132, the new procedure as laid down in section 153A,

153B, 153C and 153D as introduced by Finance Act, 2003 shall apply.

2. Section 153A:

(i) Section 153A overrides section 139 so as to give power to the Assessing Officer

to call for the return of income of the Assessment Years falling in the specified

period of 6/10 assessment years even if the assessee was not required to file the

return of income for such assessment years in accordance with section 139.

(ii) Section 153Aoverrides sections 147,148,149 and 151 which contains the

provisions for assessment or reassessment of incomes escaping assessment. These

sections have been over-ridden because the Assessing Officer shall now assess/

reassess the incomes of the assessment years falling in specified period of six/ten

assessment years under section 153A. He shall not issue notice under section 148

for these assessment years. The notice for these assessment years shall be issued

under section 153A.

(iii) Section 153A over-rides section 153 which contains the time limits for making

assessment/ reassessment. The time limits for making assessment/ reassessment

in respect of the assessment years falling in the specified period of six/ten

assessment years have been given in section 153B.

3. Section 153A provides as under:

• Notwithstanding anything contained in section 139/147/148/149/151/153

• in case of any person where search is initiated (search is initiated by issuing a

search warrant) under section 132,

• then the Assessing Officer shall issue a notice to such person (Notice under

section 153A) requiring him to furnish within such period, as may be specified in

the notice

• the return of income in respect of each assessment year falling in the specified

period. Specified period means six assessment years immediately preceding the

assessment year relevant to the previous year in which such search is conducted.

For example, if search is initiated on 30.06.2020, then by issuing the notice under

section 153A, the Assessing Officer shall require the assessee to furnish the

returns of income for Assessment Year 2015-2016 to Assessment Year 2020-

2021. (PLUS 4 MORE AY, IF CONDITIONS ARE FULFILLED)

• The following points may be noted:

o Return is required to be furnished for the assessment years falling in the

specified period even if the assessee is not required to furnish the return of

income for any assessment year since his income is below taxable limit.

o Return is required to be furnished for the assessment years falling in the

specified period even if-

Ø Returns have already been filed earlier under section 139/ 142(1)/ 148

or


19.6

Ø Assessment/ Reassessment have been completed or

Ø Assessment / Reassessment for any assessment year falling in the

specified period is still pending.

4. The Assessing Officer shall assess/ reassess the total income of the assessment years

falling in the specified period i.e. the total income of six assessment years immediately

preceding the assessment year relevant to the previous year in which search is

conducted. The assessment/ reassessment shall be made separately for the 6 assessment

years under section 153A.

5. It may be noted that if a search is conducted on 30.06.2020, the Assessing Officer shall

assess/ reassess the income under section 153A for Assessment Year 2015-2016 to

Assessment Year 2020-2021. If the assessment/ reassessment relating to any

assessment year falling within the specified period of 6/10 years is pending under

section 143(3)/144/ 147 on the date of initiation of search under section 132, then

such pending assessment/ reassessment shall abate i.e. come to an end. The

assessment/ reassessment shall be made under section 153A only.

6. It has been clarified in the CBDT Circular explaining the provisions of Finance

Act, 2003 that the appeal, revision or rectification proceedings pending on the date

of initiation of search under section 132 shall not abate but shall continue.

7. All the provisions of the Income-tax Act shall apply to assessment/ reassessment made

under section 153A. Therefore,

• Penalties for concealment of income

• Penalties for defaults like non-filing of return

• Interest under section 234A/B/C

• Prosecution (Prosecution under section 276CC for failure to file the return

under section 153A and prosecution under section 276C for concealment of

income)

shall apply to assessment/ reassessment made under section 153A.

8. In the assessment or reassessment made in respect of an assessment year under this

section, the tax shall be chargeable at the rates applicable to such an assessment year.

9. An appeal against the order under section 153A lies to CIT (Appeals).

CONCEPT OF ABATEMENT

CONCEPT OF ABATEMENT (2nd Proviso to Sec 153A)

Suppose a search is conducted on 30.06.2020 and following information is given: -

(1) For AY 2015 – 2016 :-

The A.O. made re-assessment u/s 147 on 10.01.2020 re-assessing the income at Rs.

70,00,000. The Assessee filed on appeal to CIT (A) and appeal is pending on

30.06.2020.


19.7

(2) For AY 2016 – 2017 :-

Re-Assessment under 147 was completed on 20th March, 2020 re-assessing the income

at Rs. 50,00,000. No appeal has been filed.

(3) For AY 2017 – 2018 :-

Assessment under 143(3) was completed on 31.12.2019, assessing the income at Rs.

40,00,000. An appeal was filed against the assessment and CIT(A) reduces the income

to Rs. 30,00,000 by an order passed on 20th June, 2020 u/s 250. No further appeal has

been filed.

(4) For A.Y. 2018 – 2019 :-

Returned income (declared income) of Rs. 70,00,000 and assessment is pending on 30th

June, 2020 u/s 147.

(5) For A.Y. 2019 – 2020 :-

Returned income was Rs. 55,00,000 and assessment is pending on 30th June, 2020 u/s

143 (3).

(6) For A.Y. 2020 – 2021 :-

No return has been filed on 30th June 2020.

Now, the A.O. shall assess or re-assess income of A.Y. 15 – 16 to A.Y. 2020 – 21 u/s

153A. Now let us say that in the search, A.O. finds concealed income of Rs. 20,00,000 in

each years of above A.Y’s.

Solution :-

(1) For A.Y. 2015 – 16 :-

The appeal proceedings pending on 30th June 2020 shall not abate but shall continue.

(2) For A.Y. 2016 – 17 :-

Re-assessment completed on 20th march, 2020 shall not abate but shall remain.

(3) For A.Y. 2017 – 18 :-

Assessment completed on 31.12.2019 shall not abate but shall remain.

(4) For A.Y. 2018 – 19 :-

Assessment proceeding pending u/s 147 on 30th June, 2020 shall abate.

(5) For A.Y. 2019 – 20 :

Assessment proceeding pending u/s 143(3) shall abate.

Under section 153A the A.O. shall assess or re-assess the income as under:-

(1) A.Y. 2015 – 2016 :-

Rs. 70,00,000 (+) Rs. 20,00,000 = Rs. 90,00,000

Assuming that appeal is pending at the time of passing the order u/s 153A. Suppose

after passing an order u/s 153A, the CIT appeal reduces the income to Rs. 60,00,000.

Now the order under 153A can be rectified u/s 154.

(2) For A.Y. 2016 – 17 :-

Rs. 50,00,000 (+) Rs. 20,00,000 = Rs. 70,00,000

(3) For A.Y. 2017 – 18 :-

Rs. 30,00,000 (+) Rs. 20,00,000 = Rs. 50,00,000

(4) For A.Y. 2018 – 19 :-


19.8

Rs. 70,00,000 (+) conceal income detected u/s 147 not assessed yet (+) Rs. 20L. {It is

presumed that Rs. 20,00,000 found in search is in addition to income found u/s 147}.

(5) For A.Y. 2019 – 20 :-

Rs. 55,00,000 (+) conceal income detected u/s 143(3) not assessed yet (+) Rs. 20L. {It

is presumed that Rs. 20,00,000 found in search is in addition to income found u/s

143(3)}.

FROM THE JUDICIARY

S. R. BATLIBOI & CO. VS. DEPARTMENT OF INCOME TAX (INVESTIGATION)

(DELHI HIGH COURT) [2010]

The petitioner was a reputed firm of auditors and accountants. The laptops of two employees

of the petitioner were seized by the Dy. Director in the course of conducting a search and

seizure operation against the assessee. On the request of the Dy. Director, said employees

provided him with the electronic data relating to three companies of the assessee group

together with the print copies of the data. Nevertheless, the Dy. Director insisted on securing

total and unrestricted access to the laptops, obviously in order to gain information and data of

all the other clients of the petitioner. That request was refused by the petitioner. The seized

laptops were sent by the respondents to the Central Forensic Science Laboratory (CFSL)

which, however, could not ascertain the password and, accordingly, could not access the

entire data on the laptops. The petitioner was thereupon asked to disclose the password,

which it again declined and thereafter, the laptops were sealed in the presence of the said

employees of the petitioner. The petitionary thereafter, filed instant writ petition seeking an

appropriate writ to prevent the respondents from forcibly gaining or securing access to the

data contained in two seized laptops.

It was held that granting absolute access to the department of all the data even pertaining to

the other clients of the petitioner having no dealings with the assessee group, would

tantamount to grave professional misconduct and would be contrary to the Code of Ethics

applicable upon the petitioner as well as the obligations contained in the Chartered

Accountants Act, 1949, which prohibits them from disclosing confidential information to

third parties.

It could not be accepted that section 153C would entitle and empower the Dy. Director to

seize any or all the articles, valuables or documents found during the course of the search,

regardless of whether they are relevant for the purpose of assessment of the assessee on

whom a search and seizure is conducted.

It was argued that under section 153C, the department acts as a post office, viz., it sends the

seized material to the concerned Assessing Officer. This proposition advanced by the revenue

is legally acceptable so long as it is restricted to any person having dealings or transactions

with the person who is the subject of the search and seizure operation. The material which is

not connected with raided party must be ignored.

The impugned summons were to be set aside, and the respondents were to be directed to

forthwith return the laptops to the petitioner.


19.9

SECTION 153A(2): ADDED BY FINANCE ACT, 2008

– If any order of assessment or reassessment made under section 153A(1)

– has been annulled in any appeal,

– then, notwithstanding anything contained in section 153A(1) or section 153

– the assessment or reassessment relating to any Assessment Year which has abated

under the second proviso to section 153A(1)

– shall stand revived with effect from the date of receipt of the order of such annulment

by the Commissioner

– Provided that such revival shall cease to have effect, if such order of annulment is set

aside.

Note: Refer summary for Explanation.

SECTION 153(8): TIME LIMIT FOR ASSESSMENT OR REASSESSMENT

– Notwithstanding the time limits for making assessment /reassessment under section

143(3)/144/147 given in section 153

– and notwithstanding the time limits given in section 153B

– the order of assessment or reassessment

– relating to any Assessment Year,

– which stands revived under section 153A(2),

– shall be made

o within one year from the end of the month of such revival (revival takes place on

the date of receipt of order of annulment by Commissioner of Income tax); or

o within the time period specified in section 153B; or

WHICHEVER IS LATER.

ANALYSIS OF AMENDMENT MADE IN SECTION 153A AND 153C BY

FINANCE ACT. 2012

(1) Rule 112F provides for the Class or classes of cases in which the Assessing Officer

shall not be required to issue notice for assessment or reassessment of the total

income for six assessment years immediately preceding the assessment year,

relevant to the Previous Year in which search is conducted:

The class or classes of cases in which the Assessing Officer shall not be required to

issue notice for assessing or reassessing the total income for six assessment years

immediately preceding the assessment year relevant to the previous year in which

search is conducted, shall be the cases—

(i) where, as a result of a search under section 132, a person is found to be in

possession of any money, bullion, jewellery or other valuable articles or things,

whether or not he is the actual owner of such money, bullion, jewellery etc.; and

(ii) where, such search is conducted in the territorial area of an assembly or

Parliamentary constituency in respect of which a notification has been issued by

Election Commission or where the assets so seized are connected in any manner

to the ongoing election in an assembly or Parliamentary constituency:


19.10

Provided that this rule shall not be applicable to cases where such search under section

132 has taken place after the hours of poll so notified:

Provided further that this rule shall not be applicable to cases where any assessment or

reassessment has abated under the second proviso to section 153A and where any assessment

or reassessment has abated under section 153C.

Illustration:

The Election Commission has issued notification for conduct of Assembly elections in New

Delhi on 10.12.2020. The assembly polls will end at 6:00 P.M. on 24.12.2020. The Director

of Income tax conduct raids on 10 people and seize cash of Rs. 50 lakhs from each person.

Now, proviso to section 153A/ 153C and Rule 112F shall apply if:

(i) Raid is conducted on or after 10.12.2020 and upto 6:00 P.M. on 24.12.2020.

(ii) Raid is conducted in territorial area of New Delhi.

(iii) If raid is conducted in Gurgaon/ Faridabad/ Ghaziabad and Assessing Officer is

convinced that the seized cash relates to election in New Delhi.

Now if raid is conducted on 15.12.2020 in New Delhi and Assessing Officer is convinced

that these 10 people have no financial worth and are simply holding cash for some political

party:

• Assessing Officer need not issue notice under section 153A for any of the 6

Assessment Years i.e., Assessment Year 2015-2016 to Assessment Year 2020-

2021.

• Assessing Officer can complete assessment under section 143(3) / 144 for


• If the persons from whom cash is seized are not able to explain the source,

Assessing Officer will invoke section 68 and deemed Rs. 50 Lakhs as income

from unexplained credit. He will levy tax at flat rate of 60% under section

115BBE,

• If Assessing Officer wants to issue notice under section 153A for Assessment

Year 2015-2016 to Assessment Year 2020-2021 he can do so. But if he finds that

there is no use to issue notice under section 153A as these people are simply

carriers, then he may not issue notice under section 153A for the 6 Assessment

Years.

Taxation of Trust AJ Education NeXt

20.1

CHAPTER 20. TAXATION OF

TRUST

Disclaimer: It is strictly recommended to do this chapter from compendium only as the

language of this chapter is difficult for a student to understand.


Disallowance provisions under section 40(a)(ia) and section 40A(3) to apply to certain

exempt entities [Sec. 10(23C) and 11]

For availing of exemption under section section 11 and 10(23C)(iv)/(v)/(vi)/(via) , there

is no restrictions on payments made in cash or by bearer cheque. Likewise, there is no

check on whether such trusts or institutions follow the provisions of TDS.

• Amendment - A new explanation has been inserted in section 11 & 10(23C) with

effect from the assessment year 2019-20. It provides that for the purpose of determining

application of income, the provisions of sections 40(a)(ia) and 40A(3)/(3A), shall,

mutatis mutandis, apply as they apply in computing the income chargeable under the

head "Profits and gains of business or profession". For the previous years 2019-20 and

2020-21, XY Charitable Trust gives the following information -

2019-20

Rs.

2020-21

Rs.

Income -

Income from property held in trust

Voluntary contributions (with specific direction that contributions

shall form part of corpus of the trust)

Voluntary contributions (without any specific direction)

7,00,000

6,00,000

18,00,000

11,00,000

8,00,000

17,00,000

Expenditure -

Donation to other public charitable trusts [Note 1]

Income applied for charitable purposes during the previous year

[Note 2]

3,00,000

10,00,000

4,00,000

16,00,000

Other points-

1. Donation of Rs. 3,00,000 includes (a) cash donation of Rs. 80,000 to PQ Charitable

Trust.

2. Application of income of Rs. 10,00,000 includes (a) cash payment of Rs. 30,000, and

(b) consultancy fee of Rs. 2,00,000 by an account-payee cheque to Z (a yoga

instructor). On this consultancy fee, tax is not deducted at source during the financial

year 2019-20. However, TDS is deducted/deposited on December 29, 2020.

AY 20-21

Rs.

AY 21-22

Rs.

Income from property held in trust 7,00,000 11,00,000

Voluntary contributions (with specific direction that contributions

shall form part of corpus of the trust)

Nil

Nil

Voluntary contributions (without any specific direction) 18,00,000 17,00,000


20.2

Total income 25,00,000 28,00,000

Less: 15% set apart for future 3,75,000 4,20,000

Balance 21,25,000 23,80,000

Less: Application of income for charitable purposes -

- Donation to other public charitable trusts [Rs. 3,00,000 - cash

donation: Rs. 80,000]

2,20,000 4,00,000

- Income applied for charitable purposes during the previous year

[Rs. 10,00,000 - cash payment: Rs. 30,000 - payment without TDS :

Rs. 60,000 (being 30% of consultancy fee paid without TDS)]

9,10,000

16,00,000

- Consultancy fee to yoga instructor (since tax is deposited during

the previous year 2020-21, it is allowable as application of income

for the previous year 2020-21)

- 60,000

Taxable income 9,95,000 3,20,000

Illustration 1:

During the previous year 2020-2021, a charitable trust derived income of Rs. 6,70,600 from

the property held under trust for charitable purposes. The trust actually spent only Rs.

3,50,600 during the previous year 2020-2021. Determine the taxable income of the trust on

the assumption that:

(a) the trust has not applied for the option under clause (2) of the Explanation to section

11(1), and

(b) the trust has applied for the option and has opted for applying the unutilized portion of

income for charitable purposes during the next previous year, i.e., 2021-2022 and has

actually spent Rs. 67,800 during that previous year.

Answer: Previous Year 31.03.2021

Income from property held for charitable purposes 6,70,600

Less: 15% set apart for the future 1,00,590

5,70,010

Less: Amount actually spent during the previous year 3,50,600


On the first assumption, Rs. 2,19,410 is taxable for the assessment year 2021-2022 relevant

to the previous year 2020-2021. On the second assumption, the total income of P/Y

31.03.2021 shall be NIL and Rs. 1,51,610 (i.e., Rs. 2,19,410 – Rs. 67,800) will be treated as

taxable income of the assessment year 2022-2023 relevant to the previous year 2021-2022.

Illustration 2:

During the accounting period ending March 31, 2021 a charitable trust derived:

(a) income from property held for charitable purposes: Rs. 4,40,000 (Rs. 2,15,000

received in cash and the remaining balance of Rs. 2,25,000 is to be received in the

year 2022-2023)


20.3

(b) voluntary contribution: Rs. 7,05,000 (out of which Rs. 4,00,000 is with specific

direction that it shall form part of corpus of the trust).

During the previous year 2020-2021, the trust spent only Rs. 70,000 for charitable purposes.

Determine its taxable income on the assumption that the trust has exercised the option for

applying the unrealized income of Rs. 2,25,000 in the year of receipt, i.e. 2022-2023,

whereas it actually spends Rs. 18,000 in the year 2022-2023 and Rs. 32,000 in the year 2023-

2024.

Answer: Assessment Year 2021-2022

Rs.

Income from property held under trust for charitable purposes 4,40,000

Voluntary contributions (Rs. 7,05,000 – Rs. 4,00,000) 3,05,000


Less: 15% set apart for future 1,11,750

Balance 6,33,250

Less: Amount spent during the previous year 70,000

Shortfall 5,63,250

Less: Amount not realised during the previous year for which option has been

exercised under sub - clause (i) of clause (2) of Explanation to section 11(1)

2,25,000

Taxable income 3,38,250

Assessment Year 2024-2025 Previous Year 31.03.2024

(Previous Year next following the previous year in which the

unrealised income of the previous year 2020-2021 is received)

Rs. Rs.

Income received during the previous year 2022-2023 2,25,000

Less: Amount spent:

- during the previous year 2022-2023 18,000

- during the previous year 2023-2024 32,000 50,000

Amount deemed as income of the Assessment Year 2024-

2025

1,75,000

FROM THE JUDICIARY:

Can Explanation to section 11(2) be applied in respect of the accumulation up to 15%

referred to in section 11(1)(a), to treat the donation made to another charitable trust

from the permissible accumulation upto 15%, as income of the trust?

DIT (Exemption) v. Bagri Foundation (Delhi)

Held, that 85% income which is accumulated cannot be donated. However, 15% which is set

apart is not subject to any condition. If any amount is donated to other trust registered under

section 12AA out of 15% accumulated income, then the amount donated cannot to be said to

be violation of 11(2) and shall not be deemed as income of the trust.


20.4

Illustration: During the previous year 2020-2021, a charitable trust derived the following

income:

• Voluntary contribution (out of Rs. 20,90,000 is with a specific direction 41,10,000

that it shall form part of the corpus of the trust)

• Income from property held in trust 2,00,000

During the previous year 2020-2021, the trust spends Rs. 2,19,610 and sets apart Rs 7,46,000

for the purpose of construction of a charitable hospital up to March 31, 2026.

Determine the taxable income of the trust on the assumption that the trust utilizes Rs.

4,65,000 up to March 31, 2027 for the purpose of construction of charitable hospital.

Answer: ASSESSMENT YEAR 2021-2022 (i.e., Previous Year 2020-2021)

Rs.

Income from property held under trust 2,00,000

Add: Voluntary contribution (Rs 41,10,000 - Rs 20,90,000) 20,20,000

Total income 22,20,000

Less: 15% of Rs. 22,20,000 3,33,000

Balance 18,87,000

Less: Amount spent during 2020-2021 2,19,610

Short fall 16,67,300

Less: Amount set apart for charitable hospital under section 11(2) 7,46,000

Net income 9,21,390

Assessment Year 2027-28 (previous year 2026-27) (i.e., the previous year next following the

previous year ending March 31, 2026):

Rs.

Amount set apart 7,46,000

Less: Amount actually spent 4,65,000

Amount deemed as income of the assessment year 2027-28 2,81,000

SECTION 11(5): MODES OF INVESTMENT OF TRUST MONEY

(DO NOT TRY TO REMEMBER)

The forms and modes of investing or depositing the money referred to in clause (b) of sub-

section (2) shall be the following, namely:

(1) Investment in Government Saving Certificates.

(2) Deposits with Post Office Savings Banks.

(3) Deposit with Scheduled banks or Co-operative Banks.

(4) Investment in units of the Unit Trust of India.

(5) Investment in Central or State Government Securities.

(6) Investments in debentures issued by or on behalf of any company or corporation.

However, both the principal and interest thereon must have been guaranteed by

the Central or the State Government.


20.5

(7) Investment or deposits in any public sector company.

Where an investment is made in the shares of any public sector company and

such public sector company ceases to be a public sector company, the investment so

made shall be deemed to be an investment made for a period of three years from the

date of such cessation and in the case of any other investment or deposit, till the

date of its maturity.

(8) Investment in bonds of approved financial corporation providing long term finance

for industrial development in India and eligible for deduction under section

36(1)(viii).

(9) Investment in bonds of approved public companies whose principal object is to

provide long-term finance for construction or purchase of houses in India for

residential purposes and eligible for deduction under section 36(1)(viii).

(10) Deposits with or investment in any bonds issued by a public company formed and

registered in India with the main object of carrying on the business of providing

long- term finance for urban infrastructure in India.

"Long-term finance" means any loan or advance where the terms under which

moneys are loaned or advanced provide for repayment along with interest thereof

during a period of not less than five years.

"Urban infrastructure" means a project for providing potable water supply, sanitation

and sewerage, drainage, solid waste management, road, bridges and flyovers or urban

transport.

(11) Investment in immovable property excluding plant and machinery, not being plant

and machinery installed in a building for the convenient occupation thereof.

(12) Deposits with Industrial Development Bank of India.

(13) Any other mode of investment or deposit as may be prescribed. Rule 17C specifies

the following other modes: (1) Investments in units issued under any scheme of

mutual fund referred to in section 10(23D); (2) Any transfer of deposits to Public

Account of India; (3) Deposits made with an authority constituted in India or under

any law enacted either for the purpose of dealing with and satisfying the need for

housing accommodation or for the purpose of planning, development or

improvement of cities, towns and villages, or for both; (4) investment by way of

acquiring equity shares of a ‘depository’; (5) investment by a recognized Stock

Exchange, in the equity shares of a company promoted by it to acquire the

membership rights of other stock exchanges, where at least 51% of the paid-up

share capital is held by the Stock Exchange and the balance is held by its members;

(6) investment by way of acquiring equity shares of an incubatee by an incubator;

(7) investment by way of acquiring shares of National Skill Development

Corporation; (8) investment in debt instruments issued by any infrastructure

finance company registered with RBI; (9) investment in Stock Certificate as defined

in of Sovereign Gold Bonds Scheme, 2015.

SECTION 11(6): DEPRECIATION SHALL NOT BE ALLOWED IF PURCHASE OF

ASSET WAS ALREADY CLAIMED AS APPLICATION OF INCOME

- Where an asset

- the cost of acquisition of which has been claimed as application of income under

section 11 for any previous year.

- then no deduction by way of depreciation or otherwise in respect of such asset shall

be allowed while computing the income of any Previous Year


20.6

- and such depreciation shall not be considered as application of income while

computing the income of any Previous Year.


SECTION 11(7): EXEMPTION UNDER SECTION 10 NOT AVAILABLE EXCEPT

UNDER SECTION 10(1) AND 10(23C)

- Where a trust has been granted registration under section 12AA/12AB (FA 2020)

- and registration is in force in the Previous Year

- then the trust cannot claim any exemption under any provision of section 10 except

under section 10(1), section 10(23C) and section 10(46) for that Previous Year. (FA

2020)

Provided that such registration shall become inoperative from the date on which the trust or

institution is approved under clause (23C) of section 10 or is notified under clause (46) of the

said section, as the case may be, or the date on which this proviso has come into force,

whichever is later. (Added by Finance Act 2020)

Provided further that the trust or institution, whose registration has become inoperative

under the first proviso, may apply to get its registration operative under section 12AB subject

to the condition that on doing so, the approval under clause (23C) of section 10 or

notification under clause (46) of the said section, as the case may be, to such trust or

institution shall cease to have any effect from the date on which the said registration becomes

operative and thereafter, it shall not be entitled to exemption under the respective clauses.

(Added by Finance Act 2020)

KEY NOTES:

1. Section 10(1) exempts agricultural income and trust can claim exemption under

section 10(1) along with exemption section 11 & 12

2. Exemption under section 10(23C) is similar to exemption under section 11 & 12 and

it is available to certain big trust who are approved by Central Government.

3. Section 10(46) gives exemption to entities which are established or constituted

under a Central or State Act or by a Central or State Government.

4. Trust cannot claim any other exemption of section 10 while computing exemption

under section 11 & 12.

SECTION 12A: CONDITIONS FOR APPLICABILITY OF SECTIONS 11 & 12

The income of a Charitable or Religious Trust or Institution is exempt under Sections 11 and

12 of the Income tax Act subject to the limits and conditions specified therein. Section 12A

prescribes that the provisions of Section 11 and 12 shall be applicable to a Trust or Institution

only if the following conditions are satisfied: -

(a) the person in receipt of the income has made an application for registration of the trust

or institution in the prescribed form and manner to the Commissioner and such trust

or institution is registered under section 12AA.

The provisions of section 11 & 12 shall apply in relation to income of such trust or

institutions from the assessment year immediately following the financial year in

which such application is made. Therefore, if application for registration of trust is


20.7

made on 31.12.2020, the provisions of section 11 & 12 shall apply for Assessment

Year 2021-2022 i.e., Previous Year 31.3.2021 and future Assessment Years.


The following clause shall be inserted with effect from the 1st day of June, 2020, namely:––

“12A(1)(ac) - Notwithstanding anything contained in clauses (a) to (ab), the person in

receipt of the income has made an application in the prescribed form and manner to the

Principal Commissioner or Commissioner, for registration of the trust or institution,––

(i) where the trust or institution is registered under section 12A [as it stood immediately

before its amendment by the Finance (No. 2) Act, 1996] or under section 12AA, [as it stood

immediately before its amendment by the Finance Act, 2020] within three months from the

date on which this clause has come into force;

(ii) where the trust or institution is registered under section 12AB and the period of the said

registration is due to expire, at least six months prior to expiry of the said period;

(iii) where the trust or institution has been provisionally registered under section 12AB, at

least six months prior to expiry of period of the provisional registration or within six months

of commencement of its activities, whichever is earlier;

(iv) where registration of the trust or institution has become inoperative due to the first

proviso to sub-section (7) of section 11, at least six months prior to the commencement of the

assessment year from which the said registration is sought to be made operative;

(v) where the trust or institution has adopted or undertaken modifications of the objects

which do not conform to the conditions of registration, within a period of thirty days from the

date of the said adoption or modification;

(vi) in any other case, at least one month prior to the commencement of the previous year

relevant to the assessment year from which the said registration is sought,

and such trust or institution is registered under section 12AB.

(b) Where the total income of the Trust or Institution computed without giving effect to

the provisions of sections 11 and 12 exceeds Rs. 2,50,000 in any previous year, then

the accounts of the Trust or Institution for that year should be audited by a Chartered

Accountant and the report of such audit should be furnished before the specified date

referred to in Sec 44AB.


20.8

- Provided that the provisions of sections 11 and 12 shall apply to a trust or

institution, where the application is made under––

(a) sub-clause (i) of clause (ac) of sub-section (1), from the assessment year from

which such trust or institution was earlier granted registration;

(b) sub-clause (iii) of clause (ac) of sub-section (1), from the first of the assessment

years for which it was provisionally registered; (Added by Finance Act 2020)

- Provided further that where registration has been granted to the trust or institution

under section 12AA or 12AB,

- then,

- the provisions of sections 11 and 12 shall apply in respect of any income derived from

property held under trust of any assessment year

- preceding the aforesaid assessment year, for which assessment proceedings are

pending before the Assessing Officer as on the date of such registration

- and the objects and activities of such trust or institution remain the same for such

preceding assessment year.

- Provided also that no action under section 147 shall be taken by the Assessing

Officer in case of such trust or institution

- for any assessment year preceding the aforesaid assessment year

- only for non-registration of such trust or institution for the said assessment year.

Provided also that provisions contained in the first and second proviso shall not apply

in case of any trust or institution which was refused registration, or the registration

granted to it was cancelled at any time under section 12AA or 12AB.

SECTION 12AA: PROCEDURE FOR REGISTRATION

(1) The Commissioner, on receipt of an application for registration of a Trust or

Institution made under Section 12A, shall

(a) Call for such documents and information from the Trust or Institution as he

thinks necessary in order to satisfy himself about the genuineness of the

activities of the Trust or Institution and may make further enquiries.

(b) After satisfying himself about the objects of the Trust or Institution and the

genuineness of its activities:

(i) Pass an order in writing registering the Trust or Institution,


20.9

(ii) If he is not satisfied, pass an order in writing refusing to register the

Trust or Institution.

No order of refusal to register the Trust shall be passed unless the applicant has been

given a reasonable opportunity of being heard.

(2) Every order granting or refusing registration shall be passed before the expiry of six

months from the end of the month in which application was received under Section

12A. If no order is passed within the said six months then it shall be deemed that the

Trust has been registered.

(3) Where a trust or an institution has been granted registration under section 12AA and

subsequently the Commissioner is satisfied that the activities of such trust or

institution are not genuine or are not being carried out in accordance with the objects

of the trust or institution, as the case may be, he shall pass an order in writing

cancelling the registration of such trust or institution.

(4) Without prejudice to the provisions of sub-section (3), where a trust or an institution

has been granted registration under clause (b) of sub-section (1) and subsequently it is

noticed that the activities of the trust or the institution are being carried out in a

manner that the provisions of sections 11 and 12 do not apply to exclude either whole

or any part of the income of such trust or institution due to operation of sub-section

(1) of section 13, then, the Commissioner may by an order in writing cancel the

registration of such trust or institution:

Provided that the registration shall not be cancelled under this sub-section, if the trust

or institution proves that there was a reasonable cause for the activities to be carried

out in the said manner

(5) Nothing contained in this section shall apply on or after the 1st day of June, 2020.

ANALYSIS

While discussing section 11(7), the trust in the Previous Year 31-3-2021 deliberately invest

Rs. 10,000 in equity shares which is prohibited by section 13(1).

Now as per provisions of section 13(1), the provisions of section 11 & 12 shall not apply, and

trust will not get exemption under section 11 and 12 for Previous Year 31-3-2021. But prior

to amendment by Finance Act, 2014, Commissioner of Income-tax could not cancel the

registration of the trust for Previous Year 31-3-2021. The only consequence was that the trust

will not get exemption under section 11 & 12 for Previous Year 31-3-2021. The trust

therefore claims exemption under section 10. Next year i.e. Previous Year 31-3-2022 when

the trust has no such incomes which are exempt under section 10, trust will claim exemption

under section 11 & 12.

But after the amendment by Finance Act, 2014, the Commissioner of Income-tax will cancel

the Registration of the Trust for Previous Year 31-3-2021 and future Assessment Years.


20.10

Practically, registration once cancelled is not granted again. Therefore, assessee will loose

exemption under section 11 & 12 for Previous Year 31-3-2021 and all future Assessment

Years.


Cancellation of registration of the Trust or Institution

Section 12AA of the Act prescribes for manner of grating registration in case of trust or

institution for the purpose of availing exemption in respect of its income under section 11 of

the Act, subject to conditions contained under sections 11, 12, 12AA and 13. Section 12AA

also provides for manner of cancellation of said registration. This section provides that

cancellation of registration can be on two grounds: -

(a) the Principal Commissioner or the Commissioner is satisfied that activities of the

exempt entity are not genuine or are not being carried out in accordance with its

objects; and

(b) it is noticed that the activities of the exempt entity are being carried out in a manner that

either whole or any part of its income would cease to be exempt.

In order to ensure that the trust or institution do not deviate from their objects, it is proposed

to amend section 12AA of the Income-tax Act, so as to provide that,-

(i) at the time of granting the registration to a trust or institution, the Principal

Commissioner or the Commissioner shall, inter alia, also satisfy himself about the

compliance of the trust or institution to requirements of any other law which is material

for the purpose of achieving its objects;

(ii) where a trust or an institution has been granted registration under clause (b) of sub-

section (1) or has obtained registration at any time under section 12A and subsequently

it is noticed that the trust or institution has violated requirements of any other law

which was material for the purpose of achieving its objects, and the order, direction or

decree, by whatever name called, holding that such violation has occurred, has either

not been disputed or has attained finality, the Principal Commissioner or Commissioner

may, by an order in writing, cancel the registration of such trust or institution after

affording a reasonable opportunity of being heard.

These amendments shall be effective from 1st September 2019.

DIT (Exemptions) v. Meenakshi Amma Endowment Trust (Kar.)

Where a charitable trust applied for issuance of registration under section 12AA within

a short time span (nine months, in this case) after its formation, can registration be

denied by the concerned authority on the ground that no charitable activity has been

commenced by the trust?

The High Court observed that, with the moneys available with the trust, it cannot be expected

to carry out activity of charity immediately after its formation. Consequently, in such a case,

it cannot be concluded that the trust has not intended to do any activity of charity.

In such a situation, the objects of the trust as mentioned in the trust deed have to be taken into

consideration by the authorities for satisfying themselves about the genuineness of the trust

and not the activities carried on by it.


20.11

Later on, if it is found from the subsequent returns filed by the trust, that it is not carrying on

any charitable activity, it would be open to the concerned authorities to withdraw the

registration granted or cancel the registration as per the provisions of section 12AA(3).

The registration cannot be denied on the ground that the trust has not carried out any

charitable activity so far in the short span of time after its formation.

U.P. DISTILLERS ASSOCIATION (UPDA) V. CIT [2017] (DEL)

Is the cancellation of registration of a trust under section 12AA, on the basis of search

conducted in the premises of its Secretary General and the statement recorded by him

under section 132(4), valid?

Facts of the case: A search and seizure operation took place in the premises of the Secretary

General of the assessee, that is, Uttar Pradesh Distillers Association, in February 2006.

During the search, the Secretary General’s statement was recorded under section 132(4) of

the Act. The statement was retracted after two years. In the meanwhile, the Commissioner of

Incometax (CIT) cancelled the assessee’s registration under section 12AA(3) on the basis of

the search operation and the statement made. The order was upheld by the Appellate

Tribunal. The assessee contended that Secretary General’s statement was made in the course

of search in respect of his premises and not those of the assessee. Hence, the Secretary

General’s statement was not attributable to the assessee nor could the materials indicated by

him be the basis for cancellation of registration of the trust under section 12AA

Issue: The issue under consideration is whether the cancellation of registration under section

12AA as a charitable trust on the basis of search conducted in the premises of the Secretary

General of the assessee-trust and the statement recorded by him under section 132(4) is valid.

Delhi High Court’s Observations:

1. The Court dismissed the appeal to hold that although the premises, in which the

search under section 132 took place, belonged to the Secretary General, he virtually

ran the assessee-trust’s activities from the same premises.

2. The information which he provided in the course of the search pointed out to the

activities of the assessee-trust and not to his own activities.

3. Further, the Tribunal had expressly recorded that the search proceedings took place in

the context of section 153A, in the very premises of the Secretary General, with

respect to the assessee-trust.

Delhi High Court’s Decision: The Delhi High Court, accordingly, held that cancellation of

the trust’s registration under section 12AA on the basis of search conducted in the premises

of the Secretary General and the statement recorded under section 132(4) from him, is valid.

Note: The special leave petition filed against the aforementioned decision of the Delhi High

Court was dismissed by the Supreme Court.


20.12


Clarity of procedure in respect of change or modifications of object and filing of return

of income in case of entities exempt under sections 11 and 12

Where a trust or an institution has been granted registration under section 12AA and,

subsequently, it has adopted or undertaken modifications of the objects which do not conform

to the conditions of registration, it shall be required to obtain fresh registration by making an

application within a period of thirty days from the date of such adoption or modifications of

the objects in the prescribed form and manner.

Section 12A provide for further condition that the person in receipt of the income chargeable

to income-tax shall furnish the return of income within the time allowed under section 139(1)

of the Act.


After section 12AA of the Income-tax Act, the following section shall be inserted with effect

from the 1st day of June, 2020, namely:––

“12AB. (1) The Principal Commissioner or Commissioner, on receipt of an application

made under clause (ac) of sub-section (1) of section 12A, shall,—

(a) where the application is made under sub-clause (i) of the said clause, pass an order in

writing registering the trust or institution for a period of five years;

(b) where the application is made under sub-clause (ii) or sub-clause (iii) or sub-clause

(iv) or sub-clause (v) of the said clause,––

(i) call for such documents or information from the trust or institution or make such

inquiries as he thinks necessary in order to satisfy himself about—

(A) the genuineness of activities of the trust or institution; and

(B) the compliance of such requirements of any other law for the time being in force by the

trust or institution as are material for the purpose of achieving its objects;

(ii) after satisfying himself about the objects of the trust or institution and the genuineness

of its activities under item (A), and compliance of the requirements under item (B), of sub-

clause (i),––

(A) pass an order in writing registering the trust or institution for a period of five years; or

(B) if he is not so satisfied, pass an order in writing rejecting such application and also

cancelling its registration after affording a reasonable opportunity of being heard;

(c) where the application is made under sub-clause (vi) of the said clause, pass an order in

writing provisionally registering the trust or institution for a period of three years from the

assessment year from which the registration is sought,


20.13

and send a copy of such order to the trust or institution.

(2) All applications, pending before the Principal Commissioner or Commissioner on

which no order has been passed under clause (b) of sub-section (1) of section 12AA before

the date on which this section has come into force, shall be deemed to be an application

made under sub-clause (vi) of clause (ac) of sub-section (1) of section 12A on that date.

(3) The order under clause (a), sub-clause (ii) of clause (b) and clause (c), of sub-section

(1) shall be passed, in such form and manner as may be prescribed, before expiry of the

period of three months, six months and one month, respectively, calculated from the end of

the month in which the application was received.

(4) Where registration of a trust or an institution has been granted under clause (a) or

clause (b) of sub-section (1) and subsequently, the Principal Commissioner or

Commissioner is satisfied that the activities of such trust or institution are not genuine or

are not being carried out in accordance with the objects of the trust or institution, as the

case may be, he shall pass an order in writing cancelling the registration of such trust or

institution after affording a reasonable opportunity of being heard.

(5) Without prejudice to the provisions of sub-section (4), where registration of a trust or

an institution has been granted under clause (a) or clause (b) of sub-section (1) and

subsequently, it is noticed that––

(a) the activities of the trust or the institution are being carried out in a manner that the

provisions of sections 11 and 12 do not apply to exclude either whole or any part of the

income of such trust or institution due to operation of sub-section (1) of section 13; or

(b) the trust or institution has not complied with the requirement of any other law, as

referred to in item (B) of sub-clause (i) of clause (b) of sub-section (1), and the order,

direction or decree, by whatever name called, holding that such non-compliance has

occurred, has either not been disputed or has attained finality,

then, the Principal Commissioner or the Commissioner may, by an order in writing, after

affording a reasonable opportunity of being heard, cancel the registration of such trust or

institution.”

SECTION 11(1A): CAPITAL GAINS DEEMED TO BE APPLIED FOR

CHARITABLE/RELIGIOUS PURPOSES

For the purposes of sub-section (1), -

where a capital asset, being property held under trust wholly for charitable or religious

purposes, is transferred and the whole or any part of the net consideration is utilised for

acquiring another capital asset to be so held, then, the capital gain arising from the transfer

shall be deemed to have been applied to charitable or religious purposes to the extent

specified hereunder, namely: —

(i) where the whole of the net consideration is utilised in acquiring the new

capital asset, the whole of such capital gain;


20.14

(ii) where only a part of the net consideration is utilised for acquiring the new

capital asset, so much of such capital gain as is equal to the amount, if any, by

which the amount so utilised exceeds the cost of the transferred asset;

Explanation. — In this sub-section, —

(i) “cost of the transferred asset" means the aggregate of the cost of acquisition (as

ascertained for the purposes of sections 48 and 49) of the capital asset which is the

subject of the transfer and the cost of any improvement thereto within the meaning

assigned to that expression in section 55;

(ii) "net consideration" means the full value of the consideration received or accruing as

a result of the transfer of the capital asset as reduced by any expenditure incurred

wholly and exclusively in connection with such transfer.

ANALYSIS

Illustration: A trust holds a capital asset, income of which is fully utilized for charitable

purposes. The capital asset is transferred on March 1, 2021 and the capital gain is calculated

as under:

Sale Proceeds 9,80,000

Less: Cost (i.e. cost of acquisition and cost of improvement) 6,00,000

Less: Expenses on transfer 20,000

Capital Gain as per section 45 without giving any exemption 3,60,000

In this case, net sale consideration is Rs. 9,60,000(i.e. Rs. 9,80,000 –Rs. 20,000). Suppose,

the trust acquires another capital asset for Rs. 9,60,000 (or more), then the entire capital gain

of Rs. 3,60,000 will be exempt from tax. If, however, the amount invested is less than Rs.

9,60,000 then the exemption will be lower than Rs.3,60,000. The amount of exemption shall

be determined as follows:

Amount of investment

in the new capital

asset

Cost of the old asset

which is transferred

Amount exempt as the

amount is applied for

charitable purposes

(1) (2) [(1) -(2)]

Casel Rs. 9,60,000 Rs. 6,00,000 Rs. 3,60,000

Case 2 Rs. 9,00,000 Rs. 6,00,000 Rs. 3,00,000

Case 3 Rs. 7,00,000 Rs. 6,00,000 Rs. 1,00,000

Case 4 Rs. 6,00,000 Rs. 6,00,000 NIL

Case 5 Rs. 5,00,000 Rs. 6,00,000 NIL

SECTION 13(1): SECTION 11 NOT TO APPLY IN CERTAIN CASES

Nothing contained in sections 11 & 12 shall operate so as to exclude from the total income of

the previous year of the person in receipt of:


20.15

Section 13(1)(a): Income for private religious purposes: Entire income from property held

under a trust for private religious purposes which does not enure for the benefit of the public

is not eligible for exemption under section 11 or 12.

Section 13(1)(b): Income for the benefit of particular religious community: Entire

income of a charitable trust/ institution created for the benefit of any particular religious

community or caste is not eligible for exemption under section 11 or 12. A trust or institution

created or established for the benefit of Scheduled Castes, Backward Classes, Scheduled

Tribes or women and children shall not be deemed to be a trust or institution created or

established for the benefit of a religious community or caste for this purpose.

Section 13(1)(c): Income for the benefit of specified persons: If any part of income of a

religious / charitable trust/ institution enures directly or indirectly for the benefit of any

person specified in section 13(3) or any property of the trust or institution is during the

previous year applied or used directly or indirectly for the benefit of any person referred to in

section 13(3); then entire income of such trust is not eligible for exemption under section 11

or 12.

Therefore, entire income of a trust/ institution is not eligible for exemption under section 11

or 12 if income/ property is used/ applied, during the relevant year, for the direct/ indirect

benefit of the author of the trust and other persons mentioned in section 13(3).

Section 13(1)(d): Funds not invested in section 11(5) securities/ deposits: Entire income of

a trust/ institution is not eligible for exemption under section 11 & 12, if its funds are

invested/ deposited otherwise than as specified under section 11(5).

It has been clarified that investment in

(i) Shares of public sector company; and

(ii) Shares of depository; and

(iii) Units of mutual funds

will not amount to contravention to section 13(1)(d).

IN ALL THE ABOVE CASES ENTIRE INCOME OF THE TRUST WILL BE

TAXABLE AT MMR.

Exemption not to be denied to charitable trusts providing educational or medical

facilities to specified persons [Section 13(6)] - A charitable or religious trust running an

educational institution or a medical institution or a hospital shall not be denied the benefit

of exemption under section 11 merely due to the reason that the benefit of educational or

medical facilities have been provided to the specified persons referred to in section

13(3). However, the value of such facilities provided to such specified persons either free

of cost or at a concessional rate would be deemed to be the income of the trust. Such

income would not be eligible for exemption under section 11.


20.16

SECTION 13(3): MEANING OF SPECIFIED PERSONS

For the purposes of section 13 the following are specified persons:

(a) the author of the trust or the founder of the institution;

(b) any person who has made a total contribution (up to the end of the relevant previous

year) of an amount exceeding Rs. 50,000 (substantial contributor);

(c) where such author or founder or substantial contributor is an HUF, a member of HUF;

(cc) any trustee of the trust or manager (by whatever name called) of the institution;

(d) any relative of such author, founder, substantial contributor, member, trustee or

manager; and

(e) any concern in which any of the persons referred to above has a substantial interest.

Meaning of Substantial Interest - For the aforesaid provisions, a person will be deemed to

have substantial interest in a company if he (or along with "specified persons" mentioned

above) beneficially holds at least 20 % equity shares capital of the company at any time

during the previous year. In the case of a concern other than a company, a person will be

deemed to have substantial interest, if he (or along with "specified persons" mentioned

above) is entitled to at least 20 % of the profits of such concern at any time during the

previous year.

SECTION 13(8): NON-APPLICABILITY OF SECTION 11 & 12

Section 13(8) has been added by Finance Act, 2012 which provides as under:

Nothing contained in section 11 or section 12 shall operate so as to exclude any income from

the total income of the previous year of the person in receipt thereof if the provisions of the

first proviso to section 2(15) become applicable in the case of such person in the said

previous year.

SECTION 10(23C) VIS-A-VIS SECTION 11 & 12

Section 10(23C) is similar to section 11 & 12. Exemption under section 10(23C) is available

to certain large trusts which are to be approved by Central Government for the purpose of

section 10(23C). Conditions of 85% application, investment in specified modes etc. as

contained in section 11 & 12 are also there in section 10(23C).

Amendments similar to section 11(6) and 11(7) have also been made in section 10(23C) by

the Finance Act, 2014.

ANONYMOUS DONATIONS

SECTION 13(7): SECTION 11 OR 12 NOT TO APPLY IN CASE OF ANONYMOUS

DONATION

Nothing contained in section 11 or section 12 shall operate so as to exclude from the total

income of the previous year of the person in receipt thereof, any anonymous donation

referred to in section 115BBCon which tax is payable in accordance with the provisions of

that section”.


20.17

SECTION 115BBC: ANONYMOUS DONATIONS TO BE TAXED IN CERTAIN

CASES

REFER COMPENDIUM

Illustration: (MUST DO BEFORE EXAM)

Mani foundations, a charitable trust registered under section 12AA of the Income-tax Act,

1961, run schools for primary and secondary education. The following particulars

pertaining to the previous year 2020-21 are furnished to you by the trust:

Sr

No.

Particulars Rs. (in

lakhs)

(i) Gross receipts from students towards tuition fees, development fees,

laboratory fees etc.

200

(ii) Voluntary contributions received from public (including anonymous donation

Rs. 5 lakhs)

25

(iii) Government grants 8

(iv) Donation given towards Voluntary Donations 2

(v) Amount applied for the purpose of schools 90

(vi) Included in (v) above, a sum of 5 lakhs, being the amount applied for the

benefit of the founder of the trust.

(vii) The trust set apart Rs. 55 lakhs for acquiring a building to expand its schools.

But the amount was paid in December 2021 when the sale deed was

registered in its name

(viii) Excess of expenditure over income in the previous year 2019-20 25

Compute the total income of the trust for the assessment year 2021-22 in order to avail

maximum benefits within the four corners of law.

Answer:

Computation of total income of Mani Foundations for the A.Y.2021 -22

Particulars Rs. Rs.

Gross receipts from students towards tuition fees, development fees

etc.

2,00,00,000

Government Grants (taxable, since only grant for the purpose of

corpus of a trust established by the Central or State Government is

excluded from the definition of income)

8,00,000

[Note - Government Grants would be exempted based on the

assumption that Mani Foundations is set up by the Central or

State Government and the grant is towards the corpus of the trust]

Voluntary contributions (other than anonymous donations) [Rs. 25

lakh – Rs. 5 lakh]

20,00,000

2,28,00,000

Add: Anonymous donations [to the extent not chargeable to tax@30%

under section 115BBC(1)(i)] [See Note below]

1,25,000

2,29,25,000


20.18

Less: 15% of income eligible for being set apart without any

condition

34,38,750

1,94,86,250

Less: Amount applied for charitable purposes

- Amount applied for the purpose of schools (excluding

amount applied for the benefit of the founder) = Rs. 90 lakh

– Rs. 5 lakh

85,00,000

- Amount set apart for acquiring a building to expand its

schools

55,00,000

[The word "applied" used in section 11 means that the

income is actually applied for the charitable purposes of

the trust. The word "applied" does not necessarily imply

"spent". Even if a certain amount is irretrievably

earmarked and allocated for charitable purposes, the said

amount can be deemed to have been applied for

charitable purposes.]

- Voluntary Donations 2,00,000

- Excess of expenditure over income in the P.Y.2019-20 25,00,000 1,67,00,000

27,86,250

Add: Amount applied for the benefit of the founder of the trust

chargeable to tax under section 12(2) read with section 13(6)

5,00,000

Anonymous donation taxable @30% under section

115BBC(1)(i) [See Note below]

3,75,000

Total Income of the trust (including anonymous donation taxable@30%) 36,61,250

Note - As per section 115BBC(1)(i), the anonymous donations in excess of the higher of

the following would be subject to tax@30%;

- Rs. 1.25 lakh, being 5% of the total donations received i.e., 5% of Rs. 25 lakh; or Rs. 1 lakh

Therefore, anonymous donations of Rs. 3.75 lakh (Rs. 5 lakh – Rs. 1.25 lakh) would be

subject to tax@30% under section 115BBC(1)(i).

Such anonymous donations which are subject to tax@30% are not eligible for the benefit

of exclusion from total income under sections 11 and 12.

[Alternate Answer] – As per the plain reading of section 13(7), it is possible to take a

view that the entire anonymous donations may not be eligible for benefit of exclusion

from total income under sections 11 and 12. If this view is taken, then Rs. 1.25 lakhs

should not be added to Rs. 228 lakhs. Accordingly, Rs. 34.20 lakhs, being 15% of Rs. 228

lakhs would be the income eligible for accumulation without any condition. The total

income of the trust (including anonymous donations) would be Rs. 36.80 lakhs.

***************************************************************************

Minimum Alternate Tax AJ Education NeXt

21.1

CHAPTER 21. MINIMUM ALTERNATE

TAX

SECTION 115JB(1): CHARGING SECTION

Notwithstanding anything contained in any other provisions of the Income-tax Act,

where in the case of a company, the income-tax, payable on the total income as

computed under the Income-tax Act in respect of a previous year relevant to assessment

year , is less than 15% of its book profits, such book profits shall be deemed to be the

total income of the assessee and the tax payable on such total income shall be the

amount of income-tax at the rate of 15%.

(Amendment made by Ordinance on 20th September 2019)

SECTION 115JB(2): PREPARATION OF PROFIT & LOSS ACCOUNT

Every assessee, —

(a) being a company, other than a company referred to in clause (b), shall, for the

purposes of this section, prepare its statement of profit and loss account for the

relevant previous year in accordance with the provisions of Schedule III to the

Companies Act, 2013; or

(b) being a company, to which the second proviso to sub-section (1) of section 129 of

the Companies Act, 2013 is applicable, shall, for the purposes of this section,

prepare its statement of profit and loss account for the relevant previous year in

accordance with the provisions of the Act governing such company.

(Amended by Finance Act, 2012)

Provided that while preparing the annual accounts including profit and loss account –

(i) the accounting policies;

(ii) the accounting standards adopted for preparing such accounts including profits and

loss account;

(iii) the method and rates adopted for calculating the depreciation,

shall be the same as have been adopted for the purpose of preparing such accounts including

profit and loss account as laid before the company at its annual general meeting in

accordance with section 129 of the Companies Act, 2013.

Provided further that where a company has adopted or adopts the financial year under

the Companies Act, 2013 which is different from the previous year under the Income

Tax Act,-

(i) the accounting policies;

(ii) the accounting standards adopted for preparing such accounts including profit and

loss account;

(iii) the method and rates for calculating the depreciation,

shall correspond to the accounting policies, accounting standards and the method and rates

for calculating depreciation which have been adopted for preparing such accounts including

profit and loss account for such financial year or part of the financial year falling within the

relevant previous year.


21.2

EXPLANATION 1 TO SECTION 115JB: COMPUTATION OF BOOK PROFITS

For the purposes of this section, "book profit" means the profit as shown in the

statement of profit and loss account for the relevant previous year prepared as per sub-

section (2) above, AS INCREASED BY-

(a) the amount of income tax paid or payable, and the provision thereof; or

It has been clarified by Finance Act, 2008 that for the purpose of clause (a) to

Explanation 1, the amount of income tax shall include -

(i) any tax on distributed profits under section 115-O or on distributed

income section 115R;

(ii) any interest charged under this Act;

(iii) Health & Education Cess.

(iv) Surcharge.

ANALYSIS

1. Income tax and provision thereof shall be added back while computing book profits.

(Same is also added back while computing the total income).

2. Corporate Dividend Tax paid or payable under section 115-0 represents

additional income tax and shall be added back. (Same is also added back while

computing the total income).

3. Surcharge, Health & Education Cess on income-tax also constitutes income-tax and

shall be added back. (Same is also added back while computing the total income).

4. Any interest paid under the Income tax Act e.g., interest under section 234A/B/C/D,

interest for delay in deposit of TDS etc. shall be added back while computing the

book profits. (Same is also added back while computing the total income).

5. However, interest payable under the Wealth Tax Act or any other act shall not be

added back while computing the book profits. (Interest under Wealth-tax Act is added

back while computing the total income).

6. Wealth-tax, penalties and interest under the Wealth-tax Act and penalties under

Income Tax Act and penalties under other laws debited to P & L A/c shall not be

added back although these are disallowable while computing the total income.

7. Securities Transaction Tax does not represent income-tax and shall not be added back.

[The same is allowable while computing the total income under section 36(1)(xv).

However, STT is to be disallowed while computing total income if the income from

share/ units is assessable as capital gains.]

8. Commodities Transaction tax does not represent Income tax and shall not be added

back. [The same is allowed while computing the total income under section 36]

(b) the amounts carried to any reserves by whatever name called

(c) the amount or amounts set aside to provisions made for meeting liabilities, other

than ascertained liabilities; that means provisions made to meet unascertained

liabilities) or

(d) the amount by way of provision for losses of subsidiary companies; or


21.3

(e) the amount or amounts of dividends paid or proposed; or

(f) the amount or amounts of expenditure relatable to any income to which section

10 or section 11 or section 12; or

(fa) the amount or amounts of expenditure relatable to, income, being share of the

assessee in the income of an association of persons or body of individuals, on

which no income tax is payable in accordance with the provisions of section 86;

or

(fb) the amount or amounts of expenditure relatable to income accruing or arising to

an assessee, being a Foreign Company, from,-

(A) The capital gains arising on transactions in securities; or

(B) The interest, royalty or fees for technical services chargeable to tax at the

Rate or rates specified in Chapter XII ;

if the income tax payable thereon in accordance with the provisions of this Act,

other than the provisions of this Chapter, it is a rate less than the rate specified

in sub-section (1); or

(fc) the amount representing notional loss on transfer of a capital asset, being share

or a special purpose vehicle to a business trust in exchange of units allotted by

the trust referred to in clause (xvii) of section 47 or the amount representing

notional loss resulting from any change in carrying amount of said units or the

amount of loss on transfer of units referred to in clause (xvii) of section 47;

(To be discussed later with Business Trust)

(fd) the amount or amounts of expenditure relatable to income by way of royalty in

respect of patent chargeable to tax under section 115BBF;

(g) the amount of depreciation,

(h) the amount of deferred tax and the provision therefor,

(i) the amount or amounts set aside as provision for diminution in the value of any

asset, (Added by Finance Act, 2009 w.r.e.f Assessment Year 2001-02)

(j) the amount standing in revaluation reserve relating to revalued asset on the

retirement or disposal of such asset,

(k) the amount of gain on transfer of units referred to in clause (xvii) of section 47

computed by taking into account the cost of the shares exchanged with units

referred to in the said clause. (To be discussed later with Business Trust)

if any amount referred to in clauses (a) to (i) is debited to the statement of profit

and loss account or if any amount referred to in clause ( j ) is not credited to the

statement of profit and loss account, and AS REDUCED BY,-


21.4

(i) the amount withdrawn from any reserves or provisions if any such

amount is credited to the statement of profit and loss account:

Provided that where this section is applicable to an assessee in any

previous year, the amount withdrawn from reserves created or provisions

made in a previous year shall not be reduced from the book profit unless

the books profit of such year has been increased by those reserves or

provisions (out of which the said amount was withdrawn).

In other words, as per the proviso, any amount withdrawn from reserve credited

to profit and loss account shall be reduced from the book profits only if such

reserve has been created out of the book profits of such year i.e., reserve has

been created by debiting the Profit & Loss Account.

(ii) the amount of income to which any of the provisions of sections 10 or section 11

or section 12 apply, if any such amount is credited to the statement of profit and

loss account; or

(iia) the amount of depreciation debited to the statement of profit and loss account

(excluding the depreciation on account of revaluation of assets); or

(iib) the amount withdrawn from revaluation reserve and credited to statement of

profit and loss account, to the extent it does not exceed the amount of

depreciation on account of revaluation of assets referred to in clause (iia); or

(iic) the amount of income , being the share of the assessee in the income of an

association of persons or body of individuals , on which no income-tax is payable

in accordance with the provisions of section 86, if any such amount is credited to

the statement of profit and loss account; or

(iid) the amount of income accruing or arising to an assessee, being a Foreign Company,

from,-

(A) The capital gains arising on transactions in securities; or

(B) The interest, royalty or fees for technical services chargeable to tax at the

rate or rates specified in Chapter XII,

If such income is credited to the statement of profit and loss account and the

income-tax payable thereon in accordance with the provisions of this Act, other

than the provisions of this Chapter, is at a rate less than the rate specified in sub

section (1); or

(iie) the amount representing,-

(A) Notional gain on transfer of a capital asset, being share of special purpose

vehicle to a business trust in exchange of units allotted by that trust

referred to in clause (xvii) of section 47; or

(B) Notional gain resulting from any change in carrying amount of said units;

or

(C) Gain on transfer of units referred to in clause(xvii) of section 47,


21.5

If any, credited to the statement of profit and loss account; or


(iif) the amount of loss on transfer of units referred to in clause (xvii) of section 47

computed by taking into account the cost of the shares exchanged with units

referred to in the said clause or the carrying amount of shares at the time of

exchange where such shares are carried at a value other than the cost through

profit or loss account, as the case may be;


(iig) the amount of income by way of royalty in respect of patent chargeable to tax

under section 115BBF;

(iii) the amount of loss brought forward or unabsorbed depreciation, whichever is

less as per books of account.

Explanation: For the purposes of this clause:-

(a) LOSS SHALL NOT INCLUDE DEPRECIATION

(b) IF THE AMOUNT OF LOSS BROUGHT FORWARD OR

UNABSORBED DEPRECIATION IS NIL, then nothing shall be

deducted under this clause


Section 115JB provides for levy of a minimum alternate tax (MAT) on the "book profits" of

a company. In computing the book profit, it provides, inter alia, for a deduction in respect of

the amount of loss brought forward or unabsorbed depreciation, whichever is less, as per

books of account. Consequently, where the loss brought forward or unabsorbed depreciation

is nil no deduction is allowed. This non-deduction is a barrier to rehabilitating companies

seeking insolvency resolution.

Amendment - In view of the above, section 115JB has been amended (with effect from the

assessment year 2018-19) to provide that the aggregate amount of unabsorbed depreciation

and loss (excluding unabsorbed depreciation) brought forward shall be allowed to be reduced

from the book profit, if a company's application for corporate insolvency resolution process

under the Insolvency and Bankruptcy Code, 2016 has been admitted by the Adjudicating

Authority.

Consequently, a company whose application has been admitted would henceforth be entitled

to reduce the loss brought forward (excluding unabsorbed depreciation) and unabsorbed

depreciation for the purposes of computing book profit under section 115JB.

Also Refer Sec 79 later on for amendment made by Finance Act (No.2) 2019.

(iv) the amount of profits of sick industrial company for the assessment year

commencing from the assessment year relevant to the previous year in which the

said company has become a sick industrial company under section 17 of the Sick

Industrial Companies (Special Provisions) Act, 1985 and ending with the

assessment year during which the entire net worth of such company becomes

equal to or exceeds the accumulated losses.


21.6

Key Note:

For the purposes of this clause, "net worth" shall have the meaning assigned to it in

section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985.

(v) the amount of deferred tax, if any such amount is credited to profit and loss

account.

SECTION 115JB(3): CARRY FORWARD OF LOSSES & DEPRECIATION

Nothing contained in section 115JB shall affect the determination of the amounts in

relation to the relevant previous year to be carried forward to the subsequent year or

years under the provisions of section 32 or section 72 or section 73 or section 74 or

section 74A.

THE COMPANY CAN CARRY FORWARD LOSSES AND DEPRECIATION TO

THE EXTENT IT COULD HAVE CARRIED FORWARD HAD SECTION 115JB

NOT BEEN THERE.

SECTION 115JB(4): FURNISHING OF REPORT

Every company to which this section applies shall furnish a report from a Chartered

Accountant in the prescribed form certifying that the book profit has been computed in

accordance with the provisions of section 115JB and such report shall be furnished

before the specified date referred to in section 44AB. (Finance Act 2020)

SECTION 115JB(5): APPLICABILITY OF OTHER PROVISIONS OF INCOME-

TAX ACT

Save as otherwise provided in this section, all other provisions of this Act shall apply to

every company, mentioned in this section. (Therefore, the company to which MAT applies

shall be liable to pay advance tax, interest under sections 234A, 234B and 234C. The

company shall also be liable to pay penalty for concealment of income.) {Refer Case Law}

SECTION 115JAA: TAX CREDIT IN RESPECT OF TAX PAID UNDER SECTION

115JB

(1) Where any amount of tax is paid under section 115JB by an assessee, being a

company, then, credit in respect of tax so paid shall be allowed to him in

accordance with the provisions of this section.

(2) The tax credit to be allowed under sub-section (1) shall be the difference of the tax

paid for any assessment year under section 115JB and the amount of tax payable by

the assessee on his total income computed in accordance with the other provisions of

this Act:

Provided that no interest shall be payable on the tax credit allowed under sub-

section (1).

(3) The amount of tax credit determined under sub-section (2) shall be carried forward

and set off in accordance with the provisions of sub-section (4) and sub-section (5)

but such carry forward shall not be allowed beyond the fifteenth assessment year

immediately succeeding the assessment year in which tax credit becomes allowable

under subsection (1).


21.7

(4) The tax credit shall be allowed set-off in a year when tax becomes payable on the total

income computed in accordance with the provisions of this Act other than section

115JB.

(5) Set off in respect of brought forward tax credit shall be allowed for any assessment

year to the extent of the difference between the tax on his total income and the tax

which would have been payable under the provisions of section 115JB for that

assessment year.

(6) In case of conversion of a company into a limited liability partnership under the

Limited Liability Partnership Act, 2008, the provisions of section 115JAA shall

not apply to the successor limited liability partnership. Therefore, the MAT

credit available in hands of company shall not be allowed to the LLP.

1. APOLLO TYRES LTD. V/S. CIT (SUPREME COURT) [2002]

FACTS OF THE CASE

The assessee-company while determining its net profit for the relevant accounting

year has provided for arrears of depreciation in its profit and loss account which

according to the Assessing Officer was not in accordance with Parts II and III of

Schedule VI to the Companies Act, 1956. Hence, the Assessing Officer while

considering the case of the assessee-company under section 115JB of the Income-tax

Act recomputed the said profit and loss account of the company so as to exclude the

provision made for arrears of depreciation. The said action of the Assessing Officer in

questioning the correctness of the accounts maintained by the company was

challenged by the company before the Income-tax Appellate Tribunal which among

other things held that the Assessing Officer has no authority to reopen the accounts of

a company which is certified by the auditors of the company as having been

maintained in accordance with the provisions of the Companies Act and which

accounts have been accepted in the general meeting of the company as well as by the

Registrar of Companies. This view of the Tribunal was not accepted by the High

Court which held that the Assessing Officer has the authority to examine whether the

accounts of the company have been maintained as per the Companies Act and in that

process if he finds that the accounts of the company are not in accordance with the

provisions of the Companies Act, he could make the necessary changes before

proceeding to assess the company for tax under the Explanation to section 115JB of

the Income-tax Act.

DECISION

The Assessing Officer, while computing the book profits of a company under section

115JB of the Income-tax Act, 1961, has only the power of examining whether the

books of account are certified by the authorities under the Companies Act as having

been properly maintained in accordance with the Companies Act. The Assessing

Officer, thereafter, has the limited power of making increases and reductions as

provided for in the Explanation to section 115JB. The Assessing Officer does not

have the jurisdiction to go behind the net profits shown in the profit and loss account

except to the extent provided in the Explanation. The use of the words "in accordance

with the provisions of Parts II and III of Schedule VI to the Companies Act" in

section 115JB was made for the limited purpose of empowering the Assessing Officer

to rely upon the authentic statement of accounts of the company. While so looking

into the accounts of the company, the Assessing Officer has to accept authenticity of


21.8

the accounts with reference to the provisions of the Companies Act, which obligate

the company to maintain its accounts in a manner provided by that Act and the same

to be scrutinized and certified by statutory auditors and approved by the company in

general meeting and thereafter to be filed before the Registrar of Companies who has

a statutory obligation also to examine and be satisfied that the accounts of the

company are maintained in accordance with the requirements of the Companies Act.

Section 115JB does not empower the Assessing Officer to embark upon a fresh

enquiry in regard to the entries made in the books of account of the company.

Held accordingly, that while determining the "book profits" under section

115JB, the Assessing Officer could not recompute the profits in the profit and

loss account by excluding provisions made for arrears of depreciation. Therefore

the action of Assessing Officer was unjustified.

2. N. J. JOSE AND CO. (P.) LTD. V. ACIT (2010) (KER.)

Can long-term capital gain exempted by virtue of erstwhile section 54EC be

included in the book profit computed under erstwhile section 115JB?

As long as long-term capital gains are part of the profits included in the profit and loss

account prepared in accordance with the provisions of Part II of Schedule VI to the

Companies Act, 1956, capital gains cannot be excluded. Long term capital gains

exempt under section 54EC are part of book profits under section 115JB and are liable

to MAT.

3. Should capital gains exempt under section 54EC, which forms part of the net

profit in the statement of profit and loss of the assessee-company, be taken into

account for calculation of tax on book profits as per section 115JB?

CIT V. METAL AND CHROMIUM PLATER (P) LTD. [2019] (MAD)

Issue: The issue under consideration is, whether, while determining the “book

profit” for purposes of section 115JB, can long-term capital gains included in the

statement of profit and loss be excluded since the same is eligible for exemption

under section 54EC under the regular provisions of the Income-tax Act, 1961.

High Court’s Observations :

1. Sub-section (5) of section 115JB allows for application of all other provisions

contained in Income-tax Act, 1961 except if specifically barred by that section

itself.

2. Thus, the “book profit” would be further eligible to the benefits set out in the

other provisions of the Act.

High Court’s Decision : The High Court affirmed the decision of the Tribunal

holding that capital gains which forms part of the net profit in the statement of profit

and loss of the assessee- company, in respect of which exemption under section

54EC is available while computing total income under the regular provisions of the

Income-tax Act, 1961, should not be taken into account for calculation of minimum

alternate tax on book profits under section 115JB.


21.9


SECTION 115BBF: TAX ON ROYALTY INCOME FROM PATENT

(1) Where the total income of an eligible assessee includes any income by way of royalty

in respect of a patent developed and registered in India, the income-tax payable

shall be the aggregate of –

(a) the amount of income-tax calculated on the income by way of royalty in respect

of the patent at the rate of ten percent; and

(b) the amount of income-tax with which the assessee would have been chargeable

had his total income been reduced by the income referred to in clause (a).

(2) Notwithstanding anything contained in this Act, no deduction in respect of any

expenditure or allowance shall be allowed to the eligible assessee under any

provision of this Act in computing his income referred to in clause (a) of sub-section

(1).

(3) The eligible assessee may exercise the option for taxation of income by way of

royalty in respect of a patent developed and registered in India in accordance with

the provisions of this section, in the prescribed manner, on or before the due date

specified under section 139(1) for furnishing the return of income for the relevant

previous year.

(4) Where an eligible assessee opts for taxation of income by way of royalty in respect of

a patent developed and registered in India for any previous year in accordance with the

provisions of this section and the assessee offers the income for taxation for any of

the five assessment years relevant to the previous year succeeding the previous

year not in accordance with the provisions of sub-section (1), then, the assessee

shall not be eligible to claim the benefit of the provisions of this section for five

assessment years subsequent to the assessment year relevant to the previous year

in which such income has not been offered to tax in accordance with the provisions

of sub-section (1).

Explanation – For the purposes of this section, –

(a) “developed” means at least seventy-five per cent of the expenditure incurred in India

by the eligible assessee for any invention in respect of which patent is granted under the

Patents Act, 1970 (herein referred to as the Patents Act);

(b) “eligible assessee” means a person resident in India and who is a patentee;

Illustration:

An eligible assessee claims concessional rate of tax under section 115BBF for assessment

year 2020-21. For assessment year 2021-22 and assessment year 2022-23 also he opts for

concessional rate of tax in accordance with the provisions of section 115BBF. However, for

assessment year 2023-24, he prefers not to apply concessional rate of tax.


21.10

In this case, since he has not opted for the rate under section 115BBF in succeeding five

consecutive assessment years, after assessment year 2020-21, he will not be eligible to claim

the benefit of section 115BBF for next five assessment years i.e. from assessment years 2024-

25 to 2028-29.

EXPLANATION 4 TO SECTION 115JB(2): NON-APPLICABILITY OF SECTION

115JB FOR CERTAIN FOREIGN COMPANIES


APPLICABILITY OF MINIMUM ALTERNATE TAX (MAT ON FOREIGN

COMPANIES FOR THE PERIOD PRIOR TO 01.04.2015

Under the existing provisions contained in sub-section (1) of the 115JB in case of a company,

if the tax payable on the total income as computed under the Income-tax Act, is less than

fifteen per cent of its book profit, such book profit shall be deemed to be the total income of

the assessee and the tax payable by the assessee for the relevant previous year shall be fifteen

per cent of its book profit. Issues were raised regarding the applicability of this provision to

Foreign Institutional Investors (Flls) who do not have a permanent establishment (PE) in

India. Vide Finance Act, 2015 of the provisions of section 115JB were amended to provide

that in case of a foreign company any income chargeable at a rate lower than the rate

specified in section 115JB shall be reduced from the book profits and the corresponding

expenditure will be added back.

However, since this amendment was prospective w.e.f. assessment year 2016-17, the issue

for assessment year prior to 2016-17 remained to be addressed.

A Committee on Direct Tax matters headed by Justice A.P. Shah, set up by the Government

to look into the matter, recommended for an amendment of section 115JB to clarify the

applicability of Minimum Alternate Tax (MAT) provisions to Foreign Institutional Investors/

Foreign Portfolio Investors (Fills/FPIs) in view of the fact that flls and FPIs normally do not

have a place of business in India.

In view of the recommendations of the committee and with a view to provide certainty in

taxation of foreign companies, it is proposed to amend the Income-tax Act so as to provide

that with effect from 01.04.2001, the provisions of section 115JB shall not be applicable to a

foreign company if –

(i) the assessee is a resident of a country or a specified territory with which India has an

agreement referred to in sub-section (1) of section 90 or the Central Government has

adopted any agreement under sub-section (1) of section 90A and the assesse does not

have a permanent establishment in India in accordance with the provisions of such

Agreement; or

(ii) the assessee is a resident of a country with which India does not have an agreement of

the nature referred to in clause (i) above and the assessee is not required to seek

registration under any law for the time being in force relating to companies.


21.11

This amendment is proposed to be made effective retrospectively from the 1st day of April,

2001 and shall accordingly apply in relation to assessment year 2001-02 and subsequent

years.

SECTION 115JB(7): LOWER MAT RATE FOR UNIT LOCATED IN

INTERNATIONAL FINANCIAL SERVICES CENTER

(ADDED BY FINANCE ACT, 2016)

Notwithstanding anything contained in sub-section (1), where the assessee referred to therein,

is a unit located in an International Financial Services Center and derives its income solely in

convertible foreign exchange, the provisions of sub-section (1) shall have the effect as if for

the words “fifteen per cent” wherever occurring in that sub-section, the words “nine per cent”

had been substituted.


21.12

QUESTIONS FROM PAST EXAMINATIONS

Question 1:

ABC Ltd. is a closely held company engaged in manufacture of insecticides and fertilizers.

The value of plant and machinery owned by the company is Rs. 55 lakhs. Its profit and loss

account for the year ended March 31, 2021 is as under:

Domestic sales 22,23,900

Export sales 5,76,100

Other receipts 2,00,000

30,00,000

Less: Expenses

Depreciation 4,16,000

Salary and wages 1,34,500

Entertainment expenses 10,000

Travelling expenses 36,000

General Expenses 5,000

Income tax 3,50,000

Wealth-tax 8,000

Outstanding customs duty 17,500

Provision for unascertained liabilities 70,000

Proposed dividends 60,000

Loss of subsidiary company 30,000

Consultation fees paid to a tax consultant 21,000

Salary and perquisites of managing director 1,80,000

Excise duty of 2011-2012 75,500

14,13,500

Net Profit 15,86,500

The assessee claims the following as deduction:

(a) Deduction under section 80-IC (30% of Rs. 15,86,500)

(b) Excise duty pertaining to P.Y 2011-2012 paid during 2020-2021 Rs. 75,500 was not

debited in P & L A/c of P.Y 2011-2012.

(c) Depreciation under section 32 is Rs. 5,36,000.

The following further particulars are furnished-

For tax purposes

Rs.

For accounting purposes

Rs.

Brought forward loss of 2015-2016

Unabsorbed depreciation

11,80,000

Nil

9,10,000

2,45,000

Calculate the tax liability of the company


21.13

Answer:

BOOK PROFIT UNDER SECTION 115JB

Rs. Rs.

Net profit as per profit and loss account (it is assumed that profit

and loss account has been prepared according to Parts II of the

Schedule VI to the Companies Act)

15,86,500

Add:

Income-tax 3,50,000

Provision for unascertained liability 70,000

Loss of subsidiary company 30,000

Proposed dividend 60,000

Depreciation 4,16,000 9,26,000

25,12,500

Less:


Unabsorbed depreciation 2,45,000

Book profit 18,51,500

COMPUTATION OF TAXABLE INCOME

Net Profit as per profit and loss account 15,86,500

Add:

Income-tax 3,50,000

Wealth-tax 8,000

Outstanding custom duty 17,500


Proposed dividend 60,000

Loss of subsidiary company 30,000 5,35,500

21,22,000

Less: Depreciation (i.e., Rs. 5,36,000 – Rs. 4,16,000) 1,20,000

Balance 20,02,000

Less:

Brought forward business loss 11,80,000

Gross total Income 8,22,000

Less: Deductions

Under section 80IC [i.e., 30% of Rs. 8,22,000] 2,46,600


21.14

Total Income 5,75.400

Computation of tax liability Rs.


Tax on total income (____% of Rs. 5,75,400)

Add: Health & Education cess etc @ ___%

Tax Liability

(Rounded off)

_____% of Book Profit

Add: Health & Education cess etc @ ___%

Tax liability

Therefore, tax payable by the company is Rs.__________. MAT Credit will be Rs.______.

Question 2:

England Oil Corporation is a Foreign Company engaged in the exploration of Oil and Gas in

all countries including India. In respect of its Indian Business, the company has prepared the

Profit and Loss Account in accordance with the Companies Act and such Profit and Loss

Account for the previous year ended 31.03.2021 shows a Net Profit of Rs. 65 Lakhs. The Net

Profit from activities in all other countries stands at Rs.550 Lakhs. The company informs that

while arriving at the Net Profit as indicated above in respect of Indian business, the following

debits/ credits have been made in its Profit and Loss Account.

Credits to the Profit & Loss Account Rs (in Lakhs)

(i) Net agricultural income in India 14

(ii) Share of Profits from a firm engaged in business in India 15

(iii) Amount withdrawn from Reserve created during 2007-2008 (Book 3

Profit was not increased by the amount transferred to such reserve

in the year 2007-2008)

(iv) Profits from an Industrial Undertaking covered and qualified for 30

deduction under section 10AA of Income-tax Act, 1961

(v) Profits from an Industrial Undertaking covered and qualified under 6

section 80-IA of Income-tax Act, 1961

(vi) Deferred Tax Credit 2

Debits to the Profit & Loss Account Rs. (in Lakhs)

(i) Expenditure relating to 10AA undertaking 12

(ii) Depreciation for Current Year under Companies Act, 1956 24

(iii) Interest to Financial Institutions not paid upto the date of filing the return 6

(iv) Penalty for infraction of law 1

(v) Proposed Dividend 3

(vi) Provision for Taxation (Income-tax) including CDT 2

(vii) Transfer to General Reserve 5

(viii) Provision for Unascertained Liabilities 2

(ix) Expenditure relating to 80-IA undertaking 5


21.15

The following additional information is also provided:

Rs. (in Lakhs)

Brought forward Book Loss 12

Depreciation allowable under Income-tax rules 30

Brought forward Business Loss and unabsorbed depreciation as per Income-tax law 18

(Loss Rs. 8 Lakhs and Depreciation Rs.10 Lakhs)

You are requested to compute the total tax liability of the company for the Assessment Year

2021-2022.

Answer:

TOTAL INCOME AS PER NORMAL PROVISIONS OF INCOME-TAX ACT

Income under the head P/G/B/P Rs. (in Lakhs)

Net Profit as per P & L Account 65.00

Add: Expenses Disallowed:

(i) Depreciation under Companies Act 24.00

(ii) Expense disallowed under section 43B

- Interest not paid to Financial Institutions 6.00

(iii) Penalty for infraction of Law 1.00

(iv) Proposed Dividend 3.00

(v) Provision for taxation (Income-tax) including CDT 2.00

(vi) Transfer to General Reserve 5.00

(vii) Provision for unascertained liability 2.00 43.00

108.00

Less:

(i) Net Agricultural Income being exempt u/s 10 14.00

(ii) Share of Profits from firm being exempt u/s 10 15.00

(iii) Deferred tax Credit 2.00

(iv) Amount withdrawn from Reserve 3.00

(v) Depreciation allowable as per Income-tax Rules 30.00 64.00

Income under the head P/G/B/P 44.00

Less:

(i) Brought forward Business Loss 8.00

(ii) Brought forward depreciation 10.00 18.00

Gross Total Income 26.00

Less: Deduction under section 10AA

(Rs.30 Lakhs-Rs. 12 Lakhs) 18.00

Less: Deduction under section 80-IA


21.16

(Rs. 6 Lakhs-Rs. 5 Lakhs) 1.00 19.00

TOTAL INCOME 7.00

Tax thereon @ ______% Rs. _______

COMPUTATION OF BOOK PROFIT UNDER SECTION 115JB

Net Profit as per P & L Account 65.00

Add:

(i) Expenditure relating to 10AA undertaking NIL

(ii) Proposed Dividend 3.00

(iii) Provision for taxation (Income-tax) including CDT 2.00

(iv) Amount transferred to General Reserve 5.00

(v) Provision for unascertained liability 2.00 12.00

77.00

Less:

(i) Net Agricultural Income exempt under section 10 14.00

(ii) Share of Profit from firm exempt under section 10 15.00

(iii) Deferred tax Credit 2.00

(iv) Profit from undertaking qualified for deduction u/s 10AA NIL

(v) Loss Brought forward or Unabsorbed depreciation whichever is

less (See Note 3)

NIL

31.00

Book Profit as per section 115JB 46.00

Tax as per section 115JB = ______% of Rs. 46 lakhs = Rs _______

THEREFORE, THE FOREIGN COMPANY SHALL PAY TAX OF Rs. ________

UNDER SECTION 115JB ON ITS BOOK PROFITS. MAT Credit available is Rs.

________.

Note 1: Amount withdrawn from reserve created during 2007-2008 credited to Profit & Loss

Account shall not be reduced since book profits of the year 2007-2008 was not

increased by such reserve.

Note 2: Profits from an industrial undertaking qualified for deduction under section 80-IA

and 10AA shall not be reduced since section 115JB provides that only the profits

referred to in sections 10, 11 & 12 are to be reduced. Similarly, expenditure relating to

80-IA and 10AA undertaking shall not be added back.

Note 3: As per the question the unabsorbed depreciation as per books is NIL. Therefore,

lower of the following shall be deducted:

(i) B/F Loss as per books Rs. 12,00,000

(ii) B/F Depreciation as per books NIL


21.17

Question 3:

A domestic company, ABC Ltd. has an undertaking newly established for export of computer

software in a Special Economic Zone, the profits of which have been merged in the net

profits of the company as per profit and loss account prepared in accordance with the

Schedule III to the Companies Act. It furnishes the following particulars in respect of

assessment year 2021-2022 and seeks your opinion on the application of section 115JB. You

are also required to compute the total income and tax payable.

Rs.

Net profit as per Profit and Loss A/c as per Schedule VI 200 Lakh

Credit side of Profit and Loss A/c includes -

Agriculture income 20 lakh

Excess realized on sale of land held as investment 30 Lakh

Net profit of the undertaking for export of computer software 100 Lakh

Debit side of Profit and Loss A/c includes -

Depreciation on straight line method basis 100 Lakh

Provision for losses of subsidiary company 60 Lakh

Depreciation allowable as per income-tax law 150 Lakh

Capital Gains as computed as per income-tax law 40 Lakh

Losses brought forward as per books of account -

Business loss 50 Lakh

Unabsorbed depreciation 60 Lakh

The company has represented to you that the excess realized on sale of land cannot form part

of the book profit for purposes of section 115JB. You have to deal with his issue.

Answer:

Computation of Book Profit Rs(in lakhs)

Net profit as per Profit and Loss A/c 200

Add: Provision for losses of subsidiary company (+) 60

Depreciation as per Straight line method (+)100

Less:

Income exempt under section 10AA NIL

Depreciation (-) 100

Agriculture income (being exempt under section 10) (-) 20

Brought forward loss or depreciation, whichever is lower (-) 50

Book profit 190


21.18

Computations of Income under Normal Provisions

Net profit as per Profit and Loss A/c 200

Less: Agriculture Income (being exempt under section 10) (-) 20

Less: Capital gain (-) 30

Add: Depreciation as per books of account (+) 100

Less: Depreciation under section 32 (-) 150

Add: Provision for loss of subsidiary company (+) 60

Business income 160

Capital gain 40

Gross Total Income 200

Less: Income Exempt Under Section 10AA (-) 100

Total Income 100

Tax on net income [____of Rs 40 Lakh + ____ of Rs 60 Lakh plus education

cess____]

________

Minimum alternate tax [_________of Rs 190 Lakh] ________

Tax payable ________

MAT Credit Available ________

Notes:

1. It is assumed that capital gain is long - term capital gain and is not exempt.

2. It is further assumed that the company does not have any brought forward-unadjusted

loss under the income - tax provisions.

3. Profit on sale of capital asset is part of book profit.

Question 4:

The net profit as per profit and loss account of XYZ Ltd., a resident company for the year

ended 31.3.2021 is Rs. 190 lacs arrived at after following adjustments:

(i) Depreciation on Assets Rs. 100 lacs

(ii) Reserve for currency exchange fluctuation Rs. 50 lacs

(iii) Provision for tax Rs. 40 lacs

(iv) Proposed dividend Rs. 120 lacs

Following further information are also provided by the company:

I. Net profit includes Rs. 10 lacs received from a subsidiary company.

II. Provision for tax includes Rs. 16 lacs of tax payable on distribution of profit and of

Rs. 2 lacs of interest payable on income tax.

III. Depreciation includes Rs.40 lacs towards revaluation of assets.

IV. Amount of Rs. 50 lacs credited to P & L account was drawn from revaluation reserve.

V. Balance of profit and loss shown in balance sheet at the assets side as at 31.03.2020

was Rs. 30 lacs representing unabsorbed depreciation.

Compute the book profits of the company for the year ended 31.03.2021 liable to tax under

MAT.


21.19

Answer:

Computation of Book Profits and Tax Liability under Section 115JB

of M/s XYZ Ltd. For the Assessment Year 2021-2022

Particulars Amount

(Rs.In Lakhs)

Profit as per P& L Account 190

Add:-

(i) Depreciation on assets including depreciation on revaluation of assets 100

(ii) Any amount transferred to reserve for currency exchange fluctuation 50

(iii) Provision for tax including tax on distributed profits under 40

section 115-0 and including interest under the Income tax Act

(iv) Proposed Dividend 120

Less:-

(i) 10 Lakh received from subsidiary company shall be in form of NIL

dividend and is taxable now

(ii) Depreciation excluding depreciation on revaluation of amount 60

(iii) Amount withdrawn from Revaluation Reserve credited to Profit 40

& Loss A/c Rs. 50 Lakhs restricted to the amount of depreciation

on account of revaluation,

(iv) The unabsorbed depreciation or unabsorbed losses as per Nil

books, which ever in less is deductible. Assuming that there is

no loss as per books, unabsorbed depreciation is not deductible.

Book Profits as per section 115JB 400

Tax thereon @_______ ________

Add: Surcharge @______ ________

Tax & Surcharge ________

Add: Health & Education Cess @_____

Tax Liability ________

Question 5:

XYZ Limited's Profit & Loss Account for the year ended 31st March, 2021 shows a net profit

of Rs. 75 lakhs after debiting / crediting the following items:

(i) Depreciation Rs. 24 lakhs (including Rs. 4 lakhs on revaluation)

(ii) Interest to financial institution not paid before due date of filing return of income Rs.

6 lakhs.

(iii) Provision for doubtful debts Rs. 1 lakh.

(iv) Provision for unascertained liabilities Rs. 2 lakhs.


21.20

(v) Transfer to General Reserve Rs. 5 lakhs.

(vi) Net Agricultural Income Rs. 16 lakhs.

(vii) Amount withdrawn from Reserve created during 2016-2017 Rs. 3 lakhs. (Book profit

was increased by the amount transferred to such reserve in Assessment Year 2016-

2017)

Other Information:

Brought forward loss and unabsorbed depreciation as per books are Rs. 12 lakhs and Rs. 10

lakhs respectively.

Compute minimum alternate tax under Section 115JB for Assessment Year 2021-2022.

Answer:

Computation of Book Profit of XYZ Limited under section 115JB

Particulars Rs. Rs.

Net Profit as per profit and loss account 75,00,000

Add: Net Profit to be increased by the following amounts as

per Explanation 1 to section 115JB

Transfer to General Reserve 5,00,000

Provision for unascertained liabilities 2,00,000

Provision for doubtful debts 1,00,000

Depreciation 24,00,000 32,00,000

1,07,00,000

Less: Net Profit to be reduced by the following amounts as per

Explanation 1 to section 115JB

Amount withdrawn from reserve and credited to profit and loss

account [since the book profit was increased by the amount

transferred to such reserve in the assessment year 2016-17]

3,00,000

Depreciation (excluding revaluation) 20,00,000

Net Agricultural Income [Exempt under section 10(1)] 16,00,000

Loss brought forward (Rs. 12 lakhs) or unabsorbed

depreciation (Rs. 10 lakhs) as per books, whichever is less

10,00,000 49,00,000

Book Profit for computation of MAT under section 115JB 58,00,000

Computation of Minimum Alternative Tax (MAT) under section 115JB

Particulars Rs. Rs.

______of book profit (_____of Rs. 58 lakh) ___________

Add: Health & Education cess @ _____ _____

Minimum Alternate Tax payable under section 115JB


21.21

Note: Explanation 1 to section 115JB does not require adjustment of interest not paid before

due date of filing return of income, while computing book profit.

Question 6:

Hyper Ltd., engaged in diversified activities, earned a profit of Rs. 14,25,000 after

debit/credit of the following items to its statement of profit and loss account for the year

ended on 31.3.2021:

(a) Items debited to Statement of Profit and Loss Account Rs.

Provision for loss of subsidiary 70,000

Provision for income-tax demand 1,05,000

Expenses on purchase/sale of equity shares 15,000


Interest on deposit credited to buyers on 31.3.2021 for advance received

from them, on which TDS was deducted in April 2021 and was deposited

on 31.7.2021

1,00,000

(b) Items credited to Statement of Profit and Loss Account

Long term capital gain on sale of equity shares on which securities

transaction tax was paid at the time of acquisition and sale

3,60,000

Income from Agriculture 75,000

The company provides the following additional information:

(i) Depreciation includes Rs. 1,50,000 on account of revaluation of fixed assets.

(ii) Depreciation allowable as per Income-tax Rules is Rs. 2,80,000.

(iii) Brought forward Business Loss/Unabsorbed Depreciation:

F.Y. Amount as per books Amount as per Income-tax

Loss

Rs.

Depreciation

Rs.

Loss

Rs.

Depreciation

Rs.

2016-2017 2,50,000 3,00,000 2,00,000 2,50,000

2017-2018 Nil 2,70,000 1,00,000 1,80,000

2018-2019 3,50,000 3,15,000 1,20,000 2,10,000

You are required to:

(i) compute the total income of the company for the assessment year 2021 -22 giving the

reasons for treatment of items and

(ii) examine the applicability of section 115JB of the Income-tax Act, 1961, and

compute book profit and the tax credit to be carried forward.

Assume the tax rate applicable to Hyder Ltd for the P.Y. 2020-21 is 30%. Ignore the

provisions of section 115BAA.


21.22

Answer

Computation of total income of M/s Hyper Ltd. for the A.Y. 2021-22

Particulars Rs. Rs.

Profit as per Statement of Profit & Loss Account 14,25,000

Add: Items disallowed /considered separately

Provision for loss of subsidiary [since it is not wholly and

exclusively for the purpose of business of the assessee]

70,000

Provision for income-tax [disallowed under section 40(a)(ii)] 1,05,000

Expenses on transfer of shares [not deductible from business

income. It is to be deducted from gross sale consideration

while computing capital gains]

15,000

Interest on deposit credited on 31.3.2021 and tax deducted in

April 2021 which was deposited on 31.7.2021 [not allowed

under section 40(a)(ia) @ 30%].

30,000

Depreciation debited to statement of profit and loss account

[only depreciation calculated as per the Income-tax Rules, 1962 is

allowable as deduction]

3,60,000

5,80,000

20,05,000

Less: Items credited but not includible under business

income or are exempt under the provisions of the Act

Long-term capital gain on sale of equity shares on which

securities transaction tax was paid, since it is not a business

income.

3,60,000

Income from Agriculture. 75,000 4,35,000

15,70,000

Less: Depreciation (allowable as per the Income-tax Rules,

1962) 2,80,000

12,90,000

Less: Set-off of brought forward business loss and unabsorbed

depreciation

Brought forward business loss under section 72 4,20,000

Brought forward depreciation under section 32 6,40,000 10,60,000


Capital Gains

Long term capital gain on sale of equity shares on which

securities transaction tax was paid at the time of acquisition

and sale

3,60,000


Tax on LTCG exceeding Rs. 1 lakh @10% 26,000

Tax on other income of Rs. 2,30,000 @30% 69,000

95,000


21.23

Add: Health and Education cess @4% 3,800

Tax Payable as per the Income-tax Act, 1961 98,800

Computation of Book Profit under section 115JB

Particulars Rs. Rs.

Profit as per Statement of Profit & Loss Account 14,25,000

Add: Net Profit to be increased by the following amounts as


Provision for loss of subsidiary 70,000

Provision for income-tax 1,05,000

Depreciation debited to profit and loss account 3,60,000 5,35,000

19,60,000

Less: Net Profit to be reduced by the following amounts as


Depreciation debited to profit and loss account (excluding

depreciation on account of revaluation of fixed assets) (i.e.,

Rs. 3,60,000 – Rs. 1,50,000)

2,10,000

Income from Agriculture 75,000

Brought forward business loss or unabsorbed deprecation as per

books of account, whichever is less, taken on cumulative basis

6,00,000

8,85,000

Book Profit 10,75,000

15% of book profit 1,61,250

Add: Health and Education cess @ 4% 6,450

1,67,700

In case of a company, it has been provided that where income-tax payable on total income

computed as per the provisions of the Act is less than 15% of book profit, the book profit

shall be deemed as the total income and the tax payable on such total income shall be 15%

thereof plus health and education cess @4%.

Accordingly, in this case, since income-tax payable on total income computed as per the

provisions of the Act is less than 15% of book profit, the book profit of Rs. 10,75,000 is

deemed to be the total income and income-tax is payable @ 15% thereof plus health and

education cess @4%. The tax liability, therefore, works out to be Rs. 1,67,700.

Section 115JAA provides that where tax is paid in any assessment year in relation to the

deemed income under section 115JB(1), the excess of tax so paid, over and above the tax

payable under the other provisions of the Income-tax Act, 1961, will be allowed as tax credit

in the subsequent years.

The tax credit is, therefore, the difference between the tax paid under section 115JB(1) and

the tax payable on the total income computed in accordance with the other provisions of the

Act. This tax credit is allowed to be carried forward for 15 assessment years succeeding the

assessment year in which the credit became allowable.

Such credit is allowed to be set off against the tax payable on the total income in an

assessment year in which the tax is computed in accordance with the provisions of the Act,


21.24

other than section 115JB, to the extent of excess of such tax payable over the tax payable on

book profits in that year.

Particulars Rs.

Tax on book profit under section 115JB 1,67,700

Less: Tax on total income computed as per the other provisions of the Act 98,800

Tax credit to be carried forward under section 115JAA 68,900

*********************************************************************************

Alternate Minimum Tax AJ Education NeXt

22.1

CHAPTER 22. ALTERNATE MINIMUM TAX

(AMT) ON ALL ASSESSEES EXCEPT

COMPANIES

INTRODUCTION

Alternate Minimum Tax (AMT) is applicable to all assessees except companies. In Minimum

alternate tax on Companies, the book profits are computed. However, in Alternate Minimum

tax, book profit has no relevance. The Alternate Minimum Tax is computed after making

some adjustment in taxable income.

SECTION 115JC: SPECIAL PROVISIONS FOR PAYMENT OF TAX BY CERTAIN

ASSESSEES

(1) Notwithstanding anything contained in this Act where the regular income-tax payable

for a previous year by a person, other than a Company, is less than the alternate

minimum tax payable for such previous year, the adjusted total income shall be

deemed to be the total income of that person for such previous year and it shall be

liable to pay income-tax on such total income at the rate of 18.5%.

(2) Adjusted total income referred to in sub-section (1) shall be the total income before

giving effect to this Chapter as increased by-

(i) deductions claimed, if any, under any section (other than section 80P) included in

(Chapter VI-A under the heading "C—Deductions in respect of certain incomes";

(ii) deduction claimed, if any, under section 10AA; and

(iii) deduction claimed, if any, under section 35AD as reduced by the amount of

depreciation allowable in accordance with the provisions of section 32 as if no

deduction under section 35AD was allowed in respect of the assets on which the

deduction under that section is claimed.


Under section 115JC, alternate minimum tax in the case of a non-corporate assessee is 18.5

per cent of adjusted total income. In order to promote the development of world class

financial infrastructure in India, section 115JC has been amended (with effect from the

assessment year 2019-20) so as to provide that in case of a unit located in an International

Financial Service Center, the alternate minimum tax shall be calculated at the rate of 9 per

cent.

Key Notes:

(i) "Alternate Minimum Tax" means the amount of tax computed on "Adjusted Total

Income" @ 18.5% plus surcharge if applicable and Health & Education Cess.


22.2

(ii) “Adjusted Total Income” means:

Total Income as Computed under normal provisions of Income tax Act XXX

Add: Deductions under section 80-IA to 80RRB except section 80P. XXX

Add: Deduction under section 10AA XXX

Add: Deduction claimed under section 35AD XXX

Less: Depreciation allowable as per section 32 assuming that deduction

under section 35AD was not allowed on the assets on which deduction under

section 35AD is claimed

XXX

Adjusted total Income XXX

(iii) "Regular Income Tax" means the income tax payable by a person on his total

income in accordance with the normal provisions of the Income tax Act.

(iv) AMT is not payable by:

- Individual

- HUF

- AOP/ BOI

- Artificial Juridical person

IF ADJUSTED TOTAL INCOME OF SUCH PERSON DOES NOT EXCEED

Rs. 20 LAKHS.

(3) Every person to whom this section applies shall obtain a report, before the specified

date referred to in section 44AB, in such form as may be prescribed, from an

accountant referred to in the Explanation below sub-section (2) of section 288,

certifying that the adjusted total income and the alternate minimum tax have been

computed in accordance with the provisions of this Chapter and furnish such report

by that date. (Amended by Finance Act 2020)

(4) As per Sec 115JC(5) the provisions of this section shall not apply to a person who

has exercised the option referred to in section 115BAC or section 115BAD.

(Added by Finance Act 2020).

Example:

Total income Rs. 60

Deduction claimed under Chapter VI-A Rs. 40

Deduction claimed under section 35AD on a capital asset Rs.100

Computation of adjusted total income for the purposes of AMT

Total income Rs. 60

Addition:

(i) deduction under Chapter VI-A (on non-specified business) Rs. 40

(ii) deduction under section 35AD (on specified business) Rs. 100

Less: depreciation under section 32 Rs. 15 Rs. 85


22.3

Adjusted total income under section 115JC Rs. 185

SECTION 115JD: TAX CREDIT FOR ALTERNATE MINIMUM TAX

(1) The credit for tax paid by a person under section 115JC shall be allowed to him in

accordance with the provisions of this section.

(2) The tax credit of an assessment year to be allowed under sub-section (l) shall be the

excess of alternate minimum tax paid over the regular income-tax payable of that

year.

(3) No interest shall be payable on tax credit allowed under sub-section (1).

(4) The amount of tax credit determined under sub-section (2) shall be carried forward

and, set off in accordance with the-previsions of sub-section (5) but such carry

forward shall be not be allowed beyond the fifteenth assessment year immediately

succeeding the assessment year for which tax credit becomes allowable under sub-

section (1). (Amended by Finance Act 2017)

(5) In any assessment year in which the regular income-tax exceeds the alternate

minimum tax, the tax credit shall be allowed to be set off to the extent of the excess of

regular income-tax over the alternate minimum tax and the balance of the tax credit, if

any, shall be carried forward.

(6) The provisions of this section shall not apply to a person who has exercised the

option referred to in section 115BAC or section 115BAD (Finance Act 2020)

SECTION 115JE: APPLICATION OF OTHER PROVISIONS OF THIS ACT

Save as otherwise provided in this Chapter, all other provisions of this Act shall apply to a

person referred to in this Chapter.

SECTION 115JEE: APPLICATION OF THIS CHAPTER TO CERTAIN PERSONS

(1) The provisions of this Chapter shall apply to a person who has claimed any deduction

under—

(a) any section (other than section 80P) included in Chapter VI-A under the

heading "C— Deductions in respect of certain incomes"; or

(b) section 10AA; or

(c) section 35AD.

(2) The provisions of this Chapter shall not apply to an individual or a Hindu undivided

family or an association of persons or a body of individuals, whether incorporated or

not, or an artificial juridical person, if the adjusted total income of such person does

not exceed twenty lakh rupees.

(3) Notwithstanding anything contained in sub-section (1) or sub-section (2), the credit

for tax paid under section 115JC shall be allowed in accordance with the provisions of

section 115JD.


22.4

Illustration:

An individual for Previous Year 31-3-2021 has business income of Rs. 30,00,000. For

Previous Year 31-3-2020 he was subject to AMT as he was claiming deduction under section

80-IE. He has an AMT credit of Rs. 4,00,000. During Previous Year 31-3-2021, he is not

entitled to deductions under Chapter VI-A/10AA/35AD.

Answer:

Although AMT is not applicable to the assessee, yet he can claim AMT credit as per

amendment made by Finance Act, 2014 in section 115JEE.

Normal tax on Rs. 30,00,000 Rs. _______

Alternate Minimum Tax @ ______% on Rs. 30,00,000 Rs.

AMT credit available for set-off Rs.

Therefore, tax payable by assessee shall be Rs. __________after taking credit of AMT of

Rs.____________. Assessee will carry forward balance AMT of Rs. _____________

ILLUSTRATIONS

Illustration 1:

XYZ LLP submits the following information for Assessment Year 2021-2022:

(i) Profit as per P & L A/c 8,50,000

(ii) Depreciation as per books of Account 20,000

(iii) Depreciation as per Income-Tax Act 40,000

(Current Year) on assets other than covered by 35AD

(iv) Brought forward Depreciation 3,50,000

(v) Bought forward loss 13,000

(vi) Expenditure not allowable as per

Income-tax Act debited in P & L A/c 30,000

(vii) Interest paid to the partners debited in P & L A/c

Partner A (24%) 10,000

Partner B (24%) 16,000

(viii) Remuneration paid to the partners debited in P & L A/c

Partner A 1,40,000

Partner B 1,10,000

(ix) XYZ LLP is eligible to claim deduction under section 35AD @ 100% 5,00,000

(x) Contribution to Electoral trust eligible for deduction u/s 80GGC 10,000

The Partners A & B share profits and losses equally. Asset eligible for deduction under

section 35AD is Plant & Machinery acquired and put to use on 30-6-2020. This is eligible for

15% depreciation and is also eligible for additional depreciation. Compute the tax liability of

the LLP.


22.5

Answer:

Computation of Book Profit under section 40(b)






Add: Contribution to electoral trust eligible for 80GGC 10,000

11,73,000

Less: Deduction under section 35AD 5,00,000



Book Profits 2,83,000

Therefore, allowable remuneration as per section 40(b) is Rs. 2,54,700. Since remuneration

paid is Rs. 2,50,000, Rs. 2,50,000 is allowed as deduction under section 40(b).

Computation of the Total Income of the LLP




Add: Contribution to electoral trust eligible for 80GGC 10,000


9,23,000

Less: Deduction under section 35AD 5,00,000


3,83,000

Less: B/f Losses 13,000


Total Income 20,000

Less: Deduction under section 80GGC 10,000

Total taxable Income 10,000

Tax liability under the normal provision of tax

Tax @ 31.2% on Rs. 10,000 3,120

Adjusted Total Income is as under:

Total taxable income 10,000

Add: Deduction claimed under section 35AD 5,00,000


22.6

Less: Normal Depreciation @ 15% 75,000

Less: Additional Depreciation @ 20% 1,00,000 3,25,000

Adjusted Total Income 3,35,000

Tax liability under AMT

Tax @ _______% on Rs. 3,35,000

Therefore, Tax payable is Rs._________. The LLP will carry forward AMT credit of

Rs.__________

Illustration 2:

M/s XYZ, an AOP, is engaged in the business of manufacture of chemical goods (value of

plant and machinery owned by the assessee is Rs. 55 lakhs). One member of AOP has

income exceeding Rs. 5,00,000. The following information for the financial year 2020-2021

is given:

PROFIT AND LOSS ACCOUNT

Rs.

Sale proceeds of goods (domestic sale) 32,23,900

Sale proceeds of goods (export sale) 7,76,100

Total 40,00,000

Less: Expenses

- Salary & wages 2,10,000

- Depreciation 7,16,000

- Entertainment expenditure 12,500

- Donations to political party 2,500

- Travelling expenditure 36,000

- Income-tax 3,50,000

- Wealth-tax 8,000

- Outstanding custom duty 17,500

- Provision for unascertained liabilities 70,000

- Paid to Mafia Don 90,000

- Consultation fees paid to a tax expert 21,000

- Manufacturing expenses 1,80,000

Net profit 22,86,500

For tax purposes the assessee wants to claim the following:

1. Deduction under section 80-IB (25% of Rs. 22,86,500).

2. Excise duty pertaining 2006-2007 paid during previous year 2020-2021 (amount

actually paid is Rs. 75,500).

3. Depreciation under section 32 (Rs. 5,36,000).

4. Customs duty of Rs. 17,500 has been paid after due date of filing of ROI of



22.7

5. Depreciation of Rs. 7,16,000 includes depreciation of Rs. 3,00,000 on account of

revaluation of assets.

6. The assessee wants to set off the following losses/ allowances:

Rs.

Brought forward loss of 2014-2015 11,80,000

Unabsorbed depreciation NIL

Compute the total income of the assessee. You are given that assessee has AMT credit of Rs.

8,00,000 carried forward from Assessment Year 2020-2021.

Answer:

COMPUTATION OF TAXABLE INCOME

Net profit as per profit and loss account 22,86,500

Add:

Depreciation as per books 7,16,000

Donations to political party 2,500

Income-tax 3,50,000

Wealth-tax 8,000

Outstanding custom duty 17,500


Paid to Mafia Don 90,000 12,54,000

35,40,500

Less:

Depreciation [as per IT. Act] 5,36,000

Excise duty of 2006-2007 75,500 6,11,500

29,29,000

Less:

Brought forward business loss 11,80,000

Gross total income 17,49,000

Less: Deductions

Under section 80IB [i.e. 25% of Rs. 17,49,000] 4,37,250

Under section 80GGB for donation to Political Party 2,500

Net Income 13,09,250

Tax on Rs. 13,09,250 @ ___________ ___________

Or say ___________


22.8

COMPUTATION OF ADJUSTED TOTAL INCOME

Taxable Income 13,09,250

Add: Deduction under section 80- IB 4,37,250

Adjusted Total Income 17.46.500

AMT is not applicable since the Adjusted total Income does not exceed Rs. 20,00,000.

AMT is not applicable. However, as per sub-section (3) inserted in section 115JEE by

Finance Act, 2014, AMT credit shall be allowed to the assessee.

Tax as per normal provisions _______

Less: Tax @ _______ on the Adjusted Total Income of Rs. _________ ________

AMT credit available for set-off

The assessee shall pay tax of Rs. ________ after taking the AMT credit of Rs. ________.

The assessee shall carry forward AMT credit of Rs. ________.

SPECIAL PROVISIONS GOVERNING ASSESSMENT OF FIRMS AND

ASSOCIATION OF PERSONS OR BODY OF INDIVIDUALS, LIMITED

LIABILITY PARTNERSHIP (LLP) AND ALTERNATE MINIMUM TAX (AMT)

(QUESTIONS FROM PAST EXAMINATIONS)

Question 1:

XYZ, a firm consists of four partners namely, X, Y, Z and A. They shared profits and losses

equally during the year ending March 31, 2020. The assessed business loss of the firm for the

assessment year 2020-2021 which it is entitled to carry forward amounts to Rs. 3,60,000. A

new deed of partnership was executed among X, Y, Z and A on April 1, 2020 in terms of

which they agreed to share profits and losses in the ratio of 15:15:20:50 respectively.

Compute the amount of business loss relating to assessment year 2020-2021, which the firm

is entitled to set off against its business income for the assessment year 2021-2022.The

business income of the firm for the assessment year 2021-2022 is Rs. 3,30,000. Your answer

should be supported by reasons.

Answer:

SECTION 78(1): CARRY FORWARD AND SET OFF OF LOSSES IN CASE OF

CHANGE IN CONSTITUTION OF FIRM.

Where a change has occurred in the constitution of a firm, then nothing shall entitle the firm

to have carried forward and set off so much of the loss proportionate to the share of a retired

or deceased partner as exceeds his share of profits, if any, in the firm in respect of the

previous year.

Section 78(1) applies when there is a change in constitution of firm on account of death or

retirement of a partner. Section 78(1) does not apply if a partner is admitted to partnership

for or there is change in profit sharing ratio.


22.9

In the given Question, as only the profit sharing ratio of the existing partner's is changed,

section 78 is not applicable. Thus, the whole of the business loss of Rs. 3,60,000 shall be

available for set off against the business income for the assessment year 2021-

2022.Consequently, resultant business loss of Rs. 30,000 at the end of the assessment year

2021-2022 shall be carried forward to the next assessment year.

Question 2:

M/s. HIG, a firm, consisting of three partners namely, H, I and G, carried on the business of

purchase and sale of television sets in wholesale and manufacture and sale of pens under a

deed of partnership executed on 1.4.2015. H, I and G were partners in their individual

capacity. The deed of partnership provided for payment of salary amounting to Rs. l,50,000

each to H and G, who were the working Partners. A new deed of partnership was executed on

1.10.2020 which, apart from providing for payment of salary to the two working partners as

mentioned in the deed of partnership executed on 1.4.2015, for the first time provided for

payment of simple interest @ 12% per annum on the balances standing to the credit of the

capital accounts of partners from 1.4.2020. The Firm was dissolved on 31.3.2021 and the

capital assets of the firm were distributed among the partners on 20.4.2021.

The net profit of the firm for the year ending 31.3.2021 after payment of salary to the

working partners and debit/credit of the following items to the Profit and Loss Account was

Rs.10,000:

(i) Interest amounting to Rs. 1,00,000 paid to the partners on the balances standing to the

credit of their capital accounts from 1.4.2020 to 31.3.2021.

(ii) Interest amounting to Rs. 50,000 paid to the partners on the balances standing to the

credit of their Current Accounts from 1.4.2020 to 31.3.2021.

(iii) Interest amounting to Rs. 20,000 paid to the Hindu undivided family of partner H @

18% per annum.

(iv) Payment of Rs. 5,000 towards bribe.

(v) Rs. 30,000 being the value of gold Jewellery received as gift from a manufacturer for

achieving sales target.

(vi) Depreciation amounting to Rs. 15,000 on motor car bought and used exclusively for

business purposes, but not registered in the name of the firm.

(vii) Depreciation under section 32(1)(ii) amounting to Rs. 37,500 of new machinery

bought and installed for manufacture of pens on 1.11.2020 at a cost of Rs. 5,00,000.

There was no increase in the installed capacity as a result of the installation of the new

machinery.

(viii) Interest amounting to Rs. 25,000 received from bank on fixed deposits made out of

surplus funds.


22.10

The firm furnishes the following information relating to it:

(a) Closing stock-in-trade was valued at Rs. 60,000 as per the method of lower of cost or

market value consistently followed by it. The market value of the closing stock-in-

trade was Rs. 65,000. ( Do after Capital Gains )

(b) Brought forward business loss relating to the assessment year 2020-2021 was Rs.

40,000.

(c) The fair market value of the capital assets as on 31.3.2021 was Rs. 20,00,000 and the

cost of their acquisition was Rs. 15,00,000. ( Do after Capital Gains )

Compute the total income of M/s. HIG for the assessment year 2021-2022. You are required

to furnish explanations for the treatment of the various items given above.

Answer:

Computation of Total Income of M/S HIG for the Assessment Year 2021-2022

Rs.

Net profit as per Profit & Loss A/c 10,000

Interest to partners on capital account balance for April 1, 2020 to September

30, 2020

(+) 50,000

Interest to partners on current account balances [Not allowable since there is

no provision in the partnership deed to pay interest on Current Account]

(+) 50,000

Interest to HUF of partner H [Allowable] -

Payment of Bribe [Disallowed under section 37(1)] (+) 5,000

Gift from manufacturer [Taxable as business income] -

Depreciation on motor car (not registered in firm name) used for business

purposes [Allowable as per landmark case of Mysore Minerals Ltd. vs. CIT]

-

Additional depreciation on new machinery [50% of 20% of Rs. 5 lakh] (-) 50,000

Interest from bank on fixed deposits (-) 25,000

Valuation of closing stock (ALA Firm) (+) 5,000

Remuneration to working partners [Taken separately] (+) 3,00,000

BOOK PROFIT 3,45,000

Less: Remuneration to working partners [On first Rs. 3,00,000 of book profit

@ 90%, on balance Rs. 45,000 of book profit @ 60%]

(-) 2,97,000

48,000

Less: Brought forward Business loss (-) 40,000

BUSINESS INCOME 8,000

Income From Other Sources 25,000

NET INCOME 33,000


22.11

Note: Section 45(4) shall be attracted in previous year when assets have been distributed to

partners.

Question 3:

HSP, a partnership firm engaged in the business of running a heritage hotel approved by the

competent authority furnishes the following information relating to the year ended on

31.3.2021:

(a) Net profit as per P & L account of Rs. 200 lakhs was arrived at after charge of the

following:

(i) Depreciation on hotel building having W.D.V. on 1.4.2020 of Rs. 500 lakhs

was charged by treating the same as Plant and Machinery.

(ii) Expenses of Rs. 1,00,000 incurred for the purpose of promoting family

planning among its employees.

(iii) Payment of Rs. 50,000 for an advertisement published in the souvenir

released on 15th August by Bhartiya Janta Party.

(iv) Compensation of Rs. 1,00,000 paid to the suppliers of automatic kitchen

appliances because of termination of the contract after receipt of 50% of

appliances.

(v) Wines and liquor imported in F.Y. 2019-2020 for Rs. 20 lakhs and were

available in the stocks on 1.4.2020 for Rs. 5 lakhs were confiscated by the

Govt. authority and therefore were written off.

(vi) Expenses of Rs. 20 lakhs incurred on replacement of carpets in the foyer,

lounge and bar.

(b) Amount paid to underworld for protection of hotel of Rs. 15 Lakhs.

(c) Amount of Rs. 4 lakhs equal to U.K £5000 was remitted and paid to a travel agent

resident of U.K as commission for the booking of international tourists in the hotel.

Tax at source was not deducted out of such payment.

(d) Amount of Rs. 40,000 each was paid in cash to the suppliers of vegetables, milk

products and eggs on 11.2.2021 because of suspension of banking operations due to

strike of bank employees.

(e) Amount of Rs. 5 lakhs written off in the F.Y.2016-2017 as irrecoverable from a

travel agent; an amount of Rs. 2 lakhs out of it was recovered on 13.3.2021 and

credited to a reserve account.

Compute the income chargeable to tax for Assessment Year 2021-2022 and give

reason in brief for treatment given to each of the items.


22.12

Answer:

Computation of Total Income of HSP for Assessment Year 2021-2022

Rs. In Lakhs

Net Prof it as Per Prof it & Loss A/c 200.00

Add Depreciation charged on building as Plant & Machinery (500 Lakhs ´

15%)

75.00

Less: Depreciation allowable on building as per I.T. Act. (500 Lakhs ´

10%)

(50.00)

Add: Expenditure for promoting family planning among employees (Under

section 36(1)(ix) deduction on account of expenditure for promoting

family planning among employees is available to a company only).

1.00

Add:

Payment for advertisement published in souvenir of Bhartiya Janta

Party (As per provisions of section 37(2B), no allowance shall be

made in respect of expenditure incurred on advertisement in any

souvenir, brochure, pamphlet or the like published by a Political

Party)

0.50

Compensation paid to supplier for termination of contract. (Allowable

expenditure since it is the damages paid for breach of contract - CIT

vs. R.D Sharma & Co.)

-

Loss written off on wines and liquor held as stock confiscated by the

Govt. Authority (As per Supreme Court in Dr. T. A. Qureshi Vs. CIT,

loss on confiscation of stock in trade is an allowable expenditure)

-

Expenses incurred on replacement of carpets. (As per Sec.37 (1) it is

a revenue expenditure)

-

Add: Amount paid to underworld disallowed as per explanation to section

37(1)

15.00

Add: Commission paid to travel agent in U.K. (Not allowed as deduction

under section 40(a)(i) since TDS was not deducted on such payment)

4.00

Payment of Rs. 40,000 made in cash to the supplier of vegetables,

Milk products and eggs. (As per exception provided in Rule 6DD

such expenditure is allowed as deduction)

Add. Bad Debts Recovered (As per provision of section 41(4), where a

deduction has been allowed in respect of a bad debt and the bad debt

is subsequently recovered, then the amount so recovered shall be

deemed to be the income of the previous year in which the amount is

so recovered.)

2.00

Total Income 247.50

***************************************************************************

Penalties & Prosecutions AJ Education NeXt

23.1

Penalty can be levied by:

(i) The Assessing Officer

(ii) The CIT(Appeals)

(iii) The Commissioner of Income-tax

KEY NOTES:

1. Income Tax Appellate Tribunal (ITAT) cannot impose penalty.

2. The penalty proceedings must be initiated before levying any penalty. Penalty

proceedings are initiated by issuing a show cause notice.

3. Assessing Officer shall levy penalty for under reporting or mis-reporting of income on

the additions made by him in an assessment or reassessment under section

143(3)/144/147/153A. CIT (Appeals) shall levy penalty for under reporting or mis-

reporting of income on the additions made by him in an order passed under section 250.

CIT shall levy penalty for under-reporting or mis-reporting of income on the additions

made by him in an order passed under section 263.

4. If Assessing Officer is to levy the penalty for under-reporting or mis-reporting of

income, then the penalty proceedings must be initiated by the Assessing Officer before

the completion of assessment.

If CIT(Appeals) is to levy the penalty for under-reporting or mis-reporting of income,

then the penalty proceedings must be initiated before passing the order under section

250.

If CIT under section 263 increases the income, then he must initiate the penalty

proceedings before passing the order under section 263.

5. SHADIRAM BALMUKUND (SUPREME COURT)

Facts :

The assessee filed a return of income declaring an income of Rs. 20,00,000. The

Assessing Officer added unexplained cash credits of Rs. 6,00,000 and assessed the

income at Rs. 26,00,000. The Assessing Officer initiated penalty proceedings under

section 270A before the completion of the assessment.

The assessee filed an appeal to CIT(Appeals) against the order of the Assessing Officer. The CIT (Appeals) by his order under section 250 confirmed the additions made by the

Assessing Officer and further increased the income by Rs. 5,00,000 to Rs. 31,00,000.

CHAPTER 23- PENALTIES & PROSECUTIONS

WHO CAN IMPOSE THE PENALTY


23.2

Assessee decided not to file any further appeal, Assessing Officer levied penalty on the

additions of Rs. 11,00,000.

Decision :

The Supreme Court held that the Assessing Officer can levy penalty for under-reporting

or mis-reporting on the additions made by him and not on the additions made by the

CIT (Appeals). Similarly, the CIT(Appeals) can levy penalty on the additions made by

him and not on the additions made by the Assessing Officer.

In the present case, the Assessing Officer can levy penalty on the additions of Rs.

6,00,000 made by him and not on the additions of Rs. 5,00,000 made by CIT(Appeals).

The Supreme Court accordingly deleted the penalty levied by the Assessing Officer on

the additions of Rs. 5,00,000 made by CIT(Appeals).

The Supreme Court also held that CIT(Appeals) cannot be directed to levy penalty on

the additions made by him since he had not initiated the penalty proceedings before

passing the order under section 250.

6. Penalty other than penalty for under reporting or mis-reporting of income can be levied

by initiating the penalty proceedings (by issuing a show cause notice) and such

proceedings can be initiated at any time. Penalties such as penalty for failure to get tax

audit done, penalty for non-maintenance of books of account, can be initiated even if an

assessment is not made on the assessee.

7. Penalty order and assessment order are distinct order. Similarly, penalty proceedings

and assessment proceedings are distinct proceedings.

8. Penalty is levied by passing a penalty order. Against the penalty order passed by

Assessing Officer an appeal can be filed to CIT(Appeals) or a revision application can

be made to CIT under section 264 or a rectification application can be made under

section 154. Against the penalty order passed by CIT(Appeals) or the Commissioner of

Income-tax, an appeal can be filed to ITAT.

9. Law relating to penalty for concealment of income was contained in section 271(1)(c)

and that section is no more relevant from Assessment Year 2017-18. From Assessment

Year 2017-18, new section 270A replaces section 271(1)(c).

{ DO NOT READ THIS, DIRECTLY DO IT FROM ILLUSTRATION}

(1) The Assessing Officer or the Commissioner (Appeals) or Commissioner may, during

the course of any proceedings under this Act, direct that any person who has under

reported his income shall be liable to pay a penalty in addition to tax, if any, on the

under-reported income.

(2) A person shall be considered to have under-reported his income, if –

SECTION 270A: PENALTY FOR UNDER REPORTING AND MISREPORTING

OF INCOME (INSERTED BY FINANCE ACT, 2016)


23.3

(a) the income assessed is greater than the income determined in the return processed

under section 143(1)(a);

(b) the income assessed is greater than the maximum amount not chargeable to tax,

where no return of income has been furnished or where return has been

furnished for the first time under section 148; ( FA 2019)

(c) the income reassessed is greater than the income assessed or reassessed

immediately before such reassessment;

(d) the amount of deemed total income assessed or reassessed as per the provisions of

section 115JB or section 115JC, as the case may be, is greater than the deemed

total income determined in the return processed under section 143(1)(a);

(e) the amount of deemed total income assessed as per the provisions of section

115JB or section 115JC, is greater than the maximum amount not chargeable to

tax, where no return of income has been furnished or where return has been

furnished for the first time under section 148; ( FA 2019)

(f) the amount of deemed total income reassessed as per the provisions of section

115JB or section 115JC, as the case may be, is greater than the deemed total

income assessed or reassessed immediately before such, reassessment;

(g) the income assessed or reassessed has the effect of reducing the loss or converting

such loss into income.

(3) The amount of under-reported income shall be, –

(i) in a case where income has been assessed for the first time, –

(a) if return has been furnished, the difference between the amount of income

assessed and the amount of income determined under section 143(1)(a);

(b) in a case where no return has been furnished or where return has been

furnished for the first time under section 148, – ( FA 2019)

(A) the amount of income assessed, in the case of a company, firm or

local authority; and

(B) the difference between the amount of income assessed and the

maximum amount not chargeable to tax, in a case not covered in item

(A);

(ii) in any other case, the difference between the amount of income reassessed

and the amount of income assessed or reassessed in a preceding order:

Provided that where under-reported income arises out of determination of deemed

total income in accordance with the provisions of section 115JB or section 115JC,

the amount of total under-reported income shall be determined in accordance with

the following formula –

(A – B) + (C – D)

Where,

A = the total income assessed as per the provisions other than the provisions

contained in section 115JB or section 115JC(herein called general

provisions);

B = the total income that would have been chargeable had the total income

assessed as per the general provisions been reduced by the amount of

under-reported income;


23.4

C = the total income assessed as per the provisions contained in section 115JB

or section 115JC;

D = the total income that would have been chargeable had the total income

assessed as per the provisions contained in section 115JB or section 115JC

been reduced by the amount of under-reported income:

Provided further that where the amount of under-reported income on any issue is

considered both under the provisions contained in section 115JB or section 115JC

and under general provisions, such amount shall not be reduced from total income

assessed while determining the amount under item D.

Explanation. – For the purposes of this section, –

(a) “preceding order” means an order immediately preceding the order during

the loss declared in the return or converting that loss into income, the

amount of under-reported income shall be the difference between the loss

claimed and the income or loss, as the case may be, assessed or reassessed.

(4) Subject to the provisions of sub-section (6), where the source of any receipt, deposit or

investment in any assessment year is claimed to be an amount added to income, in the

assessment of such person in any year prior to the assessment year in which such

receipt, deposit or investment appears (hereinafter referred to as “preceding year”) and

no penalty was levied for such preceding year, then, the under-reported income shall

include such amount as is sufficient to cover such receipt, deposit or investment.

(5) The amount referred to in sub-section (4) shall be deemed to be amount to be amount of

income under-reported for the preceding year in the following order –

(a) the preceding year immediately before the year in which the receipt, deposit or

investment appears, being the first preceding year; and

(b) where the amount added or deducted in the first preceding year is not sufficient to

cover the receipt, deposit or investment, the year immediately preceding the first

preceding year and so on.

(6) The under-reported income, for the purposes of this section, shall not include the

following, namely:-

(a) the amount of income in respect of which the assessee offers an explanation and

the Assessing Officer or the Commissioner(Appeals) or the Commissioner, as the

case may be, is satisfied that the explanation is bona fide and the assessee has

disclosed all the material facts to substantiate the explanation offered;

(b) the amount of under-reported income determined on the basis of an estimate, if

the accounts are correct and complete to the satisfaction of the Assessing Officer

or the Commissioner (Appeals) or the Commissioner, as the case may be, but the

method employed is such that the income cannot properly be deduced therefrom;

(c) the amount of under-reported income determined on the basis of an estimate, if

the assessee has, on his own, estimated a lower amount of addition or

disallowance on the same issue, has included such amount in the computation of

his income and has disclosed all the facts material to the addition or disallowance;

(d) the amount of under-reported income represented by any addition made in

conformity with the arm’s length price determined by the Transfer Pricing

Officer, where the assessee had maintained information and documents as


23.5

prescribed under section 92D, declared the international transaction in Transfer

Pricing Audit Report, and disclosed all the material facts relating to the

transaction; and

(e) the amount of undisclosed income referred to in section 271AAB.

(7) The penalty referred to in sub-section (1) shall be a sum equal to 50% of the amount

of tax payable on under-reported income.

(8) Notwithstanding anything contained in sub-section (6) or sub-section (7), where under-

reported income is in consequence of any misreporting thereof by any person, the

penalty referred to in sub-section (1) shall be equal to two hundred per cent of the

amount of tax payable on under-reported income.

(9) The cases of misreporting of income referred to in sub-section (8) shall be the

following, namely:–

(a) misrepresentation or suppression of facts;

(b) failure to record investments in the books of account;

(c) claim of expenditure not substantiated by any evidence;

(d) recording of any false entry in the books of account;

(e) failure to record any receipt in books of account having a bearing on total income;

and

(f) failure to report any international transaction or any transaction deemed to be an

international transaction or any specified domestic transaction, to which the

provisions of Transfer Pricing apply.

(10) The tax payable in respect of the under-reported income shall be-

(a) where no return of income has been furnished or where return has been

furnished for the first time under section 148 and the income has been assessed

for the first time, the amount of tax calculated on the under-reported income as

increased by the maximum amount not chargeable to tax as if it were the total

income; ( FA 2019)

(b) where the total income determined under section 143(1)(a) or assessed or

reassessed in a preceding order is a loss, the amount of tax calculated on the

under-reported income as if it were the total income;

(c) in any other case determined in accordance with the formula –

(X–Y)

where,

X = the amount of tax calculated in the under-reported income as increased by

the total income determined under section 143(1)(a) or total income

assessed, or reassessed in a preceding order as if it were the total income;

and

Y = the amount of tax calculated on the total income determined under section

143(1)(a) or total income assessed or reassessed in a preceding order.

(11) No addition or disallowance of an amount shall form the basis for imposition of

penalty, if such addition or disallowance has formed the basis of imposition of penalty

in the case of the person for the same or any other assessment year.


23.6

(12) The penalty referred to in sub-section (1) shall be imposed, by an order in writing, by

the Assessing Officer, the Commissioner(Appeals) or the Commissioner, as the case

may be.

ANALYSIS OF SECTION 270A

A PERSON SHALL BE CONSIDERED

TO HAVE UNDER-REPORTED THE

INCOME IF:

AMOUNT OF UNDER-REPORTED

INCOME & TAX THEREON:

Return has been filed and assessment

made for first time

Income assessed > Income determined

under section 143(1)(a)

Under-reported Income:

Income assessed minus Income determined

under section 143(1)(a)

Tax on under-reported Income

Tax on

[Under-reported Income + Income determined

under section 143(1)(a)]

Minus

Tax on Income determined under section

143(1)(a)

No Return has been filed and assessment

made for first time

Income assessed > Maximum amount not

chargeable to Tax

Under-reported Income :

(i) In case of assessee other than individual

/ HUF = Amount of income assesssed

(ii) In case of Individual / HUF

= Amount of income assessed

minus Rs. 2,50,000/3 lacs/5 lacs.


(i) Tax on under reported income as if it

were the total income

(ii) Tax on (under-reported income + Rs.

2,50,000/ 3 lacs/ 5 lacs) as if it were total

income of assessee


Rationalisation of penalty provisions relating to under-reported income

Section 270A contains provisions relating to penalty for under-reporting and misreporting of

income. The existing provisions provide for various situations for the purposes of levy of

penalty under this section. However, these provisions do not contain the mechanism for

determining under-reporting of income and quantum of penalty to be levied in the case where

the person has under-reported income and furnished the return of income for the first time

under section 148 of the Act.

In order to provide for manner of computing the quantum of penalty in a case where the

person has under-reported income and furnished his return for the first time under section

148, it is proposed to suitably amend the provisions of section 270A.

These amendments will take effect retrospectively from 1st April, 2017 and will,

accordingly, apply in relation to assessment year 2017-2018 and subsequent

assessment years.


23.7

Case of Re-assessment

Income reassessed > Income assessed or

reassessed immediately before

such reassessment.

Under-reported Income

Amount of Income reassessed – Amount of

income assessed in preceding order

Tax on Under-reported Income

Tax on (Under-reported Income + Income

assessed in preceding order]

Minus Tax on Income assessed in preceding

order

Where section 115JB or 115JC applies

and return has been filed by the assessee

and assessment made for first time

Deemed Income Deemed Total

assessed as per income as per

section115JB/11 > section 5JC 115JB/115JC

determined under

section 143(1)(a)


(A – B) + (C – D)

A = Total Income assessed as per general

provisions

B = Total Income assessed as per general

provisions reduced by under-reported

income

C = Total Income assessed as per section

115/JB/115JC

D = Total Income assessed as per section

115/JB/115JC reduced by under-

reported income.

Note: If under-reported income in ‘B’ and ‘D’

are the same, then under-reported income shall

not be considered in ‘D’.


and return has been filed by the assessed

and assessment made for first time

Deemed total Maximum amount

Income assessed > not chargeable to as per tax

section115JB /

115JC


(A – B) + (C – D)


provisions



income


115/JB/115JC



reported income.





and it is a case of reassessment

Deemed total Deemed Total

Income assessed > income as per

as per section 115JB / section115JB / 115JC assessed

115JC immediately


(A – B) + (C – D)


provisions



income


23.8

before such

reassessment


115/JB/115JC



reported income.




Returned Income is a Loss and on

assessment Loss is reduced or in

converted into income


Loss assessed / – Loss as per

income assessed section 143(1)(a)

Tax on Under-reported Income

Tax on under-reported income as if it were

total income of the assessee.

Case of reassessment and on

reassessment

Loss in assessment immediately before such

reassessment in reduced or converted into

income.


Loss assessed / – Loss assessed in

income assessed preceding assessment order


Tax on under-reported income as if it were the

total income of the assessee.

Illustration 1:

ILLUSTRATIONS ON SECTION 270A:

Details of an individual who filed his return of income is as under:


Income under section 143(1)(a) 11,00,000

Income assessed under section 143(3) 25,00,000

Is penalty under section 270A can be imposed?

Solution:

Chargeability of section 270A: The person is considered to have under-

reported the Income since

Income assessed > Income determined under

section 143(1)(a)

Amount of under-reported Income = Income assessed under section 143(3)

– Income determined under section 143(1)(a)

= Rs. 25,00,000 - Rs. 11,00,000

= Rs. 14,00,000

Tax payable on under-reported Income = Tax on Rs. 25,00,000 – Tax on Rs.

11,00,000

= Rs. - Rs.

= Rs.


23.9

This penalty shall be 200% if additions made to income are on account of misreporting of

income.

Illustration 2:

Mr. X filed his return of income claiming loss therein:

Returned Income - Rs. 12,00,000

Income under section 143(l)(a) -Rs. 13,00,000

Income assessed under section 143(3) - Rs. 2,00,000

Can penalty be levied in this case?

Solution:

chargeability of section 270A: the person is considered to have under-reported the since loss

has been reduced because of assessment

Amount of under-reported Income = Loss assessed under section 143(3)

– Loss determined under section 143(l)(a)

= – 2,00,000 minus (- Rs. 13,00,000)

= + Rs. 11,00,000

Tax payable on under-reported Income = Tax on Rs. 11,00,000 i.e. under-reported Income

were the total income of the assessee = Rs.

Penalty for under-reporting = 50% of Rs.

= Rs.

Illustration 3:

ABC Ltd., an Indian Company furnished its return of income disclosing a loss of Rs. 50

lakhs. However, the loss determined under section 143(l)(a) is only Rs. 40 lakhs. The case

was taken up for scrutiny. The Assessing Officer made various additions and the income

assessed under section 143(3) is Rs. 1,10,00,000.

Determine the penalty leviable by Assessing Officer.

Solution:

Chargeability of section 270A: The person is considered to have under-reported the income

since LOSS HAS BEEN CONVERTED INTO INCOME.

Amount of under-reported Income = Income assessed under section 143(3)

– Income determined under section 143(1)(a)

= Rs. 1,10,00,000 minus (-Rs. 40,00,000)

= Rs. 1,10,00,000 + Rs. 40,00,000

= Rs. 1,50,00,000

Penalty for under reporting = 50% of Rs. = Rs.


23.10

Tax payable on under-reported Income = Tax on Rs. 1,50,00,000

= Rs. 45,00,000 + 7% surcharge + 4 % H & E CESS

= Rs.


= Rs. .

Illustration 4:

An Individual does not file return of Income for Assessment Year 2017-18. The Assessing

Officer assesses the income under section 144 at Rs. 10,00,000. Can the penalty be levied in

this case? If, yes, then determine the quantum of penalty.

Solution:

Chargeability of section 270A: Individual is said to have under-reported the income since

Assessed Income > Rs. 2,50,000

Under-reported Income = Rs. 10,00,000 - Rs. 2,50,000

= Rs. 7,50,000

Tax on under-reported Income = Tax on( Rs.

= Rs. 10,00,000

= Rs.

Penalty for under reporting = 50% of Rs.

= Rs.

+ Rs. )

Illustration 5:

Mr. P filed his return of income. His details are as under:

Returned Income under section 139(1) = 10,00,000

Assessment under section 143(3) = 15,00,000

Reassessment under section 147 = 32,00,000

Additions of Rs. 5,00,000 under section 147 are on the basis of disallowance of an expense in

some other case by Supreme Court. The assessee had claimed the deduction of Rs. 5,00,000

on basis of High Court judgment where in High Court has allowed the deduction. The

Assessing Officer is satisfied under section 270A(6)(a) that assessee's explanation is bonafide

and assessee has disclosed all material facts to substantiate the explanation. Addition of Rs.

5,00,000 shall not be treated as under-reported income.

Solution:

Chargeability of section 270A: Assessee has under-reported the income as Income

reassessed > Income assessed in preceding assessment


23.11

Under-reported Income = Rs. 32,00,000 - Rs. 15,00,000 = Rs. 17,00,000

However as per section 270A(6)(a) under-reported income shall be Rs. 17,00,000 - Rs.

5,00,000 = Rs.12,00,000

Tax on under-reported Income = Tax on (Rs. + Rs. ) - tax on Rs.

= Rs.

= Rs.


- Rs.

Illustration 6:

Return of income filed by the assessee company is as under:

Total Income as per Income tax Act Rs. 80,00,000

Book profits as per section 115JB Rs. 2,00,00,000

Income determined under section 143(1)(a) as per normal provision is Rs. 80,00,000 and

book profit is Rs. 2,00,00,000.

Solution:

Assessing Officer has assessed total income under section 143(3) under general provisions

Rs. 1,10,00,000 and assessed book profits at Rs. 2,10,00,000. Presume that addition of Rs.

30,00,000 made to the total income under general provisions and Rs. 10,00,000 additions

made to book profits are on different account. Under-reported income shall be:

(A-B) + (C-D)

A = Total income assessed by A.O. under general provisions of I.T. Act. = Rs. 1,10,00,000

é B = ê

Total income assessed by A.O. ù – Under-reported Incomeú

ëunder general provisions of the I.T. û

= [1,10,00,000 - 30,00,000] = Rs. 80,00,000

C = Book profits assessed by Assessing Officer under section 115JB = Rs. 2,10,00,000

éBook profits assesseed by Assessing D = ê

ù – Under-reported Incomeú

ë Officer under section 115JB û

= Rs. 2,10,00,000 – (Rs. 10,00,000 = Rs. 2,00,00,000

Under-reported income = (Rs. 1,10,00,000 - Rs. 80,00,000) + (Rs. 2,10,00,000 - Rs.

2,00,00,000)

= Rs. 40,00,000

Tax on under-reported Income:

(i) Tax on (Rs. 80,00,000 + Rs. 30,00,000) - Tax on Rs. 80,00,000


23.12

Tax on Rs. 1,10,00,000 - Tax on Rs. 80,00,000

@30% + 7% +4% @ 30% + 4%

Rs. – Rs. = Rs.

(ii) Tax on (Rs. 10,00,000 + Rs. 2,00,00,000) - Tax on Rs. 2,00,00,000

@15%+ 7%+ 4% @15%+ 7%+ 4%

= Rs.

(iii) Tax on under-reported income = Rs.


Illustration 7:

Suppose in illustration 7, out of Rs. 30,00,000 added by Assessing Officer to total income

under normal provisions and Rs. 10,00,000 added by Assessing Officer to book profits under

section 115JB, Rs. 4,00,000 is on the same issue e.g., provisions made for unascertained

liability.

Solution:

Under-reported income shall be:

(A - B) + (C - D)

A = Rs. 1,10,00,000

B = Rs. 80,00,000

C = Rs. 2,10,00,000

D = Rs. 2,04,00,000

Under-reported Income = (Rs. 1,10,00,000 - Rs. 80,00,000) + (Rs. 2,10,00,000 - Rs.

2,04,00,000)


(i) Tax on (Rs. 80,00,000 + Rs. 30,00,000) – Tax on Rs. 80,00,000

@30% + 7% +4% @30% + 4%

= Rs.

(ii) Tax on (Rs. 6,00,000 + Rs. 2,00,00,000) - Tax on Rs. 2,00,00,000

@15% + 7% + 4% @15% + 7% + 4%

= Rs.

(iii) Tax on under-reported Income = Rs.



23.13

Illustration 8:

Returned income - Rs. 10,00,000

Returned Book profits + Rs. 2,00,00,000

Return is processed at the same amounts under section 143(1)(a).

Assessing Officer determines the income under section 143(3) as under:

Assessed income under general provision of the Income tax Act + Rs. 70,00,000

[under-reported income is = Rs. 80,00,000]

Book Profit = Rs. 2,10,00,000 (under-reported income Rs. 10,00,000)

Additions of Rs. 80,00,000 to total income under normal provisions and Rs. 10,00,000 to

profit are on different account.

Solution:

Under-reported income shall be as under:

(A - B) + (C - D)

A = Rs. 70,00,000

B = Rs. 70,00,000 - Rs. 80,00,000 = - Rs. 10,00,000

C = Rs. 2,10,00,000

D = Rs. 2,00,00,000

Under-reported Income = (A - B) + (C - D)

= [Rs. 70,00,000 - (- Rs. 10,00,000)] + [Rs. 2,10,00,000 - Rs.

2,00,00,000]

= Rs. 80,00,000 + Rs. 10,00,000

= Rs. 90,00,000


Tax on Rs. 80,00,000 @ 30% + 4% = Rs.

Tax on Rs. 2,10,00,000 - Tax on 2,00,00,000

@15%+ 7%+ 4% @15%+ 7%+ 4% = Rs.

Rs.


Illustration 9:

No return filed by assessee and Total Income assessed under section 144 = Rs. 20,00,000

Book profits under section 115JB as per section 144 = Rs. 15,00,000

A = Rs. 20,00,000


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B = Rs. 20,00,000 - Rs. 20,00,000 = NIL

C = Rs. 15,00,000

D = Rs. 15,00,000 - Rs. 15,00,000 = NIL

Solution:

Under-reported Income = (A - B) + (C - D)

= (Rs. 20,00,000 - NIL) + (Rs. 15,00,000 - NIL)

= Rs. 35,00,000


On Rs. 20,00,000 @ 31.2% = Rs.

On Rs. 15,00,000 @ 15% + 4% = Rs

Penalty @ 50% = Rs.

ANALYSIS OF SECTION 270A(4) & 270A(5) - INTANGIBLE ADDITIONS

Sometimes the Assessing Officer makes additions for purely technical reasons e.g.

application of a presumptive rate of gross profit or yield, addition on account of presumptive

disallowance of expenditure, additions on account of low drawings. These additions are

commonly referred as "INTANGIBLE ADDITIONS". Penalty for under-reporting or

misreporting of income cannot be levied on such additions.

Say for example a contractor files return of income for Assessment Year 2020-21 as under:

Receipts Rs. 10 crores

Returned Income Rs. 20 lakhs

Add: Assessing Officer under section 143(3) makes additions on account of low Gross Profit Rate (G.P. Rate) and maintains G.P. rate @20% and

makes additions of Rs. 180 lakhs

Rs. 180 lakhs

Assessed Income Rs. 200 lakhs

Rs. 180 lakhs represents intangible additions and no penalty for under-reporting or

misreporting of income shall be levied on such intangible additions.

Suppose, Assessing Officer completed the above assessment on 31.12.2021 and did not

initiate penalty for underreporting of income.

The assessee on 10.2.2022 is found to be in possession of unaccounted cash of Rs. 180 lakhs.

The assessee explains that the cash of Rs. 180 lakhs represents the intangible additions made

by Assessing Officer in Assessment Year 2020-21.

The Supreme Court held in Anantharam Veera Singhaiah & Co. that these intangible

additions represent the real income of the assessee and can be used in subsequent assessment


23.15

years for explaining the unexplained investments, unexplained cash credits and unexplained

assets. The assessee can take a plea that the unexplained investments, unexplained cash

credits and unexplained assets have been acquired out of the intangible additions and the

departments shall have to accept his plea.

In this case although the assessee is admitting underreporting of income in Assessment Year

2020-21 but penalty for underreporting cannot be levied because the penalty has not been

initiated before the completion of assessment of Assessment Year 2020-21.

The objective of introducing 270A(4) and 270A(5) is to levy penalty for underreporting of

income in such case. Section 270A(4) and 270A(5) affirms the Supreme Court judgement

that an assessee can explain unexplained investments etc. out of intangible additions made in

the past assessment years. However, the said section provides that the intangible

additions so used in explaining the unexplained investments etc. shall be deemed as

underreported income on which penalty for under-reporting or misreporting of income

shall be levied.

Illustration 1:

The Assessing Officer finds unexplained investments of Rs. 10 lakhs in Assessment Year

2020-21 and the assessee explains that the said investments have been made out of the

intangible additions made in the past. The following data is given to you:

Assessment Year Additions made on which concealment penalty has not

been levied i.e. the intangible additions

2008-09 10,00,000

2009-10 1,00,000

2010-11 NIL

2011-12 5,00,000

2012-13 2,00,000

2013-14 NIL

2014-15 NIL

2015-16 1,00,000

2016-17 NIL

2017-18 NIL

Can the assessee explain the unexplained investments out of the above intangible additions?

What is the consequence if he can do so?

Answer:

By virtue of the Supreme Court's decision in Anantharam Veerasinghaiah & Co., the

assessee can explain the investments of Rs. 10 lakhs in Assessment Year 2020-21 out of the

intangible additions made in the past assessment years. But by doing so, Explanation 2 to

section 271(1)(c) [similar to section 270A(4) and 270(5)] will be attracted and Rs. 10 lakhs

will be treated as the concealed income of past assessment years in the following manner:

Assessment Year Concealed Income

2015-16 1,00,000

2012-13 2,00,000

2011-12 5,00,000

2009-10 1,00,000


23.16

2008-09 1,00,000

Total 10,00,000

Penalty for concealment of income as per the law relevant in above assessment years shall be

levied.

Illustration 2:

Suppose in Illustration 1 above, further unexplained investments of Rs. 12 lakhs are found in

assessment year 2021-22 also, can the assessee explain them out of the intangible additions

made in the past assessment years.

Answer:

The assessee can explain the investment of Rs. 9 lakhs out of the intangible additions made in

Assessment Year 2008-09. As per section Explanation 2 to section 271(1)(c) [similar to

section 270A(4) and 270(5)], Rs. 9 lakhs shall be deemed as concealed income of Assessment

Year 2008-09 for which penalty proceedings can be initiated at any time. Rs. 3 lakhs is the

misreported income of Assessment Year 2021-22, on which the assessee shall pay:

(a) tax,

(b) interest under section 234A/ 234B/ 234C, and

(c) penalty for misreporting of income under section 270A @200%

ANALYSIS OF SECTION 270A(6) - CERTAIN ADDITIONS/DISALLOWANCES NOT

REGARDED AS UNDER-REPORTED INCOME OR MISREPORTED INCOME

Section 270A(6) provides that the following shall not be treated as under-reported income/

mis-reported income and therefore no penalty under section 270A shall be levied.

1. BONAFIDE EXPLANATION [CLAUSE (a)]

It provides:

• Under-reported income shall not include amount of income for which the

assessee offers an explanation:

• The specified authority is satisfied about the explanation that it is bona fide; and

• The assessee has disclosed all the material facts to substantiate the explanation.

There is possible where disallowance/addition in made by the Revenue Authorities but

assessee proves that he has claimed the deduction/ exemption on the basis of a High

Court Judgment.

2. UNDER-REPORTED INCOME ESTIMATED, WHERE ACCOUNTS

CORRECT AND COMPLETE [CLAUSE (b)]

It provides that where:

• amount of under-reported income is estimated,

• the accounts are correct and complete to the satisfaction of the specified

authority, and

• the method employed does not enable proper determination of income,


23.17

This is possible where additions are made based on estimation of gross profit, as against

the declared profits, without rejecting the books of account and/or without finding that

the audited financial statements of the assessee are not true and correct. In such a case,

the difference attributable to estimated amount of gross profit shall be excluded from

the underreported income.

3. ENHANCEMENT OF THE ESTIMATE OF THE ASSESSEE RESULTING IN

UNDERREPORTING OF INCOME [CLAUSE (c)]

It contemplates a situation where:

• an assessee estimated an amount in respect of a claim or disallowance;

• such claim is reduced or disallowance is increased in the assessment;

• such difference in the estimate shall not be considered as amount of income

underreported; and

• the assessee has disclosed all the facts material to the addition or disallowance.

Such a case can arise where, to illustrate personal expenditure is estimated at a certain

amount in respect of travel or conveyance or the like expenditure and accordingly

disallowed in computing the returned income, which is accepted in the intimation. In

the assessment, the disallowance is increased or deduction decreased. The incremental

disallowance or reduction shall not be treated as underreported income provided all the

facts necessary in relation to the same are disclosed.

4. UNDER-REPORTED INCOME REPRESENTED BY TRANSFER PRICING

ADJUSTMENT [CLAUSE (d)]

It contemplates a situation where:

• Addition is made to the total income returned on account of adjustment in arm's

length price determined by the Transfer Pricing Officer;

• the assessee has maintained information and documents prescribed under section

92D of the Act;

• the assessee has declared the international transaction in Transfer Pricing Audit

Report

• the assessee has disclosed all the material facts relating to the transaction, in such

a case, the addition will not be regarded as under-reported income.

5. UNDISCLOSED INCOME [CLAUSE (e)]

In respect of undisclosed income found in case of search & seizure, in the Act, there is

a separate provision for levy of penalty, namely, section 271AAB. The undisclosed

income referred in the said provision should be excluded from the amount of under-

reported income.

ANALYSIS OF SECTION 270A(8) & 270A(9)

200% of amount of tax on under-reported income shall be the penalty where under-reported

income is in consequence of misreporting of income.

The following cases are the cases of misreporting of income:


23.18

(a) Misrepresentation or suppression of facts

i. Cash deposits made and source of income not disclosed. It amounts to

misrepresentation or suppression of facts.

ii. STCG shown as LTCG to claim lower rate of tax.

iii. Capital gains claimed exempt although they are not exempt.

iv. Deduction under section 43B claimed by declaring the amount has been paid by

due date although amount paid after due date.

(b) Failure to record investments in the books of account

Assessing Officer discovers unexplained investment e.g. immovable property, FDR,

Jewellery etc. which are not there in books of account.

(c) Claim of expenditure not substantiated by any evidence

- Bogus bills of expenditure.

- Claim of expenditure without Bills.

(d) Recording of any false entry in the books of account

- Cash deposits made and declared to be current year income

- Bogus expenditure

- Income received shown as advances

- Loans given shown as expenses.

(e) Failure to record any receipt in books of account having a bearing on total income

Sales not accounted.

(f) Failure to report any international transaction or any transaction deemed to be an

international transaction or any specified domestic transaction to which the provisions

of Transfer Pricing apply.

ANALYSIS OF SECTION 270A(11)

Suppose unexplained investments are found in Assessment Year 2020-21 of Rs. 1 crore. The

said investments are not recorded in books of account. The Assessing Officer levies penalty

@ 200% under section 270A for Assessment Year 2020-21 on additions made on account of

unexplained investment.

Now assessee records these investments in books of account in Assessment Year 2021-22.

Now no penalty under section 270AA shall be levied in Assessment Year 2021-22 as per

section 270A(11).

(1) An assessee may make an application to the Assessing Officer to grant immunity from

imposition of penalty under section 270A and initiation of proceedings under section

276C or section 276CC, if he fulfils the following conditions, namely: —

(a) the tax and interest payable as per the order of assessment or reassessment under

sub-section (3) of section 143 or section 147, as the case may be, has been paid

within the period specified in such notice of demand; and

SECTION 270AA: IMMUNITY FROM IMPOSITION OF PENALTY, ETC.

(INSERTED BY FINANCE ACT, 2016)


23.19

(b) no appeal against the order referred to in clause (a) has been filed.

(2) An application referred to in sub-section (1) shall be made within one month from the

end of the month in which the order referred to in clause (a) of sub-section (1) has been

received and shall be made in such form and verified in such manner as may be

prescribed.

(3) The Assessing Officer shall, subject to fulfilment of the conditions specified in sub-

section (1) and after the expiry of the period of filing the appeal as specified in clause

(b) of sub-section (2) of section 249, grant immunity from imposition of penalty under

section 270A and initiation of proceedings under section 276C or section 286CC, where

the proceedings for penalty under section 270A has not been initiated under the

circumstances referred to in sub-section (9) of the said section 270A.

(4) The Assessing Officer shall, within a period of one month from the end of the month in

which the application under sub-section (1) is received, pass an order accepting or

rejecting such application:

Provided that no order rejecting the application shall be passed unless the assessee has

been given an opportunity of being heard.

(5) The order made under sub-section (4) shall be final.

(6) No appeal under section 246A or an application for revision under section 264 shall be

admissible against the order of assessment or reassessment, referred to in clause (a) of

sub-section (1), in a case where an order under sub-section (4) has been made accepting

the application.

ANALYSIS OF SECTION 270AA

For Assessment Year 2020-21, the Assessing Officer passes assessment order under section

143(3) on 01.01.2021. Notice of demand under section 156 and assessment order under

section 143(3) is served on the assessee on 01.01.2021. The Assessing Offer also initiates

penalty proceeding under section 270A on 01.01.2021. A demand of Rs. 15,00,000 (Rs.

12,00,000 Tax and Rs. 3,00,000 interest) has been created on the assessee.

Now assessee can make an application to Assessing Officer to grant immunity from

imposition of penalty under section 270A and initiation of prosecution proceeding under

section 276C and under section 276CC if:

• Assessee pays the demand of Rs. 15,00,000 (Tax plus interest) by 31.01.2021.

• Assessee does not file an appeal to CIT(A) against the order under section 143(3).

• Assessee makes application as aforesaid on or before 29.02.2021.

Assessing Officer shall by 31.03.2021 make an order of acceptance or rejection of application

made under section 270AA.

Key Notes:

1. The order of rejection passed under section 270AA is final and no appeal/revision is

possible against such order.


23.20

2. Where application of the assessee has been admitted, i.e. he gets immunity from

penalty and prosecution, then assessee cannot file an appeal/revision application under

section 264 against the order of assessment/reassessment.

3. Suppose the assessee made application on 29.02.2021 and the application of the

assessee is rejected by an order under section 270AA, dated 31.03.2021 and the said

order is received by the assessee on 02.04.2021. Now as per amendment by Finance

Act, 2016 in section 249, the period beginning from date of application i.e. 29.02.2021

to the date on which rejection order under section 270AA is received by the assessee

i.e. 02.04.2021, shall be excluded from the period of limitation for filing appeal to

CIT(Appeals). Therefore, appeal can be filed to CIT(Appeals) by 31.01.2021 +

(29.02.21 to 02.04.2021) 34 days. = 5th March, 2021. This is an ERROR IN LAW.

4. The Assessing Officer cannot grant immunity from penalties and prosecution under

section 270AA where penalty proceedings have been initiated on account of

misreporting of income i.e. on account of following namely:

(a) misrepresentation or suppression of facts;

(b) failure to record investments in the books of account;

(c) claim of expenditure not substantiated by any evidence;

(d) recording of any false entry in the books of account;

(e) failure to record any receipt in books of account having a bearing on total income;

or

(f) failure to report any international transaction or any transaction deemed to be an

international transaction or any specified domestic transaction to which the

provisions of Chapter of Transfer Pricing apply.

SECTION 271AAB

(1) The Assessing Officer may, notwithstanding anything contained in any other

provisions of this Act, direct that, in a case where search has been initiated under

section 132, the assessee shall pay by way of penalty, in addition to tax, if any,

payable by him,—

(a) a sum computed at the rate of 30% of the undisclosed income of the specified

previous year, if such assessee—

(i) in the course of the search, in a statement under sub-section (4) of

section 132, admits the undisclosed income and specifies the manner in

which such income has been derived;

(ii) substantiates the manner in which the undisclosed income was derived;

and

(iii) on or before the specified date—

(A) pays the tax, together with interest, if any, in respect of the

undisclosed income; and

NEW LAW OF PENALTY FOR CONCEALMENT OF INCOME IN CASE OF

SEARCH & SEIZURE (AS INTRODUCED BY FINANCE ACT 2012)


23.21

(B) furnishes the return of income for the specified previous year

declaring such undisclosed income therein;

(b) a sum computed at the rate of 60% of the undisclosed income of the specified

previous year, if it is not covered by clauses (a) above.

(2) No penalty under the provisions of section 270A or 271(1)(c) shall be imposed

upon the assessee in respect of the undisclosed income referred to in sub-section

(1).

(3) The provisions of sections 274 and 275 shall, as far as may be, apply in relation to

the penalty referred to in this section.

Explanation.—For the purposes of this section,—

(a) "specified date" means the due date of furnishing of return of income under

section 139(1) or the date on which the period specified in the notice issued under

section 153A for furnishing of return of income expires, as the case may be;

(b) "specified previous year" means the previous year—

(i) which has ended before the date of search, but the date of furnishing the

return of income under sub-section (1) of section 139 for such year has not

expired before the date of search and the assessee has not furnished the

return of income for the previous year before the date of search; or

(ii) in which search was conducted;

(c) "undisclosed income" means—

(i) any income of the specified previous year represented, either wholly or

partly, by any money, bullion, jewellery or other valuable article or thing or

any entry in the books of account or other documents or transactions found

in the course of a search under section 132, which has—

(A) not been recorded on or before the date of search in the books of

account or other documents maintained in the normal course relating

to such previous year; or

(B) otherwise not been disclosed to the Commissioner before the date of

search; or

(ii) any income of the specified previous year represented, either wholly or

partly, by any entry in respect of an expense recorded in the books of

account or other documents maintained in the normal course relating to the

specified previous year which is found to be false and would not have been

found to be so had the search not been conducted.


23.22

ANALYSIS OF SECTION 271AAB

Search is conducted on 2nd August, 2019. Cash of Rs. 3 crores and jewellery of Rs. 4 crores

are seized. The due date of filing of return is 30th September of the Assessment year and the

Assessing Officer issued notice under section 153A on 4th August, 2019 to file the returns of

income under section 153A for Assessment Year 2014-15 to Assessment year 2019-20 on

before 5th September, 2019. Assessee has not filed the return of income for Assessment Year

2019-20 upto 1st August, 2019.

1. Now ''Specified Previous year" means:

(i) Previous year 31.03.2019 i.e. the previous year which has ended before the date

of search but the due date of furnishing the return of Income under section 139(1)

for such year has not expired before the date of search and the assessee has not

furnished the return of income for the said previous year before the date of

search.

(ii) Previous year 31.03.2020 i.e. the previous year in which search is conducted.

2. Now "Specified Date" means:

(i) For previous year 31.03.2019 i.e. Assessment Year 2019-20 è 5th September,

2019, i.e. the date on which the period specified in the notice issued under section

153A for furnishing the return of income expires.

(ii) For previous year 31.03.2020 i.e., Assessment Year 2020-21 è 30th

September, 2020 i.e. the due date of furnishing the Return of Income under

section 139(1).

3. Let us say that out of cash of Rs. 3 crores & Jewellery of Rs. 4 crores seized, cash of

Rs. 75 lakh and jewellery of Rs. 1.20 crores was recorded in regular books of account

of previous year 31.03.2019 and/ or previous year 31.03.2020 on or before 02.08.2019 .

Then, cash of Rs. 75 lakhs and jewellery of Rs. 1.20 crores shall not be treated as

undisclosed income of previous year 31.03.2019 and / or 31.03.2020 and no penalty of

concealment under section 271AAB or under section 270A shall be levied.

4. Regarding remaining cash of Rs. 2.25 crores and jewellery of Rs. 2.80 crores(which is

not recorded in regular books of account before 2.8.2019 of Previous Year 31.3.2019

and/ or 31.3.2020), if the assessee proves that cash of Rs. 2.25 crores and jewellery of

Rs. 2.80 crores is but of the income of previous year 31.3.2019 and/ or previous year

31.03.2020 in the following manners:

- He makes statement under section 132(4) in the course of search and admits the

undisclosed income of Rs. 2.25 crores and Rs. 2.80 crores and specifies the

manner in which such income has been derived.

- And proves the manner in which undisclosed income has been derived.

- And pays tax and interest in respect of undisclosed income of previous year

31.03.2019 on or before 5.9.2019 and of previous year 31.3.2020 on or before

30.09.2020.


23.23

then penalty of 30% on Rs. 5.05 crores i.e., Rs. 1,51,50000 shall be levied under

section 271AAB. This is in addition to income tax and interest on the said income.

Penalty under section 270A shall not be levied.

5. If assessee is not able to admit the concealed income and substantiate it in the statement

given under section 132(4) but assessee declares such income in the return of previous

year 31.03.2019 and / or previous year 31.03.2020, then there shall be a penalty of 60%

of Rs. 5.05 crores i.e. of Rs. 3.30 crores. This is in addition to income tax and interest

on the said income. Penalty under section 270A shall not be levied.

6. If assessee does not admit / disclose the income in manner given in para 4 and 5 above

and A.O. assesses the above income in previous year 31.03.2019 / 31.03.2020, then

assessee shall pay penalty of 60% of undisclosed income. Penalty under section 270A

shall not be levied.

(1) No order imposing a penalty shall be made unless the assessee has been heard, or has

been given a reasonable opportunity of being heard.

(2) No order imposing a penalty shall be made -

(a) by the Income-tax Officer, where the penalty exceeds Rs. 10,000;

(b) by the Assistant Commissioner/ Deputy Commissioner where the penalty exceeds

Rs. 20,000;

except with the prior approval of the Joint Commissioner.


PENALTY ON PROFESSIONALS FOR FURNISHING INCORRECT

INFORMATION IN STATUTORY REPORT OR CERTIFICATE [SEC. 271 J]

In order to ensure that the person furnishing report or certificate undertakes due diligence

before making such certification, section 271J has been inserted (with effect from April 1,

2017). This section provides that if a chartered accountant or a merchant banker or a

registered valuer, furnishes incorrect information in a report or certificate under any

provisions of the Act (or the rules made thereunder), the Assessing Officer or the

Commissioner (Appeals) may direct him to pay a sum of Rs. 10,000 for each such report or

certificate by way of penalty. If, however, the concerned person proves that there was

reasonable cause for the aforesaid failure, referred to above, then penalty shall not be

imposable under section 271J.

SECTION 274: PROCEDURE FOR IMPOSITION OF PENALTY


23.24

1. Section 273A(1): Notwithstanding anything contained in this Act, the Commissioner

may, in his discretion, reduce or waive the amount of penalty imposed or imposable

under section 271(1)(c) or 270A of the Act.

2. Section 273A(1): This power can be exercised by the Commissioner on his own motion

or on an application made by the assessee.

3. Section 273A(1): The Commissioner shall exercise this power if he is satisfied that

(a) the assessee has cooperated in any enquiry relating to the assessment of his

income and

(b) the assessee has either paid or made satisfactory arrangements for the payment of

tax and interest payable in respect of the relevant assessment year/years and

(c) the assessee has prior to detection by the Assessing Officer, of the concealment of

particulars of income or of the inaccuracy of particulars furnished in respect of

such income, voluntarily and in good faith, made full and true disclosure of such

particulars.

ANALYSIS OF SECTION 273A(1)

The objective of introducing section 273A(1) is to encourage voluntary disclosure of

undisclosed incomes. The intent of section 273A(1) is to encourage those taxpayers to

disclose the undisclosed income where they have not been caught by the department and

wants to become honest. Section 273A affords an opportunity to such assessees to declare

their incomes and avail waiver of penalties for concealment from the CIT.

Ilustration:

It after demonetization of currency, assessee deposits cash currency (Rs. 500 / Rs. 1000) in

bank account from 9.11.2016 to 30.12.2016 say Rs. 10 crores and voluntarily discloses this

income in his return of income of Previous Year 31/3/2017, then penalty for misreporting of

income under section 270A amounting to 200% of tax on 10 crores shall be levied. This is

because he has misreported or suppressed the facts of income of Rs. 10 crores and he is not

able to explain satisfactorily the source of Rs. 10 crores. Assessee cannot seek waiver under

section 273A(1) because disclosure is NOT VOLUNTARY AND IN GOOD FAITH.

He has no alternative but to deposit the money in bank account consequent to demonetisation.

Assessee also cannot seek waiver under section 273A(4) since he has enough money to pay

tax and penalty and no genuine hardships arise to him on payment of penalty.

4. Section 273A(2): No order reducing or waiving the penalty under section 273A(1)

shall be made by the Commissioner without the approval of Chief Commissioner or

Director General, as the case may be, in a case where the amount of income in respect

of which penalty is imposed or imposable for the relevant assessment year, or, where

such disclosure relates to more than one assessment year, the aggregate amount of such

income for those years, exceeds Rs. 5,00,000

SECTION 273A: POWER TO REDUCE OR WAIVE PENALTY IN CERTAIN CASES


23.25

5. Section 273A(3): Where an order has been made under section 273A(1) in favour of

any person, whether such order relates to one or more assessment years, he shall not be

entitled to any relief under this section in relation to any other assessment year at any

time after making of such order. In other words, the order under section 273A(1) can be

made in the favour of the assessee once in his life time.

6. Section 273A(4): The Commissioner may, on an application made by the assessee and

after recording his reasons for doing so, reduce or waive the amount of any penalty

payable by the assessee under the Act if he is satisfied that:

(a) to do otherwise would cause genuine hardship to the assessee, having regard to

the circumstances of the case and

(b) the assessee has cooperated in any enquiry relating to assessment or any

proceeding for the recovery of any amount due from him.

NOTE: Where the amount of any penalty or where the application relates to more than

one penalty, the aggregate amount of such penalties exceed Rs. 1 lakh, no

order under section 273A(4) shall be passed by the Commissioner without the

prior approval of Chief Commissioner or Director General, as the case may be.

7. Section 273A(4A): The order under sub-section (4), either accepting or rejecting

the application in full or in part, shall be passed within a period of 12 months from

the end of the month in which the application under the said sub-section is

received by the Commissioner.

Provided that no order rejecting the application, either in full or in part, shall be

passed unless the assessee has been given an opportunity of being heard.


8. The order under section 273A is a final order and no appeal is possible against such

order.

IMPORTANT KEY NOTES ON SECTION 273A:

1. Anwar Ali: The power conferred on the Commissioner under section 273A is a quasi-

judicial power. It should be exercised judiciously and not arbitrarily. The order under

section 273A should be a "Speaking Order", i.e., it should state the reasons as to why

the relief has not been granted to the assessee or why it has been restricted to a

specified percentage as against the claim of the assessee for 100% waiver. An order

which is not a speaking order is void ab-initio.

2. There is no time limit for passing an order under section 273A(1). However Finance

Act, 2016 prescribes time limit of 12 months for passing order under section 273A(4).

3. Application under section 273A can be made for a number of Assessment Years.


23.26

4. If penalty has been paid by the assessee, then also the CIT can waive/ reduce the

penalty under section 273A and in such a case, the penalty shall be refunded to the

assessee.

5. If income is detected in a raid, i.e. search and seizure, then, benefit under section 273A

is not applicable.

6. If conditions referred to in 273A are satisfied then the CIT is duty bound to grant

the relief under section 273A.

7. Where the applications for waiver under section 273A were made on different dates for

different Assessment Years by the assessee, then the CIT must consider all the

applications together and pass an order under section 273A in respect of all the

applications. The CIT will not be justified in considering the first application only and

rejecting the subsequent applications.

8. CIT under section 273A cannot waive or reduce interest under sections 234A, 234B

and 234C.

9. Section 279(1A) provides that the prosecution proceedings shall be dropped for an

assessment year in respect of which penalty under section 271(1)(c) has been

reduced or waived by an order passed by the CIT under section 273A.

10. The order under section 273A is a final order and no appeal is possible against it.

However, the assessee can challenge the order passed under section 273A in the High

Court through a WRIT PETITION. Thereafter, a SPECIAL LEAVE PETITION can be

filed to the Supreme Court. If the CIT has not acted in accordance with the law, the

Courts will quash the order passed under section 273A and direct the CIT to make an

order under section 273A in accordance with the law.

11. CBDT Circular: "Genuine Hardships" referred to in section 273A(4) should exist

at the time at which the application is made by the assessee and should also exist

even at the time of passing of an order under section 273A(4) by the CIT.

COMPARISON BETWEEN SECTION 273A(1) AND SECTION 273A(4)

S. No. Section 273A(1) S. No. Section 273A(4)

1. CIT can waive/ educe penalty under

section 271(1)(c) or 270A

1. CIT can waive/ reduce any penalty

including penalty under section

271(1)(c) or 270A.

2. CIT can act suo-moto or an

application made by the assessee.

2. CIT can act on an application made by

the assessee.

3. Approval of Chief CIT or Director General required if the concealed

Income exceeds Rs. 5 Lakhs.

3. Approval of Chief CIT or Director General required if penalties exceed

Rs. 1 Lakh.

4. Condition to be fulfilled

- Cooperation

4. Condition to be fulfilled

- Genuine hardships


23.27

- Payment

- True & Full disclosure

- Cooperation

5. Penalty if paid shall be refunded on

waiver.

5. No waiver possible if penalty has been

paid.

6. No time limit for passing order

under section 273A(1).

6. Order under section 273A(4) has to be

passed within 12 months from the end

of the month in which application is

received by CIT.

Disclaimer:

This is just for reference purpose of students. By far you would have realized that. It is

practically impossible to remember so many things for exam. On this note we are

concluding that following penalties cannot be by hearted. Further it is pertinent to note

that such individual meagre penalties are not tested by ICAI in exams regularly.

Section Nature of default Penalty leviable

1 2 3

140A(3) Failure to pay wholly or partly

(a) Self-assessment tax, or

(b) interest, or

(c) both

under section 140A(l).

Such amount as Assessing Officer may

impose but not exceeding tax and interest

in arrears. [Penalty under section 221(1)

for being an assessee in default].

221(1) Default in making payment of tax or

interest or any demand.

Such amount as Assessing Officer may

impose but not exceeding amount of

demand in arrears [Penalty under section

221(1) for being an assessee in default].

271(1)(c) Concealment of particulars of

income or furnishing of inaccurate

particulars of income. (upto

Assessment Year 2016 – 17)

Minimum: 100% of tax sought to be

evaded.

Maximum: 300% of tax sought to be

evaded.

270A

(Finance

Act, 2016)

- Under Reporting of income

- Misreporting of income

(From Assessment Year 2017-18)

50% of tax on under – reported income

200% of tax on misreported income

271A Failure to keep, maintain, or retain

books of account, documents, etc., as

required by section 44AA or failure

to retain such books of accounts or

documents for the period specified in

section 44AA.

Rs. 25,000

271AA (1) In respect of international

transaction or specified

domestic transaction:

(i) Failure to keep and maintain

any such information and

document as required by

section 92D(1) or section

2% of the value of each international

transaction or specified domestic

transaction entered into by such person

PENALTIES


23.28

92D(2).

(ii) Failure to report such

transaction which he is

required to do so.

(iii) Maintains or furnishes an

incorrect information or

document.

(2) If any person fails to furnish

the information and the

document as required under

section 92D(4).


Rs. 5,00,000

271AAB Undisclosed income of the previous

year in which search has been

initiated or previous year whose due

date of filing of ROI has not expired

before the date of search.

30% of the undisclosed income

60% of the undisclosed income

271B Failure to get accounts audited or

furnish a report of audit as required

under section 44AB.

½ % of total sales, turnover, or gross

receipts, etc., or Rs. 1,50,000, whichever

is less.

271BA Failure to furnish a report from an

accountant as required by section

92E

Rs. 1,00,000

271C - Failure to deduct the whole or

part of tax deducted at source

tax at source (TDS)

- Failure to pay the whole or part

of Corporate Dividend Tax

under section 115-O.

- Failure to pay the whole or part

of tax on winnings from

lotteries, crossword puzzles

etc. where such winnings are

wholly or partly in kind under

second proviso to section

194B.

Amount equal to tax not deducted or

paid.

271CA Failure to collect the whole or any

part of the tax as required by or

under the provisions of Section

206C.

Amount of tax, which such person failed

to collect.

271D Taking or accepting certain loans and

deposits or specified sum in

contravention of the provisions to

section 269SS.

Amount equal to loan or deposit or

specified sum taken or accepted.

271E Repaying any loan or deposit or

specified advance specified in

section 269T in contravention of its

Amount equal to loan or deposit or

specified advance repaid.


23.29

provisions.

271FA Failure to furnish Statement of

Financial Transaction or Reportable

Account (SFTRA) [Earlier known as

Annual Information Return] as

required under section 285BA within

the time prescribed under section

285BA.

Rs. 500 per day for everyday during

which the failure continues. Rs. 1,000/-

per day from the date assessee was

asked to file SFTRA by a notice under

section 285BA(5).

271FAB

(Added by

Finance

Act, 2015)

Failure to furnish statement or

information or document by an

eligible investment fund within the

time prescribed under section 9A

Rs. 5,00,000

271G Failure to furnish information or

documents in pursuance of a notice

under section 92D(3).

2% of the value of the international

transaction or specified domestic

transactions for each such failure.

271H

(Added by

Finance

Act, 2012)

(i) Failure to deliver the quarterly

returns of TDS / TCS within

the time prescribed

(ii) Furnishing incorrect

information in the quarterly

returns of TDS/TCS

Penalty minimum Rs. 10,000 and

maximum upto Rs. 1,00,000.

Note: No penalty for failure to deliver

quarterly returns of TDS/TCS in time, if

quarterly return submitted before the

expiry of one year from time prescribed

and Fees under section 234E and interest

under section 201(1A) paid.

271-I

(Added by

Finance

Act, 2015)

Failure to furnish information or

furnishing inaccurate information

under section 195(6)

Rs. 1,00,000

272A(1) (a) Refusal to answer any question

put to by an Income tax

Authority.

(b) Refusal to sign any statement

made in the course of

proceedings under the Act.

(c) Failure to attend or produce

books of account or documents

required under a summon

issued under section 131.

(d) Failure to comply with a

notice under section 142(1)

or section 143(2) or failure to

comply with a direction

issued under section 142(2A)

Rs. 10,000 for each failure or default.

272A(2) (a) Failure to give notice of

discontinuance of business or

profession u/s 176

(b) Failure to furnish in due time

the information required under

Rs. 100 for every day during which the

failure continues. However, in respect of

penalty for failures in relation to

declaration mentioned in section 197A,

furnishing of TDS/TCS certificate,


23.30

section 133.

(c) Failure to furnish the return of

income under section 139(4A)

or under section 139(4C) or to

furnish within the time allowed

therein.

(d) Failure to deliver in due time a

copy of declaration in section

197A.

(e) Failure to furnish TDS or TCS

certificate.

(f) Failure to deliver or cause to be

delivered a statement within

the time as may be prescribed

under section 200(2A) or

section 206C(3A)

returns under section 206 and 206C and

200(3) and 206C(3A), the penalty shall

not exceed amount of TDS/TCS.

272AA Failure to comply with section 133B Not exceeding Rs. 1,000

272B(1) Failure to comply with the

provisions section 139A. i.e. PAN Rs. 10,000

272B(2) (a) Failure to quote permanent

account required; or

(b) Failure to intimate such

number as required; or

(c) To quote or intimate a number

which is false and which he

either knows or believes to be

false or does not believe to be

true.

Rs. 10,000

272BB(1) Failure to comply with section 203A

i.e. Failure to:

(i) Failure to obtain Tax

Deduction and collection

Account Number (TDCAN).

(ii) Failure to quote TDCAN in the

challans, certificates, returns of

TDS and TCS and prescribed

documents.

Rs. 10,000 for each failure / default.

272BB(1A) If a person is required to quote "tax

deduction account number" or, as the

case may be, "tax collection account

number" or "tax deduction and

collection account number", quotes a

number which is false, and which he

either knows or believes to be false

or does not believe to be true.

Rs. 10,000 for failure/ default


23.31

Where any sum is found credited in the books of the assessee maintained for any previous

year, and the assessee offers no explanation about the nature and source thereof, or the

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

sum so credited may be charged to tax as the income of that previous year (i.e., the previous

year in the books of which such sum is first credited).

The following provisos shall be inserted in section 68 by the Finance Act, 2012;

Provided that where the assessee is a company, (not being a company in which the public are

substantially interested) and the sum so credited consists of share application money, share

capital, share premium or any such amount by whatever name called, any explanation offered

by such assessee-company shall be deemed to be not satisfactory, unless—

(a) the person, being a resident in whose name such credit is recorded in the books of

such company also offers an explanation about the nature and source of such sum so

credited; and

(b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be

satisfactory:

Provided further that nothing contained in the first proviso shall apply if the person, in whose

name the sum referred to therein is recorded, is a venture capital fund or a venture capital

company as referred to in section 10(23FB).

Where in the previous year relevant to the assessment year, the assessee has made

investments which are not recorded in the books of account, if any, maintained by him, and

the assessee offers no explanation about the nature and source of the investments or the


value of investments may be deemed to be the income of such previous year (i.e., the

previous year in which investments are made).

Where in any previous year, the assessee is found to be the owner of any money, bullion,

jewellery or other valuable article and such money, bullion, jewellery or other article is not

recorded in the books of account, if any, maintained by him, and the assessee offers no

explanation about the nature and source of acquisition of such assets or the explanation

offered by him is not satisfactory, in the opinion of the Assessing Officer, then the money and

the value of the bullion, jewellery or other valuable article may be deemed to be the income

of the assessee of such previous year (i.e., the previous year in which he is found the owner).

Where in any previous year, the assessee has made investments or is found to be the owner of

any bullion, jewellery or other valuable article, and the Assessing Officer finds that the

amount expended on making such investments or in acquiring such bullion, jewellery or other

valuable article exceeds the amount recorded in this behalf in the books of account

maintained by him, and the assessee offers no explanation about such excess amount or the

SECTION 68: CASH CREDITS

SECTION 69: UNEXPLAINED INVESTMENTS

SECTION 69A: UNEXPLAINED MONEY, ETC.

SECTION 69B: AMOUNT OF INVESTMENTS, ETC., NOT FULLY DISCLOSED

IN THE BOOKS OF ACCOUNT


23.32


excess amount may be deemed to be the income of the assessee for such previous year.

For example, Mr. X has purchased gold and amount recorded in the books is Rs. 1 lakh. But

according to the Assessing Officer, the gold has been purchased for Rs. 3 lakhs being its

market value. Then 2 lakhs will be the income of the assessee under this section of the

previous year in which gold was purchased.

Where in any previous year, an assessee has incurred any expenditure (e.g., marriage/party)

and he offers no explanation about the source of such expenditure or part thereof, or the


amount of such expenditure or part thereof, may be deemed to be the income of the assessee

of such previous year.

The Finance Act, 1998 has made the following amendment in section 69C:

"Notwithstanding anything contained in any other provision of this Act, such

unexplained expenditure which is deemed to be the income of the assessee shall not be

allowed as a deduction under any head of income."

This amendment has been made to over-rule certain judgements wherein it was held that the

unexplained expenditure not recorded in the books of account but actually incurred for

business purposes shall be allowed as deduction. The effect of these judgements was that if

an assessee incurred some business expenditure out of his black money, then such

expenditure was deemed as income under section 69C and the same was also allowable as

business expenditure and the net result was that nothing was added to the income of the

assessee. The above amendment nullifies these judgements and now such expenditure shall

be deemed as income and shall not be allowed as a deduction.

Note: The judgement of Supreme Court in SUN ENGINEERING PVT. LTD. which

provides that expenditure incurred to earn the escaped income can be allowed from

the escaped income is not applicable in this case since section 69C has been

specifically amended to provide that the unexplained expenditure which is deemed

to be the income of the assessee shall not be allowed as deduction.

Where any amount is borrowed on a hundi from a person, or any amount due thereon is

repaid to any person, otherwise than through an account payee cheque drawn on a bank, the

amount so borrowed or repaid shall be deemed to be the income of the person borrowing or

repaying the amount aforesaid. Such income shall be charged to tax in the previous year in

which the amount was borrowed or repaid, as the case may be. However, in case the amount

borrowed under this section has been deemed as income of the borrower, then the borrower

shall not be liable to be assessed again in respect of such amount under this section on re-

payment of such amount.

SECTION 69C: UNEXPLAINED EXPENDITURE

SECTION 69D: AMOUNT BORROWED OR REPAID ON HUNDI


23.33

Suppose Mr. A borrows Rs. 10,00,000 on hundi from Mr. B in cash on 1.1.2019. Rs.

10,00,000 will be deemed to be the income of Mr. A for Assessment Year 2019-20. Now, if

Mr. A repays the hundi in cash on 30.4.2019 of Rs. 10,00,000, then it shall not be again

deemed to be his income under this section.

(1) Where the total income of an assesse,-

(a) includes any income referred to in section 68,section 69, section 69A, section

69B, section 69C, or section 69D and reflected in the return of income

furnished under section 139; or

(b) determined by the Assessing Officer includes any income referred to in

section 68, section 69, section 69A, section 69B, section 69C, or section 69D,

if such income is not covered under clause (a),

the income tax payable shall be aggregate of-

(i) the amount of income tax calculated on the income referred to in clause (a)

and clause (b), at the rate of sixty per cent; and

(ii) the amount of income tax with which the assesse would have been chargeable

had his total income been reduced by the amount of income referred to in

clause (i).

(2) Notwithstanding anything contained in this Act, no deduction in respect of any

expenditure or allowance or set-off of any loss shall be allowed to the assessee under

any provision of this Act in computing his income referred to in clause (a) or (b) of sub-

section (1).

KEY NOTE:

Effective Tax Rate = 60% + 25% surcharge= 75% + 4% = 78%.

Sec 271AAC: Penalty in Other Cases:

SECTION 115BBE: TAX ON INCOME REFERRED TO IN SECTION 68 OR

SECTION 69 OR SECTION 69A OR SECTION 69B OR

SECTION 69C OR SECTION 69D (INSERTED BY FINANCE

ACT, 2012)

(1) The Assessing Officer may, notwithstanding anything contained in this Act other

than the provisions of section 271AAB, direct that, in a case where the income

determined includes any income referred to in section 68, section 69, section 69A,

section 69B, section 69C or section 69D for any previous year, the assessee shall pay by

way of penalty, in addition to tax payable under section 115BBE, a sum computed at the

rate of ten per cent of the tax payable under clause (i) of sub-section (1) of section

115BBE:

Provided that no penalty shall be levied in respect of income referred to in section 68,

section 69, section 69A, section 69B, section 69C or section 69D to the extent such

income has been included by the assessee in the return of income furnished under

section 139 and the tax in accordance with the provisions of clause (i) of sub-section (1)


23.34

– No person shall

– take or accept from any other person (herein after called "depositor"),

– any loan or deposit or any specified sum,

– otherwise than by an account payee cheque or account payee draft or by use of

electronic clearing system through a bank account or such other electronic mode as

may be prescribed, (Finance Act (No.2 ) 2019 )

– If,

(a) the amount of such loan or deposit or specified sum or the aggregate amount of such

loan, deposit and specified sum; or

(b) on the date of taking or accepting such loan or deposit or specified sum, any loan or

deposit accepted sum taken or accepted earlier by such person from the depositor is

remaining unpaid (whether repayment has fallen due or not), the amount or the

aggregate amount remaining unpaid; or

(c) the amount or the aggregate amount referred to in clause (a) together with the amount

or the aggregate amount referred to in clause (b),

is Rs. 20,000 or more.

Provided that the provisions of this section shall not apply to any loan or deposit or specified

sum taken or accepted from, or any loan or deposit or specified sum taken or accepted by, –

(a) the government

(b) any banking company, post office saving bank or cooperative bank,

(c) any corporation established by a Central, State or Provincial Act.

(d) any Government company company as defined in section 2(45) of the Companies Act,

2013;

Provided further that the provisions of this section shall not apply to any loan or deposit or

specified sum, where the person from whom the loan or deposit or specified sum is taken or

accepted and the person by whom the loan or deposit or specified sum is taken or accepted,

are both having agricultural income and neither of them has any income chargeable to tax

under this Act.

of section 115BBE has been paid on or before the end of the relevant previous year.

(2) No penalty under the provisions of section 270A shall be imposed upon the assessee

in respect of the income referred to in sub-section (1).

SECTION 269SS: MODE OF TAKING OR ACCEPTING CERTAIN LOANS,

DEPOSITS AND SPECIFIED SUM


23.35

Explanation. —For the purposes of this section, —

(i) "loan or deposit" means loan or deposit of money;

(ii) "specified sum" means any sum of money receivable, whether as advance or

otherwise, in relation to transfer of an immovable property, whether or not the transfer

takes place.

ANALYSIS

Section 269SS, as substituted, applies to cash received in relation to transfer of an immovable

property. It does not matter whether immovable property being transferred is held as capital

asset or as stock-in-trade.

The limit of Rs. 20,000 will have to be reckoned person-wise.

The provisions of this section shall not apply to any loan or deposit or specified sum where

the person from whom the loan or deposit or specified sum is taken or accepted and the

person by whom the loan or deposit or specified sum is taken or accepted are both having

agricultural income and neither of them has any income chargeable to tax under the Income

tax Act. (i.e. neither of them have any income under any head of income. Even one of them

has income of Rs. 4,00,000 from P/G/B/P, then this exception is not applicable).

For example, an agriculturist farmer A agrees to sell his land to agriculturist farmer B. A

receives cash advance of Rs. 50,00,000. Section 269SS is not attracted if both A and B do not

have any income chargeable to tax under the Income tax Act. However, section 269SS will

be attracted even if one of them has say income of Rs. 4,00,000 from Profits and Gains of

Business or Profession chargeable to tax.

Illustration:

Situations Violation

(i) Mr. A takes loan of Rs. 19,000 in cash from

Mr. B

Section 269SS not attracted

(ii) Mr. A takes loan of Rs. 20,000 in cash from

Mr. B

Section 269SS attracted. Mr. A has to pay

penalty of Rs. 20,000.

(iii) Mr. A on 1-1-2017 takes a loan of Rs.

15,000 in cash from Mr. B and a loan of

Rs. 19,000 in cash from Mr. C


(iv) Mr. A on 1-1-2017 takes a loan of Rs.

15,000 in cash from Mr. B. Mr. A repays

loan of Rs. 15,000 in cash on 10-1-2017.

Mr. A again takes a loan of Rs. 19,000 in

cash from Mr. B on 1-2-2017


(v) Mr. A on 1-1-2017 takes a loan of Rs. Section 269SS attracted. Mr. A has to pay


23.36

15,000 in cash from Mr. B. Mr. A on 10-1-

2017 takes a cash deposit of Rs. 16,000

from Mr. B.

penalty of Rs. 31,000.

(vi) Mr. A on 1-1-2017 agrees to transfer his

immovable property to Mr. B for Rs. 1

crore. Mr. A receives advance money of

Rs. 10,00,000 by cash.

Section 269SS attracted. Mr. A has to pay

penalty of Rs. 10,00,000.

THIS SHALL APPLY EVEN IF:

(a) Agreement for sale is cancelled later

on

(b) Agreement for sale is executed and

Mr. A receives the balance Rs. 90

lakhs by account payee cheque. If

Rs. 90 lakhs is paid by cash, then

also there is a violation of section 269SS and Mr. A has to further pay

penalty of Rs. 90 lakhs.

(vii) Mr. A on 1-1-2017 agrees to sell gold to

Mr. B for Rs. 1 crore and receives advance

money of Rs. 10,00,000 by cash


If a person takes or accepts any loan or deposit or specified sum in contravention of the

provisions of section 269SS, he shall be liable to pay, by way of penalty, a sum equal to the

amount of loan or deposit or specified sum taken or accepted. The penalty shall be imposed

by Joint Commissioner.

No Person including a banking company shall repay any loan or deposit made with it or

any specified advance received by it otherwise than by an account payee cheque or account

payee draft drawn in the name of the person who has made the loan or deposit or paid the

specified advance or by use of electronic clearing system through a bank account or such

other electronic mode as may be prescribed, if-

(a) the amount of the loan or deposit or specified advance together with interest payable

thereon is Rs. 20,000 or more; or

(b) the aggregate amount of the loans or deposits held by such person with the branch of a

banking company or other person, either in his own name or jointly with any other

person on the date of such repayment together with interest if any payable on such loan

or deposit is Rs. 20,000 or more. (Therefore, if assessee made a fixed deposit with the

bank for Rs. 18,000 and after one year the bank has to repay Rs. 21,000, then the bank

cannot pay such amount in cash).

SECTION 271D: PENALTY FOR FAILURE TO COMPLY WITH THE

PROVISIONS OF SECTION 269SS

SECTION 269T: MODE OF REPAYMENT OF CERTAIN LOANS OR DEPOSITS


23.37

(c) the aggregate amount of the specified advances received by such person either in his own name or jointly with any other person on the date of such repayment

together with the interest, if any, payable on such specified advances is Rs. 20,000

or more.

KEY NOTES:

1. Where the repayment is by branch of a banking company or cooperative bank, such

repayment may also be made by crediting the amount of such loan or deposit to the

savings bank account or the current account with such branch of the person to whom

such loan or deposit has to be repaid.

2. Nothing contained in section 269T shall apply to repayment of any loan or deposit

or specified sum taken or accepted from:-

(i) Government;

(ii) any banking company, post office savings bank or co-operative bank;

(iii) any corporation established by a Central, state or Provincial Act;

(iv) any Government company

3. "Loan or Deposit" means any loan or deposit of money, which is repayable after

notice or repayable after a period and, in the case of a person other than a company,

includes loan or deposit of any nature.

4. "Specified advance" means any sum of money in the nature of advance, by

whatever name called, in relation to transfer of an immovable property, whether

or not the transfer takes place.

Illustration 1:

ANALYSIS

Mr. A has taken a cash loan from B of Rs. 20,000 and repaid the same in cash. Section 269SS

and 269T are attracted. Penalty of Rs. 40,000 shall be levied.

Illustration 2:

Mr. X took the advance of Rs. 15,00,000 in cash from Mr. Y on 1-1-2017 against the flat

situated at Dwarka. However, the deal could not materialized and later on Mr. X refunded the

money to Mr. Y on 31-3-2017 by cash.

Answer:

Section 269T and section 269T attracted Mr. X has to pay penalty of Rs. 15,00,000 + Rs.

15,00,000 = Rs. 30,00,000.


23.38

Illustration 3:

Situations Violation

(i) Mr. A has received a loan of Rs. 1,00,000 on 1-

1-2017 from Mr. B by account payee

cheque. Mr. A repays in cash on 20-1-2017

the loan to Mr. B of Rs. 10,000.

Section 269T is attracted and Mr. A has

to pay penalty of Rs. 10,000.

(ii) Mr. A agrees to sell his house property to

Mr. B and receives Rs. 10,00,000 in cash as

advance money on 1-6-2016. The sale agreement is cancelled and Mr. A refunds

Rs. 10,00,000 is cash to Mr. B on 31-3-

2017.

Section 269SS and section 269T are attracted. A will have to pay penalty of

Rs. 20,00,000

(iii) A house property is registered in the name of

Mr. A and Mrs. A jointly. Both agree to sell

property to Mr. B on 1-1-2017 and receives

advance of Rs. 15,000 each in cash. Now

agreement to sell is cancelled and Mr. A

returns Rs. 15,000 by cash and Mrs. A return

Rs. 15,000 by cheque.

Section 269SS is not attracted.

However, section 269T is attracted since

the aggregate advance received by Mr. A

jointly with Mrs. A exceeds Rs. 20,000.

Since Mr. A has paid Rs. 15,000 in cash,

he shall have to pay penalty of Rs.

15,000.

If a person repays any loan or deposit or specified sum referred to in section 269T otherwise

than in accordance with the provisions of that section, he shall be liable to pay, by way of

penalty, a sum equal to the amount of the loan or deposit or specified sum so repaid. The

penalty shall be imposed by Joint Commissioner.

Whenever in respect of any proceeding under this Act, an income-tax authority ceases to

exercise jurisdiction and is succeeded by another who has and exercises jurisdiction, the

income-tax authority so succeeding may continue the proceeding from the stage at which the

proceeding was left by his predecessor.

PROVISO TO SECTION 129

Provided that the assessee concerned may demand that before the proceeding is so continued,

the previous proceeding or any part thereof be reopened or that before any order of

assessment is passed against him, he be reheard.

Illustration:

For Assessment Year 2020-21, the case of the assessee was taken up for scrutiny assessment

under section 143(3) by Assessing Officer Mr. X.

SECTION 271E: PENALTY FOR FAILURE TO COMPLY WITH THE

PROVISIONS OF SECTION 269T

SECTION 129: CHANGE OF INCUMBENT OF AN OFFICE


23.39

Mr. X during the course of assessment proceedings from 3rd July 2021 to 30th November

2021 examined the purchase & sales ledger.

The assessment is pending on 01.12.2021 and Mr. X is transferred on that date and new

Assessing Officer Mr. Y takes up the case.

Assessee does not demand rehearing. Mr. Y

re-examined purchase and sales ledger and

this re-examination is done in the period

15.12.2021 to 31.01.2022.

Assessee demands rehearing and therefore

Mr. Y re-examine the purchase and sales

ledger and this re-examination is done in the

period 15.12.2021 to 31.01.2022.

Time period for completion of assessment

under section 143(3) = 31.3.2022

Proviso to sec. 129 will apply

Time period for completion of assessment

under section 143(3) 31.3.2022 + 48 days

(15.12.2021 to 31.01.2022) = 18.04.2022.

This is as per Explanation 1 to section 153.

Disclaimer:

DO NOT READ OTHERWISE YOU WILL GO MAD

This is just for reference purpose of students. By far you would have realized that. It is

practically impossible to remember so many things for exam. On this note we are concluding

that following penalties cannot be by hearted . Further it is pertinent to note that such

individual meagre penalties are not tested by ICAI in exams.

Section Nature of offence Minimum period of

rigorous imprisonment

Maximum period of


(1) (2) (3) (4)

275A Dealing with seized assets in

contravention of the order made

under section 132(3) by the officer

conducting search

Any period up to 2

years and fine

2 years and fine

275B Failure to afford necessary facility

to the authorized officer to inspect

books of account or other

documents as required under

section 132(1)(iib)

Any period up to 2

years and fine

2 years and fine

276 Removal, concealment, transfer or

delivery of property to thwart tax

recovery

Any period up to 2

years and fine

2 years and fine

276A Failure to comply with the

provisions of section 178(1), (3) by

liquidator of a company

Any period up to 2

years. Imprisonment

shall not be less than 6

months unless special

2 years

OFFENCES AND PROSECUTIONS


23.40

and adequate reasons

are recorded in the

judgement of court.

276B Failure to pay to the Government's

treasury deducted tax at source or

tax payable under proviso to

section 194B

3 months and fine 7 years and fine

276BB Failure to pay to the credit of

Central Government tax collected

under section 206C


276C(1) Wilful attempt to evade tax penalty

or interest imposable under the Act

If amount sought to be

evaded exceeds Rs.

25,00,000: 6 months

and fine otherwise 3

months and fine.

If amount sought to be

evaded exceeds Rs.

25,00,000: 7 years and

fine otherwise 2 years

and fine.

276C(2) Wilful attempt to evade the

payment of any tax penalty or

interest.


276CC Wilful failure to file return of

income in time under section

139(1), or in response to notice

under section 142(1) or section 148

or section 153A.

If tax sought to be

evaded exceeds Rs.

25,00,000: 6 months

and fine. In any other

case: 3 months and

fine

Note: No prosecution

for failure to furnish

the return in due time


if: (i) the return is

filed before the expiry

of the assessment

year; or (ii) the tax

payable on regular

assessment, as

reduced by TDS and

advance tax does not

exceed Rs. 3000

If tax sought to be

evaded exceeds Rs.

25,00,000: 7 years and

fine. In any other case:

2 years and fine

Note: No prosecution

for failure to furnish

the return in due time


if: (i) the return is

filed before the expiry

of the assessment

year; or (ii) the tax

payable on regular

assessment, as

reduced by TDS and

advance tax does not

exceed Rs. 3000

276D Wilful failure to produce books of

account and documents under

section 142(1) or willful failure to

comply with a direction to get the

accounts audited under section

142(2A)

Any period upto 1

year and fine

1 year and fine

277 Making a false statement in

verification or delivering a false

account or statement

If tax evaded exceeds

Rs. 25,00,000: 6

months and fine:

otherwise: 3 months


Rs. 25,00,000: 7 years

and fine otherwise: 2

years and fine


.41

and fine.

278 Abetment to make a false statement

or declaration relating to any

income.


Rs. 25,00,000: 6

months and fine:

otherwise 3 months

and fine.


Rs. 25,00,000: 7 years

and fine otherwise: 2

years and fine

278A Punishment for second and

subsequent offences under section

276B, 276C(1), 276CC, 277 or 278

6 months for every

offence

7 years for every

offence.

280(1) Disclosure of particulars by public

servants in contravention of Section

138(2) (prosecution to be instituted

with the approval of Central Government)

Upto 6 months and

fine

6 months and fine

Section 276C: Prosecution for concealment or under reporting of income. It provides as

follows:

Amount of Tax Sought to be

evaded

Minimum period of


Maximum period of


If amount of tax sought to be evaded or tax on under reported

income is Rs. 25 lakh or less


If amount of tax sought to be evaded or tax on under reported

income is more than Rs. 25 lakh


1. Failure to file ROI within the time allowed in a notice under section 142(1)/ 148/ 153A

Ø PROSECUTION WILL BE THERE

2. Failure to file ROI within the time allowed under section 139(1)

Ø PROSECUTION WILL BE THERE

¯

�

SECTION 276CC: PROSECUTION IN CASE OF WILFUL FAILURE TO FILE

RETURN OF INCOME UNDER SECTION 139/148/153A OR IN

RESPONSE TO NOTICE UNDER SECTION 142(1)

EXCEPTIONS

If ROI filed before the expiry of the

relevant AY

If ROI filed after the expiry of the relevant

AY

No prosecution whatever may be the

amount of income tax payable. Tax on Income Assessed

Less: TDS/TCS xxx

Less: Advance tax xxx

Balance Rs. 3,000 or

less

NO PROSECUTION

23


23.42

Amount of Tax Sought to be

evaded

Minimum period of


Maximum period of


It amount of tax sought to be

evaded is Rs. 25 lakh or less


If amount of tax sought to be

evaded is more than Rs. 25 lakh

6 months and fine. 7 years and fine


Section 276CC provides that if a person wilfully fails to furnish in due time the return of

income which he is required to furnish, he shall be punishable with imprisonment for a term,

as specified therein, with fine.

Amendment - Proviso to section 276CC provides that a person shall not be proceeded

against under the said section for failure to furnish return if the tax payable by him on the

total income determined on regular assessment (as reduced by advance tax/TDS) does not

exceed Rs. 3,000.

This proviso has been amended (with effect from April 1, 2018) so as to provide that this

proviso will not be applicable in the case of a company.

AMENDMENT MADE BY FINANCE ACT (NO.2) 2019:

Rationalisation of the provisions of section 276CC

The existing provisions of section 276CC of the Act, inter alia, provide that prosecution

proceedings for failure to furnish returns of income against a person shall not proceeded

against, for failure to furnish the return of income in due time, if the tax payable by such

person, not being a company, on the total income determined on regular assessment does not

exceed three thousand rupees. The existing provisions do not provide for taking into account

tax collected at source and self-assessment tax for the purposes of determining the tax

liability.

Since the intent of said provision has always been to take into account pre-paid taxes, while

determining the tax payable, it is proposed to amend the said section so as to make the

legislative intention clear and to include the self-assessment tax, if any, paid before the expiry

of the assessment year, and tax collected at source for the purpose of determining tax

liability.

Further, in order to rationalise the existing threshold limit of tax payable under said section, it

is further proposed to amend the said section so as to increase the threshold of tax payable

from the existing rupees three thousand to rupees ten thousand.

These amendments will take effect from 1st April, 2020 and will, accordingly, apply in

relation to assessment year 2020-21 and subsequent assessment years.

(1) Where an offence under this Act has been committed by a company, every person who,

at the time the offence was committed, was in charge of, and was responsible to, the

company for the conduct of the business of the company as well as the company shall

be deemed to be guilty of the offence and shall be liable to be proceeded against and

punished accordingly:

SECTION 278B: OFFENCES BY COMPANIES


23.43

Provided that nothing contained in this sub-section shall render any such person liable

to any punishment if he proves that the offence was committed without his knowledge

or that he had exercised all due diligence to prevent the commission of such offence.

(2) Notwithstanding anything contained in sub-section (1), where an offence under this Act

has been committed by a company and it is proved that the offence has been committed

with the consent or connivance of, or is attributable to any neglect on the part of, any

director, manager, secretary or other officer of the company, such director, manager,

secretary or other officer shall also be deemed to be guilty of that offence and shall be

liable to be proceeded against and punished accordingly.

(3) Where an offence under this Act has been committed by a person, being a company,

and the punishment for such offence is imprisonment and fine, then, without prejudice

to the provisions contained in sub-section (1) or sub-section (2), such company shall be

punished with fine and every person, referred to in sub-section (1), or the director,

manager, secretary or other officer of the company referred to in sub-section (2), shall

be liable to be proceeded against and punished in accordance with the provisions of this

Act.

Explanation.—For the purposes of this section,—

(a) "company" means a body corporate, and includes—

(i) a firm; and

(ii) an association of persons or a body of individuals whether incorporated or not.

(b) "director", in relation to—

(i) a firm, means a partner in the firm;

(ii) any association of persons or a body of individuals, means any member

controlling the affairs thereof.

(1) Where an offence under this Act has been committed by a Hindu undivided family, the

karta thereof shall be deemed to be guilty of the offence and shall be liable to be

proceeded against and punished accordingly:

Provided that nothing contained in this sub-section shall render the karta liable to any

punishment if he proves that the offence was committed without his knowledge or that

he had exercised all due diligence to prevent the commission of such offence.

(2) Notwithstanding anything contained in sub-section (1), where an offence under this

Act, has been committed by a Hindu undivided family and it is proved that the offence

has been committed with the consent or connivance of, or is attributable to any neglect

on the part of, any member of the Hindu undivided family, such member shall also be

deemed to be guilty of that offence and shall be liable to be proceeded against and

punished accordingly.

SECTION 278C: OFFENCES BY HINDU UNDIVIDED FAMILIES


23.44

(1) A person shall not be proceeded against for an offence under section 275A, section

275B, section 276, section 276A, section 276B, section 276BB, section 276C, section

276CC, section 276D, section 277 or section 278 except with the previous sanction of

the Commissioner or Commissioner (Appeals):

Provided that the Chief Commissioner or, as the case may be, Director General may

issue such instructions or directions to the aforesaid income-tax authorities as he may

deem fit for institution of proceedings under this sub-section.

(1A) A person shall not be proceeded against for an offence under section 276C or section

277 in relation to the assessment for an assessment year in respect of which the penalty

imposed or imposable on him under section 271(1)(c) has been reduced or waived by

an order under section 273A.

(2) Any offence under this Chapter may, either before or after the institution of

proceedings, be compounded by the Chief Commissioner or a Director General.

SECTION 279: PROSECUTION TO BE AT INSTANCE OF CHIEF

COMMISSIONER OR COMMISSIONER


23.45


PROVISION FOR E-PENALTY:

In order to impart greater efficiency, transparency and accountability to the assessment

process under the Act a new e-assessment scheme has already been introduced.

Section 274 of the Act provides for the procedure for imposing penalty under Chapter XXI of

the Act. In response to a show cause notice issued by the Assessing Officer (AO), assessee or

his authorised representative is still required to visit the office of the Assessing Officer. With

the advent of the E-Assessment Scheme-2019 and in order to ensure that the reforms initiated

by the Department to eliminate human interface from the system reaches the next level, it is

imperative that an e-penalty scheme be launched on the lines of E-assessment Scheme-2019.

Therefore, it is proposed to insert a new sub-section (2A) in the said section so as to provide

that the Central Government may notify an e-scheme for the purposes of imposing penalty so

as to impart greater efficiency, transparency and accountability by,—

(a) eliminating the interface between the Assessing Officer and the assessee in the course

of proceedings to the extent technologically feasible;

(b) optimising utilisation of the resources through economies of scale and functional

specialisation;

(c) introducing a mechanism for imposing of penalty with dynamic jurisdiction in which

penalty shall be imposed by one or more income-tax authorities.

It is also proposed to empower the Central Government, for the purpose of giving effect to the

scheme made under the proposed sub-section, for issuing notification in the Official Gazette,

to direct that any of the provisions of this Act relating to jurisdiction and procedure of

imposing penalty shall not apply or shall apply with such exceptions, modifications and

adaptations as may be specified in the notification. Such directions are to be issued on or

before 31st March, 2022. It is proposed that every notification issued shall be required to be

laid before each House of Parliament.



In the recent past after the launch of Goods & Services Tax (GST), several cases of fraudulent

input tax credit (ITC) claim have been caught by the GST authorities. In these cases, fake

invoices are obtained by suppliers registered under GST to fraudulently claim ITC and reduce

their GST liability. These invoices are found to be issued by racketeers who do not actually

carry on any business or profession. They only issue invoices without actually supplying any

goods or services. The GST shown to have been charged on such invoices is neither paid

nor is intended to be paid. Such fraudulent arrangements deserve to be dealt with harsher

provisions under the Act.

Therefore, the following provision is introduced:

Sec 271AAD- PENALTY FOR FAKE INVOICE:

(1) Without prejudice to any other provisions of this Act, if during any proceeding under this

Act, it is found that in the books of account maintained by any person there is—

(i) a false entry; or


23.46

(ii) an omission of any entry which is relevant for computation of total income of such

person, to evade tax liability,

the Assessing Officer may direct that such person shall pay by way of penalty a sum equal to the

aggregate amount of such false or omitted entry.

(2) Without prejudice to the provisions of sub-section (1), the Assessing Officer may direct that

any other person, who causes the person referred to in sub-section (1) in any manner to make a

false entry or omits or causes to omit any entry referred to in that sub-section, shall pay by way

of penalty a sum equal to the aggregate amount of such false or omitted entry.

Explanation. ––For the purposes of this section, “false entry” includes use or intention to use—

(a) forged or falsified documents such as a false invoice or, in general, a false piece of

documentary evidence; or

(b) invoice in respect of supply or receipt of goods or services or both issued by the person or

any other person without actual supply or receipt of such goods or services or both; or

(c) invoice in respect of supply or receipt of goods or services or both to or from a person who

does not exist.’.

Clubbing of Income To be done by students themselves AJ Education NeXt

24.1

CHAPTER 24. CLUBBING OF INCOME

Note: This topic should be done by the students themselves. The weightage of this topic

is negligible in CA Final Exams.

Section

60 Transfer of Income

without transfer of

assets

- Income shall be clubbed in the hands of

transferor.

61 Revocable transfer of

assets

- Income arising from the assets shall be clubbed

in the hands of the transferor.

62 Irrevocable transfer of

assets

- Asset transferred to any person

- not revocable during the lifetime of the

beneficiary or transferee,

- Income arising from the assets shall be taxable in

the hands of the transferee.

- Provided transferor derives no benefit from such

income or assets.

Exception:

- Income shall be clubbed in the income of the

transferor, as and when the power to revoke

the transfer arises.

- Actual revocation is not relevant.

63 "Revocable Transfer"

Defined

Transfer shall be deemed to be revocable if-

- it contains provision of re-transfer, or

- it gives the transferor a right to re-assume

power,

during the lifetime of the beneficiary/transferee.

64(1)(ii) Income of individual to

include income of

Spouse from a concern

in which Individual

has substantial interest

- In the income of Individual there shall be

included,

- income of spouse by way of salary, commission,

fees or any form of remuneration,

- in cash or in kind,

- from a concern in which the individual has

substantial interest (20% voting power/share in

profit at any time during the previous year),

Exception:

- No clubbing if spouse possesses technical or

professional qualification, and

- income is attributable to his or her technical or

professional knowledge and experience.


24.2

Note:

- In case both have substantial interest,

remuneration will be clubbed in the hands of the

individual whose income excluding such

remuneration is greater.

- Once included in hand of either person cannot be

changed in subsequent year, unless A.O. is

satisfied.

64(1)(iv) Income of individual to

include income of

Spouse

- Assets transferred by one spouse to another

spouse without adequate consideration. (Except

where transfer is in connection with an

agreement to live apart)

- Income from such asset shall be clubbed in the

hands of transferor.

- The relationship must exist both at the time of

transfer of asset and at the time when income

accrues.

- Section 64(1)(iv) applies to all assets except

House Property.

- If House property is transferred to spouse

otherwise than for adequate consideration, then

section 64(1)(iv) shall not apply but section 27

shall apply.

64(1)(vi) Income of individual to

include income of son's

wife

- Assets transferred by an individual to son's wife

without adequate consideration.


hands of transferor.

- The relationship must exist both at the time of

transfer of asset and at the time when income

accrues.

64(1)(vii) Income of individual to

include income of AOP

to which assets are

transferred for the

benefit of spouse

- Asset transferred to a person or an AOP

(TRUST)

- without adequate consideration

- for the immediate or deferred benefit of his/her

spouse.


hands of the transferor.

64(1)(viii) Income of individual to

include income of AOP

to which assets are

transferred for the

benefit of son's wife

- Asset transferred to a person or an AOP

(TRUST)

- without adequate consideration

- for the immediate or deferred benefit of his son's

wife.


24.3


hands of the transferor.

64(1A) Income of Minor Child - Income of minor child including minor married

daughter.

- Shall be clubbed with the income of parent.

Exceptions:

- Minor child suffering from disability specified

under section 80U of the Income-tax Act.

- Income earned by minor child, on account of

manual work or activity involving application of

his skill, talent, specialized knowledge and

experience.

Notes:

1. The income of the minor child shall be included,

- where the marriage of his parents subsists,

in the income of that parent whose total

income (excluding the income includible

under this sub-section) is greater, or

- where the marriage of his parents does not

subsist, in the income of that parent who

maintains the minor child in the previous

year.

2. Once included in hand of either parent, cannot be

changed in subsequent year, unless A.O. is

satisfied.

3. If none of the parent is alive, minor shall file the

return through legal guardian. There shall be no

clubbing.

4. If the income by way of manual work or activity

involving application of skill, etc. which was not

clubbed, is invested, and income is earned

thereon, such investment income shall be

clubbed.

5. If the minor child becomes major during the

previous year, then the incomes which have

accrued to him till the date he attains majority

shall be clubbed.

64(2) Conversion into HUF

Property

- Where separate property of the individual

- is converted by the individual into property

belonging to the family

- otherwise than for adequate consideration

- income derived from the converted property shall

be deemed to be the income of the individual till

the time partition takes place.

- And where the converted property has been the


24.4

subject-matter of a partition, the income derived

from such converted property as is received by

the spouse on partition shall be clubbed with the

income of the individual.

If assets transferred by an individual to his spouse/ son's wife are invested by the transferee in

any business, then the following income shall be clubbed with the income of the transferor

individual:

Investment in the business as on the first day of the

previous year out of the transferred funds made by the

spouse or son's wife

´

Income from such

business of

spouse, or son's

wife Total Investment in the business as on the first day of the

previous year made by spouse, or son's wife

Note:

In case the spouse/ son's wife invests the assets in partnership firm as their capital

contribution then the interest received from partnership firm shall be clubbed in above ratio.

The share of profit from firm is exempt under section 10(2A). Salary cannot be attributed to

capital contribution and therefore salary shall not be clubbed.

GENERAL LAW APPLICABLE TO CLUBBING OF INCOME

1. The clubbing shall continue to apply even if the transferee has converted the transferred

assets to some other form.

2. Income shall include loss also. Therefore, losses are also to be clubbed.

3. If the transferee sells the transferred assets, then capital gains shall also be clubbed with

the income of the transferor.

4. Income arising out of income earned on transferred assets has not to be clubbed.

5. The Supreme Court in the case of J.H. Gotla held that the clubbed income shall be

retained under the same head in which it is earned. Therefore, business income of a

minor child shall be clubbed in the hands of the parent under the head "Profits and

gains of a Business or Profession". The business losses of the parent can be set off

against such income.

6. While clubbing the income, the deductions available under the five heads of income

shall be allowed and the income after such deductions shall be clubbed.

7. Clubbing will take place even if the assets are indirectly transferred or transferred

through cross transfers.


24.5

8. If interest free loan is given by husband to wife/ individual to son's wife /

individual to his HUF, and the person to whom the loan is given purchases an

asset out of the loan, then income from such asset shall not be clubbed in the hands

of the person who has given the loan. This is because giving a loan is not a transfer

of assets. Clubbing applies when assets are transferred for inadequate

consideration.

9. The HUF is a partner in firm ABC through its karta Mr. X and has 25% share in

the profits of the firm. Wife of Mr. X is employed by firm ABC. In this case,

clubbing shall not apply because Mr. X is partner in representative capacity and

not in his individual capacity. Clubbing applies where an individual is a partner in

his individual capacity and has substantial interest in firm and his spouse get

remuneration from the firm.

10. If a trust is created for the benefit of a minor child, then the income of the trust

shall be clubbed with the income of parent under section 64(1A). This shall apply

even if the trust deed provides that the income shall be accumulated by trust and

shall be given to minor child when he attains majority. Clubbing provisions under

section 64(1A) shall apply since the income accrues for the benefit of minor child

although it may be given on attaining majority.

SECTION 65: LIABILITY OF THE TRANSFEREE IN RESPECT OF CLUBBED

INCOME

Where, by reason of the provisions contained in section 60 to 64 or section 27, the income

from any asset is to be clubbed with the income of the transferor, then the transferee shall on

the service of a notice of demand by the Assessing Officer, shall be liable to pay that portion

of the tax levied on the transferor which is attributable to the income so clubbed.

SECTION 27: "OWNER OF HOUSE PROPERTY" DEFINED

Section 27 defines the "owner of house property" for the purposes of section 22 to 26 as

under:

(a) an individual who transfer any house property to his/her spouse otherwise than for

adequate consideration or to a minor child not being a minor married daughter

otherwise than for adequate consideration, shall be deemed to be the owner of the

house property so transferred. (This shall not apply where house is transferred in

connection with an agreement to live apart).

(b) the holder of impartible estate shall be deemed to be the owner of the properties

comprised in the estate.

(c) a member of the cooperative society, company or other AOP to whom building is

allotted or leased under the house building scheme of the society, company or AOP

shall be deemed to be the owner of such building.


24.6

(d) any person who is allowed to take possession of any building in part performance of a

contract of the nature referred to in section 53A of the Transfer of Property Act, shall

be deemed to be the owner of such building.

Note: As per section 10(32) any income includible in the total income of the assessee under

section 64(1A) shall be exempt from tax to the extent that such income does not exceed

Rs. l,500 in respect of each minor child whose income is so includible.

DIVERSION OF INCOME BY OVERRIDING TITLE

Concept: If an assessee voluntarily diverts his income to some other person, then the

income so diverted shall be included in the income of the person who diverted the

income and shall not be taxable in the hands of the recipient.

Some is not the case where income is diverted by overriding title. Diversion of income

by overriding title means that the income is diverted because of a legal obligation, then

the income shall not be included in the income of the person who has diverted the

income but shall be taxable in the hands of recipient.

For example, in case of a lottery, as per the lottery agreement certain percentage of the

first prize is to be paid to the state government and the lottery agent. In this case, the

lottery income is subject to a legal obligation and therefore the amount paid to the State

government and the lottery agent is on account of a legal obligation. Therefore, the said

amount is not taxable in the hands of winner.

***************************************************************************

Taxation of Investment Fund AJ Education NeXt

25.1

CHAPTER 25. TAXATION OF INVESTMENT FUND

TAXATION OF INVESTMENT FUND & THEIR INVESTORS

Investment funds pool resources from the investors and invest in new companies, social

ventures, infrastructure and other areas which Government consider as socially or

economically desirable. The Finance Act, 2015 has omitted the concept of Venture Capital

Fund and Venture Capital Company and replaced the concept with that of "Investment

Funds".

Salient Features of New Taxation Rules are as under:

1. Income from "Profits and Gains of Business or Profession" of Investment Fund shall be

taxable in hands of Investment Fund. The proportional income under the head "Profits

and Gains of Business or Profession” of investment fund accruing or arising to unit

holder shall be exempt in hands of unit holder under section 10(23FBB).

2. Any income of Investment Fund other than under the head "Profits and Gains of

Business or Profession" shall be exempt in hands of Investment Fund under section

10(23FBA). The proportional income other than "Profits and Gains of Business or

Profession" of investment fund accruing or arising to unit holders shall be taxable in

hands of unit holder.

3. Any income of investment fund which is exempt under section 10 shall continue to

remain exempt in the hands of Investment Fund and its unit holders.

4. The loss of Investment Fund shall not be allocated to the unit holders and shall be

set-off, carried forward and set-off by Investment Fund.

5. If investment Fund is a company, then no Dividend Distribution Tax shall be

levied under section 115-O on income distributed by it (i.e., Dividend) to its unit

holders.

6. The total income of Investment Fund shall be taxable at normal rates applicable to a

firm/ company, in case Investment fund is a firm / company.

7. If Investment Fund is not a firm/ company, then its income shall be taxable at

Maximum Marginal Rate i.e. 42.744%.

8. Investment Fund is required to deduct TDS @ 10% on distribution made by it to its unit

holder if such distribution is taxable in the hands of unit holder.

9. Investment Fund derives following income:

Income from other sources - Interest 200 Lakhs

Capital Gains 300 Lakhs

The above incomes are exempt in the hands of Investment Fund. If Investment Fund

distributes Rs. 500 Lakhs to unit holders, then Rs. 500 Lakhs is taxable in hands of unit

holders. Investment Fund has to deduct TDS @ 10% on such distribution.

Suppose, there are 2 unitholders, then, Rs. 250 Lakhs is taxable in hands of each unit

holder.

10. Suppose in above case, the Investment Fund distributes only Rs. 400 Lakhs, then, it

shall be deemed that Rs. 500 Lakh has been distributed. Rs. 250 Lakhs is taxable in

hands of each unit holder. Investment Trust shall deduct TDS @10% on Rs. 500 Lakhs.

When Rs. 100 Lakhs is distributed in next previous year, then 100 lakhs shall not be

taxable in the hands of unit holder in the next previous year and no TDS shall be


25.2

deducted on such Rs. 100 lakhs. [Section 115UB(6) and Explanation 2 to Section

115UB]


Provide for pass through of losses in cases of Category I and Category II Alternative

Investment Fund (AIF)

Section 115UB of the Act, inter alia, provides for pass through of income earned by the

Category I and II AIF, except for business income which is taxed at AIF level. Pass through

of profits (other than profit & gains from business) has been allowed to individual investors

so as to give them benefit of lower rate of tax, if applicable. Pass through of losses are not

provided under the existing regime and are retained at AIF level to be carried forward and set

off in accordance with Chapter VI.

In order to remove the genuine difficulty faced by Category I and II AIFs, it is proposed to

amend section 115UB to provide that

(i) the business loss of the investment fund, if any, shall be allowed to be carried forward

and it shall be set-off by it in accordance with the provisions of Chapter VI and it shall

not be passed onto the unit holder;

(ii) the loss other than business loss, if any, shall also be ignored for the purposes of pass

through to its unit holders, if such loss has arisen in respect of a unit which has not been

held by the unit holder for a period of atleast twelve months;

(iii) the loss other than business loss, if any, accumulated at the level of investment fund as

on 31st March, 2019, shall be deemed to be the loss of a unit holder who held the unit

on 31st March, 2019 in respect of the investments made by him in the investment fund

and allowed to be carried forward by him for the remaining period calculated from the

year in which the loss had occurred for the first time taking that year as the first year

and it shall be set-off by him in accordance with the provisions of Chapter VI;

(iv) the loss so deemed in the hands of unit holders shall not be available to the investment

fund for the purposes of chapter VI.

These amendments will take effect from the 1st April, 2020 and will, accordingly, apply in


Illustration:

The broad features of the above regime can be explained through the following Examples.

For simplicity, it is assumed that the investment fund has ten unit holders each having one

unit and the income from investment in the investment fund is the only income of the unit

holder.

Example 1: If in a previous year, the income stream of the investment fund consists of:

Income by way of capital gains Rs. 800

Income from other sources Rs. 200

Then:

Total Income of the investment fund NIL

Total income of the unit holders Rs. 1,000

Total income of a unit holder Rs. 100

Break up:


25.3

Chargeable under the head "Capital gain" Rs. 80

Chargeable under the head "Income from other sources" Rs. 20

Investment fund shall deduct TDS @ 10% on Rs. 1000 lakhs.

Example 2: If in Example 1, the income stream of investment fund consists of:

Business income Rs. 100

Income by way of capital gains Rs. 700

Income from other sources Rs. 200

Then:

Total Income of the investment fund Rs. 100

(Tax shall be charged at applicable rate if investment fund is a company or a firm, else at

maximum marginal rate)

Income arising to a unit holder which is exempt in hands of Rs. 100

unitholders

Income of unit holder which is exempt Rs. 10

Total income chargeable in the hands of unit holders Rs. 900

Total income of each unit holder (chargeable to tax) Rs. 90

Break up:

Chargeable under the head "Capital gain" Rs. 70

Chargeable under the head "Income from other sources" Rs. 20

***************************************************************************

Taxation of Securitisation Trust AJ Education NeXt

26.1

CHAPTER 26. TAXATION OF SECURITISATION

TRUST

TAXATION OF SECURITISATION TRUST & ITS INVESTORS

What is securitization? – It is a process through which the loans and future income or

receivables (the money that is to become due in future) of a bank/financial institution, are

sold to a special purpose vehicle which is a Trust. This allow the financial institution/bank to

get funds upfront, which can be put to more productive use in the business.

PROCESS OF SECURITIZATION

• Original lender (bank or FI) selects and then sells various types of loans to another

institution called Special Purpose Vehicle, which is a Trust;

• The special purpose vehicle – SPV makes the payment to the original lender for the

loans purchased under the arrangement;

• SPV issues debentures/ bonds to Individuals or institutional investors, who are willing

to make investments in SPV;

• The original lender will keep on getting recoveries from the original borrowers;

• Original lender passes on these recoveries to the SPV.

• The SPV in turn passes on the income in form of interest on debentures and bonds to

the individual / institutional investors as per the arrangement made. The money is also

used to redeem debentures / bonds as per arrangement.

What is Securitization Trust? – The Securitization Trust is a Special Purpose Vehicle

(SPV) formed as a trust and is set up by:

• A Mutual Funds

• Reconstruction companies*

• Securitization companies*

* These companies are established for the purpose of Securitization and Reconstruction

of Financial Assets and Enforcement of Security Interest Act, 2002 and are regulated

by RBI.

Funding of Securitization Trust: Money is provided to Securitization Trust by:

• Mutual Funds

• Reconstruction company

• Securitization company

and also by

• Institutional investor

• Non-Resident and Foreign Companies

The Securitization Trust issued debt instruments and security receipts to the investor.


26.2

Illustration 1:

Suppose a Securitization Trust raises money from:

Mutual Funds Rs. 100 crores

Institutional Investors Rs. 200 crores

Reconstruction companies Rs. 300 crores

Non-Resident Investors Rs. 400 crores

Rs. 1000 crores

• The Securitization Trust issues debt instruments and/or security receipts to investor for

equivalent amount.

Illustration 2:

• Securitization Trust purchases loans of Rs. 1500 crores of Bank of India i.e. Loan given

by Bank of India and shown as asset in Balance sheet of Bank of India. The said Loans

are purchased for Rs. 1000 crores.

• Bank of India get interest of Rs. 150 crores on the said Loans and said interest is passed

on to securitization Trust by Bank of India.

• Now, income of Rs. 150 crores is exempt in hands of Securitization Trust under section

10(23DA).

Illustration 3:

• Securitization Trust distributes income to investors as under:

Mutual Funds Rs. 10 crores

Institutional Investors Rs. 20 crores

Reconstruction companies Rs. 30 crores

Non-Resident Rs. 40 crores

Rs. 100 crores

• Now as per section 115TCA(3), the income of Rs. 50 crores not paid or credited by

securitization Trust to Investor shall be deemed to be credited to the account of

investors on the last day of the Previous year in proportionate manner. Therefore,

following income shall be deemed to be credited to the investors on 31.03.2021.

Mutual Funds 5 crores

Institutional Investors 10 crores

Reconstruction companies 15 crores

Non-Resident 20 crores

50 crores

• In the hands of Investors, the income received / deemed to be credited shall be in the

nature of interest received on Loans given.

• The income of Rs. 50 crores when actually paid in Previous year 31.03.2022 shall not

be included in total income of investors in previous year 31.03.2022.


26.3

• Now as per section 194LBC, the Securitization Trust shall deduct TDS as under:

Investor Amount on which TDS to be

deducted

Rate of TDS

Mutual Fund NIL

No TDs since as per section 196 there

is no TDS on any payment made to

Mutual Funds {To be done later in

TDS}

NIL

Resident

Institutional

Investor

20 crores + 10 crores = 30 crores 25% if they individual /HUF

30% in often case.

Reconstruction

Company

30 crores + 15 crores = 45 crores 30%

Non-Resident 40 crores + 20 crores = 60 crores 20% as per section 115A

{To be done later in

International Taxation}

The Investor can apply under section 197 to the Assessing Officer for deducting of tax at a

lower rate or NIL rate.

**************************************************************************

Past Questions AJ Education NeXt

27.1

CHAPTER 27 – PAST QUESTIONS

Note: These are past exam questions taken from the study material of ICAI as updated

by Finance Act 2019. As and when the New Finance Act 2020 as well as new ICAI Study

Material will be released I will provide you a complete Question Bank with solutions

(HARD COPY) as updated by Finance Act 2020. Till then a student can refer these

questions for their practice purpose. Once you will get the New Question Bank, there

after ignore this chapter from here.

QUESTIONS ON PROFITS & GAINS FROM BUSINESS & PROFESSION

Question 1

Examine critically the following cases in the context of provisions contained in the

Income-tax Act, 1961 relevant for Assessment Year 2020-21. Support the answers with

relevant case laws and workings.

(a) Mr. Janak is proprietor of M/s. Yash Texnit which is engaged in garment

manufacturing business. The entire block of Plant & Machinery chargeable to

depreciation @ 15%, has 20 different machinery items as at 31-03-2020. One of

the machineries used for packing had become obsolete and was discarded by Mr.

Janak in July’ 19.

Assessee filed its return for A.Y. 2020-21 claiming total depreciation of Rs. 40 lacs

which includes Rs. 4 lacs being the depreciation claimed on the machinery item

discarded by Mr. Janak. The A.O. disallowed the claim of depreciation of Rs. 4

lacs during the course of scrutiny assessment.

Comment on the validity of action taken by A.O.

(b) X. Ltd. issued debentures in the previous year 2019-20, which were to be matured at

the end of 5 years. The debenture holder was given an option of one time upfront

payment of Rs. 60 per debenture on account of interest which was to be

immediately paid by the company. As per the option exercised by the debenture

holders, company paid interest upfront to them in the first year itself and the same

was claimed as deduction in the return of the company. But in the accounts, the

interest expenditure was shown as deferred expenditure to be written off over a

period of 5 years. During the course of assessment, the Assessing Officer spread the

upfront interest paid over a period of five year term of debentures and allowed only

one-fifth of the amount in the previous year 2019-20. Examine the correctness of the

action of Assessing Officer.

Answer

(a) The issue under consideration is whether disallowance of depreciation made by the

Assessing Officer with regard to the discarded asset, in arriving at the written down

value of the block of assets, is justified.

One of the conditions for claim of depreciation under section 32 is that the eligible

asset must have been put to use for the purpose of business or profession.

The other aspect to considered is whether merely discarding an obsolete machinery,

which is physically available, will attract the expression “moneys payable” appearing

in section 43(6), so as to deduct its value from the written down value of the block.


27.2

The facts in the present case are similar to facts in the case of CIT v. Yamaha

Motor India Pvt. Ltd. (2010) 328 ITR 297, wherein the Delhi High Court observed

that the expression "used for the purposes of the business" in section 32 when used

with respect to discarded machinery would mean the use in the business, not only

in the relevant financial year/previous year, but also in the earlier financial years.

The discarded machinery may not be actually used in the relevant previous year but

depreciation can be claimed as long as it was used for the purposes of business in the

earlier years provided the block continues to exist in the relevant previous year.

Therefore, the condition for claiming depreciation in respect of the discarded

machine would be satisfied if it was used in the earlier previous years for the

business.

For the purpose of section 43(6), “moneys payable” means the sale price, in case of

sale, or the insurance, salvage or compensation moneys payable in respect of the

asset. In this case, the machinery has not been sold as machinery or scrap or

disposed off, and it continues to exist. Hence, there is no “moneys payable” in this

case, which alone is deductible while computing the WDV of the block to which it

belongs.

Applying the rationale of the above case, the action of the Assessing Officer in

disallowing Rs. 4 lakhs, being the depreciation claim attributable to discarded

machinery, on the ground that the same was not put to use in the relevant previous

year, is invalid, since the said machinery was put to use in the earlier previous years.

(b) The issue under consideration is whether, in a case where debentures are issued with

maturity at the end of five years, and the debenture holders are given an option of

upfront payment of interest in the first year itself, can the entire upfront interest

paid, be claimed as deduction by the company in the first year or should the same

be deferred over a period of five years; and would the treatment of such interest as

deferred revenue expenditure in the books of account have any impact on the tax

treatment.

The facts of the case are similar to the facts in Taparia Tools Ltd. v. JCIT (2015)

372 ITR 605, wherein the above issue came up before the Supreme Court. In that

case, it was observed that under section 36(1)(iii), the amount of interest paid in

respect of capital borrowed for the purposes of business or profession, is allowable as

deduction.

The moment the option for upfront payment was exercised by the subscriber, the

liability of X Ltd. to make the payment in that year had arisen. Not only had the

liability arisen in the previous year in question, it was even quantified and discharged

as well in that very year.

As per the rationale of the Supreme Court ruling in Taparia Tools Ltd.’s case,

when the deduction of entire upfront payment of interest is allowable as per the

Income-tax Act, 1961, the fact that a different treatment was given in the books

of account could not be a factor which would bar the company from claiming the

entire expenditure as a deduction.

Accordingly, the action of the Assessing Officer in spreading the upfront interest paid

over the five year term of debentures and restricting the deduction in the P.Y.2018-19

to one-fifth of the upfront interest paid is not correct. The company is eligible to

claim the entire amount of interest paid upfront as deduction under section 36(1)(iii)

in the P.Y.2019-20.


27.3

Question 2

Compute the quantum of depreciation available under section 32 of the Income-tax Act,

1961 in respect of the following items of Plant and Machinery purchased by PQR Textile

Ltd., by paying through account payee cheque, which is engaged in the manufacture of

textile fabrics, for the year ended 31-3-2020:

(Rs. In crores)

New machinery installed on 1-5-2019 84

New Windmill purchased and installed on 18-6-2019. 22

Items purchased after 30th November 2019:

Lorries for transporting goods to sales depots 3

Fork-lift-trucks, used inside factory 4

Computers installed in office premises 1

Computers installed in factory 2

New imported machinery 12

The new imported machinery arrived at Chennai port on 30-03-2020 and was installed on

3-4-2020. All other items were installed during the year ended 31-3-2020.

The company was newly started during the year.

Also, compute the WDV of the various blocks of assets as on 1.4.2020.

Answer

Computation of depreciation allowance under section 32 for the A.Y. 2020-21

Particulars Normal

Depreciation

[u/s 32 (1)

(ii)]

Additional

Depreciation

[u/s 32 (1)

(iia)]

(Rs. in crores)

(A) Plant and Machinery (15% block) (Put to use for

180 days or more)

- New machinery installed on 01.05.2019 84.00 84.00

- Lorries for transporting goods to depots 3.00 -

Normal Depreciation @15% & additional

deprecation @20%

13.05 16.80

(B) Plant and Machinery (15% block) (Put to use for

less than 180 days – hence, depreciation is

restricted to 7.5%, being 50% of 15%)

- Fork-lift trucks, used inside a factory 4.00 4.00

Normal Depreciation @ 7.5% & additional

depreciation @10%

0.30 0.40

(C) Plant and Machinery (40% block) (Put to use for

less than 180 days, hence depreciation restricted

to 30%, i.e., 50% of 40%)

- Computers installed in office premises 1.00 -

- Computers installed in factory 2.00 2.00

3.00 2.00

Normal depreciation @20% & additional

depreciation @10%

0.60 0.20

(D) Plant and Machinery (40% block) (Put to use for

180 days or more) (See Note 1)


27.4

- New windmill purchased and installed on 18.06.2019 22.00 22.00

Normal Depreciation @ 40% & additional

depreciation @ 20%

8.80 4.40

Total depreciation and additional depreciation

- Plant and Machinery (15% block) (A +B) 13.13 17.20

- Plant and Machinery (40% block) (C + D) 9.40 4.60

Depreciation available under section 32 = Rs.44.55 crores

Computation of Written Down Value (WDV) as on 01.04.2020

Particulars Plant &

Machinery

15% 40%

(Rs. in crores)

WDV as on 01.04.2019 (The company was started during the year –

as given in question)

Nil Nil

Add: Plant and Machinery acquired during the year

- New Machinery installed on 01.05.2019 84.00

- Lorries for transporting goods to sales depots 3.00

- Fork-lift trucks, used inside factory 4.00

- New imported machinery 12.00 103.00 -

- New Windmill purchased and installed on 18.6. 2019 - 22.00

- Computers installed in office premises - 1.00

- Computers installed in factory - 2.00

103.00 25.00

Less: Asset sold during the year Nil Nil

WDV as on 31.3.2020 (before charging depreciation) 103.00 25.00

Less: Depreciation for the P.Y.2019-20

- Normal depreciation 13.35 9.40

- Additional depreciation 17.20 4.60

WDV as on 1.4.2020 72.45 11.00

Notes:

(1) Windmills and any specially designed devices which run on windmills installed on

or after 1.4.2014 would be eligible for depreciation @ 40%.

(2) New imported machinery was not installed during the previous year 2019-20. Hence,

it would not be eligible for additional depreciation for A.Y. 2020-21. It would also

not be eligible for normal depreciation for A.Y 2020-21, since it was not put to use

in the P.Y.2019-20 being the year of acquisition.

(3) It may be noted that investment in the following plant and machinery would not be

eligible for additional depreciation under section 32(1)(iia):

(a) Lorries for transporting goods to sales depots, being vehicles/road transport

vehicles; and

(b) Computers installed in office premises.

(4) As per section 2(28) of the Motor Vehicles Act, 1988, the definition of a “vehicle”

excludes, inter alia, a vehicle of special type adopted for use only in a factory or

in any enclosed premises. Therefore, fork-lift trucks used inside the factory would

not fall within the definition of “vehicle”. Hence, it is eligible for additional

deprecation under section 32(1)(iia).


27.5

Question 3

(A) Examine the taxability and/or allowability of the following receipts or expenditures

under the provisions of the Income-tax Act, 1961, for the assessment year 2020-21:

(i) S Ltd. receives a sum of Rs. 10 lakhs from K Ltd. on 3rd January, 2020 for

agreeing not to carry on any business relating to computer software in India

for the next three years.

(ii) Secret commission was paid during the previous year 2019-20.

(iii) P Ltd. paid dollars equivalent to Rs. 50 lakhs as sales commission for the

year ended 31.03.2020, without deducting tax at source, to Mr. Rodrigues,

a citizen of UK and non-resident who acted as agent for booking orders,

from various customers who are outside India.

(B) Can the following transactions be covered under section 43B for disallowance?

(i) A bank guarantee given by a company towards disputed tax liabilities.

(ii) Interest payable to Goods and Services Tax Department but not paid before

the due date specified in section 139(1).

Answer

(A) (i) As per section 28(va), any sum received under an agreement for not carrying

out any activity in relation to any business / profession (i.e., non-compete fee)

is chargeable to income-tax under the head “Profits and gains of business or

profession”.

Accordingly, Rs. 10 lakhs received by S Ltd. from K Ltd. for agreeing not to

carry on any business relating to computer software in India for the next three

years is chargeable to income-tax under the head “Profits and gains of business

or profession”.

The amount shall be allowed as deduction in the hands of K Ltd. provided tax

has been deducted at source under section 194J on the payment so made to S

Ltd. If tax is not deducted at source, 30% of the expenditure shall be disallowed

under section 40(a)(ia).

(ii) Secret commission is one of the forms of commission payment generally made

by business organizations. Secret commission is a payment for obtaining

business orders or contracts from parties and /or customers and paid to

employees and / or officials of those parties and / or customers or companies

from whom business orders are obtained by the assessee.

Explanation 1 below section 37(1) of Income-tax Act, 1961 provides that any

expenditure incurred by an assessee for any purpose which is an offence or

which is prohibited by law, shall not be deemed to have been incurred for

the purpose of business and no deduction or allowance shall be made in

respect of such expenditure. In view of the Explanation, any expenditure

incurred for a purpose which is an offence and prohibited by law cannot be

allowed as expenditure. Therefore, if secret commission payment could be

established as a payment for an offence prohibited by law, the same cannot be

allowed as deduction.

(iii) A foreign agent of an Indian exporter operates in his own country and no

part of his income accrues or arises in India. His commission is usually

remitted directly to him and is, therefore, not received by him or on his behalf

in India. The commission paid to the non-resident agent for services rendered

outside India is, thus, not chargeable to tax in India.


27.6

Since commission income for booking orders by non-resident who remains

outside India is not subject to tax in India, disallowance under section

40(a)(i) is not attracted in respect of payment of commission to such non-

resident outside India even though tax has not been deducted at source. Thus,

the amount of Rs. 50 lakhs remitted to Mr. Rodrigues outside India in foreign

currency towards commission would not attract disallowance under section

40(a)(i) for non-deduction of tax at source.

(B) (i) For claiming deduction of any expense enumerated under section 43B, the

requirement is, the actual payment and not deemed payment. Furnishing of

bank guarantee cannot be equated with actual payment. Actual payment

requires that money must flow from the assessee to the public exchequer as

specified in section 43B. Therefore, deduction of an expense covered under

section 43B cannot be claimed by merely furnishing a bank guarantee [CIT v.

McDowell & Co Ltd (2009) 314 ITR 167 (SC)]

(ii) Interest payable to Goods and Services Tax department is part of Goods and

Services Tax.

Therefore, interest payable to Goods and Services Tax department, which is

not paid before the “due date” of filing of return of income, would attract

disallowance under section 43B [Mewar Motors v. CIT (2003) 260 ITR 218

(Raj)]

Question 4

ILT Limited is engaged in manufacturing pipes and tubes. The profit and loss account

of the company for the year ended 31st March, 2020 shows a net profit of Rs. 405

lacs. The following information and particulars are furnished to you. You are required to

compute total income of the company for Assessment Year 2020-21 indicating reasons for

treatment of each item.

(i) A group free air ticket was provided by a supplier for reaching a certain volume of

purchase during the financial year 2019-20. The same is encashed by the company

for Rs. 10 lacs in April 2019 and credited to General Reserve Account.

(ii) A regular supplier of raw materials agreed for settlement of Rs. 8 lacs instead of

Rs. 10 lacs for poor quality of material supplied during the previous year which

was not given effec t in the running account of the supplier.

(iii) Andhra Bank sanctioned and disbursed a term loan in the financial year 2016-17 for

a sum of Rs. 50 lacs. Interest of Rs. 8 lacs was in arrear. The bank has converted the

arrear interest into a new loan repayable in 10 equal instalments. During the year,

the company has paid 2 instalments and the amount so paid has been reduced from

Funded Interest in the Balance Sheet.

(iv) The company remitted Rs. 5 lacs as interest to a company incorporated in USA on a

loan taken 2 years ago. Tax deducted under section 195 from such interest has been

deposited by the company on 15th July, 2020. The said interest was debited to profit

and loss account.

(v) Sandeep, a sales executive stationed at HO at Delhi, was on official tour in

Bangalore from 31st May, 2019 to 18th June, 2019 and 28th September, 2019 to 15th

October, 2019 for the business development. The company has paid Sandeep's salary

in cash, from its local office at Bangalore for the month of May, 2018 (payable on 1st

June) and September 2018 (payable on 1st October), amounting to Rs. 45,000 and


27.7

Rs. 47,000 respectively (net of TDS and other deduction), as Sandeep has no bank

account at Bangalore. These were included in the amount of “salary” debited to Profit

and Loss Account.

(vi) The company has contributed Rs. 50,000 by cheque to an electoral trust and the

same stands included under the head "General Expenses".

Answer

Computation of total income of ILT Ltd. for the A.Y.2020-21

Particulars Rs. (in lacs)

Profits and gains from business or profession

Net profit as per profit and loss account 405.00

Add : Items debited to profit and loss account, but to be

disallowed and items not considered in accounts but to be taxed

Value of group free air ticket provided by a supplier is taxable as

business income under section 28(iv), as the value of any benefit,

whether convertible into money or not, arising from business is taxable

as business income.

10

Amount waived by the supplier of raw materials is a deemed income

under section 41(1), as the expenditure was allowed as deduction in the

last year and there is a benefit by way of remission or cessation of a

trading liability. The fact that effect was not given in the running

account of supplier is not relevant.

2

Interest payable outside India to a foreign company is allowable (See

Note 1 below)

-

Contribution to electoral trust is not an allowable expenditure while

computing business income. Hence, the same has to be added back,

since it is included in general expenses.

0.50

Salary paid to employee Sandeep is eligible for deduction.

Disallowance under section 40A(3) will not apply [See Note 2 below]

NIL

12.50

417.50

Less: Amount of deduction allowable

Under section 43B, interest on loan due to any scheduled bank, etc.

is allowed as deduction, if such interest is actually paid irrespective

of the method of accounting followed by the assessee. Conversion

of arrear interest into a fresh loan by a bank cannot be considered as

actual payment of interest. However, the amount of funded interest

(i.e., converted loan) actually paid is allowable as deduction. Hence,

Rs. 1,60,000, being two installments of Rs. 80,000 each, actually

paid is deductible.

1.60

Business Income 415.90

Gross total income 415.90

Less: Deduction under Chapter VI-A

Deduction under section 80GGB in respect of contribution by the

assessee company to an electoral trust.

0.50

Total Income 415.40

Notes:

1. Since tax has been deducted on interest payable outside India to a foreign company

during the previous year 2019-20 and the same has been deposited before the due

date of filing return of income under section 139(1), disallowance under section


27.8

40(a)(i) is not attracted. Since the interest has already been debited to profit and

loss account, no further adjustment is required.

2. In respect of payment of salary to sales executive in cash, no disallowance under

section 40A(3) is to be made as the payments fall within the scope of Rule 6DD(i).

Salary paid to him in cash is allowable as the executive was temporarily posted for a

continuous period of more than 15 days in Bangalore which is not the place of his

normal duty. Further tax was deducted from such salary under section 192 and he

does not maintain any bank account in Bangalore. No disallowance under section

40A(3) is attracted in respect of such salary.

Question 5

G Ltd. is engaged in the business of growing and manufacturing tea in India. For the

previous year ended 31.03.2019, its composite business profits before allowing deduction

u/s 33AB is Rs. 60,00,000. On 01.09.2019, it deposited a sum of Rs. 11,00,000 in the Tea

Development Account. During the previous year 2017-18, G Ltd. had incurred a business

loss of Rs. 14,00,000 which has been carried forward. On 25.01.2020, it withdrew Rs. 10

lakhs, from deposit account which is utilized as under:

Rs. 6,00,000 for purchase on non-depreciable asset as per the scheme specified.

Rs. 3,00,000 for purchase of machinery to be installed in the office premises.

Rs. 1,00,000 was spent for the purpose of scheme on 5.4.2020.

(i) You are required to determine business income of G Ltd. and the tax consequences

that may arise from the above transactions in the relevant assessment year.

(ii) What will be the consequence if the asset which was purchased for Rs. 6,00,000 is sold

for Rs. 8,00,000 in April, 2020.

Answer

(i) Computation of Business Income of G Ltd. for the A.Y. 2020-21

Particulars Rs.

Rs. 10,00,000 being the amount withdrawn from Tea Development

Account has to be utilized in the prescribed manner, otherwise, the

withdrawn amount would be chargeable to tax as business income. In the

given case, the taxability of withdrawal amount based on their utilization

is as follows:

- Rs. 6,00,000, out of the amount withdrawn from the deposit account,

utilised for purchase of non-depreciable asset as per the specified

scheme.

[As per section 33AB(6), no deduction would be allowed under

section 33AB since amount is spent out of Rs. 11 lakh deposited

in Tea Development Account, which has already been allowed as

deduction in A.Y.2019-20 (See Working Note below)].

Not

taxable

- Rs. 3,00,000, being the amount utilized for purchase of machinery

to be installed in the office premises is not a permissible

utilization. Hence, the amount would be deemed as profits and

gains of business of the previous year 2019-20 as per section

33AB(4).

3,00,000

- Rs. 1,00,000 was spent for the purpose of scheme on 05.04.2020.

As per section 33AB(7), this amount would be taxable since the

same is not utilized during the same previous year (i.e., P.Y. 2019-

1,00,000


27.9

20) in which the amount is withdrawn from the deposit account.

When any part of withdrawal amount becomes taxable, the agricultural and non-

agricultural portions of income must be segregated.

Accordingly, Rs. 1,60,000, being 40% of Rs. 4,00,000 (Rs. 3,00,000 + Rs. 1,00,000)

would be chargeable to tax as business income and the balance Rs. 2,40,000, being

60% of Rs. 4,00,000 would be agricultural income exempt from tax.

Working Note:

Computation of Business Income of G Ltd. for the A.Y. 2019-20

Particulars Rs.

Composite business profits before allowing deduction under section 33AB 60,00,000

Less: Deduction under section 33AB(1) would be the lower of:

- Amount deposited in Tea Development Account on or before

30.9.2019 [i.e., Rs. 11,00,000]

- 40% of profits of such business [i.e., Rs. 24,00,000, being

40% of Rs. 60,00,000]

11,00,000

49,00,000

Less: 60% of Rs. 49,00,000, being agricultural income [as per Rule 8] 29,40,000

Business income 19,60,000

Less: Brought forward business loss of A.Y.2018-19 set-off as per

section 72

14,00,000

Business income chargeable to tax 5,60,000

(ii) Consequences, if asset purchased out of deposit account is sold during the

previous year 2020-21

As per section 33AB(8), if the asset is sold before the expiry of eight years from the

end of the previous year in which it was acquired, then, the cost of such asset shall

be deemed to be the profits and gains from business or profession of the previous year

in which asset is sold.

Therefore, Rs. 6,00,000 would be deemed to be the business income (composite) for

the A.Y.2021-22. However, since the full cost of the asset was deducted in the

assessment year 2019-20 (being part of Rs. 11 lakh deposited in Tea Development

Account) before segregation of agricultural income and non-agricultural income, the

agricultural and non-agricultural portions of income should be segregated in the

year in which such amount becomes taxable on account of sale of asset before the

expiry of eight years. Therefore, Rs. 3,60,000, being 60% of Rs. 6,00,000 would

represent agricultural income. The balance Rs. 2,40,000 being 40% of Rs. 6,00,000

would be chargeable to tax as business income.

Moreover, the difference between the sale consideration and purchase price of the

asset would be chargeable to tax as “Short term capital gains”, which is computed as

follows:

Sales consideration 8,00,000

Less: Cost of acquisition 6,00,000

Short term capital gain 2,00,000


27.10

Question 6

The trading and profit and loss account of Pingu Trading Pvt. Ltd. having business of

agricultural produce, consumer items and other products for the year ended 31.03.2020 is

as under:

Trading Account

Particulars Rs. Particulars Rs.

Opening Stock 3,75,000 Sales 1,55,50,000

Purchases 1,25,75,000 Closing Stock 4,50,000

Freight & Cartage 1,26,000

Gross profit 29,24,000

1,60,00,000 1,60,00,000

Profit and Loss Account

Particulars Rs. Particulars Rs.

Bonus to staff 47,500 Gross profit 29,24,000

Rent of premises 53,500 Income-tax refund 20,000

Advertisement 5,000 Warehousing charges 15,00,000

Bad Debts 75,000

Interest on loans 1,67,500

Depreciation 71,500

Goods and Services tax demand paid 1,08,350

Miscellaneous expenses 5,25,650

Net profit of the year 33,90,000

44,44,000 44,44,000

On scrutiny of records, the following further information and details were extracted/

gathered:

(i) There was a survey under section 133A on the business premises on 31.3.2020 in

which it was revealed that the value of closing stocks of 31.3.2019 was Rs.

8,75,000 and a sale of Rs. 75,000 made on 13.3.2020 was not recorded in the books.

The value of closing stocks after considering these facts and on the basis of

inventory prepared by the department as on 31.3.2020 worked out at Rs.

12,50,000, which was accepted to be correct and not disputed.

(ii) Income-tax refund includes amount of Rs. 4,570 of interest allowed thereon.

(iii) Bonus to staff includes an amount of Rs. 7,500 paid in the month of December 2019,

which was provided in the books on 31.03.2019.

(iv) Rent of premises includes an amount of Rs. 5,500 incurred on repairs. The

assessee was under no obligation to incur such expenses as per rent agreement.

(v) Advertisement expenses include an amount of Rs. 2,500 paid for advertisement

published in the souvenir issued by a political party. The payment is made by way

of an account payee cheque.

(vi) Miscellaneous expenses include:

(a) amount of Rs. 15,000 paid towards penalty for non-fulfillment of delivery

conditions of a contract of sale for the reasons beyond control,

(b) amount of Rs. 1,00,000 paid to the wife of a director, who is working as

junior lawyer for taking an opinion on a disputed matter. The junior advocate

of High Courts normally charge only Rs. 25,000 for the same opinion,

(c) amount of Rs. 1,00,000 paid to an Electoral Trust by cheque.


27.11

(vii) Goods and Services Tax demand paid includes an amount of Rs. 5,300 charged as

penalty for delayed filing of returns and Rs. 12,750 towards interest for delay in

deposit of tax.

(viii) The company had made an investment of Rs. 25 lacs on the construction of a

warehouse in rural area for the purpose of storage of agricultural produce. This was

made available for use from 15.09.2019 and the income from this activity is credited

in the Profit and Loss account under the head “Warehousing charges”.

(ix) Depreciation under the Income-tax Act, 1961 works out at Rs. 65,000.

(x) Interest on loans includes an amount of Rs. 80,000 on which tax was not deducted.

Compute the income chargeable to tax for assessment year 2020-21 of Pingu Trading

Pvt. Ltd, ignoring MAT. Support your answer with working notes.

Answer

Computation of Income of Pingu Trading Pvt. Ltd. chargeable to tax for the A.Y.

2020-21

Particulars Rs.


Add: Difference in the value of stocks detected on survey under section 133A

on 31.03.2020 chargeable as income (See Note 1)

3,75,000

37,65,000

Less: Income-tax refund credited in the profit and loss account, out of which

interest is to be considered separately under the head “Income from

other sources”

20,000

37,45,000

Add: Expenses either not allowable or to be considered separately but

charged in the profit & loss account

Repair expenses on rented premises where assessee is under no

obligation to incur such expenses are not allowable as per section

30(a)(i). However, if such expenses are required for carrying on the

business efficiently, the same are allowable under section 37. In this

case, assuming that such expenses are required for carrying on

business efficiently, the same are allowable under section 37.

Advertisement in the souvenir of political party not allowable as per

section 37(2B) (See Note 3)

2,500

Payment made to the wife of a director examined as per section 40A(2)

and the excess payment made to be disallowed (See Note 5)

75,000

Payment made to electoral trust by cheque (See Note 6) 1,00,000

Penalty levied by the Goods and Services tax department for delayed

filing of returns not allowable as being paid for infraction of law

(See Note 7)

5,300

Depreciation as per books 71,500

30% of interest paid on loan without deduction of tax at source not

allowable as per section 40(a)(ia)

24,000

40,23,300

Less: Depreciation allowable as per Income-tax Act, 1961 65,000

39,58,300

Less: Income from specified business (warehousing charges) credited to

profit and loss account, to be considered separately (See Note 8)

15,00,000

Income from business (other than specified business) 24,58,300


27.12

Computation of income / loss from specified business (See Note 8)

Income from specified business Rs. 15,00,000

Less: Deduction under section 35AD @ 100% of Rs. 25 lakhs Rs. 25,00,000

Loss from specified business to be carried forward as per (10,00,000)

section 73A

Income from Other Sources

Interest on income-tax refund 4,570


Less: Deduction under section 80GGB

Contribution to political party (See Note 3) Rs. 2,500

Contribution to an Electoral trust (See Note 7) Rs. 1,00,000 1,02,500


Notes:

(1) The business premises were surveyed and differences in the figures of opening and

closing stocks and sales were found which have not been disputed and accepted by

the assessee. Therefore, the trading account for the year is to be re-cast to arrive at

the correct amount of the gross profit/ net profit for the purpose of return of income

to be filed for the previous year ended on 31.3.2020.

Revised Trading Account

Particular Rs. Particular Rs.

Opening Stock 8,75,000 Sales

(Rs. 1,55,50,000 +Rs. 75,000)

1,56,25,000

Purchases 1,25,75,000 Closing Stock 12,50,000

Freight and Cartage 1,26,000

Gross Profit 32,99,000

1,68,75,000 1,68,75,000

The difference of gross profit of Rs. 32,99,000 - Rs. 29,24,000 = Rs. 3,75,000 is to be

added as income of the business for the year.

(2) Bonus for the previous year 2018-19 paid after the due date for filing return for

that year would have been disallowed under section 43B for the P.Y.2018-19.

However, when the same has been paid in December 2019, it should be allowed as

deduction in the P.Y.2019-20(A.Y. 2020-21). Since it is already included in the

figure of bonus to staff debited to profit and loss account of this year, no further

adjustment is required.

(3) The amount of Rs. 2,500 paid for advertisement in the souvenir issued by a

political party attracts disallowance under section 37(2B). However, such

expenditure falls within the meaning assigned to “contribute” under section 293A

of the Companies Act, 1956, and is hence, eligible for deduction under section

80GGB. Any contribution to the political party or electoral trust made by way of

cash is not allowed as deduction under section 80GGB. Since in the present case, the

payment to the political party is made by way of an account payee cheque, it is

allowed as deduction under section 80GGB.

(4) The penalty of Rs. 15,000 paid for non-fulfilment of delivery conditions of a contract

for reasons beyond control is not for the breach of law but was paid for breach of

contractual obligations and therefore, is an allowable expense.

(5) It has been assumed that Rs. 25,000 is the reasonable payment for the wife of

Director, working as a junior lawyer, since junior advocates of High Courts normally


27.13

charge only Rs. 25,000 for the same opinion and therefore, the balance Rs. 75,000 has

been disallowed.

(6) Payment to an electoral trust qualifies for deduction under section 80GGB since the

payment is made by way of a cheque. However, since the amount has been debited

to profit and loss account, the same has to be added back for computing business

income.

(7) The interest of Rs. 12,750 paid on the delayed deposit of goods and services tax is

for breach of contract and hence, is allowable as deduction. However, penalty of

Rs. 5,300 for delay in filing of returns is not allowable since it is for breach of law.

(8) Deduction @ 100% of the capital expenditure is available under section 35AD in

respect of specified business of setting up and operating a warehouse facility for

storage of agricultural produce which commences operation on or after 1.04.2012.

It is presumed that Rs. 25 lacs does not include expenditure on acquisition of any

land.

The loss from specified business under section 35AD (warehousing) should be

segregated from the income from other businesses, since, as per section 73A(1), any

loss computed in respect of any specified business referred to in section 35AD

shall not be set off except against profits and gains, if any, of any other specified

business.

In view of the provisions of section 73A(1), the loss of Rs. 10 lacs from the

specified business cannot be set-off against income from other businesses. Such

loss has to be carried forward to be set-off against profit from specified business

in the next assessment year. The return should be filed on or before the due date

under section 139(1) for carry forward of such losses.

Question 7

(a) A Ltd. paid IDBI (a public financial institution) a lump sum pre-payment premium of

Rs. 1.2 lacs on 7.4.2019 for restructuring its debts and reducing its rate of interest.

It claimed the entire sum as business expenditure for the P.Y. 2019-20. The

Assessing Officer, however, held that the pre-payment premium should be amortised

over a period of 10 years (being the tenure of the restructured loan), and thus,

allowed only 10% of the pre-payment premium in the P.Y.2019-20. Discuss, with

reasons, whether the contention of A Ltd. is correct or that of the Assessing Officer.

(b) Explain the tax treatment of emergency spares (of plant and machinery) acquired

during the year which, even though kept ready for use, have not actually been used

during the relevant previous year.

Answer

(a) This issue came up before the Delhi High Court in CIT v. Gujarat Guardian Ltd

(2009) 177 Taxman 434.The Court observed that the assessee company’s claim

for deduction has to be allowed in one lump sum keeping in view the provisions of

section 43B(d), which provide that any sum payable by the assessee as interest on

any loan or borrowing from any financial institution shall be allowed to the

assessee in the year in which the same is paid, irrespective of the periods, in

which the liability to pay such sum is incurred by the assessee according to the

method of accounting regularly followed by the assessee.The High Court

concurred with the Tribunal’s view supporting the assessee that in terms of

section 36(1)(iii) read with section 2(28A), the deduction for pre-payment


27.14

premium was allowable. Since there was no dispute that the pre-payment premium

was nothing but interest and that it was paid to a public financial institution i.e.

IDBI, the Court held that, in terms of section 43B(d), the assessee’s claim for

deduction has to be allowed in the year in which the payment has actually been

made.

Therefore, applying the ratio of the above case, the contention of A Ltd. is correct

and not that of the Assessing Officer.

Note – Section 36(1)(iii) provides for deduction of interest paid in respect of

capital borrowed for the purposes of business or profession. Section 2(28A)

defines interest to include, inter alia, any other charge in respect of the moneys

borrowed or debt incurred. Section 43B provides for certain deductions to be

allowed only on actual payment. From a combined reading of these three sections,

it can be inferred that –

(i) pre-payment premium represents interest as per section 2(28A);

(ii) such interest is deductible as business expenditure as per section 36(1)(iii);

(iii) such interest is deductible in one lump-sum on actual payment as per section

43B(d).

(b) As per ICDS V on Tangible Fixed Assets, machinery spares shall be charged to the

revenue as and when consumed. When such spares can be used only in connection

with an item of tangible fixed asset and their use is expected to be irregular,

they shall be capitalised. Where the spares are capitalised as per the above

requirement, the issue as to provision of depreciation arises – whether

depreciation can be provided where such spares are kept ready for use or is it

necessary that they are actually put to use. This issue was dealt with by the Delhi

High Court in CIT v. Insilco Ltd (2010) 320ITR 322. The Court observed that

the expression “used for the purposes of business” appearing in section 32 also

takes into account emergency spares, which, even though ready for use, yet are

not consumed or used during the relevant period. This is because these spares are

specific to a fixed asset, namely plant and machinery, and form an integral part

of the fixed asset. These spares will, in all probability, be useless once the asset

is discarded and will also have to be disposed of. In this sense, the concept of

passive use which applies to standby machinery will also apply to emergency

spares. Therefore, once the spares are considered as emergency spares required

for plant and machinery, the assessee would be entitled to capitalize the entire

cost of such spares and claim depreciation thereon.

Note – One of the conditions for claim of depreciation is that the asset must be

“used for the purpose of business or profession”. In the past, courts have held that, in

certain circumstances, an asset can be said to be in use even when it is “kept ready for

use”. For example, depreciation can be claimed by a transport company on spare

engines kept in store in case of need, though they have not actually been used by the

company. Hence, in such cases, the term “use” embraces both active use and passive

use for business purposes.

Question 8

“Easy Call Ltd.”, to provide telecom services in Mumbai, obtained a licence on

1.4.2017 for a period of 10 years ending on 31.3.2027 against a fee of Rs. 27 lacs to

be paid in 3 installments of Rs. 9 lacs each by April, 2017, April, 2018 and April, 2019,

respectively. The company has commenced business on 1.5.2018.


27.15

Explain, how the payment made for licence fee shall be dealt with under the Income-tax

Act, 1961 and the amount, if any, deductible for A.Y. 2020-21.

Answer

The payment made for acquiring the licence to operate telecom services in Mumbai shall

be subject to deduction as per the scheme in section 35ABB. As per section 35ABB,

any amount actually paid for obtaining licence to operate telecommunication services shall

be allowed as deduction in equal instalments during the number of years for which the

license is in force.

If the payment is made before the commencement of business: The deduction shall be

allowed beginning with the year of commencement of business.

In any other case: It will be allowed commencing from the year of payment. Deduction

shall be allowed up to the year in which the license shall cease to be in force.

The amount of deduction available for A.Y. 2020-21 is worked out below:-

(1) (2) (3) (4) = (3)/(2)

Previous year of

payment

Unexpired

period of license

Instalment paid

(Rs.)

Deduction in respect of

each instalment (Rs.)

2017-18 9 years 9,00,000 1,00,000

2018-19 9 years 9,00,000 1,00,000

2019-20 8 years 9,00,000 1,12,500

27,00,000 3,12,500

The deduction under section 35ABB from assessment year 2020-21 shall be Rs. 3,12,500.

Question 9

Alpha Ltd., a manufacturing company, has disclosed a net profit of Rs. 12.50 lacs for the

year ended 31st March, 2020. You are required to compute the taxable income of the

company for the Assessment year 2020-21, after considering the following information,

duly explaining the reasons for each item of adjustment:

(i) Advertisement expenditure debited to profit and loss account includes the sum of Rs.

60,000 paid in cash to the sister concern of a director, the market value of which is Rs.

52,000.

(ii) Repairs of plant and machinery debited to profit and loss account includes Rs. 1.80

lacs towards replacement of worn out parts of machineries. Such expenditure does

not increase the future benefit from the asset beyond its previously assessed standard

of performance.

(iii) A sum of Rs. 6,000 on account of liability foregone by a creditor has been taken

to general reserve. The original purchases was debited to the Profit & Loss Account

in the A.Y.2015-16.

(iv) Sale proceeds of import entitlements amounting to Rs. 1 lac has been credited to

Profit & Loss Account, which the company claims as capital receipt not chargeable

to income-tax.

(v) Being also engaged in the biotechnology business, the company incurred the

following expenditure on in-house research and development as approved by the

prescribed authority:

(a) Research equipments purchased Rs. 1,50,000.

(b) Remuneration paid to scientists Rs. 50,000.


27.16

The total amount of Rs. 2,00,000 is debited to the profit and loss account.

Answer

Computation of taxable income of Alpha Ltd. for the A.Y.2020-21

Particulars Rs.


Add: Items debited to profit and loss A/c but not deductible or income to

be taxed

1. Payment of advertisement expenditure of Rs.60,000

(i) Rs. 8,000, being the excess payment to a relative disallowed

under section 40A(2)

8,000

(ii) As the payment is made in cash and since the remaining amount

of Rs. 52,000 exceeds Rs. 10,000, 100% shall be disallowed under

section 40A(3)

52,000

2. Under section 31, expenditure relatable to current repairs regarding

plant, machinery or furniture is allowed as deduction.

The test to determine whether replacement of parts of machinery

amounts to repair or renewal is whether the replacement is one which

is in substance replacement of defective parts or replacement of the

entire machinery or substantial part of the entire machinery [CIT v.

Darbhanga Sugar Co. Ltd. [1956] 29 ITR 21 (Pat)].

Here expenditure on repairs does not bring in any new asset into

existence. Such replacement can only be considered as current repairs.

Hence, no adjustment is required.

Further, as per ICDS V on Tangible Fixed Assets, only an expenditure

that increases the future benefits from the existing asset beyond its

previously assessed standard of performance has to be added to the

actual cost.

3. Liability foregone by creditor chargeable as business income but not

credited to profit and loss account [taxable under section 41(1)]

6,000

4. Sale proceeds of import entitlements. The sale of the rights gives rise

to profits or gains taxable under section 28(iiia). As the amount has

already been credited to profit and loss account, no further adjustment

is necessary.

-

Less: Amount not debited to profit and loss account but allowable as

deduction

5. Expenditure on in-house research and development is entitled to a

weighted deduction of 150% of the expenditure (both capital and

revenue) so incurred under section 35(2AB)(1) = Rs.2 lacs ´ 150% =

Rs.3 lacs

Expenditure of Rs. 2,00,000 has already been debited to Profit & Loss

Account, therefore only additional deduction of Rs. 1 lacs further to be

allowed

1,00,000


Question 10

(i) A corporation was set up by the State Government transferring all the buses owned by

it for a consideration of Rs. 75 lacs, which was discharged by the Corporation by

issue of equity shares. The Corporation in its assessment claimed depreciation.


27.17

Can the depreciation be denied in the Corporation’s hands on the ground that there

was no registration of the buses in favour of the Corporation?

(ii) Ravi succeeded to his father’s business in the year 2017. In the previous year ended

31.3.2020, Ravi has written off the balance in the name of ‘Y’ which relates to

supply made by his father, when he carried on business. Ravi desires to know

whether the write off could be eligible for deduction.

Answer

(i) The decision of the Supreme Court in Mysore Minerals Ltd v. CIT (1999) 239

ITR 775 is relevant in the context of the facts stated. The term “asset used” in

section 32 must be assigned a wider meaning and anyone in possession of property

in his own title, exercising dominion over the property, to the exclusion of others and

having the right to use and enjoy it, must be taken to be the owner.

Registration of the buses is only a formality to perfect the title and does not bar

enjoyment. The Corporation cannot, therefore, be denied depreciation on the buses.

A similar decision was also taken in CIT v. J & K Tourism Development Corporation

(2001) 114 Taxman 734 (J&K).

(ii) The deduction of bad debt is allowed if it is written off in the books of account of the

assessee. In this case, Ravi has succeeded to the business carried on by his father.

Under clause (vii) of section 36(1) the amount has been written off in the books

of account as irrecoverable is eligible for deduction provided the debt has been

taken into account in computing the income of the business in an earlier previous year

[vide section 36(2)].

Therefore, Ravi is eligible for deduction in respect of the amount due in the name of

Y which is written off in the books of account as bad debt, even though the debt

represents the amount due for the supplies made by previous owner viz. deceased

father of Ravi.[CIT v. T. Veerabhadra Rao, K. Koteswara Rao and Co (1985) 155

ITR 152 (SC)].

Question 11

Boat Club is an association governed by the provisions of Section 44A of the Income-

tax Act, 1961.The subscription received from members for the year ended 31st March,

2020 was Rs. 2,00,000. The expenditures in the normal course of its activities were Rs.

3,85,000. Its other income taxable under the Act works out to Rs. 2,75,000. You are

consulted as to how Boat Club’s income would be determined for assessment year 2020-21?

Answer

As per section 44A, the deficiency arising on account of income from members by way

of, inter alia, subscriptions, falling short of the expenditure incurred solely for the

protection or advancement of the interest of its members, shall first be set off against the

association’s income under the head “Profits and gains of Business or Profession”. If there

is no such income under this head, the deficiency shall be set off against income under any

other head.

Particulars Rs.

Income from subscription 2,00,000

Less: Expenses incurred in the course of its activities 3,85,000

Deficiency (-)1,85,000


27.18

Other income 2,75,000

Less: Deficiency Rs.1,85,000 but limited to 50% of other income 1,37,500

Income of the Association 1,37,500

There is a ceiling on the deduction admissible by way of deficiency being that it shall not

exceed one-half of the total income of the association computed before making any

allowance under this section. This ceiling has been exceeded above and the deficiency

hence is limited to Rs. 1,37,500 being one-half of Rs.2,75,000 [vide section 44A(3)].

Question 12

X Ltd. set up a manufacturing unit in Warangal in the state of Telangana on 01.06.2019. It

invested Rs. 30 crore in new plant and machinery on 1.6.2019. Further, it invested Rs. 25

crore in the plant and machinery on 01.11.2019, out of which Rs. 5 crore was second

hand plant and machinery. Compute the depreciation allowable under section 32. Is X

Ltd. entitled for any other benefit in respect of such investment? If so, what is the benefit

available?

Solution

(i) Computation of depreciation under section 32 for X Ltd. for A.Y. 2020-21

Particulars Rs.

(in crores)

Plant and machinery acquired on 01.06.2019 30.000

Plant and machinery acquired on 01.11.2019 25.000

WDV as on 31.03.2020 55.000

Less: Depreciation @ 15% on Rs. 30 crore 4.500

Depreciation @ 7.5% (50% of 15%) on Rs. 25 crore 1.875

Additional Depreciation@35% on Rs. 30 crore 10.500

Additional [email protected]% (50% of 35%) on Rs. 20 crore 3.500 20.375

WDV as on 01.04.2020 34.625

Computation of deduction under section 32AD for X Ltd. for A.Y. 2020-21

Particulars Rs. (in crores)

Deduction under section 32AD @ 15% on Rs. 50 crore 7.50

Total benefit 7.50

Notes:

(1) As per the second proviso to section 32(1)(ii), where an asset acquired during the

previous year is put to use for less than 180 days in that previous year, the

amount deduction allowable as normal depreciation and additional depreciation

would be restricted to 50% of amount computed in accordance with the prescribed

percentage.

Therefore, normal depreciation on plant and machinery acquired and put to use on

1.11.2019 is restricted to 7.5% (being 50% of 15%) and additional depreciation is

restricted to 17.5% (being 50% of 35%).

(2) The balance additional depreciation of Rs. 3.5 crore, being 50% of Rs. 7 crore (35% of

Rs. 20 crore) would be allowed as deduction in the A.Y.2021-22.

(3) As per section 32(1)(iia), additional depreciation is allowable in the case of any

new machinery or plant acquired and installed after 31.3.2005 by an assessee

engaged, inter alia, in the business of manufacture or production of any article or

thing. In this case, since new plant and machinery acquired was installed by a

manufacturing unit set up in a notified backward area in the State of Telengana, the


27.19

rate of additional depreciation is 35% of actual cost of new plant and machinery.

Since plant and machinery of Rs. 20 crore was put to use for less than 180 days,

additional [email protected]% (50% of 35%) is allowable as deduction. However,

additional depreciation shall not be allowed in respect of second hand plant and

machinery of Rs. 5 crore.

Likewise, the benefit available under sections 32AD would not be allowed in respect

of second hand plant and machinery.

Accordingly, additional depreciation and investment allowance under section 32AD

have not been provided on Rs. 5 crore, being the actual cost of second hand plant

and machinery acquired and installed in the previous year.

Question 13

A Ltd., engaged in the business of manufacturing, furnishes the following particulars for the

P.Y.2019-20. Compute the deduction allowable under section 35 for A.Y.2020 -21, while

computing its income under the head “Profits and gains of business or profession”.

Particulars Rs.

1. Amount paid to Indian Institute of Science, Bangalore, for scientific

research

1,00,000

2. Amount paid to IIT, Delhi for an approved scientific research programme 2,50,000

3. Amount paid to X Ltd., a company registered in India which has as its

main object scientific research and development, as is approved by the

prescribed authority

4,00,000

4. Expenditure incurred on in-house research and development facility as

approved by the prescribed authority

(a) Revenue expenditure on scientific research 3,00,000

(b) Capital expenditure (including cost of acquisition of land Rs. 5,00,000)

on scientific research

7,50,000

Solution

Computation of deduction under section 35 for the A.Y.2020-21

Particulars Rs. Section % of

weighted

deduction

Amount of

deduction

(Rs.)

Payment for scientific research

Indian Institute of Science 1,00,000 35(1)(ii) 150% 1,50,000

IIT, Delhi 2,50,000 35(2AA) 150% 3,75,000

X Ltd. 4,00,000 35(1)(iia) 100% 4,00,000

Expenditure incurred on in-house

research and development facility

Revenue expenditure 3,00,000 35(2AB)) 150% 4,50,000

Capital expenditure (excluding cost

of acquisition of land Rs. 5,00,000)

2,50,000

35(2AB)

150%

3,75,000

Deduction allowable under section 35 17,50,000

Question 14

Mr. A commenced operations of the businesses of setting up a warehousing facility for

storage of food grains, sugar and edible oil on 1.4.2019. He incurred capital expenditure

of Rs. 80 lakh, Rs. 60 lakh and Rs. 50 lakh, respectively, on purchase of land and


27.20

building during the period January, 2019 to March, 2019 exclusively for the above

businesses, and capitalized the same in its books of account as on 1st April, 2019. The

cost of land included in the above figures are Rs. 50 lakh, Rs. 40 lakh and Rs. 30 lakh,

respectively. Further, during the P.Y.2019-20, he incurred capital expenditure of Rs. 20

lakh, Rs. 15 lakh & Rs. 10 lakh, respectively, for extension/ reconstruction of the

building purchased and used exclusively for the above businesses.

The profits from the business of setting up a warehousing facility for storage of food

grains, sugar and edible oil (before claiming deduction under section 35AD and section

32) for the A.Y. 2020-21 is Rs. 16 lakhs, Rs. 14 lakhs and Rs. 31 lakhs, respectively.

Compute the income under the head “Profits and gains of business or profession” for the

A.Y.2020-21 and the loss to be carried forward, assuming that Mr. A has fulfilled all the

conditions specified for claim of deduction under section 35AD and has not claimed

any deduction under Chapter VI-A under the heading “C. – Deductions in respect of

certain incomes”. Assume in respect of expenditure incurred, the payments are made by

account payee cheque or use of ECS through bank account.

Solution

Computation of profits and gains of business or profession for A.Y. 2020-21

Particulars Rs. (in

lakhs)

Profit from business of setting up of warehouse for storage of edible oil

(before providing for depreciation under section 32)

31

Less: Depreciation under section 32

10% of Rs. 30 lakh, being (Rs. 50 lakh – Rs. 30 lakh + Rs. 10 lakh) 3

Income chargeable under “Profits and gains from business or profession” 28

Computation of income/loss from specified business under section 35AD

Particulars Food

Grains

Sugar Total

Rs. (in lakhs)

(A) Profits from the specified business of setting up a

warehousing facility (before providing deduction

under section 35AD)

16 14 30

Less: Deduction under section 35AD

(B) Capital expenditure incurred prior to 1.4.2017 (i.e.,

prior to commencement of business) and capitalized in

the books of account as on 1.4.2017 (excluding the

expenditure incurred on acquisition of land) = Rs. 30

lakh (Rs. 80 lakh – Rs. 50 lakh) and Rs. 20 lakh (Rs.

60 lakh – Rs. 40 lakh)

30 20 50

(C) Capital expenditure incurred during the P.Y. 2018-19 20 15 35

(D) Total capital expenditure (B + C) 50 35 85

(E) Deduction under section 35AD

100% of capital expenditure 50 35 85

Total deduction u/s 35AD for A.Y. 2020-21 50 35 85

(F) Loss from the specified business of setting up and

operating a warehousing facility (after providing for

deduction under section 35AD) to be carried forward

as per section 73A (A-E)

(34)

(21)

(55)


27.21

Notes:

(i) Deduction of 100% of the capital expenditure is available under section 35AD for

A.Y.2020-21 in respect of specified business of setting up and operating a

warehousing facility for storage of sugar and setting up and operating a warehousing

facility for storage of agricultural produce where operations are commenced on or

after 01.04.2012 or on or after 01.04.2009, respectively.

(ii) However, since setting up and operating a warehousing facility for storage of edible

oils is not a specified business, Mr. A is not eligible for deduction under section

35AD in respect of capital expenditure incurred in respect of such business.

(iii) Mr. A can, however, claim depreciation@10% under section 32 in respect of the

capital expenditure incurred on buildings. It is presumed that the buildings were put

to use for more than 180 days during the P.Y. 2019-20.

(iv) Loss from a specified business can be set-off only against profits from another

specified business. Therefore, the loss of Rs. 55 lakh from the specified

businesses of setting up and operating a warehousing facility for storage of food

grains and sugar cannot be set-off against the profits of Rs. 28 lakh from the

business of setting and operating a warehousing facility for storage of edible oils,

since the same is not a specified business. Such loss can, however, be carried forward

indefinitely for set-off against profits of the same or any other specified business.

Question 15

XYZ Ltd. commenced operations of the business of a new three-star hotel in Madurai,

Tamil Nadu on 1.4.2019. The company incurred capital expenditure of Rs. 50 lakh

during the period January, 2019 to March, 2019 exclusively for the above business, and

capitalized the same in his books of account as on 1st April, 2019. Further, during the P.Y.

2019-20, it incurred capital expenditure of Rs. 2 crore (out of which Rs. 1.50 crore was for acquisition of land) exclusively for the above business.


A.Y.2020-21, assuming that XYZ Ltd. has fulfilled all the conditions specified for claim of

deduction under section 35AD and has not claimed any deduction under Chapter VI-A

under the heading “C. – Deductions in respect of certain incomes”.

The profits from the business of running this hotel (before claiming deduction under section

35AD) for the A.Y.202-21 is Rs. 25 lakhs. Assume that the company also have another

existing business of running a four-star hotel in Coimbatore, which commenced operations

ten years back, the profits from which are Rs. 120 lakhs for the A.Y.2020-21. Also,

assume that expenditure incurred during the previous year 2019-20 were paid by account

payee cheque or use of ECS through bank account.

Solution

Computation of profits and gains of business or profession for A.Y. 2020-21

Particulars Rs.

Profits from the specified business of new hotel in Madurai (before

providing deduction under section 35AD)

25 lakh

Less: Deduction under section 35AD

Capital expenditure incurred during the P.Y.2019-20(excluding the

expenditure incurred on acquisition of land) = Rs. 200 lakh – Rs. 150 lakh

50 lakh

Capital expenditure incurred prior to 1.4.2019 (i.e., prior to

commencement of business) and capitalized in the books of account

50 lakh


27.22

as on 1.4.2019

Total deduction under section 35AD for A.Y.2020-21 100 lakh

Loss from the specified business of new hotel in Madurai (75 lakh)

Profit from the existing business of running a hotel in Coimbatore 120 lakh

Net profit from business after set-off of loss of specified business against

profits of another specified business under section 73A

45 lakh

Question 16

ABC Ltd. is a company having two units – Unit A carries on specified business of setting

up and operating a warehousing facility for storage of sugar; Unit B carries on non-

specified business of operating a warehousing facility for storage of edible oil.

Unit A commenced operations on 1.4.2018 and it claimed deduction of Rs. 100 lacs

incurred on purchase of two buildings for Rs. 50 lacs each (for operating a warehousing

facility for storage of sugar) under section 35AD for A.Y. 2019-20. However, in February,

2020, Unit A transferred one of its buildings to Unit B.

Examine the tax implications of such transfer in the hands of ABC Ltd.

Solution

Since the capital asset, in respect of which deduction of Rs. 50 lacs was claimed under

section 35AD, has been transferred by Unit A carrying on specified business to Unit B

carrying on non - specified business in the P.Y.2019-20, the deeming provision under

section 35AD(7B) is attracted during the A.Y. 2020-21.

Particulars Rs.

Deduction allowed under section 35AD for A.Y.2019-20 50,00,000

Less: Depreciation allowable u/s 32 for A.Y.2019-20 [10% of Rs. 50 lacs] 5,00,000

Deemed income under section 35AD(7B) 45,00,000

ABC Ltd., however, by virtue of proviso to Explanation 13 to section 43(1), can claim

depreciation under section 32 on the building in Unit B for A.Y. 2020-21. For the

purpose of claiming depreciation on building in Unit B, the actual cost of the building

would be:

Particulars Rs.

Actual cost to the assessee 50,00,000

Less: Depreciation allowable u/s 32 for A.Y.2019-20 [10% of Rs. 50 lacs] 5,00,000

Actual cost in the hands of ABC Ltd. in respect of building in its Unit B 45,00,000

Question 17

The following are the particulars in respect of a scheduled bank incorporated in India -

Particulars Rs. in

lakh

(i) Provision for bad and doubtful debts under section 36(1)(viia) upto

A.Y.2019-20

100

(ii) Gross Total Income of A.Y.2020-21 [before deduction under section

36(1)(viia)]

800

(iii) Aggregate average advances made by rural branches of the bank 300

(iv) Bad debts written off (for the first time) in the books of account (in

respect of urban advances only) during the previous year 2019-20

210

Compute the deduction allowable under section 36(1)(vii) for the A.Y.2020-21.


27.23

Solution

Compute the deduction allowable under section 36(1)(vii) for the A.Y.2020-21.

Particulars Rs. in lakh

Bad debts written off (for the first time) in the books of account 210

Less: Credit balance in the “Provision for bad and doubtful debts” under

section 36(1)(viia) as on 31.3.2020

(i) Provision for bad and doubtful debts u/s 36(1)(viia) upto A.Y.2019-20 100

(ii) Current year provision for bad and doubtful debts u/s 36(1)(viia) [8.5%

of Rs. 800 lakhs + 10% of Rs. 300 lakhs]

98

198

Deduction under section 36(1)(vii) in respect of bad debts written off

for A.Y.2020-21

12

Question 18

Isac limited is a company engaged in the business of biotechnology. The net profit of the

company for the financial year ended 31.03.2020 is Rs. 35,25,890 after debiting the

following items:

S. No Particulars Rs.

1. Purchase price of raw material used for the purpose of in-house research

and development

11,80,000

2. Purchase price of asset used for in-house research and development

wrongly debited to profit and loss account:

(1) Land 5,00,000

(2) Building 3,00,000

3. Expenditure incurred on notified agricultural extension project 25,50,000

4. Expenditure on notified skill development project:

(1) Purchase of land 40,00,000

(2) Expenditure on training for skill development 32,50,000

5. Expenditure incurred on advertisement in the souvenir published by a

political party

75,000


A.Y.2020-21 of Isac Ltd.

Solution

Computation of income under the head “Profits and gains of business or

profession” for the A.Y.2020-21

Particulars Rs. Rs.


Add: Items debited to profit and loss account, but to be

disallowed

Purchase price of Land used in in-house research

and development - being capital expenditure not

allowable as deduction under section 35

5,00,000

Purchase price of building used in in-house

research and development - being capital

expenditure, 100% of which is allowable as

deduction u/s 35(1)(iv) read with section 35(2)

-

Expenditure incurred on notified agricultural

extension project (to be treated separately)

25,50,000

Expenditure incurred on notified skill development


27.24

project - Purchase of land - being capital

expenditure not qualifying for deduction under

section 35CCD

40,00,000

Expenditure incurred on notified skill development

project - Expenditure on training for skill

development (to be treated separately)

32,50,000

Expenditure incurred on advertisement in the

souvenir published by a political party not allowed

as deduction as per section 37(2B)

75,000

1,03,75,000

1,39,00,890

Less: Purchase price of raw material used for in-house

research and development qualifies for 150%

deduction under section 35(2AB). Since, it is already

debited to profit and loss account balance 50% is

allowed.

5,90,000

Less: Expenditure incurred on notified agricultural

extension project qualifies for 150% deduction under

section 35CCC.

38,25,000

Less: Expenditure incurred on training for skill

development in a notified skill development project

qualifies for 150% deduction under section 35CCD.

48,75,000

92,90,000

Profit and gains from business 46,10,890

Note: The expenditure incurred on advertisement in the souvenir published by a political

party is disallowed as per section 37(2B) while computing income under the head

“Profit and Gains of Business or Profession” but the same would be allowed as deduction

under section 80GGB from the gross total income of the company.

Question 19

Hari, an individual, carried on the business of purchase and sale of agricultural

commodities like paddy, wheat, etc. He borrowed loans from Andhra Pradesh State

Financial Corporation (APSFC) and Indian Bank and has not paid interest as detailed

hereunder:

Rs.

(i) Andhra Pradesh State Financial Corporation (P.Y. 2018-19 & 2019-20) 15,00,000

(ii) Indian Bank (P.Y. 2019-20) 30,00,000

45,00,000

Both APSFC and Indian Bank, while restructuring the loan facilities of Hari during the

year 2019-20, converted the above interest payable by Hari to them as a loan repayable

in 60 equal installments. During the year ended 31.3.2020, Hari paid 5 installments to

APSFC and 3 installments to Indian Bank.

Hari claimed the entire interest of Rs. 45,00,000 as an expenditure while computing the

income from business of purchase and sale of agricultural commodities. Discuss whether

his claim is valid and if not what is the amount of interest, if any, allowable.

Solution

According to section 43B, any interest payable on the term loans to specified financial

institutions and any interest payable on any loans and advances to scheduled banks shall

be allowed only in the year of payment of such interest irrespective of the method of

accounting followed by the assessee. Where there is default in the payment of interest by


27.25

the assessee, such unpaid interest may be converted into loan. Such conversion of unpaid

interest into loan shall not be construed as payment of interest for the purpose of section

43B. The amount of unpaid interest so converted as loan shall be allowed as deduction only

in the year in which the converted loan is actually paid.

In the given case of Hari, the unpaid interest of Rs. 15,00,000 due to APSFC and of Rs.

30,00,000 due to Indian Bank was converted into loan. Such conversion would not amount

to payment of interest and would not, therefore, be eligible for deduction in the year of

such conversion. Hence, claim of Hari that the entire interest of Rs. 45,00,000 is to be

allowed as deduction in the year of conversion is not tenable. The deduction shall be

allowed only to the extent of repayment made during the financial year. Accordingly, the

amount of interest eligible for deduction for the A.Y.2020-21 shall be calculated as

follows:

Interest

outstanding

(Rs.)

Number of

Installments

Amount per

installment

(Rs.)

Installments

paid

Interest

allowable

(Rs.)

APSFC 15 lakh 60 25,000 5 1,25,000

Indian Bank 30 lakh 60 50,000 3 1,50,000

Total amount eligible for deduction 2,75,000

Question 20

Vinod is a person carrying on profession as film artist. His gross receipts from profession

are as under:

Rs.

Financial year 2016-17 1,15,000



What is his obligation regarding maintenance of books of accounts for Assessment Year

2020-21 under section 44AA of Income-tax Act, 1961?

Solution

Section 44AA(1) requires every person carrying on any profession, notified by the Board

in the Official Gazette (in addition to the professions already specified therein), to maintain

such books of account and other documents as may enable the Assessing Officer to

compute his total income in accordance with the provisions of the Income-tax Act, 1961.

A person carrying on a notified profession shall be required to maintain specified books of

accounts, only if:

(i) his gross receipts in all the three years immediately preceding the relevant previous

year has exceeded Rs. 1,50,000; or

(ii) it is a new profession which is setup in the relevant previous year, it is likely to

exceed Rs. 1,50,000 in that previous year.

In the present case, Vinod is a person carrying on profession as film artist, which is a

notified profession. Since his gross receipts have not exceeded Rs. 1,50,000 in financial

year 2016-17, the requirement under section 44AA to compulsorily maintain the

prescribed books of account is not applicable to him for A.Y. 2020-21.

Mr. Vinod, however, required to maintain such books of accounts as would enable the

Assessing Officer to compute his total income.


27.26

Question 21

Mr. Praveen engaged in retail trade, reports a turnover of Rs. 1,98,50,000 for the financial

year 2019-20. His income from the said business as per books of account is Rs. 11,20,000

computed as per the provisions of Chapter IV-D “Profits and gains from business or

Profession” of the Income-tax Act, 1961. All transactions are carried out by way of A/c payee

cheque/ECS through bank A/c. Retail trade is the only source of income for Mr. Praveen.

A.Y. 2019-20 was the first year for which he declared his business income in accordance with

the provisions of presumptive taxation under section 44AD.

(i) Is Mr. Praveen eligible to opt for presumptive taxation scheme in respect of his

income from retail trade for the assessment year 2020-21?

(ii) If so, determine his income from retail trade as per the applicable presumptive

provision.

(iii) In case Mr. Praveen does not opt for presumptive taxation of income from retail

trade, what are his obligations under the Income-tax Act, 1961?

(iv) What is the due date for filing his return of income under both the options?

Solution:

(i) Yes. Since his total turnover for the F.Y 2019-20 is below Rs. 200 lakhs, he is

eligible to opt for presumptive taxation scheme under section 44AD in respect of his

retail trade business.

(ii) His income from retail trade, applying the presumptive tax provisions under section

44AD, would be Rs. 15,88,000, being 8% of Rs. 1,98,50,000.

(iii) Mr. Praveen had declared profit for the previous year 2018-19 in accordance with the

presumptive provisions and if he does not opt for presumptive provisions for any of

the five consecutive assessment years i.e., A.Y. 2020-21 to A.Y. 2024-25, he would

not be eligible to claim the benefit of presumptive taxation for five assessment

years subsequent to the assessment year relevant to the previous year in which the

profit has not been declared in accordance the presumptive provisions i.e., if he

does not opt for presumptive taxation in say P.Y. 2019-20, then he would not be

eligible to claim the benefit of presumptive taxation for A.Y. 2021-22 to A.Y. 2025-

26.

Consequently, Mr. Praveen is required to maintain the books of accounts and get them

audited under section 44AB, since his income exceeds the basic exemption limit.

(iv) In case he opts for the presumptive taxation scheme under section 44AD, the due date

would be 31st July, 2020.

In case he does not opt for the presumptive taxation scheme, he is required to get his

books of account audited, in which case the due date for filing of return would be

30th September, 2020.

Question 22

Mr. X commenced the business of operating goods vehicles on 1.4.2019. He purchased the

following vehicles during the P.Y.2019-20. Compute his income under section 44AE for A.Y.

2020-21.

Gross Vehicle Weight (in

kilograms)

Number Date of purchase

(1) 7,000 2 10.04.2019

(2) 6,500 1 15.03.2020


27.27

(3) 10,000 3 16.07.2019

(4) 11,000 1 02.01.2020

(5) 15,000 2 29.08.2019

(6) 15,000 1 23.02.2020

Would your answer change if the two goods vehicles purchased in April, 2019 were put to

use only in July, 2019?

Solution

Since Mr. X does not own more than 10 vehicles at any time during the previous year

2019-20, he is eligible to opt for presumptive taxation scheme under section 44AE. Rs.

1,000 per ton of gross vehicle weight or unladen weight per month or part of the month

for each heavy goods vehicle and Rs. 7,500 per month or part of month for each goods

carriage other than heavy goods vehicle, owned by him would be deemed as his profits

and gains from such goods carriage.

Heavy goods vehicle means any goods carriage, the gross vehicle weight of which exceeds

12,000 kg.

(1) (2) (3) (4)

Number

of

Vehicles

Date of purchase No. of months for which

vehicle is owned No. of months ´ No. of

vehicles [(1) ´ (3)]

Heavy goods vehicle

2 29.08.2019 8 16

1 23.02.2020 2 2

18

Goods vehicle other than heavy goods vehicle

2 10.4.2019 12 24

1 15.3.2020 1 1

3 16.7.2019 9 27

1 2.1.2020 3 3

55

The presumptive income of Mr. X under section 44AE for A.Y.2020-21 would be -

Rs. 6,82,500, i.e., 55 × Rs. 7,500, being for other than heavy goods vehicle + 18 ´ Rs.

1,000 ´ 15 ton being for heavy goods vehicle.

The answer would remain the same even if the two vehicles purchased in April, 2019 were

put to use only in July, 2019, since the presumptive income has to be calculated per month

or part of the month for which the vehicle is owned by Mr. X.

***************************************************************************


27.28

QUESTIONS ON TAXATION OF VARIOUS ENTITIES

Question 23

Sona Ltd., a resident company, earned a profit of Rs. 15 lakhs after debit/credit of the

following items to its Statement of Profit and Loss for the year ended on 31/03/2020.

(i) Items debited to Statement of Profit and Loss:

No. Particulars Rs.

1. Provision for the loss of subsidiary 70,000

2. Provision for doubtful debts 75,000

3. Provision for income-tax 1,05,000

4. Provision for gratuity based on actuarial valuation 2,00,000

5. Depreciation 3,60,000

6. Interest to financial institution (unpaid before filing of return) 1,00,000

7. Penalty for infraction of law 50,000

(ii) Items credited to Statement of Profit and Loss:

No. Particulars Rs.

1. Profit from unit established in special economic zone 5,00,000

2. Share in income of an AOP as a member 1,00,000

3. Income from units of UTI 75,000

4. Long term capital gains 3,00,000

Other Information:

(i) Depreciation includes Rs. 1,50,000 on account of revaluation of fixed assets.

(ii) Depreciation as per Income-tax Rules is Rs. 2,80,000.

(iii) Brought forward loss of Rs. 10 lakhs which includes unabsorbed depreciation of Rs. 4

lakhs.

(iv) The capital gain has been invested in specified assets under section 54EC.

(v) The AOP, of which the company is a member, has paid tax at maximum marginal rate.

(vi) Provision for income-tax includes Rs. 45,000 of interest payable on income-tax.

Compute minimum alternate tax under section 115JB of the Income-tax Act, 1961, for A.Y.

2020-21, assuming that Sona Ltd. is not required to comply with the Indian Accounting

Standards.

Solution

Computation of “Book Profit” for levy of MAT under section 115JB for A.Y.2020 -21

Particulars Rs. Rs.

Net Profit as per Statement of Profit and Loss 15,00,000

Add: Net profit to be increased by the following amounts as per

Explanation 1 to section 115JB:

- Provision for the loss of subsidiary 70,000

- Provision for doubtful debts, being the amount set

aside as provision for diminution in the value of any

asset

75,000

- Provision for income-tax

[As per Explanation 2 to section 115JB, income-tax

shall include, inter alia, any interest charged under the

Act, therefore, whole of the amount of provision for

income-tax including Rs. 45,000 towards interest

1,05,000


27.29

payable has to be added]

- Depreciation 3,60,000 6,10,000

21,10,000

Less: Net profit to be decreased by the following amounts as

per Explanation 1 to section 115JB:

- Share in income of an AOP as a member

[In a case, where AOP has paid tax on its total

income at maximum marginal rate, no income-tax is

payable by the company, being a member of AOP, in

accordance with the provisions of section 86.

Therefore, share in income of an AOP on which no

income-tax is payable in accordance with the

provisions of section 86, would be reduced while

computing book profit, since the same has been

credited to profit and loss account]

1,00,000

- Income from units in UTI

[Income from units in UTI shall be reduced while

computing the book profits, since the same is exempt

under section 10(35)]

75,000

- Depreciation other than depreciation on revaluation

of assets (Rs. 3,60,000 – Rs. 1,50,000) 2,10,000

- Unabsorbed depreciation or brought forward business

loss, whichever is less, as per the books of account.

Lower of unabsorbed depreciation Rs. 4,00,000 and

brought forward business loss Rs. 6,00,000 as per

books of accounts has to be reduced while computing

the book profit]

4,00,000

7,85,000

Book Profit 13,25,000

Computation of MAT liability under section 115JB

Particulars Rs.

15% of book profit 1,98,750

Add: Held and Education cess@4% 7,950

Minimum Alternate Tax liability 2,06,700

Notes:

(1) It is only the specific items mentioned under Explanation 1 to section 115JB, which

can be adjusted from the net profit as per the Statement of Profit and Loss

prepared as per the Companies Act for computing book profit for levy of MAT.

Since the following items are not specified thereunder, the same cannot be adjusted

for computing book profit:

• Interest to financial institution (unpaid before filing of return) and

• Penalty for infraction of law

(2) Provision for gratuity based on actuarial valuation is an ascertained liability [CIT v.

Echjay Forgings (P) Ltd. (2001) 251 ITR 15 (Bom.)]. Hence, the same should not

be added back to compute book profit.

(3) As per proviso to section 115JB(6), the profits from unit established in special

economic zone cannot be excluded while computing the book profit, and hence, such

income would be liable for MAT.


27.30

(4) Long-term capital gains cannot be deducted while computing book profit even if such

amount of capital gains is invested in specified assets under section 54EC, since book

profit has to be computed by adding/deducting the items mentioned under

Explanation 1 to section 115JB alone. Capital Gains reflected in the statement of

profit and loss shall be part of book profit under section 115JB. Capital gains

exempted under section 54EC cannot also be excluded for computing book profit.

[CIT v. Veekaylal Investment Co. P. Ltd. (2001) 249 ITR 597 (Bom.) & N J Jose and

Co. (P) Ltd. v. ACIT (2010) 321 ITR 132 (Ker.)]

Question 24

The following are the particulars of income of three investment funds for P.Y.2020-21:

Particulars A B C

Rs. in lakh

Business Income 2 (2)

Capital Gains 16 14 (6)

Income from other sources 4 4 8

Compute the total income of the investment funds and unit-holders for A.Y.2020-21,

assuming that:

(i) each investment fund has 20 unit holders each having one unit; and

(ii) income from investment in the investment fund is the only income of the unit -holder.

If Investment Fund C has the following income components for A.Y.2021-22, what would be

the total income of the fund and the unit holder for that year?

Business Income Rs. 2 lakh

Capital Gains Rs. 9 lakh

Income from other source Rs. 8 lakh

Solution

Computation of total income of the investment fund for A.Y.2019-20

Particulars A B C

Rs.

Business Income Nil 2,00,000 Nil

Total Income Nil 2,00,000 Nil

Computation of total income of a unit holder of the following Investment funds for

A.Y. 2019-20

Particulars A B C

Rs.

Capital Gains 80,000 70,000 -

Income from other sources 20,000 20,000 30,000

Total Income 1,00,000 90,000 30,000

Notes:

(i) The total income of Investment Fund B would be chargeable to tax@30% if the fund

is a firm and @30%/25%, as the case may, if the fund is a company and at the

maximum marginal rate, in any other case.

(ii) In case of Investment Fund C, the business loss of Rs. 2 lakh is set-off against

income from other sources of Rs. 8 lakh. Loss of Rs. 6 lakh under the head capital


27.31

gains cannot be set-off. The same has to be carried forward by the Investment Fund for

set-off in the subsequent years.

(iii) For A.Y.2020-21, the brought forward capital loss of Rs. 6 lakh can be set-off against

capital gains of Rs. 9 lakh. Business income of Rs. 2 lakh would be taxable in

the hands of the Investment Fund. Capital gains of Rs. 3 lakh (Rs. 9 lakh – Rs. 6

lakh) and Income from other sources of Rs. 8 lakh would be taxable in the hands of the

unit-holders. The total income of each unit holder for A.Y.2020-21 would be Rs.

55,000, comprising of –

Capital gains = Rs. 15,000 [i.e., Rs. 3 lakh/20]

Income from other sources = Rs. 40,000 [i.e., Rs. 8 lakh / 20]

Question 25

XYZ Ltd. is engaged in the manufacture of textile since 01-04-2009. Its Statement of Profit

& Loss shows a profit of Rs. 700 lakhs after debit/credit of the following items:

(1) Depreciation calculated on the basis of useful life of assets as per provisions of the

Companies Act, 2013 is Rs. 50 lakhs.

(2) Employer's contribution to EPF of Rs. 2 lakhs and Employees' contribution of Rs. 2 lakhs for the month of March, 2020 were remitted on 8th May 2020.

(3) The company appended a note to its Income Statement that industrial power tariff

concession of Rs. 2.5 lakhs was received from the State Government and credited

the same to Statement of P & L.

(4) The company had provided an amount of Rs. 25 lakhs being sum estimated as

payable to workers based on agreement to be entered with the workers union

towards periodical wage revision once in 3 years. The provision is based on a fair

estimation on wage and reasonable certainty of revision once in 3 years.

(5) The company had made a provision of 10% of its debtors towards bad and doubtful

debts. Total sundry debtors of the company as on 31-03-2020 was Rs. 200 lakhs.

(6) A debtor who owed the company an amount of Rs. 40 lakhs was declared

insolvent and hence, was written off by debit to Statement of Profit and loss.

(7) Sundry creditors include an amount of Rs. 50 lakhs payable to A & Co, towards

supply of raw materials, which remained unpaid due to quality issues. An

agreement has been made on 31-03-2020, to settle the amount at a discount of

75% of the outstanding. The amount waived is credited to Statement of Profit and

Loss.

(8) The opening and closing stock for the year were Rs. 200 lakhs and Rs. 255 lakhs, respectively. They were overvalued by 10%.

(9) Provision for gratuity based on actuarial valuation was Rs. 500 lakhs. Actual

gratuity paid debited to gratuity provision account was Rs. 300 lakhs.

(10) Commission of Rs. 1 lakhs paid to a recovery agent for realization of a debt. Tax

has been deducted and remitted as per Chapter XVIIB of the Act.

(11) The company has purchased 500 tons of industrial paper as packing material at a

price of Rs. 30,000/ton from PQR, a firm in which majority of the directors are partners. PQR's normal selling price in the market for the same material is Rs. 28,000/ton.

Additional Information:

(1) There was an addition to Plant & Machinery amounting to Rs. 50 lakhs on 10-06-

2019, which was used for more than 180 days during the year. Additional depreciation

has not been adjusted in the books.

(2) Normal depreciation calculated as per income-tax rules is Rs. 80 lakhs.


27.32

(3) The company had credited a sub-contractor an amount of Rs. 10 lakhs on 31-03-

2019 towards repairing a machinery component. The tax so deducted was remitted on

31-12-2019.

(4) The company has collected Rs. 7 lakhs as sales tax from its customers and paid the

same on the due dates. However, on an appeal made, the High Court directed the Sales

Tax Department to refund Rs. 3 lakhs to the company. The company in turn refunded

Rs. 2 lakhs to the customers from whom the amount was collected and the balance of

Rs. 1 lakh is still lying under the head “Current Liabilities”.

Compute total income and tax payable for A.Y. 2020-21. Ignore MAT provisions.

Note - The turnover of XYZ Ltd. for the P.Y.2017-18 was Rs. 405 crore.

Answer

Computation of Total Income of XYZ Ltd. for the A.Y.2020-21

Particulars Amount (Rs.)

Profits and Gains from Business and Profession

Profit as per Statement of profit and loss account 7,00,00,000

Add: Items debited but to be considered separately or to be

disallowed

(a) Depreciation as per Companies Act, 2013 50,00,000

(b) Employees’ contribution to EPF [See Note 1 below] 2,00,000

[Since employees’ contribution to EPF has not been

deposited on or before the due date under the PF Act, the

same is not allowable as deduction as per section

36(1)(va). Since the same has been debited to profit and

loss account, it has to be added back for computing

business income].

(c) Employers contribution to EPF

[As per section 43B, employers’ contribution to EPF is

allowable as deduction since the same has been deposited

on or before the ‘due date’ of filing of return under

section 139(1). Since the same has been debited to profit

and loss account, no further adjustment is necessary]

Nil

(d) Provision for wages payable to workers Nil

[The provision is based on fair estimate of wages and

reasonable certainty of revision, the provision is

allowable as deduction, since ICDS X requires

‘reasonable certainty for recognition of a provision,

which is present in this case. As the provision has been

debited to profit and loss account, no adjustment is

required while computing business income]

(e) Provision for doubtful debts [10% of Rs. 200 lakhs]

[Provision for doubtful debts is allowable as deduction

under section 36(1)(viia) only in case of banks, public

financial institutions, state financial corporations, state

industrial investment corporations and non-banking

financial corporations. Such provision is not allowable

as deduction in the case of a manufacturing company.

Since the same has been debited to profit and loss account,

it has to be added back for computing business income]

20,00,000


27.33

(f) Bad debts written off

[Bad debts write off in the book of account is allowable

as deduction under section 36(1)(vii). Since the same

has already been debited to profit and loss account, no

further adjustment is required]

Nil

(g) Provision for gratuity 2,00,00,000

[Provision of Rs. 500 lakhs for gratuity based on

actuarial valuation is not allowable as deduction as per

section 40A(7). However, actual gratuity of Rs. 300

lakhs paid is allowable as deduction. Hence, the

difference has to be added back]

(h) Commission paid to recovery agent for realization of a

debt.

[Commission of Rs. 1 lakh paid to a recovery agent for

realisation of a debt is an allowable expense under section

37 as per DCIT v. Super Tannery (India) Ltd. (2005)

274 ITR 338 (All). Since the same has been debited to

profit and loss account, no further adjustment is required]

Nil

(i) Purchase of paper at a price higher than the fair market

value 10,00,000

[As per section 40A(2), the difference between the

purchase price (Rs. 30,000 per ton) and the fair market

value (Rs. 28,000 per ton) multiplied by the quantity

purchased (500 tons) has to be added back since the

purchase is from a related party, a firm in which

majority of the directors are partners, at a price higher

than the fair market value]

(j) Sales tax not refunded to customers out of sales tax refund 1,00,000

[The amount of sales tax refunded to the company by the

Government is a revenue receipt chargeable to tax under

section 41(1). Deduction can be claimed of amount

refunded to customers [CIT v. Thirumalaiswamy Naidu

& Sons (1998) 230 ITR 534 (SC)]. Hence, the net amount

of Rs. 1,00,000 (i.e., Rs. 3,00,000 minus Rs. 2,00,000)

would be chargeable to tax]

2,83,00,000

9,83,00,000

Less: Items credited but to be considered separately/

permissible expenditure and allowances

(k) Industrial power tariff concession received from State

Government

[Any assistance in the form of, inter alia, concession

received from the Central or State Government would

be treated as income as per section 2(24)(xviii). Since

the same has been credited to Statement of profit and

loss, no adjustment is required.

Nil

(l) Discount given by Sundry Creditors for supply of raw

materials

[Discount of 75% given by Sundry Creditors for supply

of raw materials is taxable under section 41(1). Since the

Nil


27.34

same has already been credited to Statement of profit and

loss, no further adjustment is required]

(m) Depreciation as per Income-tax Act, 1961 80,00,000

(n) Over-valuation of stock [Rs. 55 lakhs × 10/110] 5,00,000

[The amount by which stock is over-valued has to be

reduced for computing business income. Rs. 50 lakhs,

being the difference between closing and opening stock,

has to be adjusted to remove the effect of over-valuation]

(o) Additional Depreciation[See Note 2 below] 10,00,000

[Additional depreciation@20% is allowable on Rs. 50

lakhs, being actual cost of new plant & machinery

acquired on 10.06.2019, as the same was put to use for

more than 180 days in the P.Y.2019-20.]

(p) Payment to a sub-contractor where tax deducted last year

was remitted after the due date of filing of return [See

Note 3 below]

3,00,000

[30% of Rs. 10 lakhs, being payment to a sub-contractor,

would have been disallowed under section 40(a)(ia)

while computing the business income of A.Y.2019-20,

since tax deducted was remitted after the due date of

filing of return. However, the same is allowable in

A.Y.2020-21, since the remittance has been made on

31.12.2019]

98,00,000

Total Income 8,85,00,000

Computation of tax liability of XYZ Ltd. for A.Y.2020-21

Particulars Rs.

Tax @30% on the above total income (since the turnover exceeded Rs.

400 crore in the P.Y. 2017-18)

2,65,50,000

Add: Surcharge@7% (since total income exceeds Rs. 1 crore but less than Rs.

10 crore)

18,58,500

2,84,08,500

Add: Health and Education cess@4% 11,36,340

Total tax liability 2,95,44,840

Notes:

(1) Employees contribution to PF deposited after the due date mentioned under the PF

Act is not allowable as deduction as per section 36(1)(va). The same has also been

affirmed by the Gujarat High Court in CIT v. Gujarat State Road Transport

Corporation (2014) 366 ITR 170. Hence, in the above solution, employees’

contribution to PF has been disallowed while computing business income.

The CBDT has, vide Circular No. 22/2015, dated 17.12.2015, clarified that the

employer contribution to provident fund remitted on or before due date of filing of

return under section 139(1), is allowable as deduction while computing Business

Income. Further, it has also clarified that the circular does not apply to claim of

deduction relating to employee’s contribution welfare funds which are governed by

section 36(1)(va) of the Act.


27.35

Alternate View - An alternate view has, however, been expressed in CIT v. Kiccha

Sugar Co. Ltd. (2013) 356 ITR 351 (Uttarakhand), CIT v. AIMIL Ltd (2010) 321 ITR

508 (Del) and CIT v. Nipso Polyfabriks Ltd (2013) 350 ITR 327 (HP) that employees

contribution to PF, deducted from the salaries of the employees of the assessee,

shall be allowed as deduction from the income of the employer-assessee, if the same

is deposited by the employer-assessee with the provident fund authority on or before

the due date of filing of return for the relevant previous year. If this view is

considered, then no disallowance would be attracted in this case, since the

employees’ contribution has been remitted before the due date of filing of return of

income.

(2) Rs. 50 lakhs, being the addition to plant and machinery on 10.6.2019 qualifies for

additional depreciation@20% under section 32(1)(iia). Since only the normal

depreciation as per Income- tax Rules, 1962, has been debited to profit and loss

account, additional depreciation of Rs. 10 lakhs (being 20% of Rs. 50 lakhs) has to

be deducted while computing business income.

(3) Since the tax deducted during the P.Y.2018-19 was remitted only on 31.12.2019, i.e.,

after the due date of filing of return for A.Y.2019-20, Rs. 3,00,000, being 30% of Rs.

10 lakh would have been disallowed while computing the business income of that

year. Since the tax deducted has been remitted on 31.12.2019, Rs. 3,00,000 would be

allowed as deduction while computing the business income of the A.Y.2020-21.

Question 26

PQR LLP, a limited liability partnership set up a unit in Special Economic Zone (SEZ) in the

financial year 2015-16 for production of washing machines. The unit fulfills all the

conditions of section 10AA of the Income-tax Act, 1961. During the financial year 2018-

19, it has also set up a warehousing facility in a district of Tamil Nadu for storage of

agricultural produce. It fulfills all the conditions of section 35AD. Capital expenditure in

respect of warehouse amounted to Rs. 75 lakhs (including cost of land Rs. 10 lakhs). The

warehouse became operational with effect from 1st April, 2019 and the expenditure of

Rs. 75 lakhs was capitalized in the books on that date.

Relevant details for the financial year 2019-20 are as follows:

Particulars Rs.

Profit of unit located in SEZ 40,00,000

Export sales of above unit 80,00,000

Domestic sales of above unit 20,00,000

Profit from operation of warehousing facility (before considering deduction

under Section 35AD).

1,05,00,000

Compute income tax (including AMT under Section 115JC) payable by PQR LLP for


Answer

Computation of total income and tax liability of PQR LLP for A.Y.2020-21

(under the regular provisions of the Income-tax Act, 1961)

Particulars Rs. Rs.

Profits and gains of business or profession

Unit in SEZ 40,00,000

Less: Deduction under section 10AA [See Note (1) below] 32,00,000

Business income of SEZ unit chargeable to tax 8,00,000


27.36

Profit from operation of warehousing facility 1,05,00,000

Less: Deduction under section 35AD [See Note (2) below]

Business income of warehousing facility chargeable to tax

65,00,000

40,00,000


Computation of tax liability (under the normal/regular

provisions)

Tax@30% on Rs. 48,00,000 14,40,000

Add: Education cess@4% 57,600

Total tax liability 14,97,600

Computation of adjusted total income of PQR LLP for levy of Alternate Minimum

Tax

Particulars Rs. Rs.

Total Income (as computed above) 48,00,000

Add: Deduction under section 10AA 32,00,000

80,00,000

Add: Deduction under section 35AD 65,00,000

Less: Depreciation under section 32

On building @10% of Rs. 65 lakhs 6,50,000 58,50,000

Adjusted Total Income 1,38,50,000

Alternate Minimum [email protected]% 25,62,250

Add: Surcharge@12% (since adjusted total income > Rs. 1 crore) 3,07,470

28,69,720

Add: Health and Education cess @ 4% 1,14,789

29,84,509

Tax liability under section 115JC (rounded off) 29,84,510

Since the regular income-tax payable is less than the alternate minimum tax payable, the

adjusted total income shall be deemed to be the total income and tax is leviable

@18.5% thereof plus surcharge@12% and cess@4%. Therefore, the tax liability is Rs.

29,84,510.

AMT Credit to be carried forward under section 115JEE Rs.

Tax liability under section 115JC 29,84,510

Less: Tax liability under the regular provisions of the Income-tax Act, 1961 14,97,600

14,86,910

Notes:

(1) Deduction under section 10AA in respect of Unit in SEZ =

Profit of the Unit in SEZ × Export turnover of the Unit in SEZ

Total turnover of the Unit in SEZ

Rs.40,00,000 × = Rs. 32,00,000

(2) Deduction @ 100% of the capital expenditure is available under section 35AD for

A.Y.2020- 21 in respect of specified business of setting up and operating a

warehousing facility for storage of agricultural produce which commences

operation on or after 01.04.2012.

Further, the expenditure incurred, wholly and exclusively, for the purposes of such

specified business, shall be allowed as deduction during the previous year in which

80,00,000

1,00,00,000

`

`


27.37

he commences operations of his specified business if the expenditure is incurred

prior to the commencement of its operations and the amount is capitalized in the

books of account of the assessee on the date of commencement of its operations.

Deduction under section 35AD would, however, not be available on expenditure

incurred on acquisition of land.

In this case, since the capital expenditure of Rs. 65 lakhs (i.e., Rs. 75 lakhs – Rs. 10 lakhs, being expenditure on acquisition of land) has been incurred in the F.Y.2018-19 and capitalized in the books of account on 1.4.2019, being the date when the warehouse became operational, Rs. 65,00,000, being 100% of Rs. 65 lakhs would qualify for deduction under section 35AD.

**************************************************************************


27.38

QUESTIONS ON ASSESSMENT PROCEDURE

Question 27

Teachwell Education is a trust approved under section 10(23C)(vi) which runs various

educational institutions. During the course of assessment under section 143(3), the

Assessing Officer finds that the trust has carried out its activities in contravention of the

section under which it was approved for exemption. Hence, the Assessing Officer wants to

pass an order without giving exemption under section 10, which the assessee objects. You

are required to examine the following with respect to the provisions of Income-tax Act,

1961.

(a) Whether the Assessing Officer can pass an order without giving exemption under

section 10?

(b) Can the Assessing Officer get any additional time limit in completing this

assessment?

Answer

(a) As per the first proviso to section 143(3), in the case of an institution approved under,

inter alia, section 10(23C)(vi), which is required to furnish the return of income

under section 139(4C), the Assessing Officer shall not pass an order of assessment

under section 143(3) without giving effect to the provisions of section 10, unless he

is of the view that the activities of the institution are being carried on in

contravention to the provisions of that section and:

(1) he has intimated the Central Government or the prescribed authority, which

had earlier approved the concerned institution, about the contravention of the

relevant provisions by the institution; and

(2) the approval granted to such institution has been withdrawn or notification in

that respect has been rescinded.

Therefore, in the aforesaid case, the Assessing Officer can pass an assessment order

without giving exemption under section 10 to Teachwell Education, which is an

educational institution approved under section 10(23C)(vi), only if he has intimated

the contravention made by Teachwell Education to the Central Government or the

prescribed authority, as the case may be, and its approval under section 10(23C)(vi)

is withdrawn.

(b) As per Explanation 1 to section 153, in case the Assessing Officer intimates the

contravention of provisions of section 10(23C)(vi) to the Central Government or the

prescribed authority, the period commencing from the date of intimation of such

contravention by the Assessing Officer and ending on the date on which the copy of

the order of withdrawing the approval under section 10(23C)(vi) is received by the

Assessing Officer, shall be excluded for computing the period of limitation for

completing the assessment.

Further, in case the time limit available to the Assessing Officer for passing an

assessment order, after such exclusion, is less than 60 days, such remaining period

of assessment shall be deemed to have been extended to 60 days.

Therefore, the Assessing Officer will get the above mentioned additional time for

completing the assessment of Teachwell Education.

Question 28

The Assessing Officer issued a notice under section 142(1) on the assessee on 24th

December, 2019 calling upon him to file return of income for Assessment Year 2019-20. In

response to the said notice, the assessee furnished a return of loss and claimed carry


27.39

forward of business loss and unabsorbed depreciation. State whether the assessee would

be entitled to carry forward as claimed in the return.

Answer

As per the provisions of section 139(3), any person who has sustained loss under the head

‘Profit and gains of business or profession’ is allowed to carry forward such a loss under

section 72(1) or section 73(2), only if he has filed the return of loss within the time

allowed under section 139(1). Also, the provisions of section 80 specify that a loss which

has not been determined as per the return filed under section 139(3) shall not be allowed to

be carried forward and set-off under, inter alia, section 72(1) (relating to business loss) or

section 73(2) (losses in speculation business) or section 74(1) (loss under the head “Capital

gains”) or section 74A(3) (loss from the activity or owning and maintaining race horses)

or section 73A (loss relating to a “specified business”). However, there is no such

condition for carry forward of unabsorbed depreciation under section 32.

In the given case, the assessee has filed its return of loss in response to notice under section

142(1). As per the provisions stated above, the return filed by the assessee in response to

notice under section 142(1) is a belated return and therefore, the benefit of carry forward of

business loss under section 72(1) or section 73(2) or section 73A shall not be available.

The assessee shall, however be entitled to carry forward the unabsorbed depreciation as per

provisions of section 32(2).

Question 29

The regular assessment of MNO Ltd. for the Assessment Year 2018-19 was completed under

section 143(3) on 13th March, 2020. There was an audit objection by the Revenue Audit

team that interest on loan should be disallowed partly as there was diversion of borrowed

fund to sister concern without charge of interest.

Based on the above facts:

(i) State, with reasons, whether the Assessing Officer can issue notice under section

148 on the basis of audit objection of the Revenue Audit team.

(ii) If the action stated in (i) above is not permitted, what is the option open to the

Revenue Department to deal with the said audit objection?

Answer

(i) Section 147 states that if the Assessing Officer has reason to believe that any

income chargeable to tax has escaped assessment for any assessment year, he

may assess or reassess such income and also any other income chargeable to tax

which has escaped assessment and which comes to his notice subsequently in the

course of the proceedings under this section.

The Assessing Officer should, therefore, have reason to believe that income chargeable

to tax has escaped assessment. The belief should be that of the Assessing Officer

and not of the revenue audit team.

Further, the Income-tax Act, 1961 does not confer jurisdiction on the Assessing

Officer to change its opinion on the interpretation of a particular provision earlier

adopted by it. If the issue had already been considered earlier during the course of

scrutiny assessment and the Assessing Officer had come to a conclusion that no

disallowance of interest paid by the assessee is required, even though loans had

been given to sister concern without any interest, the same issue cannot be the basis of

reassessment, merely because the revenue audit team takes a different view.

The Supreme Court, in ACIT v. ICICI Securities Primary Dealership Ltd. (2012) 348

ITR 299, held that re-opening of the assessment by the Assessing Officer on the

ground of change of opinion is not valid.


27.40

Therefore, the Assessing Officer cannot issue notice under section 148 on the basis

of audit objection of the Revenue Audit team.

If the Assessing Officer has acted only under compulsion of the audit party and not

independently, the action of reopening would be invalid.

(ii) The option open to the Revenue is initiation of proceedings under 263, by the

jurisdictional Commissioner. He has the power to call for and examine the records, if

he is of the opinion that the order passed by the Assessing Officer under section

143(3) is erroneous in so far as it is prejudicial to the interests of the Revenue.

However, where the Assessing Officer has considered the issue in the original

assessment and come to a conclusion that no disallowance of interest is called for,

the Commissioner cannot initiate revisionary proceedings, merely because he holds a

different view. Only where the view taken by the Assessing Officer is unsustainable

in law, the Commissioner will be justified in initiating the revisionary proceedings

under section 263. It was so held in CIT vs. Sohana Woollen Mills (2008) 296 ITR

238 (P & H).

Mere audit objection and possibility of a different view are not sufficient to

conclude that the order of the Assessing Officer is erroneous or prejudicial to the

interest of revenue.

Question 30

State whether the following assessees have to file return of income and if so, the due date

for the assessment year 2020-21:

(i) A registered trade union having income from let out property of Rs. 1,00,000.

(ii) A public trust hospital having an aggregate annual receipt of Rs. 200 lacs and availing

exemption under section 10(23C)(via) with total income of Rs. 1,10,000.

Answer

(i) A registered trade union is having income from house property, which is exempt


Section 139(4C) mandates filing of return only when the total income exceeds the

maximum amount which is not chargeable to tax without giving effect to the

provisions of section 10. In this case, even without giving effect to section 10(24),

the total income of the registered trade union is below basic exemption limit and

therefore, there is no mandatory requirement to file the return of income.

(ii) Since the total income without giving effect to the exemption under section

10(23C)(via) is Rs. 3,30,000, which exceeds Rs. 2,50,000, the trust has to file

its return of income by 30th

September, 2020.

Question 31

Dishant received a notice under section 148 from the Assessing Officer for A.Y. 2016-

17 on the ground that depreciation on certain assets was allowed in excess. The Assessing

Officer recorded the reason for reopening. The original assessment was completed under

section 143(3). In course of reassessment proceeding, the Assessing Officer also

disallowed certain sum under section 14A in respect of expenses purported to be in

relation to dividend from companies and tax-free interest. However, the Assessing Officer

did not record the reason for applying the provisions of section 147 in respect of the issue

of disallowance under section 14A and passed the order disallowing the excess

depreciation and also certain sum under section 14A. Is there any infirmity in the order

passed by the Assessing Officer?


27.41

Answer

Explanation 3 to section 147 permits the Assessing Officer to assess or reassess the

income in respect of any issue (which has escaped assessment) which comes to his notice

subsequently in the course of proceedings under section 147, even though the reason for

such issue does not form part of the reasons recorded under section 148(2).

Therefore, in the instant case, the Assessing Officer has the power to disallow expenses

under section 14A in addition to disallowing excess depreciation for which notice under

section 148 was issued even though the reason for issue relating to disallowance under

section 14A was not recorded under section 148(2).

Hence, there is no deficiency in the order passed by the Assessing Officer.

Question 32

In the proceedings initiated under section 153A, the assessment order passed in respect of

Mr. Simbu pertaining to a particular assessment year was annulled by the Income-tax

Appellate Tribunal in its order passed on 28.1.2019. The same was received on 28.2.2020

by the jurisdictional Commissioner of Income-tax. Does the Department have any power

to complete the assessment subsequent to such annulment? If yes, within what time limit?

Answer

As per section 153A(2), if any proceedings initiated under section 153A or any order of

assessment or reassessment made under section 153A(1) has been annulled in any

appeal or other legal proceeding, the abated assessment or reassessment relating to any

assessment year shall stand revived with effect from the date of receipt of the order of such

annulment by the Principal Commissioner or Commissioner. If the order of annulment is

set aside, such revival shall cease to have effect [Sub-section (2) of section 153A].

The time limit for completion of such assessment or reassessment shall be one year from

the end of the month in which the abated assessment revives or within the period specified in

section 153B(1) [i.e., 18 months from the end of the financial year in which the last of

authorisations for search or requisition was executed], whichever is later.

Question 33

The assessment of CNK Associates, a partnership firm, for the assessment year 2017-18 was

made under section 143(3) on 31st July, 2019. The Assessing Officer made two additions

to the income of the assessee viz. (a) addition of Rs. 2 lacs under section 40(a)(ia) due to

non-furnishing of evidence of payment of TDS and (ii) addition of Rs. 5 lacs on account of

unexplained cash credit. The assessee contested addition on account of unexplained cash

credit in appeal to the Commissioner (Appeals). The appeal was decided in January, 2020

against the assessee. The assessee approaches you for your suggestion as to whether it

should apply for revision to the Commissioner under section 264 or rectification to the

Assessing Officer under section 154 as regards disallowance under section 40(a)(ia).

What should be your suggestion?

Answer

The Commissioner cannot exercise his power of revision under section 264 where the order

sought to be revised has been made the subject of an appeal to the Commissioner

(Appeals) or to the Appellate Tribunal [Section 264(4)], even if the relief claimed in the

revision is different from the relief claimed in the appeal. This was the view of the

Supreme Court in the case of Hindustan Aeronautics Limited vs. CIT (2000) 243 ITR 808.

It is not open to the assessee to seek recourse to revision under section 264 after the appeal

is decided. Therefore, although the matter of addition of Rs. 2 lacs under section 40(a)(ia)


27.42

was not taken before the Commissioner (Appeals), the assessee, CNK Associates cannot

apply for revision under section 264 in respect of the same.

Under section 154(1A), where any matter had been considered and decided in any

proceeding by way of appeal or revision, rectification of such matter cannot be done by

the Assessing Officer. However, in respect of the matter which has not been considered

and decided in the appeal or revision, the order of the Assessing Officer can be rectified

under section 154. Thus, the assessee can apply to the Assessing Officer for rectification

of the order in respect of addition under section 40(a)(ia), as this matter has not been

considered and decided in any proceeding by way of appeal or revision.

In view of above, the assessee, CNK Associates should seek rectification under section 154.

Question 34

Examine critically in the context of provisions of the Act “Can the Assessing Officer

issue notice under section 148 to reopen the same assessment order on the same grounds

for which the CIT had issued notice under section 263 of the Act”?

Answer

The Assessing Officer cannot issue notice under section 148 to reopen the same assessment

order on the same grounds for which the Commissioner had issued notice under section

263 of the Income-tax Act, 1961, since the third proviso to section 147 specifically

provides that the Assessing Officer may assess or reassess an income which is chargeable to

tax and has escaped assessment, other than the income involving matters which are the

subject matter of any appeal, reference or revision. Therefore, if the income relates to a

matter which is the subject matter of revision under section 263, then the Assessing

Officer cannot issue notice under section 148 to reopen the assessment order.

Question 35

Is the Assessing Officer empowered to assess or reassess an income which is chargeable

to tax and has escaped assessment, in a case which is pending before the Appellate

Tribunal? Discuss.

Answer

As per third proviso to section 147, the Assessing Officer may assess or reassess an income

which is chargeable to tax and which has escaped assessment, other than the income

involving matters which are the subject matter of any appeal, reference or revision.

Therefore, in respect of the matters which are the subject matter of an appeal before the

Appellate Tribunal, it is not possible for the Assessing Officer to initiate proceeding

under section 147. However, in respect of other matters, which are not the subject matter

of the appeal, the Assessing Officer can initiate proceeding under section 147.

Question 36

A search was conducted under section 132 in the business premises of Harish on 15th

December, 2019. At that time, assessments under section 143(3) for A.Y. 2017-18 and

A.Y. 2018-19 and reassessment proceeding under section 147 for A.Y. 2016-17 were

pending before the Assessing Officer.

(i) What are the assessment years for which notice can be issued for making post-search

assessment?

(ii) What would be the fate of pending assessments and reassessment?

(iii) What would be the effect, if the post-search assessment orders are annulled by the

Income- tax Appellate Tribunal?


27.43

Answer

(i) The notice under section 153A can be issued for six assessment years preceding the

assessment year relevant to the previous year in which the search is conducted. In

this case, the search is conducted in the previous year 2019-20, the relevant

assessment year for which is A.Y.2020-21. Therefore, notice can be issued for the

six preceding assessment years i.e. for assessment years 2014-15 to 2019-20.

Further, notice for assessment or reassessment can be issued by Assessing Officer

for the relevant assessment year or years (i.e. for A.Y.2010-11 to A.Y.2013-14) if the

following conditions are satisfied:

(a) The Assessing Officer has in his possession, books of account or other

documents or evidence which reveal that the income, represented in the

form of asset, which has escaped assessment amounts to or is likely to amount

Rs.50 lakhs or more in the relevant assessment year or in aggregate in the

relevant assessment years.

(b) The income so referred above has escaped assessment for such year or years;

and

(c) The search under section 132 is initiated or requisition under section 132A is

made on or after 01.04.2017 (This condition is satisfied since the search has

taken place in December, 2019).

Note - The expression "relevant assessment year" shall mean an assessment year

preceding the assessment year relevant to the previous year in which search is

conducted or requisition is made which falls beyond six assessment years but not

later than ten assessment years from the end of the assessment year relevant to the

previous year in which search is conducted or requisition is made.

"Asset" shall include immovable property being land or building or both, shares and

securities, loans and advances, deposits in bank account.

(ii) As per section 153A, the assessment or reassessment relating to any assessment year,

falling within the above period of six assessment years and for the relevant

assessment year or years, pending on the date of initiation of the search under

section 132, shall abate. In other words, they will cease to be applicable. Therefore,

the assessments under section 143(3) for assessment years 2017-18 and 2018-19

and the reassessment proceeding under section 147 for assessment year 2016-17

shall abate.

(iii) Section 153A provides that where the post-search assessment order is annulled in any

appeal or any other legal proceeding, the abated assessment and reassessment

proceedings shall stand revived. Therefore, the assessments under section 143(3)

relating to assessment years 2017-18 and 2018-19 and the reassessment proceeding

relating to assessment year 2016-17, which abated on initiation of search, shall

stand revived with effect from the date of receipt of the order of such annulment by

the Principal Commissioner or Commissioner.

Question 37

Tai Ltd. filed its return of income for assessment year 2019-20 on 6th June, 2019. The

return is selected for regular assessment under section 143(3) for which notice under section

143(2) is served on the company on 3rd October, 2020. The company responded to the

notice under section 143(2). Examine whether the service of the notice is within time and

if not, whether the assessment order can be challenged by the assessee.


27.44

Answer

The time limit for service of notice under section 143(2) is six months from the end of the

financial year in which the return of income was furnished by the assessee. The return of

income for assessment year 2019-20 was filed by the assessee on 6th June, 2019.

Therefore, the notice under section 143(2) has to be served by 30th September, 2020.

However, the notice was served on the assessee only on 3rd October, 2020. Hence, the

notice issued under section 143(2) is time-barred.

However, as per section 292BB, where an assessee had appeared in any proceedings or

cooperated in any enquiry relating to an assessment or reassessment, it shall be deemed

that any notice required to be served upon him, has been duly served upon him in time in

accordance with the provisions of the Act and such assessee shall be precluded from

raising any objection in any proceeding or enquiry that the notice was (a) not served upon

him or (b) not served upon him in time or (c) served upon him in an improper manner.

The above provision shall not be applicable where the assessee has raised such objection

before the completion of such assessment or reassessment. Therefore, in the instant case, if

the assessee, Tai Limited, had raised an objection to the proceeding, on the ground of

non-service of the notice under section 143(2) upon it on time, then, the validity of the

assessment order can be challenged. In absence of such objection, the assessment order

cannot be challenged.

Question 38

In the case of Mr. Rajesh, a summary assessment was made under section 143(1) for

assessment year 2016-17 without calling him. Thereafter, Mr. Rajesh has received a

notice under section 148 on 6th April, 2019 for reopening of assessment. Can Mr. Rajesh

challenge the legality of the notice on the ground of change of opinion?

Answer

Under the scheme of section 143(1), only the adjustments relating to any arithmetical error

in the return, incorrect claim which is apparent from any information in the return,

disallowance of losses claimed where the relevant return of income was filed beyond the

due date under section 139(1), disallowance of expenditure indicated in the audit report

but not taken into account in computing total income in the return, disallowance of

deduction claimed under section 10AA, sections 80-IA to 80-IE, where return is furnished

beyond due date and addition of income appearing in Form 26AS or Form 16 or Form 16A

which has not been included in computing the total income in the return are permitted. In

short, what is permissible is only correction of errors apparent on the basis of the return

and tax audit report filed as well as Form 26AS, Form 16 or Form 16A. Therefore, the

intimation given under section 143(1) is only a preliminary assessment, commonly referred

to as a summary assessment without calling the assessee. The same cannot be treated as

an order of assessment under section 143(3). Since there has been no assessment under

section 143(3) in this case, the question of change of opinion does not arise.

Therefore, the assessee cannot challenge the legality of the notice issued under section

148 reopening the assessment on the ground of change of opinion in a case where no

assessment is made under section 143(3). This inference is supported by the Supreme

Court ruling in ACIT vs. Rajesh Jhaveri Stock Brokers P. Ltd. (2007) 291 ITR 500.


27.45

Question 39

Discuss the correctness or otherwise of the following proposition in the context of the

Income-tax Act, 1961:

A fresh claim before the Assessing Officer can be made only by filing a revised return

and not otherwise.

Answer

This proposition is correct. A return of income filed within the due date under section

139(1) or a belated return filed under section 139(4) may be revised by filing a revised

return under section 139(5) where the assessee finds any omission or wrong statement in

the original return subject to satisfying other conditions. There is no provision in the

Income-tax Act, 1961, to make changes or modification in the return of income by filing

a letter. The revised return can be filed at any time before the end of the relevant

assessment year or before completion of assessment, whichever is earlier. In a case where

a return of income has been filed within the due date under section 139(1) or after the due

date under section 139(4), the only option available to the assessee to make an

amendment to such return is by way of filing a revised return under section 139(5).

Therefore, a fresh claim can be made before the Assessing Officer only by filing a

revised return and not otherwise. The Supreme Court in Goetze (India) Ltd. vs. CIT (2006)

284 ITR 323 has held that there is no provision in the Income-tax Act, 1961 to allow an

amendment in the return of income filed except by way of filing a revised return.

Question 40

The Assessing Officer within the powers vested in him under section 142(2A), while

examining the accounts of PNF Ltd., had ordered to get the same audited. The company

challenges this order on the ground “that the opportunity was not provided to them by the

Assessing Officer prior to passing of such an order”. Decide the correctness of the action

of the Assessing Officer.

Answer

As per the proviso to section 142(2A), the Assessing Officer shall not direct the assessee to

get the accounts so audited unless the assessee has been given a reasonable opportunity of

being heard.

Therefore, in this case, the order of the Assessing Officer is not valid, since the assessee

was not given an opportunity of being heard prior to passing of such order.

Question 41

Smt. Kanti engaged in the business of growing, curing, roasting and grounding of coffee after

mixing chicory had a total income of Rs. 6,00,000 from this business which was her only

source of income during the year ended on 31.3.2020. She consults you to have an opinion

whether she is required to file return of income for the A.Y. 2020-21 as per provisions of

section 139(1).

Answer

The clarification regarding filing of return of income by the coffee growers being

individuals covered by Rule 7B of the Income-tax Rules, 1962 is given in Circular

No.10/2006 dated 16.10.2006. According to the Circular, an individual deriving income

from growing, curing, roasting and grounding of coffee with or without mixing chicory,

would not be required to file the return of income if the aggregate of 40% of his or her

income from growing, curing, roasting and grounding of coffee with or without mixing

chicory and income from all other sources liable to tax in accordance with the


27.46

provisions of this Act, is equal to or less than the basic exemption limit prescribed in

the First Schedule of the Finance Act of the relevant year.

In this case, Smt. Kanti has a total income of Rs. 6,00,000 from this business, which was her

only source of income for P.Y.2018-19. 40% of her total income works out to Rs. 2,40,000,

which is less than the basic exemption limit of Rs. 2,50,000 in respect of an individual

assessee. Therefore, Smt. Kanti is not required to file a return of income for the A.Y.2019-20

as per the provisions of section 139(1).

Question 42

Ram, an individual, filed his return of income for the assessment year 2020-21 on

15.6.2020. He later discovered that he had not claimed deduction under section 80C in the

said return. He claimed the said deduction through a letter addressed to the Assessing

Officer. The Assessing Officer completed the assessment without allowing the deduction

claimed by Ram. Is the Assessing Officer justified in doing so?

Answer

The Supreme Court has, in Goetze (India) Ltd. v. CIT (2006) 284 ITR 323, ruled that the

assessing authority has no power to entertain a claim for deduction made after filing of

the return of income otherwise than by way of a revised return. In the instant case, Ram has

claimed the deduction under section 80C, which he omitted to claim in the original return

of income, through a letter addressed to the Assessing Officer and not by filing a revised

return under section 139(5). In view of the decision of the Supreme Court cited above,

the Assessing Officer was justified in completing the assessment without allowing the

deduction under section 80C.

Question 43

Examine the correctness or otherwise of the following statements in the context of

provisions contained in the Income-tax Act, 1961 and the decided case laws:

“The Assessing Officer is bound to allow the set-off of brought forward losses under section

72 even if the assessee has not claimed the same in the return filed”.

Answer

The statement is correct.

The Supreme Court has, in CIT v. Mahalakshmi Sugar Mills Co. Ltd. (1986) 160 ITR 920,

held that it is the duty of the Assessing Officer to apply the relevant provisions of the Act

for the purpose of determining the true figure of the assessee’s total income and

consequential tax liability. Merely because the assessee has not claimed the set-off in the

return filed, it cannot relieve the Assessing Officer of his duty to apply section 72 in the

appropriate case.

As per CBDT Circular No.14 (XL-35) of 1955 dated 11.04.1955, it is the duty of the

Assessing Officer to assist a taxpayer in every reasonable way, particularly in the matter

of claiming and securing reliefs and in this regard, they should take the initiative in

guiding a taxpayer where proceedings or other particulars before them indicate that some

refund or relief is due to him.

Therefore, on the basis of the above Supreme Court ruling and the CBDT Circular, the

Assessing Officer is bound to allow the set-off of brought forward losses under section 72,

even if the assessee has not claimed the same in the return filed, provided the loss was

determined in pursuance of a return filed under section 139(3) in any earlier previous year.

Moreover, the wording used in section 72 is “shall”, indicating that the provisions relating

to set off of brought forward business loss are mandatory.


27.47

Therefore, the Assessing Officer is bound to allow the claim for set off of brought forward

business losses even if the assessee has not claimed the same in the return filed.

Question 44

X, an individual, has got his books of account for the year ending 31.3.2020 audited under

section 44AB. His total income for the assessment year 2020-21 is Rs. 5,20,000. He desires

to know if he can furnish his return of income for the assessment year 2020-21 through a

Tax Return Preparer.

Answer

Section 139B provides for submission of return of income through Tax Return Preparers. It

empowers the Central Board of Direct Taxes (CBDT) to frame a scheme for the purpose of

enabling any specified class or classes of persons to prepare and furnish their returns of

income through Tax Return Preparers. Specified class or classes of persons have been

defined to mean any person, other than a company or a person whose accounts are

required to be audited under section 44AB or under any other existing law, who is

required to furnish a return of income under the Act. Thus, companies and persons whose

accounts are liable for tax audit under section 44AB do not fall within the definition of

‘specified class or classes of persons’ and consequently, cannot furnish their returns of

income through Tax Return Preparers. In the instant case, the books of account of X for the

year ending 31.3.2020 have been audited under section 44AB. As such, he cannot furnish

his return of income for the assessment year 2020-21 through a Tax Return Preparer.

Question 45

In April, 2019, the business premises of Priyanka Ravi were searched under section 132 by

the DDI, Delhi. The search was concluded on 30.04.2019 and following assets/documents

were found which were not recorded in her books of accounts:

- Jewellery of Rs. 25 Lacs pertaining to P.Y. 2014-15

- Agreement for purchase of land which contains the payment of advance of Rs. 35

Lacs in cash in the P.Y.2013-14

- Shares purchased in the P.Y.2011-12 and in the P.Y.2012-13 totaling to Rs. 40 Lacs.

- Paper containing the payment of Rs. 15 Lacs in the P.Y.2009-10 and Rs. 10 Lacs in

P.Y.2008-09 to a contractor for construction of residential house.

Accordingly, Assessing Officer has issued the notice for all the previous years from

P.Y.2008-09 to P.Y.2018-19 under section 153A.

However, Miss Priyanka Ravi contented that the Assessing Officer cannot issue the notice

under section 153A beyond six assessment years immediately preceding the assessment

year relevant to the previous year in which the search was conducted under section 132

i.e. notice can be issued upto A.Y.2014-15 (P.Y. 2013-14).

Discuss about the correctness of action of Assessing Officer and the contention of Miss

Priyanka Ravi.

Answer

As per section 153A(1), issuance of notice and assessment or reassessment under the said

section can also be made for an assessment year preceding the assessment year relevant to

the previous year in which search is conducted or requisition is made which falls beyond

six assessment years but not beyond ten assessment years from the assessment year

relevant to the previous year in which search is conducted or requisition is made, provided

that -


27.48

(i) the Assessing Officer has in his possession books of account or other documents or

evidence which reveal that the income which has escaped assessment amounts to or is

likely to amount to fifty lakh rupees or more in one year or in aggregate in the

relevant assessment years;

(ii) such income escaping assessment is represented in the form of asset which shall

include immovable property being land or building or both, shares and

securities, deposits in bank account, loans and advances;

(iii) the income escaping assessment or part thereof relates to such year or years; and

(iv) search under section 132 is initiated or requisition under section 132A is made on or after

1-4-2017.

In the light of the above amended provision, the Assessing Officer can issue the notice

u/s 153A beyond six assessment years but not beyond ten assessment years from the

assessment year relevant to the previous year in which search is conducted or requisition is

made. Thus, in the given case, the Assessing Officer can issue notice under section 153A

upto A.Y.2010-11 as she,

a. has in his possession, documents or evidence which reveals the escaped assessment

amounts to Rs. 55 lacs in aggregate during the relevant four assessment years i.e.

from A.Y. 2010-11 to A.Y. 2013-14

b. such income escaping assessment represents in the form of assets which includes Rs.

40 lacs being Shares purchased in P.Y. 2011-12 and P.Y. 2012-13 plus Rs. 15 lacs

being payment to contractor for construction of residential house in P.Y. 2009-10

(payment of Rs. 10 lacs relevant to P.Y. 2008-09 cannot be included as it is beyond

ten assessment years)

c. search was conducted after 01.04.2017.

Hence, the contention of Miss. Priyanka Ravi that the Assessing Officer cannot issue the

notice under section 153A beyond six assessment years immediately preceding the

assessment year relevant to the previous year in which the search was conducted under

section 132 is incorrect.

The action of Assessing Officer is partly correct as it is possible to him to issue notice

beyond six assessment years but not beyond ten assessment years from the assessment

year relevant to the previous year in which search is conducted or requisition is made.

Thus, he cannot issue the notice under section 153A for the A.Y.2009-10.

Question 46

The assessment of Mr. Hari for A.Y.2012-13 was made on 28.3.2014 making an addition of

Rs. 3,25,000 for a certain income received during the P.Y.2011-12. The assessee

contested the addition before Commissioner (Appeals) but lost the case. The Appellate

Tribunal passed an order on 26.2.2019 holding that the said income was not taxable in the

P.Y.2011-12 but the same was taxable in the year of accrual, being P.Y.2006-07 relevant to

A.Y.2007-08. The Assessing Officer issued notice under section 148 for A.Y.2007-08 in

March 2019 bringing to tax the sum of Rs. 3,25,000. Is the notice valid?

Would your answer change if in the said case, the assessment order for A.Y.2012-13 was

made on 4.4.2014 instead of 28.3.2014?

Solution

Section 149 requires issue of notice under section 148 within a period of 6 years from the

end of the relevant assessment year, where income escaping assessment exceeds Rs. 1

lakh. Accordingly, in respect of A.Y.2012-13, notice can be issued upto 31.3.2019. Section


27.49

150(1) enables issue of notice at any time to give effect to a finding contained in an

appellate order. However, this is subject to the provisions of section 150(2), which places a

restriction that if on the date of passing of the order which was the subject-matter of

appeal, no notice could have been issued, then, such notice cannot be issued by virtue of

the enabling provision contained in section 150(1).

In this case, the income was taxable in the A.Y.2007-08 as per the order of the Appellate

Tribunal. The six year time limit, in this case, expires on 31.3.2014. Since the original

assessment in respect of such income was made on 28.3.2014, the notice issued under

section 148 consequent to the Appellate Tribunal order is valid.

Had the assessment order for A.Y.2012-13 been made on 4.4.2014 (instead of 28.3.2014), then

the same would have been outside the six year time limit from A.Y.2007-08. Hence, since

notice could not have been issued at that point of time, it cannot be now issued invoking the

provisions of section 150(1).

**************************************************************************


27.50

QUESTIONS ON INCOME TAX AUTHORITY & THEIR POWERS

Question 47

The Director General of Income Tax after getting the information that Mr. Mogambo is in

possession of unaccounted cash of Rs. 50 lacs, issued orders by invoking powers vested in

him as per section 131(1A), for its seizure. Is the order for seizure of cash issued by the

Director General of Income Tax correct? If not, does the Director General of Income Tax

have any other power to seize such cash?

Answer

The powers under section 131(1A) deal with power of discovery and production of

evidence. They do not confer the power of seizure of cash or any asset. The Director

General, for the purposes of making an enquiry or investigation relating to any income

concealed or likely to be concealed by any person or class of persons within his

jurisdiction, shall be competent to exercise powers conferred under section 131(1), which

confine to discovery and inspection, enforcing attendance, compelling the production of

books of account and other documents and issuing commissions. Thus, the power of

seizure of unaccounted cash is not one of the powers conferred on the Director General

under section 131(1A).

However, under section 132(1), the Director General has the power to authorize any

Additional Director or Additional Commissioner or Joint Director or Joint Commissioner etc.

to seize money found as a result of search [Clause (iii) of section 132(1)], if he has reason to

believe that any person is in possession of any money which represents wholly or partly

income which has not been disclosed [Clause (c) of section 132(1)]. Therefore, the proper

course open to the Director General is to exercise his power under section 132(1) and

authorize the Officers concerned to enter the premises where the cash is kept by Mr.

Mogambo and seize such unaccounted cash.

Question 48

The premises of Ganesh were subjected to a search under section 132 of the Act. The

search was authorized and the warrant was signed by the Joint Commissioner of Income-

tax having jurisdiction over the assessee, consequent to information in his possession.

The assessee challenged the validity of search on the ground that section 132(1) does

not empower Joint Commissioner to authorise a search under the Act. Decide the

correctness of the contention raised by the assessee.

Answer

Under section 132(1), the income-tax authorities listed therein are empowered to authorise

other income-tax authorities to conduct search and seizure operations. The authorities

empowered to issue authorization include such Additional Director, Additional

Commissioner, Joint Director and Joint Commissioner as are empowered by the CBDT to

do so.

However, a Joint Commissioner can issue warrant of authorization only if he has been

specifically empowered to do so by the CBDT. Therefore, only if the Joint Commissioner

has not been specifically empowered by the CBDT to do so, the contention of the assessee

would hold good.

Question 49

Examine whether the information regarding possession of unexplained assets and income

received from the Central Bureau of Investigation, a Government agency, can constitute

“information” for action under section 132. Discuss.


27.51

Answer

As per section 132(1)(c), authorization for search and seizure can take place if the

authority, in consequence of information in his possession, has reason to believe that any

person is in possession of money, bullion, jewellery or other valuable article or thing and

these assets represent, either wholly or partly, income or property which has not been, or

would not be disclosed by such person for the purposes of this Act. In the absence of such

information, a search cannot be validly authorized.

The Apex Court in UOl v Ajit Jain [2003] 260 ITR 80 has held that mere intimation by the

CBI that money was found in the possession of the assessee, which according to the CBI

was undisclosed, without something more, does not constitute “information” within the

meaning of section 132, on the basis of which a search warrant could be issued.

Consequently, the Supreme Court held that the search conducted on this basis and the

assessment made pursuant to such search was not valid.

Question 50

In the course of search operations under section 132 in the month of July, 2019, a tax payer

makes a declaration under section 132(4) on the earning of income not disclosed in

respect of P.Y.2018-19. Can that statement save the tax payer from a levy of penalty, if

he is yet to file his return of income for A.Y.2019-20?

Answer

Since the search is conducted on or after 15.12.2016, and return is yet to be filed for the

P.Y. 2018-19, the penalty would be as follows

(1) penalty@30%, if undisclosed income is admitted during the course of search in the

statement furnished under section 132(4), and the assessee explains the manner in

which such income was derived, pays the tax, together with interest if any, in respect

of the undisclosed income, and furnishes the return of income for the specified

previous year declaring such undisclosed income on or before the specified date (i.e.,

the due date of filing return of income or the date on which the period specified in the

notice issued under section 153A expires, as the case may be).

(2) penalty@60% in any other case.

Therefore, even if the tax payer furnishes the statement under section 132(4),

penalty@30% of undisclosed income of the specified previous year would be attracted

under section 271AAB.

Question 51

Cash of Rs. 25 lacs was seized on 12.9.2019 in a search conducted as per section 132 of

the Act. The assessee moved an application on 27.10.2019 to release such cash after

explaining the sources thereof, which was turned down by the department. The assessee

seeks your opinion on, the following issues:

(i) Can the department withhold the explained money?

(ii) If yes, then to what extent and upto what period?

Answer

The proviso to section 132B(1)(i) provides that where the person concerned makes an

application to the Assessing Officer, within 30 days from the end of the month in which

the asset was seized, for release of the asset and the nature and source of acquisition of

the asset is explained to the satisfaction of the Assessing Officer, then, the Assessing

Officer may, with the prior approval of the Principal Chief Commissioner or Chief

Commissioner or Principal Commissioner or Commissioner, release the asset after

recovering the existing liability under the Income-tax Act, 1961, etc. out of such asset.


27.52

‘Existing liability’, however, does not include advance tax payable. Such asset or portion

thereof has to be released within 120 days from the date on which the last of the

authorizations for search under section 132 was executed.

In this case, since the application was made to the Assessing Officer within the 30 day

period the amount of existing liability may be recovered out of the asset and the balance

may be released within 120 days from the date on which the last of the authorizations for

search under section 132 was executed.

Note: It may be noted that one of the conditions mentioned above for release of an asset is

that the nature and source of acquisition of the asset should be explained to the satisfaction

of the Assessing Officer. However, in this case, it has been given that the assessee’s

application for release of the asset, explaining the sources thereof, was turned down by

the Department. If the application was turned down by the Department due to the reason

that it was not satisfied with the explanation given by the assessee as to the nature and

source of acquisition of the asset, then, the asset (in this case, cash) cannot be released,

since the condition mentioned above is not satisfied.

Question 52

The business premises of Ram Bharose Ltd. and the residence of two of its directors at

Delhi were searched under section 132 by the DDI, Delhi. The search was concluded on

9.8.2019 and following were also seized besides other papers and records:

(i) Papers found in the drawer of an accountant relating to Shri Krishna Ltd., Mumbai

indicating details of various business transactions. However, Ram Bharose Ltd. is

not having any direct or indirect connection of any nature with these transactions and

Shri Krishna Ltd., Mumbai and its directors.

(ii) Jewellery worth Rs. 5 lacs from the bed room of one of the director, which was

claimed by him to be of his married daughter.

(iii) Papers recording certain transactions of income and expenses having direct nexus

with the business of the company for the period from 16.4.2015 to date of search. It

was admitted by the director that the transactions recorded in such papers have not

been incorporated in the books.

You are required to answer on the basis of aforesaid and the provisions of Act, following

questions:

(a) What action the DDI shall be taking in respect of the seized papers relating to Shri

Krishna Ltd., Mumbai?

(b) Whether the contention raised by the director as to jewellery found from his bed-

room will be acceptable?

(c) What presumption shall be drawn in respect of the papers which indicate

transactions not recorded in the books?

(d) Can the company move an application for settlement of case as per Chapter XIX-A of

the Act?

Answer

(a) The authorised officer being DDI, Delhi is not having any jurisdiction over Shri

Krishna Ltd., Mumbai, and therefore as per section 132(9A), the papers seized relating

to this company shall be handed over by him to the Assessing Officer having

jurisdiction over Shri Krishna Ltd., Mumbai within a period of 60 days from the

date on which the last of the authorisations for search was executed for taking

further necessary action thereon.


27.53

(b) The contention raised by the Director will not be acceptable because as per the

provisions of sub-section (4A)(i) of section 132, where any books of account,

other documents, money, bullion, jewellery or other valuables are found in the

possession or control of any person in the course of search, then, in respect thereof, it

may be presumed that the same belongs to that person.

(c) As per section 132(4A), the presumptions in respect of the papers, indicating

transactions not recorded in the books but having direct nexus with the business of

the company, are that the same belong to the company, contents of such papers are

true and the handwriting in which the same are written is/are of the persons(s) whose

premises have been searched.

(d) As per clause (iiia) in the Explanation to section 245A, the assessee can approach the

Settlement Commission at any time after the date of issue of notice under section

153A or section 153C initiating the assessment proceedings. Therefore, an

application can be made to the Settlement Commission where search has been

initiated under section 132 followed by assessment under section 153A or section

153C.

The proviso to section 245C(1) specifies the monetary limit for making application

for settlement of cases, in respect of search cases. Accordingly, the additional amount

of income- tax payable on the income disclosed in the application must exceed Rs. 50

lacs so that application for settlement of the case is eligible for admission.

Question 53

In the course of search on 25.03.2019, assets were seized. Examine the procedure laid

down to deal with such seized assets under the Act.

Answer

Section 132B of the Income-tax Act, 1961 deals with the application of assets seized under

section 132. Such assets will be first applied towards the existing liability under the

Income-tax Act, 1961, etc. ‘Existing liability’, however, does not include advance tax

payable. Further, the amount of liability determined on completion of search assessment

(including any penalty levied or interest payable in connection with such assessment) and

in respect of which the assessee is in default or deemed to be in default, may be recovered

out of such assets.

Where the nature and source of acquisition of such seized assets is explained to the

satisfaction of the Assessing Officer, the amount of any existing liability mentioned in

para 1 above may be recovered out of such asset and the remaining portion, if any, of the

asset may be released, with the prior approval of the Principal Chief Commissioner or Chief

Commissioner or Principal Commissioner or Commissioner, as the case may be. The

release must be made within 120 days from the date on which the last of the authorisations

for search under section 132 or for requisition under section 132A was executed. The

assets would be released to the person from whose custody they were seized.

When the assets consist of solely of money, or partly of money and partly of other assets, the

Assessing Officer may apply such money in the discharge of the liabilities referred to in

para 1 above and the assessee shall be discharged of such liability to the extent of the

money so applied. However, the assets other than money may also be applied for the

discharge of such liabilities if the complete recovery could not be made from the money

seized or the money seized was not sufficient.

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27.54

QUESTIONS ON APPEAL & REVISION

Question 54

"SVS Propcon" did not make a claim of Rs. 20 lacs in the return of income filed for A.Y.

2020-21 which was disallowed in the previous assessment year under section 43B.

However, the said claim was also not considered by the Assessing Officer during

assessment proceedings on the ground that no revised return was filed. Can the assessee

now make such claim before the appellate authority?

Answer

Yes, the assessee is entitled to raise additional claims before the appellate authorities.

The restriction that an additional claim has to be made by filing a revised return applies

only in respect of a claim made before the Assessing Officer. An assessee cannot make a

claim before the Assessing Officer otherwise than by filing a revised return. It was so held

by the Supreme Court in Goetze (India) Ltd v. CIT (2006) 284 ITR 323.

However, this restriction does not apply to an additional claim made before an appellate

authority. The appellate authorities have jurisdiction to permit additional claims before

them, though, the exercise of such jurisdiction is entirely the authorities’ discretion. It was

so held by the Bombay High Court in CIT v. Pruthvi Brokers & Shareholders (2012) 349

ITR 336.

Thus, an additional claim can be raised before the Appellate Authority even if no revised

return is filed.

Question 55

Examine the correctness or otherwise of the following statements with reference to the

provisions of the Income-tax Act, 1961:

(i) An appeal before Income-tax Appellate Tribunal cannot be decided in the event of

difference of opinion between the Judicial Member and the Accountant Member on a

particular ground.

(ii) A High Court does not have an inherent power to review an earlier order passed by it

on merits.

Answer

(i) The statement given is not correct. As per the provisions of section 255, in the

event of difference in opinion between the members of the Bench of the Income-tax

Appellate Tribunal, the matter shall be decided on the basis of the opinion of the

majority of the members. In case the members are equally divided, they shall state the

point or points of difference and the case shall be referred by the President of the

Tribunal for hearing on such points by one or more of the other members of the

Tribunal. Such point or points shall be decided according to the opinion of

majority of the members of the Tribunal who heard the case, including those who

had first heard it.

(ii) The statement given is not correct. The Supreme Court, in CIT v. Meghalaya

Steels Ltd. (2015) 377 ITR 112, observed that the power of review would inhere on

High Courts, being courts of record under article 215 of the Constitution of India.

There is nothing in article 226 of the Constitution to preclude a High Court from

exercising the power of review which inheres in every court of plenary jurisdiction

to prevent miscarriage of justice or to correct grave and palpable errors committed

by it. The Supreme Court further observed that section 260A(7) does not purport in

any manner to curtail or restrict the application of the provisions of the Code of

Civil Procedure. Section 260A(7) only states that all the provisions that would


27.55

apply qua appeals in the Code of Civil Procedure would apply to appeals under

section 260A. The Supreme Court opined that this does not in any manner suggest

either that the other provisions of the Code of Civil Procedure are necessarily

excluded or that the High Court’s inherent jurisdiction is in any manner affected.

Question 56

Does the Income-tax Appellate Tribunal have the following powers?

(i) Power to allow the assessee to urge any ground of appeal which was not raised by him

before the Commissioner (Appeals);

(ii) Power to recall its own order.

Answer

(i) The Income-tax Appellate Tribunal has the power to entertain question raised for the

first time. The Tribunal is not confined only to the issues arising out of the appeal

before the Commissioner (Appeals). It has the power to allow the assessee to urge any

ground not raised before the Commissioner (Appeals). However, the relevant facts

in respect of such ground should be on record. The decision of the Supreme Court in

the case of National Thermal Power Company Limited vs. CIT (1998) 229 ITR 383

(SC) supports this view.

(ii) The Delhi High Court, in Lachman Dass Bhatia Hingwala (P) Ltd. v. ACIT (2011)

330 ITR 243 (Delhi)(FB) observed that the justification of an order passed by the

Tribunal recalling its own order is required to be tested on the basis of the law laid

down by the Apex Court in Honda Siel Power Products Ltd. v. CIT (2007) 295 ITR

466, dealing with the Tribunal’s power under section 254(2) to recall its order where

prejudice has resulted to a party due to an apparent omission, mistake or error

committed by the Tribunal while passing the order. Such recalling of order for

correcting an apparent mistake committed by the Tribunal has nothing to do with the

doctrine or concept of inherent power of review. It is a well settled provision of law

that the Tribunal has no inherent power to review its own judgment or order on merits

or reappreciate the correctness of its earlier decision on merits. However, the power

to recall has to be distinguished from the power to review. While the Tribunal does

not have the inherent power to review its order on merits, it can recall its order for

the purpose of correcting a mistake apparent from the record.

When prejudice results from an order attributable to the Tribunal’s mistake, error or

omission, then it is the duty of the Tribunal to set it right. The Delhi High Court

observed that the Tribunal, while exercising the power of rectification under section

254(2), can recall its order in entirety if it is satisfied that prejudice has resulted to

the party which is attributable to the Tribunal’s mistake, error or omission and the

error committed is apparent.

Question 57

Can a rectification order under section 254 of the Income-tax Act, 1961 be passed by the

Income- tax Appellate Tribunal beyond 6 months from the end of the month in which the

order sought to be rectified was passed?

Answer

The issue as to whether a rectification order can be passed by the Income-tax Appellate

Tribunal under section 254 beyond six months from the end of the month in which order

sought to be rectified was passed, has been addressed in Sree Ayyanar Spinning and

Weaving Mills Ltd. v. CIT (2008) 301 ITR 434 (SC). Section 254(2), dealing with the

power of the Appellate Tribunal to pass an order of rectification of mistakes, is in two parts.


27.56

The first part refers to the suo motu exercise of the power of rectification by the Appellate

Tribunal, whereas the second part refers to rectification on an application filed by the

assessee or Assessing Officer bringing any mistake apparent from the record to the attention

of the Appellate Tribunal.

If Income-tax Appellate Tribunal, suo moto, makes the rectification of its order, then the

order has to be passed within 6 months from the end of the month in which the order

sought to be rectified was passed. Where the application for rectification is made by the

Assessing Officer or the assesse within 6 months from the end of the month in which the

order sought to be rectified was passed, the Appellate Tribunal is bound to decide the

application on merits and not on the ground of limitation i.e. order can be passed after

expiry of 6 months from the end of the month in which the order sought to be rectified was

passed. However, the application for rectification cannot be filed belatedly after 6 months

from the end of the month in which the order sought to be rectified was passed. [Ajith

Kumar Pitaliya vs ITO (2009) 318 ITR 182 (M.P.)]

Question 58

What do you mean by substantial question of law? Examine.

Answer

The expression “substantial question of law” has not been defined anywhere in the Act.

However, it has acquired a definite meaning through various judicial pronouncements. The

tests are:

(1) whether directly or indirectly it affects substantial rights of the parties; or

(2) the question is of general public importance; or

(3) whether it is an open question in the sense that issue is not settled by the

pronouncement of the Supreme Court or Privy Council or by the Federal Court; or

(4) the issue is not free from difficulty; or

(5) it calls for a discussion for alternative view.

Question 59

Examine the correctness of the following statement:

“The Appellate Tribunal is empowered to grant indefinite stay for the demand disputed in

appeals before it.”

Answer

Section 254(2A) provides that the Appellate Tribunal, where it is possible, may hear and

decide an appeal within a period of four years from the end of the financial year in which

such appeal is filed.

The Appellate Tribunal may, on merit, pass an order of stay in any proceedings relating to an

appeal. However, such period of stay cannot exceed 180 days from the date of such order.

The Appellate Tribunal has to dispose off the appeal within this period of stay.

Where the appeal has not been disposed off within this period and the delay in disposing the

appeal is not attributable to the assessee, the Appellate Tribunal can further extend the

period of stay originally allowed. However, the aggregate of period originally allowed and

the period so extended should not exceed 365 days even if the delay in disposing of the

appeal is not attributable to the assessee. The Appellate Tribunal is required to dispose off

the appeal within this extended period. If the appeal is not disposed of within such period

or periods, the order of stay shall stand vacated after the expiry of such period or periods.

Therefore, the statement given in the question is not correct.


27.57

Question 60

Is Commissioner (Appeals) empowered to consider an appeal filed by an assessee challenging

the order of assessment in respect of which the proceedings before the Settlement Commission

abates? Examine.

Answer

Section 251(1) lists the powers of the Commissioner (Appeals) in disposing of an appeal.

Clause (aa) of section 251(1) empowers the Commissioner (Appeals), in an appeal against

the assessment order in respect of which the proceeding before the Settlement Commission

abates under section 245HA, to confirm, reduce, enhance or annul the assessment after

taking into consideration the following -

(1) all the material and other information produced by the assessee before the Settlement

Commission;

(2) the results of the inquiry held by the Settlement Commission;

(3) the evidence recorded by the Settlement Commission in the course of the proceeding

before it; and

(4) such other material as may be brought on his record.

Question 61

An Income-tax authority did not file an appeal to the Income-tax Appellate Tribunal against

an order of the Commissioner (Appeals) decided against the Income-tax department on a

particular issue in case of one assessee, Alpi for assessment year 2019-20 on the ground that

the tax effect of such dispute was less than the monetary limit prescribed by CBDT. In

assessment year 2020-21, similar issue arose in the assessments of Alpi and her sister

Palki, which was decided by the Commissioner (Appeals) against the Department. Can

the Income-tax department move an appeal to the Tribunal in respect of A.Y. 2020-21

against the orders of the Commissioner (Appeals) for Alpi and her sister Palki?

Answer

Under section 268A(1), the CBDT is empowered to issue orders, instructions or

directions to the other income-tax authorities, fixing such monetary limits, as it may

deem fit, to regulate filing of appeal or application for reference by any income-tax

authority.

Under section 268A(2), where an income-tax authority has not filed any appeal or

application for reference on any issue in the case of an assessee for any assessment year, due

to above-mentioned order/instruction/direction of the CBDT, such authority shall not be

precluded from filing an appeal or application for reference on the same issue in the case

of the same assessee for any other assessment year or any other assessee for the same or

any other assessment year. Further, in such a case, it shall not be lawful for an assessee

to contend that the income-tax authority has acquiesced in the decision on the disputed

issue by not filing an appeal or application for reference in any case.

In view of above provision, it would be in order for the Income-tax Department to move an

appeal to the Tribunal against the orders of the CIT(A) in respect of A.Y. 2020-21 both for

Alpi and Palki.

Question 62

A petition for stay of demand was filed before ITAT by XYZ Ltd. in respect of a disputed

demand for which appeal was pending before it, on which stay was granted by the

ITAT vide order dated 1.1.2019. The bench could not function thereafter till 1.2.2020

and therefore, the disputed matter could not be disposed off. The Assessing Officer

attached the bank account on 16.2.2020 and recovered the amount of Rs. 15 lacs against


27.58

the arrear demand of Rs. 25 lacs. The assessee requested the Assessing Officer to refund

back the amount as it holds stay over it. The Assessing Officer rejected the contention

of the assessee. Now the assessee seeks your opinion.

Answer

The Appellate Tribunal may, on merit, pass an order of stay in any proceedings relating to an

appeal. However, such period of stay cannot exceed 180 days from the date of such order.

The Appellate Tribunal has to dispose off the appeal within this period of stay. Where the

appeal has not been disposed off within this period and the delay in disposing the

appeal is not attributable to the assessee, the Appellate Tribunal can further extend the

period of stay originally allowed. Section 254(2A) provides that the aggregate of the

period originally allowed and the period or periods so extended or allowed shall not, in

any case, exceed 365 days, even if the delay in disposing of the appeal is not attributable

to the assessee. If the appeal is not disposed of within such period or periods, the order

of stay shall stand vacated after the expiry of such period or periods.

Accordingly, even if an appeal is not heard by the bench, say, due to the bench not

functioning or due to the department seeking adjournment, the stay granted by the

Appellate Tribunal shall stand vacated after the period of 365 days, inspite of the assessee

having taken all steps to ensure speedy disposal of the appeal and having a good prima facie

case.

In the present case, the period of 365 days has expired on 31.12.2019, after which date the

order of stay stands vacated. Accordingly, the recovery of Rs. 15 lacs against the arrear

demand of Rs. 25 lacs made by the Assessing Officer on 16.2.2020 is in order.

Question 63

An assessee who had been served with an order of assessment passed under section

143(3) on 1.1.2020 had filed an application against this order before the CIT as per section

264 on 11.1.2020. However, the CIT refused to entertain the application on the pretext

of premature application. Assessee seeks your opinion.

Answer

An assessee, who is aggrieved by the order of the Assessing Officer under section 143(3)

passed on 1.1.2020, had moved an application for revision of order under section 264 on

11.1.2020. The order passed by the Assessing Officer under section 143(3) is an order

appealable before the Commissioner (Appeals). The time limit for filing an appeal is 30

days from the date of order i.e., upto 31.1.2020. This time limit had not expired on

11.1.2020 and the assessee had also not waived his right of appeal while filing the

application for revision on 11.1.2020 before the Commissioner of Income-tax. The

application filed before the Commissioner of Income-tax for revision under section 264 by

the assessee will only be considered when the conditions specified under section 264(4)

have been complied with. One of the conditions is that the Commissioner shall not revise

any order where an appeal against the order lies to the Commissioner (Appeals) or Appellate

Tribunal and the time within which such appeal may be made has not expired, unless the

assessee has waived his right of appeal. In the present case, the time limit had not expired

on 11.1.2020 and the assessee had also not waived the right of appeal while filing the

application for revision before the Commissioner of Income-tax on 11.1.2020 under section

264. Therefore, the Commissioner’s refusal to entertain such application is correct.

Note : In practical situations, the Commissioner could have kept the proceedings in

abeyance till the expiry of the time prescribed for filing appeal by the assessee and

thereafter, could have assumed jurisdiction for making revision besides taking an

undertaking from the assessee for waiving his right of appeal. In reality, taxpayers


27.59

usually will not prefer revision in such short time period nor would the Commissioner

reject the application, the moment it is received by him.

Question 64

Answer the following in the context of provisions contained in the Income-tax Act, 1961:

The assessment for A.Y. 2016-17 was completed as per section 143(3) considering the

various claims so made by the assessee on 23.12.2017. Subsequently, this was reopened

under section 147 on certain issues, but excluding the claim of the assessee as to “Lease

Equalisation Fund”. The order of reassessment was passed on 18.11.2018. The

Commissioner within the powers vested under section 263 passed an order on 11.4.2020

rejecting the claim of assessee as to “Lease Equalisation Fund”. The assessee challenges

that the action of the CIT is not sustainable because the same was barred by limitation.

Answer

This issue was settled by the Supreme Court in CIT v. Alagendran Finance Ltd. (2007) 293

ITR 1. The Supreme Court observed that though there was no doubt that once an order of

assessment is reopened, the previous assessment will be held to be set aside and the whole

proceedings would start afresh, however, it would not mean that even when the subject-

matter of reassessment is distinct and different, the entire proceeding would be deemed to

have been reopened. The doctrine of merger would apply only in a case where the

subject-matter of reassessment and the subject- matter of assessment are the same.

However, in this case, the revision proceedings related to Lease Equalisation Fund, which

was not the subject matter of reassessment. Therefore, the doctrine of merger does not apply

in this case.

Section 263(2) provides no order shall be made under section 263(1) after the expiry of

two years from the end of the financial year in which the order sought to be revised was

passed. The period of limitation as referred to in section 263(2) relates to the assessment

in which the claim of the assessee as to Lease Equalisation Fund was considered by the

Assessing Officer. This issue was not the subject matter of reassessment proceedings.

Accordingly, the period of limitation shall be reckoned with reference to the original

assessment order and not from the date of the order of reassessment. Therefore, in this

case, the revision proceedings are barred by limitation since the original assessment order

was made on 23.12.2017 and the revision should have been made by 31.3.2020.

Question 65

An assessee, who is aggrieved by all or any of the following orders, is desirous to know the

available remedial recourse and the time limit against each under the Income-tax Act,

1961:

(i) passed under section 143(3) by the Assessing Officer.

(ii) passed under section 263 by the Commissioner of Income-tax.

(iii) passed under section 272A by the Director General.

(iv) passed under section 254 by the ITAT.

Answer

(i) An assessee, aggrieved by the order passed under section 143(3) by the Assessing

Officer, can file an appeal before the Commissioner of Income-tax (Appeals) under

section 246A(1) within 30 days of the date of service of the notice of demand

relating to the assessment. However, where the assessee does not want to prefer an

appeal, then he can move a revision petition before the Principal Commissioner or

Commissioner of Income-tax under section 264 within a period of one year from the


27.60

date of on which the order was communicated to him or the date on which he

otherwise came to know of it, whichever is earlier.

(ii) An assessee, aggrieved by the order passed under section 263 by the

Commissioner of Income-tax, can file an appeal to Income-tax Appellate Tribunal

under section 253(1)(c) within 60 days of the date on which the order sought to be

appealed against is communicated to the assessee.

(iii) An assessee, aggrieved by the order passed under section 272A by the Director

General, can file an appeal before the Income-tax Appellate Tribunal under section

253(1)(c) within 60 days of the date on which the order sought to be appealed against

is communicated to the assessee.

(iv) An assessee, aggrieved by the order passed under section 254 by the Income-tax

Appellate Tribunal, can file an appeal before the High Court under section 260A

within 120 days from the date of receipt of order of Income-tax Appellate Tribunal,

only where the order gives rise to a substantial question of law.

Question 66

Who can file memorandum of cross-objections before the Income-tax Appellate Tribunal?

What is the time limit? What is the fee for filing memorandum of cross objections?

Answer

Section 253(4) of the Income-tax Act, 1961 gives the respondent (assessee or the

Assessing Officer), in every appeal filed before the Income-tax Appellate Tribunal, a right

to file a memorandum of cross-objections against any order of the Commissioner

(Appeals). This right of filing a memorandum of cross-objections is an independent right

given to the respondent in an appeal and is in addition to the right of appeal which may

or may not be exercised by the assessee or the Assessing Officer under section 253(1) or

section 253(2). The memorandum of cross-objections has to be in the prescribed form and

verified in the prescribed manner and has to be filed within 30 days of the receipt of notice

of the appeal. The Tribunal is empowered to permit filing of memorandum of cross-

objections after the expiry of the prescribed period if sufficient cause is shown. Such

memorandum of cross-objections will be disposed of by the Appellate Tribunal as if it were

an appeal presented within the time specified in section 253(3). There is no fee for filing

a memorandum of cross-objections.

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27.61

QUESTIONS ON PENALTIES

Question 67

A search under section 132 was initiated in the premises of Mr. X on 30.4.2019 and

undisclosed money and jewellery belonging to Mr. X was found in his premises. Examine

the penal provisions under the Income-tax Act which are attracted in this case, assuming

that the undisclosed assets were acquired out of his undisclosed income of previous year

2019-20.

Answer

In order to deter the practice of non-disclosure of income, section 271AAB(1A) provides

for levy of penalty on undisclosed income found during the course of a search, which

relates to specified previous year, i.e.-

• the previous year which has ended before the date of search, but the due date of filing

return of income for the same has not expired before the date of search and the

return has not yet been furnished (P.Y. 2018-19);

• the previous year in which search is conducted (P.Y. 2019-20).

Accordingly, under section 271AAB(1A), in respect of searches initiated on or after

15.12.2016,

• penalty@30% would be attracted, if undisclosed income is admitted during the course

of search in the statement furnished under section 132(4), and the assessee explains the

manner in which such income was derived, pays the tax, together with interest if any, in

respect of the undisclosed income, and furnishes the return of income for the

specified previous year declaring such undisclosed income on or before the specified

date (i.e., the due date of filing return of income or the date on which the period

specified in the notice issued under section 153A expires, as the case may be).

• In all other cases, penalty @60% of undisclosed income would be attracted.

Question 68

What is the quantum of penalty that could be levied in each of the following cases -

(i) Failure to get books of accounts audited as required under section 44AB within

the time prescribed under the Act.

(ii) Failure to comply with a direction issued under section 142(2A).

(iii) Failure to furnish report from an accountant as required under section 92E.

Answer

The penalty that could be levied in each case is:

(i) Failure to get books of accounts audited as required under section 44AB of the

Income-tax Act, 1961 - a sum equal to ½% of the total sales, turnover or gross

receipts, as the case may be, in business, or of the gross receipts in profession, in

such previous year or years, or a sum of Rs. 1,50,000, whichever is less [Section

271B].

(ii) Failure to comply with a direction issued under section 142(2A) – a sum of Rs.

10,000 [Section 272A(1)(d)].

(iii) Failure to furnish report from an accountant as required by section 92E - a sum

of Rs. 1,00,000 [Section 271BA].

Question 69

X, an individual whose total sales in the business of food grains for the year ending

31.3.2020 was Rs. 205 lakhs, did not maintain books of account for P.Y.2019-20, even


27.62

though his turnover exceeded Rs. 25 lakhs in the P.Y.2018-19. The Assessing Officer

levied penalty of Rs. 25,000 under section 271A for non-maintenance of books of

account and penalty of Rs. 1,02,500 under section 271B for not getting the books

audited as required by section 44AB. Is the Assessing Officer justified in levying

penalty under section 271B?

Answer

X is required to maintain books of account as per section 44AA for the P.Y.2019-20

since his turnover exceeded Rs. 25 lakhs in the P.Y.2018-19. He also has to get them

audited under section 44AB, since his gross sales in the P.Y.2019-20 exceeds Rs. 1

crore. He is liable to pay penalty under section 271A for not maintaining his books of

account as per section 44AA. Accordingly, the action of the Assessing Officer in levying

penalty of Rs. 25,000 under section 271A is correct. However, where books of account

have not been maintained, there cannot be a question of getting them audited. Audit of

books of account presupposes maintenance of books of account. When admittedly X has

not maintained books, he cannot obviously get the audit done.

In Surajmal Parsuram Todi v. CIT (1996) 222 ITR 691, the Gauhati High Court has held

that when a person commits an offence by not maintaining books of accounts as

contemplated by section 44AA, the offence is complete and after that there can be no

possibility of any offence as contemplated by section 44AB and, therefore, the imposition of

penalty under section 271B is erroneous.

Therefore, in this case, the Assessing Officer is not justified in levying penalty under

section 271B.

Question 70

State the conditions, if any, to be satisfied by an assessee in order to get relief under section

273A(4) regarding the waiver of penalty. Can the Commissioner refuse to grant relief,

when the conditions laid down in the section was complied with, by the assessee?

Answer

There are two conditions to be satisfied by an assessee in order to get relief in the form of a

waiver or reduction of penalty by the Commissioner of Income-tax under section 273A(4)

of the Act. These conditions are:

(i) The payment of penalty would cause "genuine hardship" to the assessee and the

Commissioner is satisfied about the existence of genuine hardship having regard to the

circumstances of the case. The existence of genuine hardship would entitle the

assessee to relief. The CBDT in its Circular No 784 dated 22-11-1999 has clarified

that “genuine hardship” referred to in the provisions of section 273A(4) should

exist both at the time at which the application under section 273A(4) is made by

the assessee before the Commissioner and at the time of passing of order under

section 273A(4) by the Commissioner.

(ii) The assessee has co-operated in any enquiry relating to the assessment or any

proceeding for the recovery of any amount due from him.

As per the decision of Andhra Pradesh High Court in K.S.N. Murthy v. Chairman,

CBDT (2001) 252 ITR 269, if the above conditions laid down for exercise of the

discretion are satisfied, the Principal Commissioner or Commissioner cannot refuse

to exercise the discretion. Though the power given to the Commissioner under

section 273A is discretionary, the exercise of discretion cannot be either arbitrary

or capricious and has to be judicious and objective, once the conditions required

for exercise of discretion in any judicial or quasi-judicial proceedings are satisfied.

Such discretion must be exercised taking into consideration all relevant facts.


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The satisfaction for exercise of discretionary power under the section must be based

on objective consideration and not on subjective satisfaction.

Also, as per the proviso to section 273A(4), in case the quantum of penalty exceeds

Rs. 1 lakh, the Principal Commissioner or Commissioner can grant relief only

with the previous approval of the Principal Chief Commissioner or Chief

Commissioner or the Principal Director General or Director General, as the case

may be.

Note - The Principal Commissioner or Commissioner has to pass an order under

section 273A(4), either accepting or rejecting the application in full or in part, within

a period of 12 months from the end of the month in which the application is

received. Further, no order rejecting the application, either in full or in part, shall

be passed unless the assessee has been given an opportunity of being heard.

Question 71

An assessee had credited a sum of Rs. 50,000 in cash in the account of Madan, said to

represent a loan obtained from him. The Assessing Officer, having gone into the

genuineness of the transaction, disbelieved the story of loan and treated the sum of Rs.

50,000 as the income of the assessee from undisclosed sources. He also started

proceedings under section 271D and levied a penalty of Rs. 60,000 on the assessee for

having accepted the loan in contravention of section 269SS. Examine the correctness of the

levy.

Answer

There are several flaws in the penalty levied by the Assessing Officer. Firstly, the penalty

leviable under section 271D cannot exceed the sum equal to the loan taken. Hence, the

maximum penalty leviable would be Rs. 50,000. Secondly, any penalty imposable under

section 271D shall be imposed by the Joint Commissioner. Hence, unless the Assessing

Officer happens to be a Joint Commissioner the levy of penalty will be invalid. Thirdly,

the Assessing Officer cannot, on the one hand, treat the loan as undisclosed income of the

assessee and on the other, treat it as a loan for the purpose of section 269SS read with

section 271D. Such a treatment will be self-contradictory. The moment the amount of

Rs. 50,000 is treated as undisclosed income, it ceases to bear the character of loan and

therefore, the foundation for the levy of penalty under section 271D disappears. [Diwan

Enterprises v. CIT and Others (2000) 246 ITR 571].

Question 72

Examine the following cases and state whether the same are liable for penalty as per the

provisions of the Income-tax Act, 1961.

(i) Raman & Associates had made payment in excess of the limits prescribed to the

contractors for carrying out labour job work at various sites, but had not deducted

tax at source as per section 194C.

(ii) Hotels and Hotels were asked by Income-tax Officer (CIB) to furnish details of all

such tourists who stayed in their hotels and had paid bill amount in excess of Rs.

10,000. They have not furnished the requisite information in spite of various

reminders.

Answer

(i) Penalty under section 271C is attracted for failure to deduct tax at source. The penalty

would be a sum equal to the amount of tax which such person has failed to deduct.

Such penalty can be imposed only by the Joint Commissioner. Therefore, Raman &

Associates shall be liable for penalty under section 271C equal to the amount of tax


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which they have failed to deduct under section 194C from the payments made to the

contractors. The penalty would be in addition to the disallowance of 30% of

expenditure/payment under section 40(a)(ia).

(ii) Section 133(6) empowers the Income-tax authority to require any person to furnish

information in relation to such points or matters which will be useful for or

relevant to any enquiry or proceeding under the Act. Failure on the part of an

assessee to furnish the information in relation to such points or matters as required

makes him liable for penalty under section 272A(2) of Rs. 100 for every day during

which the failure continues.

Note – In a case where no proceeding is pending, the Income-tax authority can

exercise this power only after obtaining the approval of the Principal

Director/Director or Principal Commissioner/Commissioner as the case may be. In

this case, it is presumed that the Income- tax authority has obtained the approval of

the Principal Director/Director or Principal Commissioner/ Commissioner before

exercising this power.

Question 73

Fox Limited failed to furnish information and documents sought by the Transfer Pricing

Officer (TPO). Can TPO levy penalty for such failure? How much would be the quantum

of penalty imposable for the said failure?

Answer

Under section 271G, if any person who has entered into an international transaction or

specified domestic transaction fails to furnish any such information or document as required

by section 92D(3) sought for by the Transfer Pricing Officer, then, such person shall be

liable to a penalty which may be levied by the Assessing Officer or the Transfer Pricing

Officer or the Commissioner (Appeals). Thus, the Transfer Pricing Officer is a competent

authority to levy penalty.

Penalty would be a sum equal to 2% of the value of international transaction or specified

domestic transaction for each such failure.

Question 74

What would be the penalty leviable under section 270A in case of the following assessees,

if none of the additions or disallowances made in the assessment or reassessment qualify

under section 270A(6) and the under-reported income is not on account of misreporting?

Particulars of total income of A.Y.2020-21 M/s. Alpha, a

resident firm

Beta Ltd., an

Indian company

(Rs.) (Rs.)

(1) As per the return of income furnished u/s

139(1)

35,00,000 (12,00,000)

(2) Determined under section 143(1)(a) 45,00,000 (6,00,000)

(3) Assessed under section 143(3) 62,00,000 (2,00,000)

(4) Reassessed under section 147 81,00,000 6,00,000

Note – Beta Ltd. is a trading company. The total turnover of Beta Ltd. for the P.Y.2017-

18 was Rs. 401 crore and the company has not exercised option under section 115BAA.

Answer

Penalty leviable under section 270A in case of M/s. Alpha, a resident firm

M/s. Alpha is deemed to have under-reported its income since:


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(1) its income assessed under 143(3) exceeds its income determined in a return processed

under section 143(1)(a); and

(2) the income reassessed under section 147 exceeds the income assessed under section

143(3).

Therefore, penalty is leviable under section 270A for under-reporting of income.

Computation of penalty leviable under section 270A

Particulars Rs. Rs.

Assessment under section 143(3)

Under-reported income:

Total income assessed under section 143(3)

(-) Total income determined u/s 143(1)(a)

62,00,000

45,00,000

17,00,000

Tax payable on under-reported income:

Tax on under-reported income of Rs. 17 lakhs plus total income

of Rs. 45 lakhs determined u/s 143(1)(a) [30% of Rs. 62 lakh

+ EC & SHEC@4%]

19,34,400

Less: Tax on total income determined u/s 143(1)(a) [30% of

Rs. 45 lakh + EC & SHEC@4%]

14,04,000

5,30,400

Penalty leviable@50% of tax payable

Reassessment under section 147 Under-reported income:

2,62,200

Total income reassessed under section 147

(-) Total income assessed under section 143(3)

81,00,000

62,00,000

19,00,000


Tax on under-reported income of Rs. 19 lakhs plus total income

of Rs. 62 lakhs assessed u/s 143(3) [30% of Rs. 81 lakh + EC

& SHEC@4%]

25,27,200

Less: Tax on total income assessed u/s 143(3) [30% of Rs. 62

lakh + EC & SHEC@4%]

19,34,400

5,92,800

Penalty leviable@50% of tax payable 2,96,400

Penalty leviable under section 270A in the case of Beta Ltd., an Indian company

Beta Ltd. is deemed to have under-reported its income since:

(1) the assessment under 143(3) has the effect of reducing the loss determined in a

return processed under section 143(1)(a); and

(2) the reassessment under section 147 has the effect of converting the loss assessed

under section 143(3) into income.



Particulars Rs. Rs.



Loss assessed u/s 143(3)

(-) Loss determined under section 143(1)(a)

(2,00,000)

(6,00,000)

4,00,000


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Tax payable on under-reported income@30% 1,20,000

Add: EC & SHEC@4% 4,800

1,24,800

Penalty leviable@50% of tax payable 62,400

Reassessment under section 147


Total income reassessed under section 147 6,00,000

(-) Loss assessed under section 143(3) (2,00,000)

8,00,000


Add: EC & SHEC@4% 9,600

2,49,600


Note – The applicable rate of tax for Beta Ltd. for A.Y.2020-21 is 30%, since its

turnover for the P.Y.2017-18 exceeded Rs. 400 crore.

Question 75

M/s. XYZ is a firm liable to tax@30%. The following are the particulars furnished by the

firm for A.Y.2020-21:

Particulars of total income Rs.

(1) As per the return of income furnished u/s 139(1) 50,00,000

(2) Determined under section 143(1)(a) 60,00,000

(3) Assessed under section 143(3) 75,00,000

(4) Reassessed under section 147 95,00,000

Can penalty be levied under section 270A on M/s. XYZ? If the answer is in the affirmative,

compute the penalty leviable under section 270A.

Solution

M/s. XYZ is deemed to have under-reported its income since:

(1) its income assessed under 143(3) exceeds its income determined in a return processed

under section 143(1)(a); and

(2) the income reassessed under section 147 exceeds the income assessed under section

143(3).



Particulars Rs. Rs.



Total income assessed under section 143(3) 75,00,000

(-) Total income determined u/s 143(1)(a) 60,00,000

15,00,000


Tax on under-reported income of Rs. 15 lakhs plus tax on total

income of Rs. 60 lakhs determined u/s 143(1)(a) [30% of Rs. 75


23,40,000

Less: Tax on total income determined u/s 143(1)(a) [30% of 18,72,000


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Rs. 60 lakh + EC & SHEC@4%]

4,68,000


Reassessment under section 147



(-) Total income assessed under section 143(3) 75,00,000

20,00,000


Tax on under-reported income of Rs. 20 lakhs plus tax on total

income of Rs. 75 lakhs assessed u/s 143(3) [30% of Rs. 95


29,64,000

Less: Tax on total income assessed u/s 143(3) [30% of Rs. 75


23,40,000

6,24,000


Note – The following assumptions have been made -

(1) None of the additions or disallowances made in assessment or reassessment qualifies

under section 270A(6); and

(2) The under-reported income is not on account of misreporting.

Question 76

Mr. Ram, a resident individual of the age of 55 years, has not furnished his return of

income for A.Y.2020-21. However, the total income assessed in respect of such year

under section 144 is Rs. 12 lakh. Is penalty under section 270A attracted in this case, and

if so, what is the quantum of penalty leviable?

Solution

Mr. Ram is deemed to have under-reported his income since he has not filed his return of

income and his assessed income exceeds the basic exemption limit of Rs. 2,50,000.

Hence, penalty under section 270A is leviable in his case.


Particulars Rs. Rs.



Total income assessed under section 143(3) 12,00,000

(-) Basic exemption limit 2,50,000

9,50,000

Tax payable on under-reported income as increased by the

basic exemption limit [30% of Rs. 2 lakhs + Rs. 1,12,500]

1,72,500

Add: EC & SHEC@4% 6,900

1,79,400


Note – It is assumed that the under-reported income is not on account of misreporting.


27.68

Question 77

ABC Ltd. is a domestic company liable to tax@25%. The following are the particulars

furnished by the company for A.Y.2020-21:

Particulars of total income Rs.

(1) As per the return of income furnished u/s 139(1) (15,00,000)

(2) Determined under section 143(1)(a) (8,00,000)

(3) Assessed under section 143(3) (5,00,000)

(4) Reassessed under section 147 4,00,000

Is penalty leviable under section 270A on ABC Ltd., and if so, what is the quantum of

penalty?

Solution

ABC Ltd. is deemed to have under-reported its income since:

(1) the assessment under 143(3) has the effect of reducing the loss determined in a

return processed under section 143(1)(a); and

(2) the reassessment under section 147 has the effect of converting the loss assessed

under section 143(3) into income.



Particulars Rs. Rs.



Loss assessed u/s 143(3) (5,00,000)

(-) Loss determined under section 143(1)(a) (8,00,000)

3,00,000

Tax payable on under-reported income@25% 75,000

Add: EC & SHEC@4% 3,000

78,000


Reassessment under section 147 Under-reported income:


(-) Loss assessed under section 143(3) (5,00,000)

9,00,000


Add: EC & SHEC@4% 9,000

2,34,000


Note – The following assumptions have been made -

(1) None of the additions or disallowances made in assessment or reassessment qualifies

under section 270A(6); and

(2) The under-reported income is not on account of misreporting.

Question 78

A private bank has not filed its statement of financial transaction or reportable account in

relation to the specified financial transactions for the financial year 2019-20. A notice

was issued by the prescribed income-tax authority on 1st October, 2020 requiring the


27.69

bank to furnish the statement by 31st October, 2020. The bank, however, furnished the

statement only on 15th November, 2020. What would be the penalty leviable under

section 271FA?

Solution

(1) (2) (3) (4)

Non-

compliance

of section

Penalty under

section 271FA

Period Quantum of penalty

under section 271FA

(2) × (3) (Rs.)

285BA(1) Rs. 500 per day

of continuing

default

1.6.2019 to 31.10.2019 153 days × Rs.

500

76,500

285BA(5) Rs. 1,000 per day

of continuing

default

1.11.2019 to 15.11.2019 15 days × Rs.

1,000

15,000

91,500

***************************************************************************


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QUESTIONS ON TDS/TCS & ADVANCE TAX

Question 79

Smt. Vijaya, proprietor of Lakshmi Enterprises, made turnover of Rs. 210 lakhs during the

previous year 2017-18. Her turnover for the year ended 31-3-2020 was Rs. 90 lakhs.

Decide whether provisions relating to deduction of tax at source are attracted for the

following payments made during the financial year 2019-20:

(i) Purchase commission paid to one agent Rs. 25,000 on 13.6.2019 towards

purchases made during the year.

(ii) Payments to Civil engineer of Rs. 5,00,000 for construction of residential house for

self use.

Answer

Since Smt. Vijaya’s turnover was Rs. 210 lakhs in the immediately preceding financial

year (i.e., F.Y.2018-19), she is liable to deduct tax at source in the P.Y.2019-20,

irrespective of her turnover being only Rs. 90 lakhs in the F.Y.2019-20.

(i) Tax@5% has to be deducted under section 194H in respect of purchase

commission of Rs. 25,000 to an agent for purchases made during the year, since

the same exceeds the threshold limit of Rs. 15,000 for non-deduction of tax at source

thereunder.

(ii) Tax has to be deducted under section 194C in case of payment to resident

contractors. The rate of tax is 1% if the payee is an individual or HUF and 2% in

case of payees, other than individuals and HUFs.

However, as per section 194C(4), no individual or Hindu undivided family shall be

liable to deduct income tax on the sum credited or paid to the account of the

contractor where such sum is credited or paid exclusively for personal purposes of

such individual or any member of the Hindu undivided family.

In this case, since Smt. Vijaya, an individual, makes payment of Rs. 5 lakh to a

civil engineer for construction of residential house for self use, she is not liable to

deduct tax at source under section 194C from such sum.

Question 80

What is the rate at which the tax is either to be deducted or collected under the provisions

of the Act in the following cases?

(i) A partnership firm making sales of timber which was procured and obtained under a forest

lease.

(ii) Payment of income of Rs.25 lakh on investments in the securities to the Foreign

Institutional Investor.

(iii) A nationalized bank receiving professional services from a registered society

made provision on 31-03-2020 of an amount of ` 25 lakh against the service

charges bills to be received.

(iv) Payment of Rs. 5 lacs made to Mr. Phelps who is an athlete by a manufacturer of a

swim wear for brand ambassador.


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Answer

Applicable Rate of TDS/TCS

Situation TCS/TDS Rate Note

(i) Partnership firm selling timber obtained under

forest lease

TCS 2.5% 1

(ii) Payment of income on investments in the securities

to the Foreign Institutional Investors

In case the securities are Government securities

TDS 20.8%

5.20%

2

(iii) Professional services rendered by a registered

society to a nationalised bank

TDS 10% 3

(iv) Payment by a manufacturer of swim wear to its

brand ambassador Mr. Phelps, an athlete

If Mr. Phelps is a resident

If Mr. Phelps is a non-resident

TDS

10%

20.8%

4

Notes:

(1) As per section 206C(1), tax has to be collected at source@2½% by the

partnership firm, being a seller, at the time of debiting of the amount payable by the

buyer to the account of the buyer or at the time of receipt of such amount, whichever

is earlier.

(2) As per section 196D, tax has to be deducted at source @ 20.8% (20% plus

cess@4%) by any person who is responsible for paying to a Foreign Institutional

Investor, any income by way of interest on securities at the time of credit of such

income to the account of the payee or at the time of payment of such income,

whichever is earlier.

Alternatively, if the said securities are assumed to be government securities, tax is

[email protected]% (i.e., 5% plus cess@4%) under section 194LD.

(3) Tax has to be deducted at source@10% under section 194J, by the nationalized

bank at the time of credit of fees for professional services to the account of the

registered society (i.e., on 31.3.2020), even though payment is to be made after that

date.

(4) Tax has to be deducted at source@10% under section 194J in respect of income of

Rs. 5 lacs paid to Mr. Phelps, athlete, for advertisement, on the inherent presumption

that Mr. Phelps is a resident.

Alternatively, if Mr. Phelps is assumed to be a non-resident, who is not a citizen of

India, tax has to be deducted at [email protected]% (20% plus cess 3%) under section

194E in respect of income of Rs. 5 lacs paid to Mr. Phelps, an athlete, for

advertisement referred under section 115BBA.

Question 81

Examine the liability for tax deduction at source in the following cases for the

assessment year 2020-21:

(i) Wings Ltd. has paid amount of Rs. 15 lacs during the year ended 31-3-2020 to

Airports Authority of India towards landing and parking charges.

(ii) Omega Ltd., an event management company, organized a concert of international

artists in India. In this connection, it engaged the services of an overseas agent

Mr. John from UK to bring artists to India. He contacted the artists and negotiated


27.72

with them for performance in India in terms of the authority given by the

company. He did not take part in event organized in India. The company made the

payment of commission equivalent to Rs. 1 lac to the overseas agent.

(iii) Ramesh gave a building on sub-lease to Mac Ltd. with effect from 1-7-2019 on

a rent of Rs. 20,000 per month. The company also took on hire machinery from

Ramesh with effect from 1-11-2019 on hire charges of Rs. 15,000 per month. The

rent of building and hire charges of machinery for the year 2019-20 were credited

by the company to the account of Ramesh in its books of account on 31-3-2020.

(iv) Rs. 2,45,000 paid to Mr. X on 01-02-2020 by Karnataka State Government on

compulsory acquisition of his urban land. What would be your answer if the land is

agricultural land?

Answer

(i) TDS on landing and parking charges: The landing and parking charges which are

fixed by the Airports Authority of India are not merely for the "use of the land".

These charges are also for services and facilities offered in connection with the

aircraft operation at the airport which include providing of air traffic services,

ground safety services, aeronautical communication facilities, installation and

maintenance of navigational aids and meteorological services at the airport [Japan

Airlines Co. Ltd. v. CIT / CIT v. Singapore Airlines Ltd. (2015) 377 ITR 372

(SC)]. Thus, tax is not deductible under section 194I which provides deduction

of tax for payment in the nature of rent.

Hence, tax is deductible @2% under section 194C by the airline company, Wings

Ltd., on payment of Rs. 15 lacs made towards landing and parking charges to the

Airports Authority of India for the previous year 2019-20.

(ii) TDS on services of overseas agent outside India: An overseas agent of an Indian

company operates in his own country and no part of his income accrues or arises in

India. His commission is usually remitted directly to him and is, therefore, not

received by him or on his behalf in India. The commission paid to the non-resident

agent for services rendered outside India is, thus, not chargeable to tax in India.

Since commission income for contacting and negotiating with artists by Mr. John,

a non- resident, who remains outside India is not subject to tax in India,

consequently, there is no liability for deduction of tax at source. It is assumed that

the commission equivalent to Rs. 1 lakh was remitted to Mr. John outside India.

(iii) TDS on rent for building and machinery: Tax is deductible on rent under section

194-I, if the aggregate amount of rental income paid or credited to a person

exceeds Rs. 2,40,000. Rent includes payment for use of, inter alia, building and

machinery.

The aggregate payment made by Mac Ltd. to Ramesh towards rent in P.Y.2019-20 is

Rs. 2,55,000 (i.e., Rs. 1,80,000 for building and Rs. 75,000 for machinery). Hence,

Mac Ltd. has to deduct tax@10% on rent paid for building and tax@2% on rent paid for

machinery.

(iv) TDS on compensation for compulsory acquisition: Tax is deductible at source

@10% under section 194LA, where payment is made to a resident as

compensation or enhanced compensation on compulsory acquisition of any

immovable property (other than agricultural land).

However, no tax deduction is required if the aggregate payments in a year does not

exceed Rs. 2,50,000.


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Therefore, no tax is required to be deducted at source on payment of Rs. 2,45,000 to

Mr. X, since the aggregate payment does not exceed Rs. 2,50,000.

Since the definition of immovable property specifically excludes agricultural land,

no tax is deductible at source on compensation paid for compulsory acquisition of

agricultural land.

Question 82

Examine whether tax has to be deducted at source under the provisions of the Income-tax

Act, 1961 in the following situations, which have taken place during the year ended 31-3-

2020:

(i) M/s. Jiva & Co., a partnership firm, pays a sum of Rs. 43,000 as interest on loan

borrowed from an Indian branch of a foreign bank.

(ii) Above firm has paid Rs. 42,000 as interest on capital to partner Mr. A, a resident in

India, and Rs. 44,000 as interest on capital to partner Mr. B, a non-resident.

(iii) The above firm paid Rs. 50,000 being share of profit of partner Mr. B, a non-resident.

Answer

(i) Section 194A requires deduction of tax on any income by way of interest, other

than interest on securities, credited or paid to a resident, at the rates in force.

However, it specifically excludes from its scope, income credited or paid to any

banking company to which the Banking Regulation Act, 1949 applies.

An Indian branch of a foreign bank, transacting the business of banking in India, is a

banking company to which the Banking Regulation Act, 1949 applies. Therefore,

interest payment to such bank will not attract tax deduction under section 194A.

Consequently, no tax is required to be deducted at source under section 194A on

interest of Rs. 43,000 paid by M/s. Jiva & Co., a partnership firm, on loan borrowed

from an Indian branch of a foreign bank.

(ii) Section 194A requiring deduction of tax at source on any income by way of

interest, other than interest on securities, credited or paid to a resident, excludes

from its scope, income credited or paid by a firm to its partner. Therefore, no

tax is required to be deducted at source under section 194A on interest on capital

of Rs. 42,000 paid by the firm to Mr. A, a resident partner.

Section 195, which requires tax deduction at source on payments to non-residents,

does not provide for any exclusion in respect of payment of interest by a firm to its

non-resident partner. Therefore, tax has to be deducted under section 195 at the rates

in force in respect of interest on capital of Rs. 44,000 paid to partner Mr. B, a non-

resident.

(iii) As per section 10(2A), share of profit received by a partner from the total income of

the firm is exempt from tax. Therefore, the share of profit paid to non-resident

partner is not liable for tax deduction at source.

However, section 195(6) provides that the person responsible for paying any sum,

whether or not chargeable to tax, to a non-corporate non-resident or to a foreign

company, shall be required to furnish the information relating to payment of such

sum in the prescribed form and manner.


27.74

Question 83

"Come Air Ltd." has paid a sum of Rs. 12 lakhs during the year ended 31-3-2020 to

Airports Authority of India towards landing and parking charges. The company has

deducted tax at source@2% under section 194C on the said payment and remitted the tax

deducted within the prescribed time. The Assessing Officer contended that landing and

parking charges were levied for use of the land of the airport and hence, the payment

was in the nature of rent attracting TDS@10% under section 194-I. Discuss the

correctness or otherwise of the contention of the Assessing Officer.

Answer

The issue as to whether the charges fixed by the Airport Authority of India (AAI) for

landing and take-off facilities and parking facility for the aircraft are for the “use of

the land” by the airline company came up before the Supreme Court in Japan Airlines

Co. Ltd. v. CIT / CIT v. Singapore Airlines Ltd. (2015) 377 ITR 372.

The Supreme Court observed that the charges which are fixed by the AAI for landing

and take- off services as well as for parking of aircrafts are not for the "use of the

land". These charges are for services and facilities offered in connection with the

aircraft operation at the airport which include providing of air traffic services, ground

safety services, aeronautical communication facilities, installation and maintenance of

navigational aids and meteorological services at the airport.

There are various international protocols which mandate all authorities manning and

managing these airports to construct the airport of desired standards which are

stipulated in the protocols. The services which are required to be provided by these

authorities, like AAI, are aimed at passengers' safety as well as for safe landing and

parking of the aircrafts. Therefore, the services are not restricted to merely permitting

"use of the land" of airport. On the contrary, it encompasses all the facilities that are

to be compulsorily offered by the AAI in tune with the requirements of the protocol.

The Supreme Court observed that the charges levied on air-traffic includes landing

charges, lighting charges, approach and aerodrome control charges, aircraft parking

charges, aerobridge charges, hangar charges, passenger service charges, cargo charges,

etc. Thus, when the airlines pay for these charges, treating such charges as charges for

"use of the land" would tantamount to adopting a totally simplistic approach which is

far away from reality.

The Supreme Court opined that the substance behind such charges has to be considered

and when the issue is viewed from this angle, keeping the larger picture in mind, it

becomes very clear that the charges are not for use of the land per se and, therefore, it

cannot be treated as "rent" within the meaning of section 194-I. The Supreme Court,

thus, concurred with the view taken by the Madras High Court in Singapore Airlines

case and overruled the view taken by the Delhi High Court in United Airlines/Japan

Airlines case.

Applying the rationale of the Supreme Court ruling to the facts of this case, the contention

of the Assessing Officer that landing and parking charges are levied for use of the land

of airport and hence, the charges are in the nature of rent to attract the provisions of tax

deduction at source under section 194-I is not correct.


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Question 84

Mr. Madhusudan is regular in deducting tax at source and depositing the same. In respect

of the quarter ended 31st December, 2019a sum of Rs. 80,000 was deducted at source

from the contractors. The statement of tax deducted at source under section 200 was filed

on 23rd March 2020 for the quarter ended 31.12.2019.

(i) Is there any delay on the part of Mr. Madhusudan in filing the statement of TDS?

(ii) If the answer to (i) above is in the affirmative, how much amount can be levied

on Mr. Madhusudan for such default under section 234E?

(iii) Is there any remedy available to him for reduction/waiver of the levy?

Answer

(i) Yes, there has been a delay on the part of Mr. Madhusudan in filing the statement of

TDS.

As per section 200(3) read with Rule 31A, the statement of tax deducted at source

for the quarter ended 31st December, 2019 has to be filed on or before 31stJanuary,

2020. However, the same has been filed only on 23rd March, 2020. Hence, there has

been a 52 days delay on the part of Mr. Madhusudan in filing the statement of TDS.

(ii) As per section 234E of the Income-tax Act, 1961, where a person fails to file deliver

or cause to be delivered the statement of tax deducted at source within the

prescribed time, then, he shall be liable to pay, by way of fee, a sum of Rs. 200

for every day during which the failure continues.

The amount of fee shall not, however, exceed the amount of tax deductible.

In this case, since Mr. Madhusudhan has delayed filing the statement of TDS by 52

days, he would be liable to pay a fee of Rs. 10,400 (Rs. 200 ´ 52 days) under section

234E. The said fee does not exceed the tax deductible (Rs. 80,000, in this case).

(iii) The CBDT is empowered to issue general or special orders, whether by way of

relaxation of any of the provisions of sections 139, 143, 144, 147 etc. or otherwise,

in respect of any class of incomes or class of cases. The CBDT may issue such

order(s) from time to time if it considers expedient so to do, for the purpose of

proper and efficient management of the work of assessment and collection of

revenue. Section 234E is included in the list of sections in respect of which the

CBDT is empowered to issue order for relaxation of the provisions of the Act.

Hence, the remedy available to Mr. Madhusudhan is that he can file an application

to the CBDT under section 119 and seek waiver/reduction of the penalty

levied/leviable under section 234E.

Question 85

Siddharth Hospitals Pvt. Ltd. has recently been accorded recognition by several insurance

companies to admit and treat patients on cashless hospitalization basis. Payment to the

assessee hospital will be made by Third Party Administrators (TPA) who will process the

claims of the patients admitted and make payments to the various hospitals including the

assessee. All TPAs are corporate entities. The assessee wants to know whether the TPAs

are bound to deduct tax at source under section 194J or under section 194C?


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Answer

This issue has been clarified by the CBDT Circular No.8/2009 dated 24.11.2009. As per

provisions of section 194J(1), any person, who is responsible for paying to a resident any

sum by way of fees for professional services, shall, at the time of credit of such sum to

the account of the payee or at the time of payment thereof in cash or by issue of a

cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to

10% of such sum as TDS.

Further, as per clause (a) of Explanation to section 194J “professional services” includes

services rendered by a person in the course of carrying on medical profession.

The services rendered by hospitals to various patients are primarily medical services and,

therefore, the provisions of section 194J are applicable on payments made by TPAs to

hospitals etc. Further, for invoking provisions of section 194J, there is no stipulation that

the professional services have to be necessarily rendered to the person who makes payment

to hospital. Therefore, TPAs who are making payment on behalf of insurance companies to

hospitals for settlement of medical/ insurance claims etc. under various schemes including

Cashless Schemes are liable to deduct tax at source under section 194J on all such payments to

hospitals etc.

In view of the above, all such transactions between TPAs and hospitals would fall

within the ambit of provisions of section 194J.

Question 86

Examine in the context of provisions contained in Chapter XVII of the Act and also work

out the amount of tax to be deducted by the payer of income in the following cases:

(i) Payment of Rs. 5 lacs made by JCP & Co. to Pingu Events Co. Ltd. for

organizing a debate competition on the subject "Preservation of Rural Heritage of

Rajasthan".

(ii) "Profit Commission" of Rs. 1 lac paid on 10.6.2018 by a re-insurance company to

the insurer company after the expiry of the term of insurance and where there was

no claim during the treaty.

(iii) KD, a part time director of DAF Pvt. Ltd. was paid an amount of Rs. 2,25,000 as

fees which was actually in the nature of commission on sales for the period 1.4.2019 to

30.6.2019.

Answer

(i) The services of Event Managers in relation to sports activities alone have been

notified by the CBDT as “professional services” for the purpose of section 194J. In

this case, payment of Rs. 5 lacs was made to an event management company for

organization of a debate competition. Hence, the provisions of section 194J are not

attracted.

However, TDS provisions under section 194C relating to contract payments would

be attracted and consequently, tax has to be deducted @ 2% under section 194C.

The tax deductible under section 194C would be Rs. 10,000, being 2% of Rs. 5 lacs.

(ii) Section 194D requires deduction of tax at source@5% from insurance commission,

where the commission exceeds Rs. 15,000.

Reinsurance is different from insurance since there is no direct contractual

relationship between the person insured and the re-insurer.


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In order to attract section 194D, the commission or any other payment covered

under the section should be a remuneration or reward for soliciting or procuring the

insurance business. The insurance companies do not procure business for the

reinsurance company nor does the reinsurer pay commission or other payment for

soliciting the business from the insurance companies. Therefore, section 194D has

no application.

Hence, when profit commission is paid by a reinsurance company to an insurance

company, after the expiry of the term of insurance, in respect of cases where there

is no claim during the operation of the reinsurance treaty, tax deduction under section

194D is not attracted.

(iii) Section 194J provides for deduction of tax at source @10% on any remuneration

or fees or commission, by whatever name called, paid to a director, which is not in

the nature of salary in respect of which tax is deductible at source under section

192.

Hence, tax is to be deducted at source under section 194J @10% by DAF Pvt. Ltd. on

the commission of Rs. 2,25,000 paid to KD, a part-time director. The tax deductible

under section 194J would be Rs. 22,500, being 10% of Rs. 2,25,000.

Question 87

Examine the applicability of the provisions relating to deduction of tax at source in the

following transactions:

(i) Max Limited pays Rs. 1,02,000 to Mini Limited, a resident contractor who, under

the contract dated 15th October, 2019, manufactures a product according to

specification of Max Limited by using materials purchased from Max Limited.

(ii) A company operating a television channel makes payment of Rs. 5 lacs to a former

cricketer for making running commentary of a one-day cricket match.

(iii) EL Ltd., a foreign company, pays outside India, salary to its employee, Mr.

Raghavan, a foreign national and a non-resident, for services rendered in India.

Answer

(i) The definition of “work” under section 194C includes manufacturing or supplying

a product according to the requirement or specification of a customer by using

material purchased from such customer. In the instant case, Mini Limited

manufactures the product as per the specification given by Max Limited by using

the raw materials purchased from Max Limited. Therefore, it falls within the

definition of “work” under section 194C. Consequently, tax is to be deducted on

the invoice value excluding the value of material purchased from such customer

if such value is mentioned separately in the invoice. If the material component is

not mentioned separately in the invoice, tax is to be deducted on the whole of the

invoice value.

(ii) Provisions for deduction of tax at source under section 194J are attracted in respect

of payment of fees for professional services, if the amount of such fees exceeds Rs.

30,000 in the relevant financial year. The service rendered by a commentator in

relation to sports activities has been notified by the CBDT as a professional

service for the purposes of section 194J vide its Notification No. 88 dated 21st

August, 2008. Therefore, tax is required to be deducted@10% from the fee of Rs. 5

lacs payable to the former cricketer.


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(iii) Section 195 requires deduction of tax at source by any person responsible for

making payment to a non-resident, any interest or any other sum chargeable under

the provisions of the Income-tax Act, 1961 (other than income chargeable under the

head "Salaries”).

Section 192(1) requires “any person” responsible for paying income under the head

“Salaries” to deduct tax at source. Therefore, even if the payer is a foreign company,

section 192 would be applicable.

TDS provisions under section 192 are attracted, if the salary payable to a non-

resident is chargeable to tax in India. Under section 9(1)(ii), income which falls

under the head "Salaries" shall be deemed to accrue or arise in India, if it is earned

in India. Salary payable for service rendered in India shall be regarded as income

earned in India. Therefore, salary paid to Mr. Raghavan, a non-resident, attracts tax

liability in India, as he has rendered services in India and the salary is attributable to

such services.

Therefore, the foreign company, EL Limited, is liable to deduct tax at source under

section 192 from the salary of Mr. Raghavan.

Question 88

Examine in the following cases the obligation of the person paying the income in respect

of tax deduction at source and indicate the due date for payment of such tax, wherever

applicable:

(i) MNO Ltd., the employer, credited salary due for the financial year 2019-20

amounting to Rs. 3,40,000 to the account of Q, an employee, in its books of account

on 31.3.2020. Q has not furnished any information about his income/loss from any

other head or proof of investments/payments qualifying for deduction under section

80C.

(ii) T, an individual whose total sales in business during the year ended 31.3.2019 was

Rs. 2.20 crores, paid Rs. 9 lacs by cheque on 1.1.2020 to a contractor (an

individual), for construction of his factory building. No amount was credited

earlier to the account of the contractor in the books of T.

(iii) BCD Ltd. credited Rs. 28,000 towards fees for professional services and Rs. 27,000

towards fees for technical services to the account of HG in its books of account

on 6.10.2019. The total sum of Rs. 55,000 was paid by cheque to HG on

18.12.2019.

Answer

(i) Section 192 requires deduction of tax from salary at the time of payment. Thus, the

employer is not required to deduct tax at source when salary has not been paid but

is merely credited to the account of the employee in its books of account. MNO Ltd.

therefore, is not required to deduct tax at source in respect of the salary merely

credited to the account of employee Q which is not paid.

If salary has been paid during the year to Q, then, MNO Ltd has to obtain from

Q, the evidence/proof/particulars of prescribed claims (including claim for set-off

of loss) under the provisions of the Act in such form and manner as may be

prescribed.

If Q has not furnished any information about his income/loss under any other head or

proof of investments/expenditure qualifying for deduction under section 80C, then,


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the employer has to deduct tax without considering any claim for any expenditure or

set-off of losses or deduction under section 80C.

(ii) An individual who is liable for tax audit under section 44AB in the immediately

preceding financial year is liable to deduct tax at source under section 194C for the

financial year 2018-19 in respect of the payment made to contractor exceeding Rs.

30,000 in a single contract and Rs. 1,00,000 in aggregate of contracts during the

financial year. Turnover of the individual T is Rs. 2.20 crores in the financial year

2017-18. Therefore, T is liable to get his accounts for that year audited under

section 44AB. As the payment during financial year 2018-19 to the contractor has

exceeded the limits prescribed in section 194C, tax has to be deducted under

section 194C.

The rate of tax deduction is 1% as the contractor is an individual.

(iii) The limit of Rs. 30,000 for non-deduction of tax under section 194J would apply

separately for fees for professional services and fees for technical services. This

means that if a person has rendered services falling under both the categories, tax

need not be deducted if the fee for each category does not exceed Rs. 30,000 even

though the aggregate of the amounts credited to the account of such person or paid to

him for both the categories of services exceed Rs. 30,000. Therefore, BCD Ltd. is not

required to deduct tax at source in respect of the fees either at the time of credit or at

the time of payment.

Question 89

Examine the liability for tax deduction at source in the following cases for the

assessment year 2020-21:

(i) Mr. Anand has been running a sole proprietary business whose accounts are

audited under section 44AB with turnover of Rs. 202 lakhs for the A.Y. 2019-20.

He pays a monthly rent of Rs. 10,000 for the office premises to Mr. R, the owner of

building and an individual. Besides, he also pays service charges of Rs. 6,000 per

month to Mr. R towards the use of furniture, fixtures and vacant land appurtenant

thereto.

(ii) By virtue of an agreement with a nationalised bank, a catering organisation receives

a sum of Rs. 50,000 per month towards supply of food, water, snacks etc. during

office hours to the employees of the bank.

(iii) An Indian company pays gross salary including allowances and monetary

perquisites amounting to Rs. 7,30,000 to its General Manager. Besides, the

company provides non- monetary perquisites to him whose value is estimated at Rs.

1,20,000.

(iv) A notified infrastructure debt fund eligible for exemption under section 10(47) of

the Income- tax Act, 1961 pays interest of Rs. 5 lakhs to a company incorporated in

USA. The US Company incurred expenditure of Rs. 12,000 for earning such

interest. The fund also pays interest of Rs. 3 lakhs to Mr. X, who is a resident of a

notified jurisdictional area.

Answer

(i) Where the payer is an individual or HUF whose turnover exceeds the monetary

limits specified in clause (a) of section 44AB, he has to deduct tax at source. Since

the turnover of Mr. Anand was Rs. 202 lakhs for the A.Y.2018-19, he is liable to


27.80

deduct tax at source under section 194-I in respect of rental payments during the

financial year 2019-20.

Accordingly, Mr. Anand is liable to deduct tax at source under section 194-I on

the rental payments made. Section 194-I provides that rent includes any payment,

by whatever name called, for the use of land or building together with furniture,

fittings etc. Therefore, in the given case, apart from monthly rent of Rs. 15,000

p.m., service charge of Rs. 6,000 p.m. for use of furniture and fixtures would also

attract TDS under section 194-I. Since the aggregate rental payments to Mr. R

during the financial year 2019-20 exceeds Rs. 2,40,000, Mr. Anand is liable to

deduct tax at source @10% under section 194-I from rent paid to Mr. R.

(ii) The definition of “work” under Explanation to section 194-C includes catering

services and therefore, TDS provisions under section 194C are attracted in respect

of payments to a caterer. As the payment exceeds Rs. 30,000, the nationalised bank

is required to deduct tax at source at 2% on the payments made to catering

organisation under 194-C. If the catering organization is an individual or HUF,

then the tax deduction shall be @1%.

(iii)

Rs.

Gross salary, allowances and monetary perquisites 7,20,000

Non-Monetary perquisites 1,20,000

8,50,000

Less: Standard deduction under section 16(ia) 50,000

8,00,000

Tax Liability 75,400

Average rate of tax (Rs. 75,400 / Rs. 8,00,000 × 100) 9.425%

The company can deduct Rs. 75,400 at source from the salary of the General

Manager. Alternatively, the company can pay tax on non-monetary perquisites as

under –

Tax on non-monetary perquisites = 9.425% of Rs. 1,20,000 = Rs. 11,310

Balance to be deducted from salary = Rs. 64,090

If the company pays tax of Rs. 11,310 on non-monetary perquisites, the same is not a

deductible expenditure as per section 40(a). The amount of tax paid towards non-

monetary perquisite by the employer, however, is not chargeable to tax in the hands

of the employee as per section 10(10CC).

(iv) As per section 194LB, tax would be deductible @ 5% on gross interest paid/credited

by a notified infrastructure debt fund, eligible for exemption under section 10(47), to a

foreign company.

In the first case, since the payment is to a foreign company, health and education

cess @4% has to be added to the applicable rate of TDS. Therefore, the tax

deductible under section 194LB would be Rs. 26,000 (i.e., 5.20% of Rs. 5 lakhs).

However, in case the notified infrastructure debt fund pays interest to a person

who is a resident of a notified jurisdictional area, section 94A will apply.

Accordingly, tax would be deductible @30% (plus health and education cess@4%)

under section 94A, even though section 194LB provides for deduction of tax at a

concessional rate of 5%. Therefore, the tax deductible in respect of payment of

Rs. 3 lakh to Mr. X, who is a resident of a notified jurisdictional area, would be

Rs. 93,600, being 31.2% of Rs. 3,00,000.


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Question 90

The following issues arise in connection with the deduction of tax at source under Chapter

XVII-B. Examine the liability for tax deduction in these cases:

(a) An employee of the Central Government receives arrears of salary for the earlier 3

years. He enquires whether he is liable for deduction of tax on the entire amount during

the current year.

(b) A T.V. channel pays Rs. 10 lakh on 1.9.2019 as prize money to the winner of a

quiz programme, “Who will be a Millionaire”?

(c) State Bank of India pays Rs. 50,000 per month as rent to the Central Government for

a building in which one of its branches is situated.

(d) A television company pays Rs. 80,000 to a cameraman for shooting of a

documentary film.

(e) A State Government pays Rs. 22,000 on 2.7.2019 as commission to one of its agents

on sale of lottery tickets.

(f) A Turf Club awards a jack-pot of Rs. 5 lakh to the winner of one of its races on

1.2.2020.

Answer

(a) As per section 192, tax is deductible at source by any person who is responsible

for paying any income chargeable under the head ‘Salaries’. However, as per sub-

section (2A) of that section, the employee will be entitled to relief under section

89 and consequently he will be required to furnish to the person responsible for

making the payment, such particulars in the prescribed form (i.e., Form No.10E).

The person responsible for making the payment shall compute the relief and take

into account the same while deducting tax at source from salary.

(b) Under section 194B, the person responsible for paying by way of winnings from

any card game and other game in an amount exceeding Rs. 10,000 shall at the time

of payment deduct income-tax at 30%. Therefore, tax of Rs.3 lakh has to be

deducted at source from the prize money of Rs. 10 lakh payable to the winner.

(c) Section 194-I, which governs the deduction of tax at source on payment of rent,

exceeding Rs. 2,40,000 p.a., is applicable to all taxable entities except individuals

and HUFs, whose turnover/gross receipts do not exceed the monetary limits specified

under clause (a) of section 44AB. Section 196, however, provides exemption in

respect of payments made to Government from application of the provisions of tax

deduction at source.

Therefore, no tax is required to be deducted at source by State Bank of India from

rental payments to the Government.

(d) If the cameraman is an employee of the T.V. Company, the provisions of section 192

will apply. However, if he is a professional, TDS provisions under section 194-J will

apply. Tax at 10% will have to be deducted at the time of credit of Rs. 80,000 or on its

payment, whichever is earlier.

(e) Under section 194G, the person responsible for paying to any person stocking,

distributing, purchasing or selling lottery tickets shall at the time of credit of the

commission or payment thereof, whichever is earlier, amounting to more than Rs.

15,000, deduct income-tax at source @5%.


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Accordingly, tax@5% under section 194G amounting to Rs. 1,100 has to be

deducted from commission payment of Rs. 22,000 to the agent of the State

Government.

(f) The payment by way of winnings from horse race is governed by section 194BB.

Under this section, the person responsible for payment shall, at the time of payment,

deduct tax at source @ 30%, if the payment exceeds Rs. 10,000.

Accordingly, tax@30% amounting to Rs. 1,50,000 has to be deducted from the winnings

of Rs. 5 lakh payable to the winner of the race.

Question 91

Examine and compute the liability for deduction of tax at source, if any, in the cases stated

hereunder, for the financial year ended 31st March, 2020

(i) Mr. X, a resident, acquired a house property at Mumbai from Mr. Y for a

consideration of Rs. 90 lakhs, on 20.6.2019. On the same day, Mr. X made two

separate transactions, thereby acquiring an urban plot in Kolkata from Mr. C for a

sum of Rs. 49,50,000 and rural agricultural land from Mr. D for a consideration of

Rs. 60 lakhs.

(ii) On 17.6.2019, a commission of Rs. 50,000 was retained by the consignee 'ABC

Packaging Ltd.' and not remitted to the consignor 'XYZ Developers', while remitting

the sale consideration. Examine the obligation of the consignor to deduct tax at source.

(iii) Raj is working with AB Ltd. He is entitled to a salary of Rs. 55,000 per month w.e.f.

1.4.2019. He has a house property which is self-occupied. He paid an interest of Rs.

80,000 on loan, during the previous year 2019-20. The loan was taken for

construction of house. He has notified his employer AB Ltd. that there will be a loss of

Rs. 80,000 in respect of this house property for financial year ended 31.3.2020.

Answer

Amount

of TDS

(Rs.)

(i) Since the consideration for transfer of house property at Mumbai

exceeds Rs. 50 lakhs, Mr. X, being the transferee, is required to

deduct tax @1% under section 194-IA on Rs. 90 lakhs, being the

amount of consideration for transfer of property.

Mr. X is not required to deduct tax as source under section 194-IA

from the consideration of Rs. 49,50,000 paid to Mr. C for transfer of

urban plot, since the consideration is less than Rs. 50 lakhs.

Mr. X is also not required to deduct tax at source under section 194-IA

from the consideration of Rs. 60 lakhs paid to Mr. D for transfer of rural

agricultural land, since the same is specifically excluded from the scope

of immovable property for the purpose of tax deduction under section

194-IA.

90,000

Nil

Nil

Note - Section 194-IA requires every transferee responsible for paying

any sum as consideration for transfer of immovable property (land,

other than agricultural land, or building or part of building) to

deduct tax, at the rate of 1% of such sum, at the time of credit of such

sum to the account of the resident transferor or at the time of


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payment of such sum to the resident transferor, whichever is earlier.

However, no tax is required to be deducted where the consideration

for transfer of an immovable property is less than Rs. 50 lakhs.

(ii) Section 194H requires deduction of tax at source@5% from

commission and brokerage payments to a resident. However, no tax is to

be deducted at source where the amount of such payment does not

exceed Rs. 15,000.

In the given case, ‘ABC Packaging Ltd.’, the consignee, has not

remitted the commission of Rs. 50,000 to the consignor ‘XYZ

Developers’ while remitting the sales consideration.

Since the retention of commission by the consignee/agent amounts to

constructive payment of the same to him by the consignor/principal,

deduction of tax at source is required to be made from the amount of

commission [CBDT Circular No.619 dated 4/12/1991].

Therefore, XYZ Developers has to deduct tax at source on Rs.

50,000 at the rate of 5%.

2,500

(iii) Section 192 provides that tax is required to be deducted on the

payment made as salaries. Tax is to be deducted on the estimated

income at the average of income tax computed on the basis of the

rates in force for the financial year in which payment is made.

The employee may declare details of his other incomes (including loss

under the head “Income from house property” but not any other loss)

to his employer. In this case, since Mr. Raj has notified his employer

AB Ltd. of loss from self-occupied house property, the employer has

to take the same into consideration for deduction of tax at source.

Therefore, AB Ltd. is required to deduct tax at source on the salary

of Rs. 45,000 per month paid to Mr. Raj, in the following manner:

Income under the head salaries (55,000 ´ 12) 6,60,000

Less: Standard deduction under section 16(ia) 50,000

6,10,000

Income under the head “house property” (80,000)

Gross total income 5,30,000

Less: Deduction under Chapter VI-A Nil


Tax@10% on Rs. 1,70,000, being the amount arrived at

18,500 after reducing the basic exemption limit of Rs. 2,50,000

from Rs. 4,20,000

Add: Health and Education cess @4% 740

Tax to be deducted at source 19,240 18,240

Question 92

Mr. Sharma, an employee of M/s. ABC Ltd. since 10-04-2016 resigned on 31-03-2020

and withdrew Rs. 60,000 being the balance in his EPF account. State with reasons

whether the provisions of Chapter XVII-B are attracted and if so, what is the net

amount receivable by the payee, Mr. Sharma?


27.84

Solution

As per section 192A,in a case where the accumulated balance due to an employee

participating in a recognized provident fund is includible in his total income owing to

the provisions of Rule 8 of Part A of the Fourth Schedule not being applicable, the

trustees of the Employees Provident Fund Scheme, 1952 or any person authorised

under the scheme to make payment of accumulated balance due to employees are

required to deduct income-tax@10% at the time of payment of accumulated balance

due to the employee. Tax deduction at source has to be made only if the amount of such

payment or aggregate amount of such payment of the payee is Rs. 50,000 or more.

Rule 8 of Part A of the Fourth Schedule, inter alia, provides that only if an employee has

rendered continuous service of five years or more with the employer, then accumulated

balance in a recognized provident fund payable to an employee would be excluded from

the total income of that employee.

In the present case, Mr. Sharma has withdrawn an amount exceeding Rs. 50,000 on his

resignation after rendering a continuous service of four years with M/s. ABC Ltd.

Therefore, tax has to be deducted at source@10% under section 192A on Rs. 60,000,

being the amount withdrawn on his resignation without rendering continuous service of a

period of five years with M/s. ABC Ltd.

The net amount receivable by Mr. Sharma is Rs. 54,000 [i.e., Rs. 60,000 – Rs. 6,000,

being tax deducted at source].

Note – It is assumed that Mr. Sharma has furnished his permanent account number

(PAN) to the person responsible for deducting tax at source. Otherwise, tax would be

deductible at the maximum marginal rate. It may be noted that with effect from 1.6.2015

such employee can furnish declaration in Form No.15G for non-deduction of tax at

source under section 192A by virtue of section 197A(1A).

Question 93

ABC Ltd. makes the following payments to Mr. X, a contractor, for contract work during

the P.Y.2019-20–

Rs. 20,000 on 1.5.2019

Rs. 25,000 on 1.8.2019

Rs. 28,000 on 1.12.2019

On 1.3.2020, a payment of Rs. 30,000 is due to Mr. X on account of a contract work.

Discuss whether ABC Ltd. is liable to deduct tax at source under section 194C from

payments made to Mr. X.

Solution

In this case, the individual contract payments made to Mr. X does not exceed Rs.

30,000. However, since the aggregate amount paid to Mr. X during the P.Y.2019-20

exceeds Rs. 1,00,000 (on account of the last payment of Rs. 30,000, due on 1.3.2020,

taking the total from Rs. 73,000 to Rs. 1,03,000), the TDS provisions under section 194C

would get attracted. Tax has to be deducted@1% on the entire amount of Rs. 1,03,000 from

the last payment of Rs. 30,000 and the balance of Rs. 28,970 (i.e., Rs. 30,000 – Rs. 1,030) has to

be paid to Mr. X.


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Question 94

Examine the applicability of the provisions for tax deduction at source under section

194DA in the following cases -

(i) Mr. X, a resident, is due to receive Rs. 4.50 lakhs on 31.3.2020, towards maturity

proceeds of LIC policy taken on 1.4.2017, for which the sum assured is Rs. 4 lakhs and

the annual premium is Rs. 1,10,000.

(ii) Mr. Y, a resident, is due to receive Rs. 3.25 lakhs on 31.3.2020 on LIC policy taken on

31.3.2012, for which the sum assured is Rs. 3 lakhs and the annual premium is Rs.

35,000.

(iii) Mr. Z, a resident, is due to receive Rs. 95,000 on 1.8.2019 towards maturity proceeds

of LIC policy taken on 1.8.2013 for which the sum assured is Rs. 90,000 and the annual

premium was Rs. 12,000.

Solution

(i) Since the annual premium exceeds 10% of sum assured in respect of a policy taken after 31.3.2012, the maturity proceeds of Rs. 4.50 lakhs due on 31.3.2020 are not exempt under section 10(10D) in the hands of Mr. X. Therefore, tax is required to be deducted@5% under section 194DA on the amount of income comprised therein i.e., on Rs. 1,20,000 (Rs. 4,50,000, being maturity proceeds - Rs. 3,30,000, being the entire amount of insurance premium paid).

(ii) Since the annual premium is less than 20% of sum assured in respect of a policy

taken before 1.4.2012, the sum of Rs. 3.25 lakhs due to Mr. Y would be exempt under

section 10(10D) in his hands. Hence, no tax is required to be deducted at source under

section 194DA on such sum payable to Mr. Y.

(iii) Even though the annual premium exceeds 10% of sum assured in respect of a policy

taken after 31.3.2012, and consequently, the maturity proceeds of Rs. 95,000 due

on 1.8.2019 would not be exempt under section 10(10D) in the hands of Mr. Z, the tax

deduction provisions under section 194DA are not attracted since the maturity

proceeds are less than Rs. 1 lakh.

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27.86

QUESTIONS ON TAXATION OF TRUST

Question 95

An institution operating for promotion of education claiming exemption under section 11

since 1994 furnishes the following data for the assessment year 2020-21:

S. No. Particulars Rs. in crores

(i) Fees collected from students 14

(ii) Construction of a new computer science laboratory 0.50

(iii) Land acquired to be used as a cricket field for the students 2

(iv) Amount earmarked and set apart for construction of an arts block

within the next 4 years.

4

Compute the total income of the institution for the A.Y.2020-21.

Answer

Computation of total income of the institution for the A.Y. 2020-21

Particulars Rs. (in crores)

Fees received 14.00

Less : 15% (exempt even if not spent for the objects of the institution) 2.10

Less : Accumulated for specified purpose (See Note 2)

11.90

4.00

Balance to be spent 7.90

Actual amount spent on construction of computer science lab (See Note 1) 0.50

Actual amount spent on purchase of land for cricket field (See Note 1) 2.00

Total Income 5.40

Notes:

(1) The institution must utilise 85% of its income within the previous year for the objects

of the institution. The institution can apply its income either for revenue expenditure or

for capital expenditure provided the expenditure is incurred for promoting the objects

of the institution. Land acquired and meant for use as cricket field for students is a

capital expenditure incurred for promoting the objects of the institution and hence,

eligible for deduction. Likewise, the amount spent on construction of computer science

laboratory is also eligible for deduction.

(2) Section 11(2) provides that a trust/institution can accumulate or set apart its income for

a specified purpose by furnishing statement in prescribed format to the concerned

Assessing Officer. However, the period for which the funds can be accumulated cannot

exceed 5 years. The amount so accumulated should be invested in the specified forms

and modes. In this case, the institution has to furnish statement in Form 10 on or before

the due date of filing return of income to the Assessing Officer, stating the purpose for

which the income is being accumulated or set apart and the period for which the income

is being accumulated or set apart, which shall, in no case, exceed five years. Further,

the institution has to invest Rs. 4 crore in the specified forms and modes.


27.87

Question 96

A public charitable trust registered under Section 12AA, for the previous year ending

31.3.2020, derived gross income of Rs. 21 Lacs, which consists of the following:

(Rs. in Lacs)

(a) Income from properties held by trust (net) 10

(b) Income (net) from business (incidental to main objects) 4

(c) Voluntary contributions from public 7

The trust applied a sum of Rs. 11.60 lacs towards charitable purposes during the year

which includes repayment of loan taken for construction of orphanage Rs. 3.60 lacs.

Determine the taxable income of the trust for the assessment year 2020-21.

Answer

Computation of taxable income of public charitable trust

Particulars Rs.

(i) Income from property held under trust (net) 10,00,000

(ii) Income (net) from business (incidental to main objects) 4,00,000

(iii) Voluntary contributions from public 7,00,000

Voluntary contribution made with a specific direction towards corpus

are alone to be excluded under section 11(1)(d). In this case, there is

no such direction and hence, included.

21,00,000

Less: 15% of the income eligible for retention / accumulation without

any conditions

3,15,000

17,85,000

Less: Amount applied for the objects of the trust

(i) Amount spent for charitable purposes

(Rs. 11,60,000 - Rs. 3,60,000)

(ii) Repayment of loan for construction of orphan home

8,00,000

3,60,000


Question 97

An institution having its main object as “advancement of general public utility” received

Rs. 30 lakhs in aggregate during the P.Y.2019-20 from an activity in the nature of trade.

The total receipts of the institution, including donations, was Rs. 140 lakhs. It applied

85% of its total receipts from such activity during the same year for its main object i.e.

advancement of general public utility.

(i) What would be the tax consequence of such receipt and application thereof by the

institution?

(ii) Would your answer be different if the institution’s total receipts had been Rs. 150

lakhs (instead of Rs. 140 lakhs) in aggregate during the P.Y.2019-20?

(iii) What would be your answer if the main object of the institution is “relief of the poor”

and the institution receives Rs. 30 lakhs from a trading activity, when its total

receipts are Rs. 140 lakhs and applies 85% of the said receipts for its main object?

Solution

(i) As the main object of the institution is “advancement of object of general public

utility”, the institution will lose its “charitable” status for the P.Y.2019-20, since it

has received Rs. 30 lakhs from an activity in the nature of trade, which exceeds Rs.

28 lakhs, being 20% of the total receipts of the institution undertaking that activity


27.88

for the previous year. The application of 85% of such receipt for its main object

during the year would not help in retaining its “charitable” status for that year. The

institution will lose its charitable status and consequently, the benefit of exemption

of income for the P.Y.2019-20, irrespective of the fact that its approval is not

withdrawn or its registration is not cancelled.

(ii) If the total receipts of the institution is Rs. 150 lakhs, and the institution receives

Rs. 30 lakhs in aggregate from an activity in the nature of trade during the P.Y.2019-

20, then it will not lose its “charitable” status since receipt of upto 20% of the total

receipts of the institution in a year from such activity is permissible. The institution

can claim exemption subject to fulfilment of other conditions under sections 11 to

13. Further, such activity should also be undertaken in the course of actual carrying

out of such advancement of any other object of general public utility.

(iii) The restriction regarding carrying on of a trading activity for a cess, fee or other

consideration will not apply if the main object of the institution is “relief of the

poor”. Therefore, receipt of Rs. 30 lakhs from a trading activity by such an

institution will not affect its “charitable” status, even if it exceeds 20% of the total

receipts of the institution. The institution can claim exemption subject to fulfilment

of other conditions under sections 11 to 13.

Question 98

A charitable trust, whose income can be exempt under section 11 of the Income-tax

Act, 1961, was formed on 1st March, 2017. For the accounting year ended 31st March,

2020, it earned an income of Rs. 3,60,000.

It filed with the Commissioner of Income-tax its application for registration on 31st

August, 2019 explaining that for good and sufficient reasons, it was prevented from filing

the application for so long.

Examine

(i) by which date the application for registration should have been filed;

(ii) whether such an application could have been filed before the formation of the trust;

(iii) in the absence of an order of registration from the Commissioner, can the trust

be deemed to be registered;

(iv) the steps to be taken by the trust to secure exemption from income-tax;

(v) whether a certificate of registration once granted can be cancelled and if so, the

conditions there for.

Solution

(i) The requirement of filing an application for registration under section 12A within

one year of creation of the trust has been removed. The application can be filed at

any time now. Accordingly, the provisions of sections 11 and 12 would apply from

the assessment year relevant to the financial year in which the application is made

i.e. the exemption would be available only with effect from the assessment year

relevant to the previous year in which the application was filed.

However, where registration has been granted to the trust under section 12AA and

on the said date, assessment proceedings relating to earlier assessment years are

pending, then, the benefit of sections 11 and 12 shall be available in respect of

income derived from property held under trust in those years, provided the objects

and activities of the trust remain unchanged.


27.89

(ii) No. The application for registration under section 12A cannot be filed before the

formation of the trust.

(iii) As per section 12AA(2), every order granting or refusing registration should be

passed before the expiry of 6 months from the end of the month in which the

application was received under section 12A. The Supreme Court, in CIT v.

Society for Promotion of Education (2017) 382 ITR 6, held that the trust would be

deemed as registered if the application under section 12AA is not disposed of

within the stipulated period of six months. Therefore, in this case, the trust would

be deemed as registered with effect from 1st March, 2020. The benefit of exemption

under section 11 and 12 would be available from A.Y. 2020-21, being the

assessment year relevant to the financial year in which the application is made.

(iv) The following are the steps to be taken by the trust to secure exemption from

income - tax:

(1) The trust should be registered with the Principal Commissioner or

Commissioner of Income-tax under section 12AA.

(2) The accounts of the trust for the previous year must be audited by a Chartered

Accountant if its total income without giving effect to the provisions of section

11 and section 12 exceeds the maximum amount which is not chargeable to

tax. The audit report in the prescribed form, duly signed and verified by the

Chartered Accountant, should be furnished along with the return of income of

the trust for the relevant assessment year.

(3) At least 85% of the income is required to be applied for the approved purposes.

(4) The unapplied income and the money accumulated or set apart should be

invested or deposited in the specified forms or modes, after filing statement in

Form 10 on or before the due date of filing return of income specified under

section 139(1).

(v) Yes, the certificate of registration can be cancelled by the Commissioner. According

to section 12AA, if the Commissioner is satisfied that the activities of the trust

are not genuine or are not being carried out in accordance with the objects of the

trust, he shall, after giving the trust a reasonable opportunity of being heard, pass an

order in writing cancelling the registration of the trust.

Further, section 12AA(4) provides that where a trust or an institution has been

granted registration, and subsequently it is noticed that its activities are being carried

out in such a manner that,—

(i) its income does not enure for the benefit of general public;

(ii) it is for benefit of any particular religious community or caste;

(iii) any income or property of the trust is applied for benefit of specified persons

like author of trust, trustees etc.; or

(iv) its funds are invested in prohibited modes,

then, the Commissioner may cancel the registration of such trust or institution. The

Commissioner may also cancel the registration of such trust or institution, if it has

not complied with the requirement of any other law and the order, direction or

decree, by whatever name called, holding that such non-compliance has occurred,

has either not been disputed or has attained finality. However, if the trust or

institution proves that there was a reasonable cause for the activities to be carried

out in the above manner, the registration shall not be cancelled.

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27.90

QUESTIONS ON SET OFF AND CARRY FORWARD & SET OFF

Question 99

ABC Limited was amalgamated with XYZ Limited on 01.04.2019. All the conditions of

section 2(1B) were satisfied.

ABC Limited has the following carried forward losses as assessed till the

Assessment Year 2019-20:

Particulars Rs. (in

lacs)

(i) Speculative Loss 4

(ii) Unabsorbed Depreciation 18

(iii) Unabsorbed expenditure of capital nature on scientific research 2

(iv) Business Loss 120

XYZ Limited has computed a profit of Rs. 140 lacs for the financial year 2019-20 before

setting off the eligible losses of ABC Limited but after providing depreciation at 15% per

annum on Rs. 150 lacs, being the consideration at which plant and machinery were

transferred to XYZ Limited. The written down value as per income-tax record of ABC

Limited as on 31st March, 2019 was Rs. 100 lacs.

The above profit of XYZ Limited includes speculative profit of Rs. 10 lacs.

Compute the total income of XYZ Limited for Assessment Year 2020-21 and indicate the

losses/other allowances to be carried forward by it.

Answer

Computation of total income of XYZ Limited for the A.Y. 2020-21

Particulars Rs.(in lacs)

Business income

Business income before setting-off brought forward losses of ABC Ltd. 140.00

Add: Excess depreciation claimed in the scheme of amalgamation of

ABC Limited with XYZ Limited.

Value at which assets are transferred by ABC Ltd. 150

WDV in the books of ABC Ltd. 100

Excess accounted 50

Excess depreciation claimed in computing taxable income of

XYZ Ltd. [Rs. 50 lacs × 15 %] [Explanation 2 to section 43(6)]

7.50

147.50

Set-off of brought forward business loss of ABC Ltd. (See Notes

2 & 4) (120.00)

Set-off of unabsorbed depreciation under section 32(2) read with

section 72A (See Notes 2 & 4) (18.00)

Set-off of unabsorbed capital expenditure under section 35(1)(iv)

read with section 35(4) (See Note 5)

(2.00)

Business income 7.50


27.91

Notes:

1. It is presumed that the amalgamation is within the meaning of section 72A of the

Income-tax Act, 1961.

2. In the case of amalgamation of companies, the unabsorbed losses and unabsorbed

depreciation of the amalgamating company shall be deemed to be the loss or

unabsorbed depreciation of the amalgamated company for the previous year in

which the amalgamation was effected and such business loss and unabsorbed

depreciation shall be carried forward and set-off by the amalgamated company for

a period of 8 years and indefinitely, respectively.

3. As per section 72A(7), the accumulated loss to be carried forward specifically

excludes loss sustained in a speculative business. Therefore, speculative loss of

Rs. 4 lacs of ABC Ltd. cannot be carried forward by XYZ Ltd.

4. Section 72(2) provides that where any allowance or part thereof unabsorbed under

section 32(2) (i.e., unabsorbed depreciation) or section 35(4) (i.e., unabsorbed

scientific research capital expenditure) is to be carried forward, effect has to be

first given to brought forward business losses under section 72.

5. Section 35(4) provides that the provisions of section 32(2) relating to unabsorbed

depreciation shall apply in relation to deduction allowable under section 35(1)(iv) in

respect of capital expenditure on scientific research related to the business carried on

by the assessee. Therefore, unabsorbed capital expenditure on scientific research

can be set-off and carried forward in the same manner as unabsorbed depreciation.

6. The restriction contained in section 73 is only regarding set-off of loss computed in

respect of speculative business. Such a loss can be set-off only against profits of

another speculation business and not non-speculation business. However, there is no

restriction under the Income-tax Act, 1961 regarding set-off of normal business

losses against speculative income. Therefore, normal business losses can be set-off

against profits of a speculative business.

Consequently, there is no loss or allowance to be carried forward by XYZ Ltd. to

the F.Y. 2020-21.

Question 100

X carrying on a business as sole proprietor, died on 31st March, 2019. On his death,

the same business was continued by his legal heirs, by forming a firm. As on 31st March

2019, a determined business loss of Rs. 5 lacs is to be carried forward under the Income-

tax Act, 1961.

Does the firm consisting of all legal heirs of Mr. X, get a right to have this loss adjusted

against its current income?

Answer

Section 78(2) provides that where a person carrying on any business or profession has

been succeeded in such capacity by another person, otherwise than by inheritance,

then, the successor is not entitled to carry forward and set-off the loss of the

predecessor against his income. This implies that generally, set-off of business losses

should be claimed by the same person who suffered the loss and the only exception to

this provision is when the business passes on to another person by inheritance.

The facts of case given in the question are similar to the case CIT v. Madhukant M.

Mehta (2001) 247 ITR 805, where the Supreme Court has held that if the business is

succeeded by inheritance, the legal heirs are entitled to the benefit of carry forward of


27.92

the loss of the predecessor. Even if the legal heirs constitute themselves as a

partnership firm, the benefit of carry forward and set off of the loss of the predecessor

would be available to the firm.

In this case, the business of X was continued by his legal heirs after his death by

constituting a firm. Hence, the exception contained in section 78(2) along with the

decision of the Apex Court discussed above, would apply in this case. Therefore, the

firm is entitled to carry forward the business loss of Rs. 5 lacs of X.

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