Category: Direct Taxes

The Finance Minister has also introduced the Finance Bill, 2022, containing 84 sections amending various sections of the Income-tax Act. Before the passage of the Bill, 39 amendments to the Bill were
introduced in Parliament. The Parliament passed the Bill with the
amendments on 29th March, 2022. The Finance Act, 2022, has received the
assent of the President on 30th March, 2022. By this Act, several
amendments are made to the Income-tax Act, increasing the burden of
compliance for tax payers. However, there are some amendments which will
give some relief to taxpayers. Contrary to the Government’s declared
policy , there are some amendments that will have retrospective effect.
In this article, some of the important amendments in the Income tax-Act
(Act) are discussed.

2. RATES OF TAXES FOR A.Y. 2023-24

2.1
There are no changes in the slabs and the rates for an Individual, HUF,
AOP and BOI. The tax rates remain unchanged in the case of a Firm
(including LLP), Co-operative Society and Local Authority. In the case
of a Domestic Company, the tax rate remains the same at 25% if a
company’s total turnover or gross receipts for F.Y. 2020-21 was less
than R400 Crore. In the case of other larger companies, the tax rate
will be 30%. The rate of 4% of the tax for ‘Health and Education Cess’
will continue for all assessees. Apart from what is stated in Para 2.2,
the rates of surcharge are the same as in earlier years.

2.2 It
may be noted that some relief in rates of surcharge is given in A.Y.
2023-24 (F.Y. 2022-23). The revised rates of surcharge are as under:

(i) Individual, HUF, AOP / BOI
There
is no change in the surcharge rates on slab rates in A.Y. 2023-24.
However, the surcharge on income taxable under sections 111A, 112, and
112A and dividend income will not exceed 15%.

(ii) AOP (having corporate members only)
In
the case of AOP having only corporate members, the rate of surcharge
will be 7% if the income exceeds R1 crore but does not exceed R10
crores. The rate of surcharge will be 12% if the income exceeds R10
crores.

(iii) Co-operative Societies
The rate of
surcharge is reduced for A.Y. 2023-24 to 7% if the income is more than
R1 crore, but less than R10 crore. In respect of income exceeding R10
crore, the rate of surcharge is unchanged at 12%.

2.3. Alternate Minimum Tax
In
the case of co-operative societies, the Alternate Minimum Tax (AMT)
payable u/s 115JC is reduced from 18.5% to 15% from A.Y. 2023-24 (F.Y.
2022-23).

3. TAX DEDUCTION AND COLLECTION AT SOURCE (TDS AND TCS)

3.1 Section 194-IA:
This section is amended w.e.f. 1st April, 2022 – tax at 1% is to be
deducted on higher of stamp duty value or the transaction value. When
the consideration and stamp duty valuation is less than R50 Lakhs, no
tax is required to be deducted.

3.2 Section 194R: (i) This new section comes into force from 1st April, 2022.
It provides that tax shall be deducted at source at 10% of the value of
the benefit or perquisite arising from business or profession if the
value of such benefit or perquisite in a financial year exceeds R20,000.

(ii) The provisions of this section are not applicable to an
Individual or HUF whose sales, gross receipts or turnover does not
exceed R1 crore in the case of business or R50 Lakhs in the case of
profession during the immediately preceding financial year.

(iii)
The section also provides that if the benefit or perquisite is wholly
in kind or partly in kind and partly in cash, and the cash portion is
not sufficient to meet the TDS amount, then the person providing such
benefit or perquisite shall ensure that tax is paid in respect of the
value of the benefit or perquisite before releasing such benefit or
perquisite.

(iv) In the Memorandum explaining the provisions of
the Finance Bill, 2022, it is clarified that section 194R is added to
cover cases where the value of any benefit or perquisite arising from
any business or profession is chargeable to tax u/s 28(iv). Therefore,
this new TDS provision will apply only when the value of the benefit or
perquisite is chargeable to tax in the hands of the person engaged in
the business or profession u/s 28(iv). It is also provided that the
Central Government shall issue guidelines to remove any difficulty that
may arise in implementing this section.

3.3 Section 194-S: (i) This is a new section which will come into force on 1st July, 2022
– which provides that any person paying to a resident consideration for
transfer of any Virtual Digital Asset (VDA) shall deduct tax at 1% of
such sum. In a case where the consideration for transfer of VDA is (a)
wholly in kind or in exchange of another VDA, where there is no payment
in cash or (b) partly in cash and partly in kind but the part in cash is
not sufficient to meet the liability of TDS in respect of the whole of
such transfer, the payer shall ensure that tax is paid in respect of
such consideration before releasing the consideration. However, this TDS
provision does not apply if such consideration does not exceed R10,000
in the financial year.

(ii) Section 194-S defines the term
‘Specified Person’ to mean a person being an Individual or a HUF, whose
total sales, gross receipts or turnover from business or profession does
not exceed R1 crore in case of business or R50 Lakhs in the case of
profession, during the financial year immediately preceding year in
which such VDA is transferred or being Individual or a HUF who does not
have income under the head ‘Profits and Gains of Business or
Profession’. In the case of a Specified Person –

(a) The
provisions of section 203A relating to Tax Deduction and Collection
Account Number and section 206AB relating to special provision for TDS
for non-filers of Income-tax returns will not apply.

(b) If the
value or the aggregate value of such consideration for VDA does not
exceed Rs. 50,000 during the financial year, no tax is required to be
deducted.

(iii) In the case of a transaction to which sections
194-O and 194-S are applicable, then tax is to be deducted u/s 194-S and
not u/s 194-O.

3.4 Sections 206AB and 206CCA: These
sections deal with a higher rate of TDS and TCS in cases where the payee
has not filed his Income-tax returns for two preceding years and in
whose case aggregate TDS/TCS exceeds R50,000. At present, section 206AB
is not applicable in respect of TDS under sections 192, 192A, 194B,
194BB, 194BL and 194N. By amendment, effective from 1st April, 2022,
it is now provided that TDS/TCS at higher rates in such cases will not
apply u/s 194IA, 194IB and 194M where the payer is not required to
obtain TAN. Further, the test of non-filing the Income-tax returns under
sections 206AB/206CCA has been now reduced from two preceding years to
one preceding year.

4. DEDUCTIONS

4.1 Section 80CCD: At
present, the deduction for employer’s contribution to National Pension
Scheme (NPS) is allowed to the extent of 14% of the salary in the case
of Central Government employees. For others, the deduction is restricted
to 10% of the salary. In order to give benefit to State Government
employees, section 80CCD(2) is amended with retrospective effect from A.Y. 2020-21 (F.Y. 2019-20).
By this amendment, the State Government employees will now get a
deduction for employer’s contribution to NPS to the extent of 14% with
retrospective effect.

4.2 Section 80DD: At present, a
deduction is allowed in respect of the contribution to a prescribed
scheme for maintenance of a dependent disabled person if such scheme
provides for payment of the annuity or lump sum to such dependent person
in the event of death of the assessee contributing to the scheme, i.e.
the parent or guardian. This section is amended effective from A.Y. 2023-24 (F.Y. 2022-23)
to allow a deduction for such contribution even where the scheme
provides for payment of annuity or lump sum to the disabled dependent
when the assessee contributor has attained the age of 60 years or more
and the deposit to such scheme has been discontinued. It is also
provided by the amendment that such receipt of annuity or lump sum by
the disabled dependent shall not result in the contribution made by the
assessee to the scheme taxable.

4.3 Section 80-IAC: At
present, an eligible start-up incorporated on or after 1st April, 2016
but before 1st April, 2022, is entitled to claim an exemption of profits
for three consecutive assessment years out of ten years from the year
of incorporation. For this purpose, the conditions laid down in this
section should be complied. This section is now amended to provide that
the above benefit will be available to a start-up company incorporated
on or before 31st March, 2023.

4.4 Section 80LA: This
section provides for specified deduction in respect of income arising
from the transfer of an ‘aircraft’ leased by a unit in International
Financial Services Centre (IFSC) if the unit has commenced operation on
or before 31st March, 2024. The amendment of this section has extended
this benefit to a ‘ship’ effective A.Y. 2023-24 (F.Y. 2022-23).

5. CHARITABLE TRUSTS AND INSTITUTIONS
Significant
amendments were made in the procedural provisions relating to
Charitable Trusts and Institutions in sections 10(23C), 12A and 12AA of
the Income-tax Act by Finance Acts 2020 and 2021. A new section 12AB was
added to the Income-tax Act. This year, far-reaching amendments are
made in sections 10(23C), 11 and 13 dealing with Specified Universities,
Educational Institutions, Hospital etc. (herein referred to as
‘Institutions’) and Charitable and Religious Trusts (herein referred to
as ‘Charitable Trusts’). These amendments are as under:

5.1 Institutions Claiming Exemptions u/s 10(23C)
Section
10(23C) of the Act provides for exemption to a Specified University,
Educational Institutions, Hospitals etc., (Institutions). This section
is amended as under:

(i)  Section 10(23C)(v) grants exemption to
an approved Public Charitable or Religious Trusts. It is now provided
that if any such Trust includes any temple, mosque, gurudwara, church or
other notified place and the Trust has received any voluntary
contribution for the purpose of renovation or repair of these places of
worship, the Trust will have option to treat such contribution as part
of the Corpus of the Trust. It is also provided that this Corpus amount
shall be used only for this specified purpose and the amount not
utilized shall be invested in specified investments listed in section
11(5) of the Act. It is also provided that if any of the above
conditions are violated, the amount will be considered as income of the
Trust for the year in which such violation takes place. This provision
will come into force from A.Y. 2021-22 (F.Y. 2020-21).

It may be noted that a similar provision is added, effective A.Y. 2021-22 (F.Y. 2020-21), in section 11 in respect of Charitable or Religious Trusts claiming exemption u/s 11.

(ii)
At present, an Institution claiming exemption u/ 10(23C) must utilise
85% of its income every year. If this is not possible, it can accumulate
the unutilised income within 5 years. However, there is no provision
for any procedure to be followed for such accumulation. The amendment to
section 10(23C), effective from A.Y. 2023-24 (F.Y. 2022-23),
now provides that the Institution should apply to the Assessing Officer
(AO) in the prescribed form before the due date for filing the return
of income for accumulation of unutilised income within 5 years. The
Institution must state the purpose for which the income is being
accumulated. By this amendment, the provisions of section 10(23c) are
brought in line with section 11 of the Act.

(iii) At present,
section 10(23C) provides for an audit of accounts of the Institution. By
amendment, it is now provided that, effective from A.Y. 2023-24 (F.Y. 2022-23),
the Institution shall maintain its accounts in such manner and at such
place as may be prescribed by the Rules. Such accounts will have to be
audited by a CA, and a report in the prescribed form will have to be
given by him.

(iv) Section 10(23C) is also amended by replacing
the existing proviso XV to give very wide powers to the Principal CIT to
cancel approval or provisional approval given to the Institution for
claiming exemption. If the Principal CIT comes to know about specified
violations by the Institution, he can conduct an inquiry, and after
giving an opportunity to the Institution, cancel the approval or
provisional approval. The term ‘specified violations” is defined in this
amendment.

(v) By another amendment to section 10 (23C), effective from A.Y. 2023-24 (F.Y. 2022-23), it is provided that the Institution shall file their returns of income by the due date specified in section 139(4C).

(vi)
A new Proviso XXI is added in section 10(23C) to provide that if any
benefit is given to persons mentioned in section 13(3), i.e., author of
the Institution, Trustees or their related persons, such benefit shall
be deemed to be the income of the Institution. This will mean that if a
relative of a trustee is given free education in the educational
Institution, the value of such benefit will be considered as income of
the Institution. In this case, the tax will be charged at 30% plus
applicable surcharge and cess u/s 115BBI.

(vii) It may be noted that section 56(2)(x) has been amended from A.Y. 2023-24 (F.Y. 2022-23)
to provide that if the Author, Trustees or their related persons as
mentioned in section 13(3) receive any unreasonable benefit from the
Institution or Charitable Trust exempt under sections 10(23C) or 11, the
value of such benefit will be taxable as ‘Income from Other Sources’.

(viii)
At present, the provisions of section 115TD apply to a Charitable or
Religious Trust registered u/s 12AA or 12AB. Now, effective from A.Y. 2023-24 (F.Y. 2022-23), the
provisions of section 115TD will apply to any University, Educational
Institution, Hospital etc., claiming exemption u/s 10(23C) also. Section
115TD provides that if the Institution loses exemption u/s 10(23C) due
to cancellation of its approval or due to conversion into a
non-charitable organization or other reasons, the market value of all
its assets, after deduction of liabilities, will be liable to tax at 30%
plus applicable surcharge and cess.

5.2 Charitable Trusts claiming exemption u/s 11

Sections
11, 12 and 13 of the Act provide exemption to Charitable Trusts
(Including Religious Trusts), registered u/s 12A, 12AA or 12AB. Some
amendments are made in these and other sections as stated below:

(i)
As stated above, if a Charitable Trust owns any temple, mosque,
gurudwara, church etc., it can treat any contribution received for
repairs or renovation of such place of worship as corpus donation. This
amount should be used for the specified purpose. The unutilized amount
should be invested as provided in section 11(5). This provision will
come into force from A.Y. 2021-22 (F.Y. 2020-21).

(ii)
At present, if a Charitable Trust is not able to utilise 85% of its
income in a particular year, it can apply to the AO for permission for
the accumulation of such income for 5 Years. If any amount out of such
accumulated income is not utilised for the objects of the Trust up to
the end of the 6th year, it is taxable as income in the sixth year. This
provision has now been amended, effective from A.Y. 2023-24 (F.Y. 2022-23),
to provide that if the entire amount of the accumulated income is not
utilised up to the end of the 5th Year, the unutilised amount will be
considered as income of the fifth year and will become taxable in that
year.

(iii) If a Charitable Trust is maintaining accounts on an accrual basis of accounting, it is now provided that any
part of the income which is applied to the objects of the Trust, the
same will be considered as application for the objects of the Trust only
if it is actually paid in that year. If paid in a subsequent year,
it will be considered as application of income in the subsequent year.
This amendment will come into force from A.Y. 2022-23 (F.Y. 2021-22).

(iv)
Section 13 deals with the circumstances in which exemption under
section 11 can be denied to Charitable Trusts. At present, if any income
or property of the Trust is utilised for the benefit of the Author,
trustee or related persons stated in section 13(3), the exemption is
denied to the Trust. Now, effective from A.Y. 2023-24 (F.Y. 2022-23),
this section is amended to provide that only that part of the income
which is relatable to the unreasonable benefit allowed to the related
person will be subjected to tax in the hands of the Charitable Trust.
This tax will be payable at 30% plus applicable surcharge and cess.

(v)
At present, section 13(1)(d) provides that if any funds of the
Charitable Trust are not invested in the manner provided in section
11(5), the Trust will not get exemption u/s 11. This section is now
amended, effective from A.Y. 2023-24 (F.Y. 2022-23), to
provide that the exemption will be denied only in respect of the income
from such prohibited investments. Tax on such income will be chargeable
at 30% plus applicable surcharge and cess.

(vi) Section 12A has been amended, effective from A.Y. 2023-24 (F.Y. 2022-23),
to provide that the Charitable Trust shall maintain its accounts in the
manner as may be prescribed by Rules. These accounts will have to be
audited by a Chartered Accountant.

(vii) In line with the
amendment in section 10(23c) proviso XV, very wide powers are now given,
by amending section 12AB (4), to the Principal CIT to cancel
registration given to a Charitable Trust for claiming exemption. If the
Principal CIT comes to know about specified violations by the Charitable
Trust, he can conduct an inquiry and after giving opportunity to the
Trust, cancel its registration. The term ‘Specified Violations’ is
defined by this amendment.

5.3 Special Rate of Tax
A new section 115BBI has been added, effective from A.Y. 2023-24 (F.Y. 2022-23),
for charging tax at 30% plus applicable surcharge and cess. This rate
of tax will apply to registered Charitable Trusts, Religious Trusts,
Educational Institutions, Hospitals etc., in respect of the following
specified income:

(i) Income accumulated in excess of 15% of the income where such accumulation is not allowed.

(ii)
Where the income accumulated by the Charitable Trust or Institution is
not utilised within the permitted period and is deemed to be the income
of the year when such period expires.

(iii) Income which is not
exempt u/s 10(23c) or section 11 by virtue of the provisions of section
13(1)(d). This will include the value of benefit given to related
persons, income from Investments made otherwise then what is provided in
section 11(5) etc.

(iv) Income which is not excluded from the
total income of a Charitable Trust u/s 13(1) (c). This refers to the
value of benefits given to related persons.

(v) Income which is
not excluded from the total income of a Charitable Trust u/s 11(1) (c).
This refers to income of the Trust applied to objects of the Trust
outside India.

5.4 New Provisions for Levy of Penalty

New
section 271 AAE is added in the Income-tax Act for levy of penalty on
Charitable Trusts and Institutions claiming exemption under sections
10(23C) or 11. This penalty relates to benefits given by the Charitable
Trusts or Institutions to related persons. The new section provides that
If an Institution claiming exemption u/s 10(23C) or a Charitable Trust
claiming exemption u/s 11 gives an unreasonable benefit to the Author of
the Trust, Trustee or other related persons in violation of proviso XXI
of section 10(23C) or section 13(1) (c), the AO can levy penalty on the
Trust or Institution as under:

(i) 100% of the aggregate amount
of income applied for the benefit of the related persons where the
violation is noticed for the first time.

(ii) 200% of the aggregate amount of such income where the violation is noticed again in the subsequent year.

6. INCOME FROM BUSINESS OR PROFESSION

6.1 Section 14A:
At present, expenditure incurred in relation to exempt income is not
allowed as a deduction. There was a controversy as to whether section
14A would apply when there was no income from a particular investment.
This section is now amended effective from A.Y. 2022-23 (F.Y. 2021-22)
to clarify that the disallowance under this section can be made even in
a case where no exempt income had accrued or was received, and
expenditure was incurred. It is also clarified that the provisions of
section 14A will apply notwithstanding anything to the contrary
contained in the Income-tax Act.

6.2 Section 35 (1A):
Section 35 allows deduction of expenditure on scientific research. Under
section 35(1A), such deduction is denied under certain circumstances.
This section is now amended effective from A.Y. 2021-22 (F.Y. 2020-21) to
provide that the donor will not be allowed a deduction in respect of
the donation for research u/s 35 if the donee has not filed a statement
of donations before the specified authorities.

6.3 Section 17: This section is amended effective from A.Y. 2020-21 (F.Y. 2019-20) to
provide that any sum paid by the employer in respect of any expenditure
actually incurred by the employee on medical treatment of the employee
or any of his family members for treatment relating to COVID-19 shall
not be regarded as taxable perquisite. This will be subject to such
conditions as may be notified by the Central Government.

6.4 Section 37(1): At
present, Explanation 1 to section 37(1) provides that any expenditure
incurred for any purpose which is an offence or which is prohibited by
law shall not be allowed as a deduction while computing income under the
head ‘Profits and Gains of Business or Profession’. Now Explanation – 3
is added from A.Y. 2022-23 (F.Y. 2021-22) to clarify that the following types of expenses shall not be allowed while computing the business income of the assessee:

(i)
Expenditure incurred for any purpose which is an offence under, or
which is prohibited by, any law in India or outside India, or

(ii)
Any benefit or perquisite provided to a person, whether or not for
carrying on business or profession, where its acceptance is in violation
of any law or rule or regulation or guidelines governing the conduct of
such person, or

(iii) Expenditure incurred to compound an
offence under any law, in India or outside India. It may be noted that
this amendment may affect the benefits or perquisites provided by
pharmaceutical companies to medical professionals. If any benefit or
perquisite is received by a medical professional from a pharmaceutical
company, the same is taxable as the income of the medical professional
u/s 28 (iv). This will now suffer TDS at 10% of the value of such
benefit or perquisite under new section 194R. Further, it will be
difficult to find out whether a particular benefit is prohibited by law
in a foreign country.

6.5  Section 40(a) (ii): (i) Tax
levied on ‘Profits and Gains of Business or Profession’ is not allowed
as a deduction under this section. In the case of Sesa Goa Ltd vs. JCIT 117 taxmann.com 96,
the Bombay High Court held that the term ‘tax’ will not include ‘cess’
levied on tax. A similar view was taken by the Rajasthan High Court.
This section is now amended retrospectively effective from A.Y. 2005-06 (F.Y. 2004-05),
and it is now provided that the term ‘tax’ shall include any surcharge
or cess on such tax. Thus, no deduction will be allowable for ‘cess’ on
the basis of the above High Court decisions.

(ii) It may be noted
that section 155 has been amended from 1st April, 2022 to provide for
the amendment of the computation of income/loss in a case where
surcharge or cess has been claimed and allowed as a deduction in
computing total income. This amendment is as under:

(a) If the
assessee has claimed the deduction for surcharge or cess as business
expenditure, the AO can rectify the computation of income or loss u/s
154. He can also treat this deduction as under-reported income u/s
270A(3) and levy a penalty under that section. For this purpose, the
limitation period of 4 years u/s 154 shall be counted from 31st March
2022. This will mean that such a rectification order can be passed on or
before 31st March, 2026.

(b) However, if the
assessee makes an application to the AO in the prescribed form and
within the prescribed time, requesting for recomputation of the income
by excluding the above claim for deduction of surcharge or cess and pays
the amount due thereon within the specified time, no penalty under
section 270A will be levied. It appears that interest will also be
payable with the tax.

(iii) This is a retrospective legislation.
The claim for deduction of surcharge or cess may have been made by some
assessees in view of the High Court decision. To levy a penalty u/s 270A
for such a claim made in earlier years is a very harsh provision.

6.6 Section 43B:
This section provides that interest payable on an existing loan or
borrowing from Financial Institutions shall be allowed only in the year
of actual payment. The Supreme Court, in the case of M.M. Aqua Technologies Ltd. vs. CIT reported in 436 ITR 582
held that the interest payable in such a case can be considered to have
been actually paid if the liability to pay interest is converted into
debentures. The Explanation 3C, 3CA and 3CD of section 43B have been
amended from A.Y. 2023-24 (F.Y. 2022-23) to provide that
if such interest payable is converted into debenture or any other
instrument, by which the liability to pay is deferred to a future date,
it shall not be considered as actual payment.

6.7 Section 50: This section was amended by the Finance Act, 2021, from A.Y. 2021-22 (F.Y. 2020-21). Now, an explanation is added from A.Y. 2021-22 to
clarify that reduction of the amount of goodwill of a business or
profession from the ‘block of assets’ as provided in section 43(6) (c)
(ii) (B) shall be deemed to be transfer of goodwill.

6.8 Section 79A:
At present, there is no restriction on the set-off of any loss or
unabsorbed depreciation against undisclosed income detected during a
search or survey proceedings under sections 132, 132A or 133A (other
than 133A (2A)). Now, a new section 79A is added from the A.Y. 2022-23 (F.Y. 2021-22)
to provide that any loss, either of the current year or brought forward
loss or unabsorbed depreciation, cannot be adjusted against the
undisclosed income, which is defined as under:

(i) Any income of
the relevant year or any entry in the books of accounts or other
documents or transactions detected during a search, requisition or
survey, which has not been recorded in the books of accounts or has not
been disclosed to the Principal Chief CIT, Chief CIT, Principal CIT or
CIT before the date of search, requisition or survey, or

(ii) Any
expenditure recorded in the books of accounts or other documents are
found to be false and would not have been detected but for the search,
requisition or survey.

7. TAXATION OF VIRTUAL DIGITAL ASSETS
In
this year’s Budget, no ban has been imposed on dealing in
cryptocurrencies or other similar digital currencies. In para III of the
budget speech, the Finance Minister has stated that “Introduction of
Central Bank Digital Currency (CBDC) will give a big boost to digital
economy. Digital Currency will also lead to a more efficient and cheaper
management system. It is, therefore, proposed to introduce Digital
Rupee, using blockchain and other technologies, to be issued by the
Reserve Bank of India starting 2022-23”.

Further, in Para 131 of
the Budget Speech, the Finance Minister has stated that “There has been a
phenomenal increase in transactions in virtual digital assets. The
magnitude and frequency of these transactions have made it imperative to
provide for a specific tax regime. Accordingly, for taxation of virtual
digital assets, I propose to provide that any income from transfer of
any virtual digital assets shall be taxed at the rate of 30 per cent”.

To implement this decision the following amendments are made in various sections of the Income-tax Act effective A.Y. 2023-24 (F.Y. 2022-23).

7.1 Section 2(47A): This
is a new section which defines the term ‘Virtual Digital Asset’ (VDA)
to mean any information or code or number or token (other than an Indian
currency or a foreign currency) generated through cryptographic means
in or otherwise, by whatever name called, providing a digital
representation of value exchanged with or without consideration with the
promise or representation of having inherent value, or functions as a
store of value or a unit of account including its use in any financial
transaction or investment, but not limited to investment scheme, and can
be transferred, stored or traded electronically. This definition also
includes non-fungible tokens or any other token of a similar nature. It
also includes any other digital asset that may be notified by the
Central Government. This definition comes into force from 1st April,
2022.

7.2 Section 115BBH: This is a new section which comes into force from A.Y. 2023-24. It provides as under:

(i)
Where the total income of an assessee includes any income from transfer
of VDA, income tax on such income is payable at 30% plus a surcharge
and cess. It may be noted that in this provision, no distinction is made
between income from transfer VDA in the course of trading or VDA held
as a capital asset. However, it is clarified that the definition of the
term ‘transfer’ in section 2(47) shall apply whether VDA is a capital
asset or not.

(ii) No deduction in respect of any expenditure
(other than the cost of acquisition) or allowance or set-off of any loss
shall be allowed to the assessee under any provision of the Income-tax
Act in computing income from transfer of such VDA.

(iii) No
set-off of loss from the transfer of the VDA shall be allowed against
income computed under any provision of the Income-tax Act, and such loss
shall not be allowed to be carried forward.

7.3 Section 56(2)(x): Gift
of VDA received by a non-relative will be taxable u/s 56(2) (x) as
‘Income from Other Sources’. If a person receives a gift of VDA of the
aggregate market value exceeding R50,000 or VDA is transferred to him
for a consideration where the difference between the consideration paid
and its market value is more than R50,000, tax will be payable by him as
provided in section 56(2) (x). Amendment in section 56(2) (x) provides
that the expression ‘property’ includes ‘VDA’. The CBDT will have to
frame rules for the determination of market value of VDA for the
purposes of section 56(2) (x).

7.4 Section 194-S: This is a
new section which provides for deduction of TDS @1% from the
consideration for VDA. The provisions of this section are discussed in
Para 3.3 above. This provision comes into force on 1st July, 2022.

7.5 General: In
the Memorandum explaining the provisions of the Finance Bill, 2022, it
is stated that “Virtual digital assets have gained tremendous popularity
in recent times and the volumes of trading in such digital assets has
increased substantially. Further, a market is emerging where payment for
transfer of virtual digital assets can be made through another such
asset. Accordingly, a new scheme to provide for taxation of such virtual
digital assets has been proposed in the Bill”.

Reading the above amendments, some issues arise for consideration.

(i)
The new provisions do not clarify as to under which head the income
from transfer of VDA will be taxable i.e. whether it is ‘Income from
Business’ or ‘Capital Gains’ or ‘Income from Other Sources’.

(ii)
A transfer of VDA in exchange for another VDA is liable to tax. It is
not clear how the market value of the VDA received in exchange will be
determined. The Central Government will have to frame Rules for this
purpose.

(iii) VDA is defined u/s 2(47 A) and this definition
comes into force on 1st April, 2022. A question will arise as to whether
income from transfer of similar VDA prior to 1st April, 2022 will be
taxable and if so whether it will be considered as a ‘Capital Asset’ as
defined in section 2(14). Under this definition, ‘Capital Asset’ means
“property of any kind held by an assessee, whether or not connected with
his business or profession”.

(iv) If income arising from
transfer VDA before 1st April, 2022 is considered taxable, a question
will arise whether the loss in such transactions will be allowed to be
adjusted against other income and carried forward loss will be allowed
to be adjusted against income in subsequent years.

We will have to wait for some clarification from CBDT on all the above issues.

8. CAPITAL GAINS

8.1 Section 2(42C): This
section defines ‘slump sale’. Finance Act, 2021, had widened this
definition to cover a case of transfer of an undertaking ‘by any means’,
which till then was restricted to a case of transfer ‘as a result of
the sale’. There was some doubt about the interpretation of this
provision. Therefore, this definition is now amended from A.Y. 2021-22 (F.Y. 2020-21)
to substitute the word ‘sales’ by the word ‘transfer’. Thus, the
definition now covers a case of transfer of any undertaking by means of a
lump sum consideration without assigning individual values to assets
and liabilities for such transfer.

8.2 Surcharge on Capital Gains: As
stated in Para 2.2 above, a surcharge on tax on long-term capital gains
u/s 111A, 112 and 112 A in the case of Individual, HUF, AOP, BOI etc.
will not exceed 15% of tax from the A.Y. 2023-24 (F.Y. 2022-23).

9. INCOME FROM OTHER SOURCES

9.1 Section 56(2)(x): According
to the Government’s declared policy, amount received by a person for
medical treatment of COVID -19 illness should not be made liable to any
tax. Therefore, section 56(2) (x) has been amended to provide as under:

(i)
Any sum of money received by an Individual from any person in respect
of the medical treatment of himself or any member of his family for any
illness related to COVID -19, to the extent of the expenditure actually
incurred will not be taxable.

(ii) Any amount received by a
member of the family of a deceased person from the employer of the
deceased person will not be taxable.

(iii) An amount up to R10
lakhs received from any person by a member of the family of the deceased
person, whether the cause of death of such person was illness related
to COVID -19 will not be taxable. However, such amount should be
received within 12 months of the date of the death, and such other
conditions as may be notified by the Central Government are satisfied.

It
may be noted that for the purpose of (ii) and (iii), the word ‘family’
is given the meaning as defined in section 10(5). This word will,
therefore, mean (a) the spouse, (b) children of the individual and (c)
parents, brothers and sisters of the Individual or any of them who is
wholly or mainly dependent on the Individual.

The above amendments are made from A.Y. 2020-21 (F.Y. 2019-20)

9.2 Section 68: This
section provides that any sum credited in the books of the assessee
shall be considered as income if the assessee does not offer an
explanation about the nature and source of such sum. Even if the
explanation is offered by the assessee, but the AO is of the opinion
that the explanation offered by the assessee is not to his satisfaction,
the AO can treat such sum as income of the assessee. This section is
amended from A.Y. 2023-24 (F.Y. 2022-23). The amendment
now provides that where the amount received by the assessee consists of
loan or borrowing or otherwise, by whatever name called, the assessee
will have to give a satisfactory explanation to the AO about the source
from which the person in whose name the amount is credited obtained the
money. In other words, the assessee will now have to prove the source of
funds in the hands of the lender. However, this provision will not
apply if the amount is credited in the name of a Venture Capital Company
or a Venture Capital Fund.

It may be noted that this new
provision will create many practical difficulties for the assessee. If
the lender does not co-operate and share the details of the source of
his funds, the assessee borrower will suffer. Further, it is not clear
whether this new provision will apply to borrowings made on or after 1st
April, 2022 or to old borrowing also. There is also no clarity on
whether the assessee will have to prove the source of funds borrowed
from a Financial Institution, Banks or Co-operative Societies etc.

9.3 Dividend from Foreign Company:
At present, dividend income earned by an Indian Company from a Foreign
Company in which it holds 26% or more of the equity share capital is
taxed at the concessional rate of 15%. This provision is contained in
section 115BBD. By amendment of this section from A.Y. 2023-24 (F.Y. 2022-23),
this concession is withdrawn from 1st April, 2022. Thus, such dividends
will be taxed at the normal rate of 30%. However, the Indian Company
will be able to take benefit of deduction u/s 80M if it declares a
dividend out of such dividend from the Foreign Company.

10. ASSESSMENT AND REASSESSMENT OF INCOME

10.1 In the Finance Act, 2021, new
provisions were made for the procedure to be followed for assessment or
reassessment of income including that in the case of a search or
requisition. Sections 147, 148 and 149 were substituted and a new
section 148A was added from 1st April, 2021. The following amendments
are made in these provisions from A.Y. 2022-23 (F.Y. 2021-22):

10.2 Section 132 and 132B
dealing with search and requisition are amended to include reference to
the assessment, reassessment or re-computation under sections 14(3),
144 or 147 in addition to assessment under section 153A.

10.3 Explanation 1
to Section 148 lists items considered as information about income
escaping assessment. Following changes are made in this list:

(i)
One of the item relates to the final objection raised by C&AG. Now
the requirement is that if any ‘Audit Objection’ states that the
assessment for a particular year is not made in accordance with the
provisions of the Income-tax Act, it will become information, and the AO
can issue notice based on such information.

(ii) The scope of the ‘information’ is now extended to the following items:

(a) Any information received under an agreement referred to in section 90 or 90A.

(b)
Any information made available to the AO under the scheme notified u/s
135A, providing for the collection of information in a faceless manner.

(c) Any information which requires action in consequence of the order of a Tribunal or a Court.

10.4 Explanation 2 to
section 148 deals with information with the AO about escapement of
income in cases of search, survey etc. The following changes are made in
these provisions:

(i) Information about any function, ceremony
or event obtained in a survey u/s 133A (5) can now be used for reopening
an assessment u/s 148. This will include any marriage or similar
function.

(ii) The deeming fiction that Explanation 2 to section
148 was applicable for 3 assessment years immediately preceding the
relevant year has been removed.

10.5 The requirement of obtaining approval of any Specified Authority by the AO is modified as under:

(i)
If the AO has passed the order u/s 148A(d) to the effect that it is a
fit case for the issue of notice u/s 148, he is not required to take the
approval of the Specified Authority before issuing a notice u/s 148.

(ii) For serving a show-cause notice on the assessee u/s 148A(b), no approval of the Specified Authority is required.

(iii)
A new section 148B is inserted, providing that the AO below the rank of
Joint Commissioner is required to take the approval of Additional
Commissioner, Additional Director, Joint Commissioner or Joint Director
before passing an order of assessment or reassessment or re-computation
in respect of an assessment year to which Explanation 2 to section 148
applies.

10.6 Section 149(1)(b): This section provides for
extended time limit of 10 years for issuance of notice u/s 148. This
extended time limit applies where the AO has in his possession books of
accounts, documents or evidence to reveal that income represented in the
form of asset which has escaped assessment is of R50 Lakhs or more.
This provision is now amended to provide that the income escaping
assessment should be represented in the form of (a) an asset, (b)
expenditure in respect of a transaction or in relation to an event or
occasion or (c) An entry or entries in the books of account.

Further,
the words ‘for that year’ has been omitted. Thus, the threshold limit
of R50 Lakhs or more need not be satisfied for each assessment year for
which notice u/s 148 is to be issued.

10.7 Section 149(1A):
A new sub-section (IA) is added in section 149 to provide that, in case
investment in such asset or expenditure in relation to such event or
occasion has been made or incurred in more than one year within the 10
years period, a notice u/s 148 can be issued for every such assessment
year.

10.8 Section 148A: It is now provided that the
procedure for issue of a notice under this section will not apply where
the AO has received any information under the scheme notified u/s 135A.

10.9 It is now provided, effective from 1st April, 2021, that restriction in section 149(1) for issuance of a notice u/s 148 for A.Y. 2021-22 or
any earlier year, if such notice could not have been issued at that
time on account of being beyond the time limit as specified in section
149(1)(b) as it stood before 1st April, 2021, shall also apply to notice
under sections 153A or 153C.

10.10 Section 153: This section, dealing with the time limit for completing an assessment, has been amended from 1st April, 2021.
It is now provided that the assessment for the A.Y. 2020-21 (F.Y.
2019-20) should be completed by 30th September, 2022 (within 18 months
of the end of the assessment year).

10.11 Section 153A:
Explanation 1 to this section provides for excluding the period to be
excluded for limitation. This section is now amended from 1st April, 2021
to provide for the exclusion of the period (not exceeding 180 days)
commencing from the date on which search is initiated u/s 132 or
requisition is made u/s 132A to the date on which the books of account,
documents, money, bullion, jewellery or other valuable articles seized
or requisitioned are handed over to AO having jurisdiction over the
assessee. A similar amendment is made in section 153B.

10.12 Section 153B: The time limit for completing assessment u/s 153A relating to search cases have now been removed from 1st April, 2021. In all cases where a search is made on or after 1st April, 2021,
the assessment will be made under sections 143, 144 or 147. Time limit
provided for such assessments will apply. However, in a case where the
last authorization for search or requisition u/s 132/132A was executed
in F.Y. 2020-21, or books/documents/assets seized were handed over to
the AO in F.Y. 2020-21, the assessment in such case for the A.Y. 2021-22
can be made on or before 30th September, 2022.

10.13 Section 271 AAB: This
section provides for the levy of penalty at a lower rate in search
cases if the specified conditions are complied. One of the conditions is
that the assessee should have paid tax on undisclosed income and filed
the return of income declaring the undisclosed income before the
specified date. The definition of ‘specified date’ is now amended from 1st April, 2021 to include the date on which the period specified in the notice u/s 148 expires.

11. FACELESS ASSESSMENTS SCHEME

11.1
Section 92CA deals with the provisions for reference to the Transfer
Pricing Officer. Section 144C deals with reference to Dispute Resolution
Panel. Section 253 deals with the procedure for filing appeals before
ITA Tribunal. Under these sections, power is given to notify a scheme
for faceless procedure for assessments and appeals before 31st March,
2022. Similarly, u/s 255 dealing with the procedure for disposal of
appeals before the ITA Tribunal, the notification for a faceless hearing
can be issued before 31st March, 2023. In all these sections,
amendments are made, and the above time limit for issue of notification
for faceless procedure is now extended up to 31st March, 2024.

11.2 Section 144B dealing with the procedure for faceless assessments has been amended from 1st April, 2022.
The faceless assessment scheme has come into force on 1st April, 2021.
Some amendments are made in section 144B, modifying the procedure under
the scheme. In brief, these amendments are as under:

(i) At
present, the scheme applies to assessments under sections 143(2) and
144. Now, it will also apply to assessments, reassessments and
recomputation u/s 147.

(ii) At present, the time limit for a
reply to a notice u/s 143(2) is 15 days from the receipt of notice. This
time limit is removed. Now, the time limit will be stated in the notice
u/s 143(2).

(iii) The concept of Regional Faceless Assessment Centre is done away with.

(iv)
It is now specified that the Assessment Unit can seek the assistance of
the Technical Unit for (a) determination of Arm’s Length Price, (b)
valuation of property, (c) withdrawal of registration and (d) approval,
exemption or any other matter.

(v) The procedure for Assessment
Unit (AU) preparing the draft assessment order and revising the same on
getting comments has been done away with. Now, AU has to state in
writing if no variations are proposed to the returned income. If
variations are proposed a show-cause notice is to be issued to the
assessee. On receipt of the response from the assessee, the National
Assessment Centre shall direct the AU to prepare a draft order, or it
can assign the matter to the Review Unit.

(vi) After receiving
the suggestions from the Review Unit, the National Assessment Centre has
to assign the case to the same AU which had prepared the draft order.
In the old scheme, the case had to be assigned to another AU. To this
extent, the new provision that the matter goes back to the original AU
which made the draft order is a welcome change.

(vii) In the old
scheme, there was no provision for referring the case for special audit
u/s 142(2A). Now, it is provided that if AU is of the opinion that
considering the complexity of the case, it is necessary to get special
audit done, it can refer the matter to the National Assessment Centre.

(viii)
Under the old scheme, a request for a personal hearing through video
conferencing could be granted only if the Chief Commissioner or Director
General approved the same. This provision is now amended and it is
provided that if the request for personal hearing is made by the
assessee, the Income tax Authority of the concerned Unit has to allow
the same through video conferencing. This is a welcome provision.

(ix)
At present, section 144B(9) provides that the assessment shall be
considered non-est if the same is not made in accordance with the
procedure laid down u/s 144B. This provision is now deleted with retrospective effect from 1st April, 2021. This is very unfair. It removes the safeguard, which ensured that the department would follow the procedure u/s 144B.

(x)
At present, section 144B(10) provides that the function of the
verification unit can be assigned to another verification unit. This
sub-section is now deleted from 1st April, 2022.

12. TO SUM UP

12.1
Contrary to the declared policy of the present government, there are
more than a dozen amendments in the Income-tax Act which have
retrospective effect. In particular, the amendment to disallow surcharge
and cess while computing business income is retrospective and applies
from A.Y. 2005-06. Further, such a claim made by an assessee based on
the High Court decision will be subject to a levy of penalty if the
assessee does not recompute the total income for that year and pay the
tax within the specified time. It is not clear whether interest on the
tax due will be payable. The AO is given time up to 31st March, 2026 to
pass the rectification order u/s 154 and levy penalty u/s 270A. Such
type of retrospective amendment is very harsh and may not stand judicial
scrutiny.

12.2 It is true that there is no increase in the rates
of taxes, and some relief is given to specific entities in the matter
of rates of surcharge. The only new tax levied is on Virtual Digital
Assets (VDA). This is a new type of asset, and some issues will arise
while computing the income from transactions relating to VDAs. The CBDT
will have to clarify issues relating to the valuation and reporting of
transactions.

12.3 Significant amendments were made in the
Finance Act 2020 and 2021 in the provisions relating to Charitable
Trusts and Institutions claiming exemption u/s 10(23c) and 11. This
year, some further amendments are made to these provisions. Some of
these amendments are beneficial to Charitable Trusts and Institutions.
However, the manner in which the amendments are worded creates a lot of
confusion. It is necessary that a separate chapter is devoted in the
Income-tax Act, and all provisions of sections 10(23c), 11, 12, 12A,
12AA, 12AB, 13 etc., dealing with exemption to these Trusts and
Institutions are put under one heading. This chapter should deal with
rate of tax, interest, penalty etc., payable by such Trusts and
Institutions. This will enable the person dealing with Public Trusts and
Institutions to know their rights and obligations.

12.4 The
scope for deduction of tax at source (TDS) has been extended to two more
items. New section 194-R has been added, and TDS provisions will now
apply to the value of benefit or perquisite given to a person engaged in
business or profession. Further, under the new section 194-S, the TDS
provisions apply to the transfer of VDA. These provisions will increase
the compliance burden of assessees.

12.5 Significant amendments
are made in the provisions relating to computation of ‘Income from
Business or Profession’. Now, expenditure incurred in relation to exempt
income will be disallowed even if no exempt income is received.
Further, the value of any benefit or perquisite provided to a person
where acceptance of such benefit or perquisite is prohibited by any law,
rule or guidelines governing the conduct of such person will be
disallowed. This will affect most of the pharmaceutical and other
companies providing such benefits or perquisites to their agents or
dealers.

12.6 Another damaging provision introduced by new
section 79A relates to denial of adjustment of current years or carried
forward loss or unabsorbed depreciation against specified undisclosed
income. This provision comes into force from A.Y. 2022-23 (F.Y.
2021-22).

12.7 The amendment to section 68, putting the burden of
proving the source of the money in the hands of the person from whom
funds are borrowed is another amendment that will increase the
compliance burden of the assessees. Now assessees will have to maintain
evidence about the source of funds in the hands of the lender. This is
going to be difficult.

12.8 A new provision is made in section
139 (8A), allowing the assessee to file a belated return of income
within 24 months after the end of the specified time limit for filing a
revised return. There are several conditions attached to this provision.
Further, interest, fees for late filing, and additional tax is payable.
Reading these conditions, it is evident that such belated return cannot
be filed to claim any relief in tax. Thus, very few persons will be
able to take advantage of this provision.

12.9 Taking an overall
view of the amendments made in the Income-tax Act this year, one can
take the view that it is a mixed bag. There are some retrospective
amendments which are very harsh. There are some amendments which are
with a view to give some relief to assessees but they are attached with
several conditions. In this effort, the Income-tax Act has become more
complex, and the Government’ declared objective to simplify the tax laws
is not achieved.

(This article summarises key direct tax
provisions. Because of the extensive amendments, provisions related to
updated returns, penalties and prosecution, IFSC, appeals and revisions,
and certain other amendments are excluded due to space constraints –
Editor)

While the aforesaid sections apply to even AOPs and BOIs, for the purpose of this article reference is made only to firm and partners.

When a partner’s account is settled on retirement or dissolution, he may be given one or more of the following;

(a) Cash, (b) Capital asset, (c) Stocks.

The aforesaid provisions dealt with transfer of capital asset in the limited circumstances provided thereunder.These sections generated a lot of controversies and have given rise to a number of court rulings. A prominent issue is, when a partner upon retirement or dissolution takes home more cash than his capital account balance at the time of retirement, whether he or the firm is liable to pay any tax. The courts are almost unanimous in holding that mere payment of cash would not give rise to any taxable capital gains either in the hands of the firm or in the hands of the partner. It has been held that what he gets is in settlement of his account and nothing more.

B. FINANCE ACT, 2021
The changes proposed in the Finance Bill, 2021 by way of substitution of section 45(4) and insertion of section 45(4A) were not carried through. The Finance Act, 2021 discarded the proposed changes but seeks to change the scheme of taxation of capital gain in the following manner:

(a) Existing section 45(3) is retained,
(b) Existing section 45(4) is replaced by a new sub-section,
(c) New section 9B is introduced,
(d) New clause (iii) is added to section 48.

The new scheme, through the combination of sections 45(4) and 9B, provides for taxation in the hands of the firm in the case of receipt of capital asset or stock-in-trade or cash (or a combination of two or more of them) by the partner on reconstitution or dissolution of the firm. Section 48(iii) seeks to mitigate the impact of double taxation.

Sections 9B and 45(4) apply to receipts by partner from the firm on or after 1st April, 2020 in connection with dissolution / reconstitution. A question arises as to whether these sections apply to such receipts in connection with dissolution / reconstitution which took place prior to 1st April, 2020. The literal interpretation suggests that the date of receipt being critical, the date of dissolution / reconstitution is immaterial as long as the  receipt is in connection with dissolution / reconstitution. One possible counter to this interpretation is that the erstwhile section 45(4) dealt with distribution of capital asset on dissolution or otherwise of the firm and it held the field till 31st March, 2020. Section 9B deals with receipt in connection with reconstitution or dissolution, while substituted section 45(4) deals with receipt in connection with reconstitution. One could notice some overlap between erstwhile section 45(4) and section 9B insofar as receipt of capital asset on dissolution is concerned.

On the basis of this reasoning, it is not unreasonable to expect that new provisions should be considered as applicable only when both the dissolution / reconstitution and receipt have taken place on or after 1st April, 2021. One more reason for this interpretation could be that once dissolution / reconstitution has taken place prior to 1st April, 2021, respective rights arising from such dissolution / reconstitution crystallised on the date of such dissolution / reconstitution. Any receipt thereafter is only in relation to such rights which crystallised before the effective date of the new provisions.

C. SECTION 9B
The Finance Bill, 2021 did not propose section 9B. It rather proposed a substitution of existing section 45(4) and insertion of new section 45(4A). However, while enacting the Finance Act, 2021, section 9B is introduced.

Explanation (ii) to section 9B defines ‘specified entity’ as a firm or other association of persons or body of individuals (not being a company or a co-operative society). Explanation (iii) defines ‘specified person’ as a person who is a partner of a firm or member of other association of persons or body of individuals (not being a company or a co-operative society) in any previous year. For the sake of convenience, in this article, specified entity is referred to as a firm and specified person is referred to as a partner.

Section 9B(1) provides that where a partner receives, during the previous year, any capital asset or stock-in-trade or both from a firm in connection with the dissolution or reconstitution of such firm, the firm shall be deemed to have transferred such capital asset or stock-in-trade, or both, as the case may be, to the partner in the year in which such capital asset or stock-in-trade or both are received by the partner.

Section 9B(2) provides that any profits and gains arising from such deemed transfer of capital asset or stock-in-trade, or both, as the case may be, by the firm shall be deemed to be the income of such firm of the previous year in which such capital asset or stock-in-trade or both were received by the partner. Such income shall be chargeable to income-tax as income of such firm under the head ‘Profits and gains of business or profession’ or under the head ‘Capital gains’ in accordance with the provisions of this Act.

As per section 9B(3), fair market value of the capital asset or stock-in-trade, or both, on the date of its receipt by the partner shall be deemed to be the full value of the consideration received or accruing as a result of such deemed transfer of the capital asset or stock-in-trade, or both, by the firm.

As per Explanation (i), reconstitution of the firm means, where
(a) one or more of its partners of firm ceases to be partners; or
(b) one or more new partners are admitted in such firm 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
(c) all the partners, as the case may be, of such firm continue with a change in their respective share or in the shares of some of them.

D. SALIENT FEATURES OF SECTION 9B
The purpose of placing section 9B outside the heads of income appears to be to avoid replication of charging and computation provisions under both heads of income, i.e., profits and gains from business or profession, and capital gains.

Section 9B would apply when a partner receives during the previous year any capital asset / stock-in-trade or both from a firm in connection with dissolution or reconstitution of firm.

Upon such receipt, the firm shall be deemed to have transferred such capital asset / stock-in-trade or both to the partner in the year of receipt of the same by the partner.

The business profits or capital gains arising from aforesaid deemed transfer shall be chargeable under the respective heads of income. Fair market value (FMV) of capital asset / stock-in-trade or both on the date of receipt shall be deemed to be the full value consideration (FVC) for determination of the business profits / capital gain.

Reconstitution would include the case of admission / retirement / change in profit-sharing ratio.

E. CERTAIN ISSUES ASSOCIATED WITH SECTION 9B
Section 9B(2) deems the profits and gains on deemed transfer of capital asset or stock-in-trade as the income of the firm in the year of receipt of asset by the partner. If receipts by one or more partners spread over to more than one year, the taxability thereof on the firm follows suit.

In the case of dissolved firm, it is interesting to note how the above fiction works when the partners receive the assets in the years subsequent to the year of dissolution. While there is a fiction to deem such receipt as a transfer by firm, there is no fiction to deem that the firm is not dissolved. In such a situation, whether the machinery provision of section 189(1) which permits the A.O. to proceed to assess the firm as if it is not dissolved, applies or not is a debatable issue.

The fair market value of the allotted asset shall be deemed to be the full value of consideration. For this purpose, the balance in the capital account of the partner is not relevant.

Section 9B does not as such provide for prescription of the rules for determination of the FMV. Therefore, recourse has to be had to section 2(22B) which defines FMV. Special provisions like sections 43CA and 50C do not apply in a case covered by section 9B.

The business profit arising u/s 9B, though chargeable under the head ‘profits and gains from business or profession’, does not fall u/s 28. Therefore, section 29 which provides that ‘the income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43D’ may not apply. This is for the reason that section 29 refers only to income referred to in section 28. Therefore, business profits may have to be computed on commercial principles, without recourse to the aforesaid provisions providing any allowance or disallowance.

Unlike in the case of section 29 which refers only to section 28, section 48 refers to the head ‘capital gains’. Therefore, capital gains arising from section 9B will have to be computed after considering section 48. Therefore, the cost of acquisition, cost of improvement, their indexation and incidental transfer expenditure will be available as deduction.

While section 45 is saved by sections 54 to 54GB, there is no such saving provision in section 9B. Therefore, whether a firm is eligible for exemption u/s 54EC, etc., in respect of capital gains arising u/s 9B is an open question. While on a stricter note such exemption is not available, on a liberal note one may contend that exemption should be available if related conditions are fulfilled. Proponents of a stricter interpretation may argue that exemption u/s 54EC is inconceivable as there is no inflow in terms of actual consideration for satisfying the requirement of rollover. The proponents of a liberal interpretation may counter such contention by pointing out that deeming fiction requires logical extension and rollover sections do not require rupee-to-rupee mapping. If the liberal theory is accepted, the date of receipt being deemed to be the date of transfer, is relevant for reckoning the time limit irrespective of the date of change in constitution or dissolution.

F. SECTION 45(4)
Section 45(4) as it stood before substitution by Finance Act, 2021 read as follows:
‘(4) The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.’

The substituted section 45(4) by the Finance Act, 2021 reads as follows:
‘(4) Notwithstanding anything contained in sub-section (1), where a specified person receives during the previous year any money or capital asset or both from a specified entity in connection with the reconstitution of such specified entity, then any profits or gains arising from receipt of such money by the specified person shall be chargeable to income-tax as income of such specified entity under the head “capital gains” and shall be deemed to be the income of such specified entity of the previous year in which such money or capital asset or both were received by the specified person, and notwithstanding anything to the contrary contained in this Act, such profits or gains shall be determined in accordance with the following formula, namely:…’

The following table depicts some key differences between the two provisions:

G. SALIENT FEATURES OF SECTION 45(4)
Section 45(4) would apply when a partner receives during the previous year any money or capital asset or both from a firm in connection with the reconstitution of a firm.

Any profits and gains arising from such receipt shall be chargeable in the hands of the firm under the head ‘capital gains’.

Such capital gain shall be deemed to be chargeable to tax in the previous year of receipt of such money or capital or both by the partner.

Reconstitution is defined in the same manner as is defined u/s 9B.

H. COMPUTATION OF CAPITAL GAIN U/S 45(4)
Capital gain shall be computed u/s 45(4) as per the formula provided therein, i.e., A=B+C-D.

The capital gain is computed by considering the following components:
B = Amount of cash received by the partner,
C = Amount of FMV of capital asset received by the partner,
D = Amount of capital account balance of a partner in the books of the firm at the time of its reconstitution.

The difference between capital account balance on the date of receipt and aggregate of cash received and FMV of capital asset received constitutes capital gains in the hands of the firm.

I. CORRIGENDUM TO SECTION 45(4)
On 22nd March, 2021, the Finance Ministry sent a notice of amendments to the Lok Sabha, wherein section 45(4) as proposed in the Bill was substituted completely by a new section 45(4). The newly-proposed section 45(4) had the words ‘…any profits or gains arising from receipt of such money by the specified person…’

On 23rd March, 2021, the Lok Sabha approved the Bill as amended by notice of amendments dated 22nd March, 2021. The Presidential Assent to the Bill was given on 28th March, 2021. The Finance (No. 13) Act, of 2021 was notified on 28th March, 2021. The Notified Finance (No. 13) Act, of 2021 carried Section 45(4) with the aforesaid words.

Two corrigenda were issued on 6th April, 2021 and 15th April, 2021. In the first corrigendum, for the words ‘…from receipt of such money by’, the words ‘…from such receipt by…’ were substituted. While it is not known as to the exact content of section 45(4) as approved by the Lok Sabha, on the basis of Notified Finance (No. 13) Act, of 2021 it can be inferred that the Lok Sabha has approved the Bill which carried section 45(4) as stated in the notice of amendments dated 22nd March, 2021.

The aforesaid substitution is not just correcting a clerical error, but it has substantial implications. The originally introduced words would have confined the scope of section 45(4) only to receipt of money, whereas the substituted words would extend it not only to receipt of money but also to receipt of capital asset.

Unless an Amendment Act is enacted, substituted words by a corrigendum having the effect of amending a law passed by the Parliament may be open to challenge on the ground of overreach by the executive.

J. COMPARISON BETWEEN SECTION 9B AND SECTION 45(4)
The following table compares above two provisions;

The following table summarises the applicability of the above two sections:

K. DOUBLE TAXATION AND ITS MITIGATION
As may be seen from a close reading of sections 9B and 45(4), in the event of receipt of capital asset by a partner from a firm in connection with its reconstitution, the firm is liable to tax under both section 9B and section 45(4).

Explanation 2 to section 45(4) clarifies that when a capital asset is received by a partner from a firm in connection with the reconstitution of such firm, the provisions of section 45(4) shall operate in addition to the provisions of section 9B and the taxation under the said provisions thereof shall be worked out independently.

Therefore, it is a clear case where double taxation is explicitly intended or provided for. Where Parliament in its wisdom chooses to explicitly provide for double taxation, it has a plenary power to do so.

In this regard, reliance is placed on the following decisions:

•     Jain Bros vs. Union of India [1970] 77 ITR 107 (SC);

•     Laxmipat Singhania vs. CIT [1969] 72 ITR 291 (SC);

•     CIT vs. Manilal Dhanji [1962] 44 ITR 876 (SC);

•     Escorts Limited vs. UOI [1993] 199 ITR 43 (SC); and

•     Mahaveer Kumar Jain vs. CIT [2018] 404 ITR 738  (SC).

Thus, while double taxation cannot be inferred or implied, the same can be explicitly provided for.

Thus, it is a clear case of Parliament wanting to apply both sections in case of receipt of capital asset by a partner in connection with the reconstitution of a firm.

Section 48 is also amended by Finance Act, 2021 where Clause (iii) is inserted which reads as follows:
‘(iii) in case of value of any money or capital asset received by a specified person from a specified entity referred to in sub-section (4) of section 45, the amount chargeable to income-tax as income of such specified entity under that sub-section which is attributable to the capital asset being transferred by the specified entity, calculated in the prescribed manner:’

Section 48(iii) provides that the amount chargeable to tax u/s 45(4) to the extent attributable to the capital asset being transferred by a firm shall be reduced from the FVC of a capital asset being transferred by a firm. Such reduction, however, needs to be calculated in the prescribed manner. The rules in this regard are awaited. These provisions are applicable for PY 2020-21 and the rules were not out as on 1st April, 2021. Therefore, such rules when notified will have to be made retrospective so as to be applicable to PY 2020-21. If the retrospective application of rules causes prejudice to the taxpayer, the same may be open to challenge in terms of section 295(4).

As noted earlier, section 45(4) applies when a partner receives capital asset or money or both from a firm in connection with its reconstitution. If a partner receives capital asset with or without money, capital gain attributable to such receipt of capital asset will not be available for relief u/s 48(iii). This is for the obvious reason that the subject capital asset having already been given to a partner, could not be subsequently transferred by the firm to any other person. Upon allotment to a partner, the capital asset concerned ceases to exist with the firm.

However, if a firm is liable to tax on transfer of money with or without capital asset to the partner in connection with reconstitution of a firm, the capital gain on such transfer of money chargeable u/s 45(4) would be available for relief u/s 48(iii). This relief is given on the premise that when cash is paid to the retiring partner on reconstitution, the same may be attributed wholly or partly to the revaluation of one or more capital assets which are retained by the firm. Subsequently, when a firm transfers such revalued capital asset, it would be liable to pay tax on capital gain. In such a case, capital gain may include the revalued portion on which the firm would have discharged tax u/s 45(4). This will result in double taxation. In order to mitigate such double taxation, it is provided that capital gains already charged to tax u/s 45(4) to the extent attributable to the capital asset that is being transferred by a firm would be allowed as deduction u/s 48(iii).

It is interesting to note that section 48(iii) may also apply in a situation where both sections 9B and 45(4) are applied simultaneously in the same previous year.

As stated earlier, section 8 applies not only to capital gain chargeable u/s 45, but to any capital gains chargeable under the head ‘capital gain’. As section 9B provides for capital gains to be chargeable to tax under the head ‘capital gain’, section 48 is applicable to the capital gain covered u/s 9B as well.

While computing the capital gain chargeable u/s 9B read with section 48, capital gain chargeable u/s 45(4) to the extent attributable to the capital asset dealt with by section 9B would be reduced from the FVC determined u/s 9B(3). Section 48 does not provide for determination of the FVC. It only provides for deductions from the same. Therefore, there is no disharmony between section 9B(3) and deduction u/s 48(iii).

L. CERTAIN OTHER ISSUES OF SECTION 45(4)
What is the meaning of receipt of money? Whether receipt of money includes constructive receipt by way of credit to account? A mere credit to the account of the partner cannot be equated with the receipt of money. Upon reconstitution, certain sum may be credited to a partner’s account which is allowed to remain in the firm. In such case, it cannot be said that he received money from the firm upon a mere credit. However, when the amount so credited is withdrawn by him, section 45(4) is attracted. The answer could be different if the ratio of Raghav Reddy in 44 ITR 760 SC is applied to such credit unless such ratio is distinguished on the basis of Toshiku in 125 ITR 525 SC.

Whether receipt of rural agricultural land covered: As rural agricultural land is not a capital asset, section 45(4) is not attracted.

Receipt by legal heirs of deceased partner: Section 45(4) would apply to receipt by a partner from the firm. A receipt by the legal heir of the deceased partner cannot be regarded as receipt by the partner. Therefore, section 45(4) is not applicable.

Would capital balance include balances in current account and loan of partners: While the balance in current account could be appropriately called as part of capital balance, the same may not be so in the case of loan by partners.

Is proportionate share of reserves to be considered as part of capital: Credit balance in the profit and loss account or balances in the reserves should be credited to partners’ accounts before dissolution / reconstitution. In any case, payment from such credit / reserves cannot be regarded as payment in connection with dissolution / reconstitution.

How to compute if there is negative capital balance: A negative balance in the capital account represents money due by the partner to the firm. If such balance is not made good by him on dissolution / reconstitution, it amounts to a waiver which may in turn amount to payment of cash in the light of the ratio in Mahindra and Mahindra 404 ITR 1 SC.

M. WHEN GOODWILL IS TRANSFERRED
If goodwill, being a capital asset, is transferred to a partner, sections 45(4) and 9B as discussed earlier would apply. This is so irrespective of whether the goodwill is self-generated or acquired.

If goodwill is self-generated, in terms of section 55(2)(a) and section 55(1)(a) the cost of acquisition and cost of improvement shall be deemed to be nil.

If goodwill is purchased for a consideration, newly-introduced proviso to section 55(2)(a) would apply. This proviso provides that the actual cost of goodwill shall be reduced by the depreciation allowed up to A.Y. 2020-21.

Provisions of section 50 along with the newly-introduced proviso to section 50(2) may not apply in view of the fact that sections 45(4) and 9B are special provisions.

Additionally, upon such transfer, if no consideration is received or is accrued, provisions of section 50 may not operate unless the fiction of section 9B(3) is read into section 50. In any case, section 45(4) does not have any such fiction.

ACKNOWLEDGEMENTS: The author acknowledges the inputs from Mr. S. Ramasubramanian and Mr. H. Padam Chand Khincha and the support of Mrs. Sushma Ravindra for the purposes of this analysis.

Joint development of real estate – A win-win for both landowner and developer?

What are the possible risk factors?

Why this article?

1. Outright sale of land / grant of development rights by the landowner to the developer against a fixed monetary consideration either paid upfront or in deferred instalments over the project period.
2. Grant of development rights by the landowner to the developer against sharing of gross revenue earned by the developer from the sale of the project.
3. Grant of development rights by the landowner to the developer against sharing of net profits earned by the developer from the project.
4. Grant of development rights by the landowner to the developer against sharing of area developed by the developer in a pre-determined ratio.

How does one choose an appropriate structure?

From the landowners’ perspective, the structure could be determined based on the fine balancing of the timing of the transfer of legal title in the property from the landowner and the timing of the flow of consideration to him. Throw in the subjective metrics of the risk-taking ability of the stakeholders and the level of comfort that the landowner and the developer have with each other in terms of the extent of trust and / or mistrust, and the entire equation starts becoming fuzzy. To add to the fizz, compliance obligations under regulations like RERA and restrictions under FEMA could also act as show-stoppers.

Ameet Hariani says, ‘For example, under RERA it is the promoter’s obligation to obtain title insurance of the real estate project. The relevant section of RERA, among other things, requires a promoter to obtain all such insurances as may be notified by the appropriate Government, including in respect of the title of the land and building forming the real estate project and in respect of the construction of the said project. Since both the landowner as well as the developer will be classified as promoters, it would be prudent for parties entering into a JDA to specify which party (among the “promoters”) will be responsible for obtaining the title insurance for the project.’

In some transaction structures, tax obligations (both direct tax as well as indirect tax – GST and, not to forget, stamp duty) could act as the final nail in the coffin. For example, the upfront exposure towards payment of stamp duty and income-tax coupled with the ab initio parting of the title may rule out the possibility of an outright sale of land by the landowner against deferred consideration from the developer. As stated by Ameet Hariani, ‘From a legal perspective, legal rights should be retained by the landowner till the performance by the developer of the developer’s obligations. Only then should legal rights be transferred.’

While stamp duty is a duty on the execution of the document and could be paid by either of the parties, Ameet Hariani has this to say, ‘So far as stamp duty implications are concerned, normally these are borne by the developer. All documents relating to immovable property should be registered and consequently the quantum of stamp duty is an important determinant to be worked out.’

The above factors are relevant from the developer’s perspective as well. However, many more aspects become relevant. While the landowner would like to protect and retain his title in the property to the last possible milestone, for the developer a restricted right in the land could present significant constraints in financing the project, especially if he is dependent on funding from banks. Ameet Hariani has a word of advice, ‘Legally speaking, agreements for development rights are significantly different from those for sale of land. Courts have held that some types of development agreements cannot be specifically enforced. The key is to ensure that the development agreements that are executed should be capable of being specifically enforced.’ More importantly, the marketability of the project to the end customer / investor depends significantly on the buyer taking a loan from the bank. Therefore, the customer’s and the customer’s lending institution’s perception of the transaction structure and the clarity of the title of land become very important factors.

Hence, Ameet Hariani warns, ‘Financial institutions normally will not give finance in respect of the development agreement unless there is a specific clause in the development agreement entitling the developer to raise finance on the property; and the developer must also have the right to also mortgage the developer’s proportionate share in the land. This often makes the landowner extremely uncomfortable, especially because the landowner’s contribution, i.e., the land comes into the “hotchpotch” almost immediately. This is a matter that is often debated strongly while financing the development agreement’. The local development regulations and restrictions may also play an important part. ‘Is the plot size economically viable? Is there some arbitrage available due to an adjacent plot of land also available for development? Does the development fit within the overall vision of the developer?’ These are some questions which occupy the mind-space of the developer.

Is there one dominant parameter determining the transaction structure?

Sudhir Soni concurs: ‘The commercial considerations are largely dependent on the cash flow requirements of the developer and the landowner. Grant of development rights against sharing of revenue or developed area are the more prevalent JDA structures and there is not much difference in the business context. Grant of development rights against share of net profits is rare. The commercial considerations for a landowner to select between an area share or revenue share arrangement also depend on the cash flow requirements and taxation implications.’

There is a financial facet other than cash which is equally important – the timing of revenue recognition. Says Ameet Hariani, ‘So far as the developer’s requirements are concerned, since revenues can now only be recognised effectively upon the Occupation Certificate being obtained, and keeping the RERA perspective in mind, the speed of completion of the project is of paramount importance. This is especially true so far as listed developers are concerned.’

Practically, joint development arrangements have specific performance clauses for both the parties and will not allow a mid-way exit to either party. However, the future is uncertain. What if a developer runs out of cash mid-way and needs to exit and bring in another developer? Ameet Hariani opines, ‘Normally, a landowner would be uncomfortable to have a provision whereby development rights can be transferred / assigned without the landowner’s consent. It will be a very rare case where such right is allowed to the developer. There is a high likelihood of litigation where there is a transfer of rights proposed to a third party developer by the current developer’.

The litigation risk is not only at the developer’s end but also at the landowner’s end. Ameet Hariani continues, ‘Also, in the event the landowner wants the developer to exit and wants to appoint a new developer, once again there is a high likelihood of litigation.’ But Ameet Hariani has a golden piece of advice suggesting the incorporation of an arbitration clause in the agreement. ‘Earlier, there was a debate as to whether developer agreements could be made subject to arbitration or not. Recent judgments read with the amendments to the Specific Relief Act and the Arbitration Act have now clarified the position significantly and a well-drafted arbitration clause would be key to ensure protection for both the parties’, he says.

But new transaction structures are emerging

But wait! Weren’t transactions in immovable property expected to be outside the purview of GST? ‘Though there is a strong case to argue that such transactions should not be subjected to GST, there are conflicting interpretations on this front and the lower judicial forums are divided. One therefore has to wait for the Supreme Court to provide a final stand on this aspect,’ says Sunil Gabhawalla. Unluckily, businesses can’t wait and the stakes involved are phenomenal. The industry therefore tries to adapt and innovate newer transaction structures which are perhaps more tax-efficient.

Welcome the new concept of ‘Development Management Agreement’ wherein the developer acts as a project manager or a consultant to the landowner in developing the identified real estate. Suitable clauses are inserted to ensure that the developer and the landowner appropriate the profits of the venture in the manner desired. Essentially, this concept turns the entire relationship topsy-turvy and the key challenge is to ensure that the developer has a suitable title in the property while under development. ‘Safeguarding the developer’s rights and title in the property being developed becomes the most important aspect in this structure. Further, the brand value of the developer and past experience of other landowners with the developer is crucial for the landowner to make a choice as to which developer the landowner will go with,’ says Ameet Hariani.

It’s not really new for a tax aspect to be an important determinant for deciding a transaction structure. In case of corporate-owned properties put up for redevelopment, it is not uncommon to explore the route of demerger or slump sale and seek the associated benefits under the income-tax law. Pradip Kapasi says, ‘In case of demerger, the transfer of land by the demerged company to the resulting company would be tax-neutral provided the provisions of section 2(19AA) and sections 47(vib) and 47(vic) are complied with. No tax on transfer would be payable by the company or the shareholders. The cost of the land in the hands of the resulting company would be the same as was its cost in the hands of the demerged company’. Sunil Gabhawalla supports this approach, ‘GST is not payable on a transaction of transfer of business under a scheme of demerger’.

Well, the devil lies in the details. The provisions referred to above effectively require continuity of shareholding to the extent of at least 75%. This may not be possible in all cases. There comes up another option, of slump sale. Pradip Kapasi suggests, ‘The provisions of section 2(42C) r/w/s 2(19AA) and section 50B would apply on transfer of land as a part of the undertaking. No separate gains will be computed in respect of land. The company, however, would be taxed on the gains arising on transfer of the business undertaking in a slump sale. The amendments of 2021 in sections 2(42C) and 50B would have to be considered in computing the capital gains in the hands of the assignor company’. Effectively, income-tax becomes due on slump sale. What happens to GST? Sunil Gabhawalla opines, ‘There is an exemption from payment of GST.’

While such exotic products and arrangements may exist and appeal to many, there would always be takers for the plain vanilla example. The essential business case is that of the landowner and the developer coming together to jointly develop the property. A simple transaction structure could be to recognise the same as a joint venture, as an unincorporated association of persons. In fact, this is a risk parameter always at the back of the mind of any tax consultant. A less litigative route would be to grant such concept a legal recognition by entering into a partnership. To limit the liability of the stakeholders, the LLP / private limited company route can be considered. What could be the tax consequences of introduction of land into the entity?

Pradip Kapasi has this to say, ‘In such an event, of introduction in the partnership firm or LLP, provisions of section 45(3) of the Income-tax Act would be attracted and the landlord’s income under the head capital gains would be computed as per section 45(3) read with or without applying the provisions of section 50C. The profit / loss on subsequent development by the SPV would be computed under the head profits and gains of business and profession. In computing the income of the SPV, a deduction for the cost of land would be allowed on adoption of the value at which the account of the partner introducing the land is credited’. Would such introduction of land into the partnership have any GST implications? ‘Apparently, no, since such transactions are structured as in the nature of supply of land per se’, says Sunil Gabhawalla. He further comments, ‘If the transaction is structured as an introduction of a development right in the partnership firm, things can be different and reverse charge mechanism as explained earlier could be triggered’.

The next steps

Landowner’s perspective

Landowner as an investor
Essentially, in case the immovable property is held as an investor, it would be treated as a capital asset and the transfer of the capital asset or any rights therein would attract income-tax in the year of transfer itself under the head ‘capital gains’. While a concessional long-term capital gains tax rate and the benefits of reinvestment may be available, in order to curb the menace of tax evasion the Government prescribes that the value of consideration will be at least equivalent to the stamp duty valuation. This provision can become a spoilsport especially in situations where the ready reckoner values prescribed by the Government are not in alignment with the ground-level reality. However, Pradip Kapasi offers some consolation. While the said provisions would apply with full force to transactions of outright sale of land, the application of section 50C to grant of development rights transferred could be a matter of debate. But is the minor tax advantage (if at all) so derived really worth it? Remember the jigsaw puzzle of GST discussed above. But again, someone said that GST applies only on supplies
made in the course or furtherance of business. Did we not start this paragraph with the assumption that the landowner is an investor and is not undertaking a business venture?

Sunil Gabhawalla agrees with this thought process but at the same time cautions that the term ‘business’ is defined differently under the GST law and the income-tax law. He adds, ‘The valuation based on ready reckoner may be prescribed under income-tax law, but the same does not apply to GST where either the transaction value or equivalent market value become the key criteria’. Sudhir Soni endorses this thought from the accounting perspective as well, ‘The ready reckoner value will not necessarily be the fair value for accounting. The valuation for accounting purposes will be either based on the fair value of the entire land parcel received by the developer [or] based on the standalone selling price of constructed property given by the developer’.

In many cases, both the developer as well as the landowner wish to share the risks and rewards of the price fluctuations and also align cash flows. Accordingly, the consideration for the grant of development is both deferred as well as variable – either by way of share of gross revenue or share of profits, or sharing of area being developed. In cases where the landowner does not receive the money upfront and is keen on deferring the taxation to a future point of time, is it possible? The views of Pradip Kapasi are very clear, ‘Provision in agreement or deed for deferred payment or even possession may not help in deferring the year of taxation’. In the case of sharing of gross revenue, he further cautions that the fact of uncertainty of the quantum of ‘full value of consideration’ and its time of realisation may be impending factors but may not be conclusive for computation of capital gains, unless ‘arising’ of profits and gains on transfer itself is questioned. There could be debatable issues about the year of taxation of overflow or the underflow of consideration.

How does one really question or defer the timing of ‘arising’ of profits and gains on transfer? Without committing to the conclusiveness of the end position, which would be based on multiplicity of factors, Pradip Kapasi has a ray of hope to offer. In his words, ‘The cases where either the profit or developed area is shared could be differentiated on the ground that the landlord here has agreed to share the net profits of a business and therefore has actively joined hands to carry on a business activity for sharing of profits of such business. In such circumstances, his “share of profits” could arise as and when it accrues to the business’.

But tax law is full of caveats and provisos. Pradip Kapasi further warns, ‘There is a possibility that the landowner’s association with the developer here could be viewed as constituting an AOP and his action or treatment could activate the provisions of section 45(2) dealing with conversion of capital asset into stock-in-trade and / or the provisions of section 45(3) for introduction of capital asset into an AOP. In case of application of section 45(2) and / or 45(3), there would arise capital gains in the hands of the landlord and would be subjected to tax as per the respective provisions. The surplus, if any, could be the business profits; however, where the transactions are viewed as constituting an AOP, he would be receiving a share in the net profits of the AOP and the share of profit received from the AOP would be computed as per provisions of sections 67B, 86 and 110 of the Income-tax Act’.

Phew, that’s a barrage of cryptic sections to talk about! Let’s keep our fingers crossed and assume that the landlord survives this allegation of the transaction being treated as an AOP. The battle is then nearly won. Pradip Kapasi continues, ‘Where no profits and gains are brought to tax in the year of grant of development rights under the head “capital gains”, the capital gains can be held to have arisen in the year of receipt of the ready flats, where the gains would be computed by reducing the COA (cost of acquisition) of land from the SDV (stamp duty value) of the flats received. Further, if the transaction is structured such that no capital gains tax is levied in the year of receipt of ready flats, the capital gains may be taxed in the year of sale of the flats allotted by the developer’. He further warns about some practical difficulties in this stand being taken; ‘where the landlord on receipt of flats does not sell them but lets them out, difficulties may arise for bringing to tax the notional gains in the hands of the landlord’.

In case all this mumbo-jumbo has dumbed your senses, a landlord who is an individual or HUF may consider the possibility of entering into a ‘specified agreement’ prescribed u/s 45(5A) that involves the payment of consideration in kind, with or without cash consideration in part, for grant of development rights. Under the circumstances, the capital gains on execution of the development agreement shall stand deferred to the year of issue of the completion certificate of the project or part thereof where the full value of consideration for the purpose of computation of capital gains would be taken as the aggregate of the cash consideration and the stamp duty value of his share of area in the project in kind on the date of the issue of the completion certificate. This assumed concession is made available on compliance of the strict conditions including ensuring that the landlord does not transfer his share in the project prior to the date of issue of the completion certificate. Subsequent sale of the premises received under the agreement would be governed as per the provisions of section 45 r/w/s 48.

That’s too much of income-tax. Let’s divert our attention to GST. As a welcome change, Sunil Gabhawalla has a bit of advice for the landowners entering into joint development agreements after 1st April, 2019, ‘Sit back and relax. As stated earlier, the burden of paying the tax on supply of development rights has been transferred to the developer’. What happens when the landowner resells the developed area allotted to him under the area-sharing agreement? Sunil Gabhawalla adds, ‘If the developed area is sold after the receipt of the completion certificate, there is no tax. If the developed area is sold while the property is under construction, the landowner can argue that he is not constructing any area and therefore he is not liable for payment of GST. Remember, the GST on the area allotted to the landowner would also be paid by the developer’.

But life in GST cannot be so simple, right? Nestled in the by-lanes of a condition to a Rate Notification disentitling a developer from claiming input tax credit (ITC) for residential projects is an innocent-looking sentence which permits the landowner to claim ITC on units resold by him if he pays at least equivalent output tax on the units so resold. Sunil Gabhawalla says, ‘Well, the legal tenability of such a position can be questioned. But in tax laws, with the risk of litigation and retrospective amendments, the writing on the wall is that the boss is always right. If the landowner opts to fall in line, he would require a registration and would be paying additional GST on the difference between the tax charged to him and that which he charges to the end buyer. While this also brings commercial parity vis-à-vis the buyers for landowner’s inventory and the developer’s inventory, it could also result in some cash flow issue if not structured appropriately.’

In a nutshell, therefore, the key tax issue bothering the landowner in case of joint development agreements is not really GST but the upfront liability towards a substantial capital gains tax irrespective of actual cash realisation.

Landowner as a businessman
Will things change if the land is held as stock-in-trade? Actually, yes, and substantially. As a businessman, the landowner forfeits his entitlement of concessional long-term capital gains tax rate. But that pain comes with commensurate gain – the tax is attracted not when the transfer takes place but at a point of time when the income accrues in relation to such land. Says Pradip Kapasi, ‘The point of accrual of income is likely to arise on acquisition of an enforceable right to receive the income with reasonable certainty of realisation. The method of accounting and sections 145 and 28 may also play a vital role here. Provisions of ICDS and Guidance Note, where applicable, would apply’. Welcome to the wonderland of accounting and its impact on taxation!

Sudhir Soni says, ‘There may be alternatives. If it is treated as a capital gain, the amounts received as revenue share will be accumulated as advance and recognised at the end of the project, on giving possession. If it is treated as a business, at each reporting date apply percentage of completion to the extent of its share’. But is it really that simple? Well, the situation is fluid and the conflict is nicely summarised by Pradip Kapasi, ‘The fact that there was a “transfer” would not be a material factor in deciding the year of taxation. At the same time, the deferment of receipt may not be the sole factor for delaying the taxation where the enforceability of realisation is reasonably certain’.

Pradip Kapasi further cautions, ‘The provisions of section 43CA may play a spoilsport by introducing a deeming fiction for quantifying the revenue receipts.’ He has an additional word of advice. He suggests the preference of variable consideration models like gross revenue sharing, profit sharing or area sharing over the fixed consideration model. To quote him, ‘The case of the landlord here to defer the year of taxation could be better unless an income can be said to have accrued as per section 28 r/w/s 145, ICDS, where applicable, and Guidance Note of 2012’.

As usual, he has a few words of caution: firstly, ‘There is a possibility that the development rights held by the landlord are considered as a capital asset within the meaning of section 2(14) by treating such rights as a sub-specie of the land owned by him. In such case, a challenge may arise on the income-tax front where transfer of such
rights to the developer is subjected to taxation in the year of transfer itself. This possibility, however remote, could not be ignored though the better view is that even this sub-specie is a part of this stock-in–trade’; and secondly, ‘The possibility of treating the association with the developer as an AOP is not altogether ruled out especially in view of the amendment of 2002 for insertion of Explanation of section 2(31) dealing with the definition of “person” w.e.f. 1st April, 2002. In such an event, though remote, issues can arise in application of the provisions of section 45 to 55, particularly of sections 45(2), 45(3), 50C and 50D.’ Again, a plethora of sections to study and analyse. Well, that’s for the homework of the readers.

What happens on the GST front if the landowner is a businessman? Sunil Gabhawalla reiterates, ‘Sit back and relax if the development agreement is entered into after 1st April, 2019’. But what happens in cases where the development agreement is prior to that date? ‘I’m afraid, definitive answers are elusive. Whether transfer of development rights is liable for GST or not is itself a subject matter of debate. The issues of valuation and the timing of payment of tax are also not settled. We may need a separate article to deal with this,’ he adds.

Is Development Management Agreement a panacea for the landowner?
The concept of Development Management Agreement (DMA) has already been explained earlier. A quick sum and substance recap of the transaction structure would help us appreciate that the appointment of a development manager by the landowner vide a DMA would tantamount to the landowner donning the hat of a real estate developer and the development manager acting as a mere service provider. It will effectively mean that the landowner is the real estate developer who is developing a real estate project in his own land parcel. While this model offers significant respite in the GST outflow on development rights and also avoids the stretched interpretation of barter and consequent GST on free units allotted to existing members for self-consumption (remember, a redevelopment agreement entered into by a co-operative society is a sub-specie of a development agreement), it also helps the landowner in deferring the income-tax liability to a subsequent stage due to his becoming a businessman.

In the words of Pradip Kapasi, ‘In this case, the appointment of a Development Consultant under a DMA would itself be treated as a business decision in most of the cases. The appointment would signal the undertaking of an enterprise by the landlord on a systematic and continuous basis, constituting a business. Such an appointment would not be regarded as a “transfer” of capital asset and no capital gains tax would be payable on account of such an appointment. The first effect of such a decision would be to invite the application of section 45(2) providing for conversion or treatment of a capital asset into stock-in-trade and as a consequence lead to computation of capital gains that would be chargeable in the year of transfer of the stock-in-trade being developed. The market value of the land on such happening would be treated as the cost of the stock-in-trade and the rest would be governed by the computation of Profits and Gains of Business and Profession r/w/s 145, ICDS and Guidance Note’.

But is all hunky-dory as far as GST is concerned? Sunil Gabhawalla cautions, ‘While there is a respite in taxation for the landowner, it may be important to note that the developer relegates himself to the position of a contractor rather than a developer. This would disentitle him from claiming the concessional tax rate of 5% for developers and instead he would be liable for the general tax rate of 18% on the value of the services provided by him. However, this higher rate of tax comes with the eligibility towards claiming input tax credit.’

Developer’s perspective
Well, that was a lot of discussion from the point of view of the landowner. What happens at the developer’s end? Pradip Kapasi has a very simple and affirmative answer on this front. ‘The payment agreed to be made towards the development rights / land acquisition to the landowner would constitute a business expenditure that will be allowed to be deducted against the sale proceeds of the developed area, and if not sold by the yearend, would form the stock-in-trade and would be reflected in the books of accounts as its carrying cost’.

But what happens if the payment towards the development rights is deferred like in gross revenue sharing arrangements? ‘The net receipts subject to his method of accounting would be taxed in respective years of sale and / or realisation. The carrying cost of the stock would be represented by the amount of direct expenditure incurred by him excluding the notional cost of acquiring DR. In the alternative, the payment to be made to the landlord would constitute a business expenditure that will be allowed to be deducted against the gross sale proceeds, and if remaining to be sold by the yearend, would form part of the stock-in-trade and would be reflected in the books of accounts as its carrying cost’, says Pradip Kapasi.

In case of profit-sharing arrangements, however, he cautions about the risk of constitution of an AOP and the associated perils of sections 67B, 86 and 110. He is also afraid that the land cost may not be available as a deduction to the AOP. How does one deal with area-sharing agreements? Pradip Kapasi responds, ‘The net receipts of the balance area coming to the share of the developer would be taxed in respective years of sale and / or realisation where the cost of construction of all the flats would be allowed to be deducted as business expenditure. The carrying cost of the stock could be represented by the amount of direct expenditure incurred by him excluding the notional cost of acquiring DR. In the alternative, the payment to be made to the landlord in kind would constitute a business expenditure that will be allowed to be deducted against the gross sale proceeds, and if remaining unsold by the yearend, would form a part of the stock-in-trade and would be reflected in the books of accounts as its carrying cost.’

The clear essence of the above discussion is that the accounting treatment is important. But depending on certain criteria, enterprises are required to follow either IGAAP or Ind AS. Let us check out what Sudhir Soni has to say. ‘While there is very limited guidance available under IGAAP for accounting of joint development agreements, the cost that is incurred by the developer towards construction of the entire project is treated as cost towards earning the revenue from sale to the developer’s customers. Accordingly, in case of area share for landowner there is no separate accounting and in case of revenue share to landowner it is accounted through the balance sheet. Elaborate guidance is, however, available under Ind AS 115’.

He adds, ‘The JDA is a contract for specific performance and does not have a cancellation clause. For projects executed through joint development arrangements, it is evaluated that the arrangement with land owners are contracts with customers. The transaction is treated as if the developer is buying land from the landowner and selling the constructed area to the landowner. This results in a “grossing” of revenue and land cost, which is a difference from the accounting under Indian GAAP.’ Whether such a difference in accounting treatment will have any ramifications under the income-tax or GST law, only time will tell.

Having treated the transaction as a barter, there comes the issue of accounting for such a transaction. Sudhir Soni says, ‘For real estate projects executed through JDA not being jointly controlled operations, wherein the landowner provides land and the developer undertakes the development work on such land and agrees to transfer certain percentage of constructed area / revenue proceeds to the landowner, the revenue from the development and transfer of agreed share of constructed area / revenue proceeds in exchange of such development rights / land is accounted on gross basis. Revenue is recognised over time (JDA being specific performance arrangements) using input method, on the basis of the inputs to the satisfaction of a performance obligation relative to the total expected inputs to the satisfaction of that performance obligation. The gross accounting at fair value for asset in form of land inventory (subsequently recognised as land cost over time basis stage of project completion) and the corresponding liability to the landowner (subsequently recognised as revenue over time basis stage of project completion) may be accounted on signing of JDA, but in practice the accounting is done on the launch of the project, considering the time gap between the signing of the JDA and the actual launch of the project. The developer’s commitments under the JDA, which is executed and pending completion of its performance obligation, are disclosed in the financial statements.’

Further, ‘For real estate projects executed through a JDA being jointly controlled operations, which provide for joint control to the contracting parties for the relevant activities, the respective parties would be required to account for the assets, liabilities, revenues and expenses relating to their interest in such jointly controlled JDA.’

Now comes the next accounting issue of measurement of fair value for such a barter. Sudhir Soni says, ‘The fair value for the gross accounting of JDA is the market value of land received by the developer or based on the standalone selling price of the share of constructed property given by the developer. In case the same cannot be obtained reliably, the fair value is then measured at the fair value of construction services provided by the developer to the landowner’. Well, but the valuation provisions under GST are different. Sunil Gabhawalla agrees and says that each domain will have to be independently respected.

The bottom line, it seems, is that the direct tax consequences for the developer will closely follow the generally accepted accounting principles for determination of net profit for a year. But are things equally simple in GST? Not really. Sunil Gabhawalla shares his inputs. ‘Unless the developer in essence constitutes a contractor, all new residential projects attract 5% GST on the sale proceeds of the units sold while under construction. Even area allotted to the landowner attracts this 5% GST on the equivalent market value of the units allotted to the landowner. Affordable housing projects enjoy a concessional tax rate of 1%. However, no input tax credit is available to the developer’.

But wait a minute! This is not all. A plethora of reverse charge mechanism Notifications require the developer to pay tax on the expenses incurred by him. For example, the proportionate value of the development rights acquired by him from the landowner is liable to GST in the hands of the developer at the time of receipt of the occupation certificate. As Sunil Gabhawalla adds, ‘It may make sense for the developer to procure goods and services from registered dealers only since another Notification requires the developer to pay GST on reverse charge if the procurement from unregistered dealers exceeds 20%. Notably, no tolerance limit has been provided for procurement of cement, where reverse charge mechanism triggers from the first rupee of procurement from unregistered dealers.’

Summing up
This article was an attempt to apprise the readers of the nuances of this complex topic. All experts agreed that the tax efficiencies of each structure over the other would be determined largely by the available circumstances and the needs of the parties. No structure, in such an understanding, is superior to other structures, nor inferior to any.