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Category: Is it fair:

Is It Fair To Ignore Prior Agreement For section 50C of Income-tax Act, 1961? [vis-a-vis section 43CA and section 56(2)(vii)(b)]

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Synopsis:

Section 43CA and Section 56 bring to tax incaome based on the concept of stamp duty value of the property transferred. The provisions contemplate the valuation as on the date of an agreement if the same is anterior to registration. There is no such saving in Section 50C, making it unfair.

This article attempts to examine whether amendments brought by Finance Act, 2013 has created anomaly, rendering section 50C of Income-tax Act, 1961 (“Act”) unfair or causing inequity.

Vide the Finance Act 2013, a new section viz. 43CA has been introduced in the Actto come into effect from 1st April, 2014. Section 43CA is similar to section 50C of the Act, (which came into effect from 1st April 2003). Section 50C provides for capital gains tax on deemed consideration as per the stamp duty valuation of capital asset at the time of its transfer. The newly introduced section 43CA creates a legal fiction, that in case of transfer of land and building by assessee, who held such asset not as a capital asset but as stock in trade. (eg. a builder), the market value decided by the Stamp authority shall be the deemed consideration received by the Transferor and income tax shall be charged on such deemed consideration notwithstanding the lesser consideration written in the deed of transfer. However, section 43CA carves out an exception to this legal fiction, where the consideration has been already fixed under an earlier Agreement for sale and when sale is completed subsequently in pursuance of such earlier Agreement for sale, the stamp duty value on the date ofprior Agreement for sale shall be taken into account and the legal fiction would operate with reference to such prior date of agreement for calculating the income tax liability under the head “profits and gains of business/profession”.

 By the Finance Act 2013, section 56 of the Act is also amended, which amendment is to come into effect from 1st April, 2014. Prior to the amendment section 56 provides that, in case of purchase of an immovable property, if consideration stated in the agreement, is less than the stamp duty value of the property, the differential amount, shall be deemed to be an income of the Purchaser, under the head “Income from other source” and accordingly, the purchaser shall be required to pay the income tax on such differential amount under the head “income from other source”. The amendment to section 56, however, provides for similar exception to the legal fiction by laying down that in cases in which the sale is completed subsequently in pursuance of an earlier agreement, the stamp duty value on the date of the earlier Agreement for sale shall be taken into consideration for income tax purpose and not the stamp duty value of property on the date of completion of transfer. In other words, the escalated market value of the property on the date of completion of transfer will not bring any additional tax liability for the purchaser.

The exceptions as aforesaid, introduced by Finance Act, 2013, to the deeming provisions are do not find a place in section 50C of Income Tax Act. The insertion of section 43CA and amendment to section 56 of the Act seem to have been brought in to provide for a remedy in several genuine situations, where under an earlier Agreement for sale the consideration is fixed and the completion of transfer is required to be postponed on account of transfer being conditional upon various statutory permissions and sanctions etc. and merely because in the meantime, the property prices have shot up, the assessee would not be required to pay additional taxes due to deeming provisions, although in fact the parties are bound by the consideration fixed under the earlier agreement and the boom in real estate market is of no help to seller for claiming higher consideration.

There seems to be no reason for not providing the similar exception in section 50C. The status of seller who is taxed u/s. 50C of the Act and the one u/s. 43CA of the Act is the same in almost all respect except that in the first case there is a transfer of capital asset and in the latter case, there is a transfer of immoveable property held as stock in trade. For the differential treatment to be valid, there has to be an intelligible differentia and reasonable nexus connected to the object of statute, which does not seem to be present in this case.

Section 50C and section 56 of Act seek to tax two sides of one transaction. The former seeks to tax the seller on a deemed to have incremental consideration on sale of capital asset and the latter seeks to tax the benefit that the purchaser is deemed to have received by paying consideration lesser than the stamp duty value. Amending only section 56 leads to an incongruous situation. The purchaser alone can rely on earlier Agreement for sale and successfully establish that the stamp duty valuation on the date of agreement is to be considered for testing the deeming fiction, however the seller in the same transaction cannot raise this contention. Further, having accepted in the assessment of purchaser a particular stamp duty valuation, it will be absurd for the department to contend in assessment of seller that a different stamp duty valuation is to be adopted.

Therefore, section 50C in its existing form is unfair and needs to be amended or read down by judicial forums.

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IS IT FAIR TO EXPECT AN INDIVIDUAL TO DO TDS (EVEN WITH PRESENT EXEMPTIONS)?

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Introduction It is an accepted fact that the provisions relating to tax deduction at source (TDS) under the Income-tax Act, 1961 (the Act) are very cumbersome, ambiguous and irrational. No amount of input can give you an assurance that the compliances are flawless. There would hardly be any organisation that can claim perfection in compliance with these provisions. As regards the Government organisations — including statutory corporations, nationalised banks, etc., the less said the better.

The law-makers in their wisdom have by and large exempted individuals and HUFs from complying with these provisions. However, there is still much to desire in this respect.

The unfairness In sections 194A (Interest), 194C (Contracts), 194H (Commission), 194I (Rent) and 194J (Professional fees), there are clear provisions that ordinarily, an individual and HUF are not required to deduct tax at source. However, either a sub-section or a proviso in these sections makes an exception that if the individual or the HUF is required to get his/its accounts audited u/s.44AB for the preceding financial year, on the basis of turnover-criterion, then the said individual/HUF would be required to comply with the provisions of TDS.

Again section 194C and 194J provide that if the individual/ HUF is making a payment for personal purpose, then TDS provisions are not applicable. Thus, when a businessman is making a payment to a doctor/ lawyer, etc. for personal matters (non-business), no tax needs to be deducted.

The unfairness lies in not providing similar exemption in section 194A, 194H, 194I. Therefore, if a businessman with tax audit makes personal borrowings for buying a house, he may be required to deduct tax on interest. So also, on brokerage for sale/purchase of house. The same difficulty may arise for rent.

Difficulties in respect of section 195 are too well known. A typical case of an individual buying a house from a non-resident — entails so much of a nightmarish exercise! Either to comply with all formalities for just one single transaction or to obtain exemption u/s.195(2)/ 195(3), involves tremendous hardship.

It can be well understood that the main intention of the statute, to exclude individual and HUF from complying with the requirements for TDS u/s.194C and 194J, was to cover only business transactions and to exclude personal transactions from the ambit of TDS. However, the same logic is not made applied in case of sections 194A, 194H and 194I.

Nevertheless, there is some solace to the individuals and HUF viz. non-applicability of the provisions of section 40(a)(ia). The provisions of section 40(a)(ia) are applicable to any business expense, thus saving the personal expense. But there is an exception to this solace — section 25 which disallows the deduction of interest on housing loan made to a non-resident if TDS requirements are not fulfilled.

The test for deciding, whether individuals and HUFs have to comply with the provisions of TDS, is based on the turnover of the business or professional receipts (same limit as for tax audit u/s.44AB) (i.e., 60 lakh for business and 15 lakh for profession)? However, is it fair that this turnover must be a conclusive criterion for deciding TDS requirement?

Further even compliance procedure of TDS viz. taking TAN, deducting and making TDS payment, filing quarterly returns, issuing TDS certificates, can prove to be extremely cumbersome for individuals and HUFs.

Solution:
One solution that can be thought of may be to lay down a separate criterion which is not based on limits laid down in section 44AB for deciding the TDS compliance by individual or HUF. For instance, the monetary limit for applicability of TDS can be gross payments of Rs.1 crore for individuals and HUFs.

Also, similar exclusion (as in section 194J and 194C) should be provided in case of section 194A, 194H, 194I. Hence, in case of personal expenses none of the provisions dealing with TDS should not apply to individuals and HUFs.

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Is it fair to make amendments that may cause unintended hardship (Sub-clauses (e) and (f) of Section 80IB vis-à-vis sub-clause (c)

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Introduction:

Section 80IB(10) provides for 100% deduction of profits and gains from housing projects for certain period if it satisfies various conditions prescribed in the section. Section 80IB(10)(c) prescribes the condition restricting the size of residential unit to maximum built-up area of one thousand sq.ft if the residential unit is situated within the cities of Delhi or Mumbai and one thousand five hundred sq.ft at any other place.

In case of housing project having houses beyond this size, the developers used to circumvent the provisions by showing one house as two adjacent houses on paper, sell these premises to one person or persons belonging to one family and then combine it.

To avoid any such misuse, sub-clauses (e) and (f) were inserted by Finance Act, 2009 w.e.f. 1-4-2010. According to sub-clause (e), deduction shall be denied to the undertaking if more than one residential unit in the housing project is allotted to an individual.

Further, as per sub-clause (f), such deduction shall be denied to the undertaking, if one residential unit is allotted to an individual and at the same time the other unit is allotted to

(i) him or the spouse or his/her minor child, or

(ii) HUF of which he is a karta. Thus insertion of clause (e) and (f) definitely provided a check in the case of undertakings where the size of units was more than 1000 or 1500 sq.ft as the case may be. However, it created a hurdle even where the combined size of units was less than the prescribed area. In other words, if two units of 500 sq.ft each are allotted to husband and wife, respectively, then in that case the undertaking may lose the deduction even though the cumulative area does not exceed the prescribed area. This was certainly not the intention of the Legislature.

The unfairness:
How far is it logical to deny the deduction to an undertaking just because the condition in sub-clause (e) or (f) is not satisfied even though the prescribed condition of total built-up area to a family of an individual is satisfied, or not violated.

In fairness sub-clause (e) or (f) should have been drafted in such a way that the area allotted to a family of an individual collectively shall not exceed the prescribed area. In fact, that was the intention of the Legislature in inserting clauses (e) and (f).

In the situation where the question of denial of deduction arises where the areas of some of flats are exceeding the prescribed area or the flats are allotted as stated above, the solace is available to an undertaking in view of the decisions given below in which it was held that in such a situation, deduction may be denied only in respect of those units where the area exceeds the prescribed limit or the condition as above is not satisfied.

The said decisions are as follows:

(1) Sanghavi & Doshi Enterprise v. ITO, (Third member ITAT Chennai) (2011) 131 ITD 151/12 Taxmann. com 240

(2) CIT v. Bengal Ambuja Housing Development Ltd., (ITA 458 of 2006 dated 5-1-2007)

Conclusion:
In short, the purpose of introducing sub-clauses (e) and (f) was to curb the practice of claiming tax benefits by circumventing the limits of area. However, in the process, there has been an overdoing of the remedy, due to which even the genuine cases involving the total area within prescribed limits are also adversely affected. It is desirable that a suitable proviso be inserted or a clarification issued to the effect that the deduction or the tax benefits would not be denied so long as the total area is within the limits. In fact section 80-IB was introduced to encourage housing projects and in view of this, one may even feel that clauses (e) and (f) may prove to be harsh on the assessees.

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Is it fair to insist on e-compliance without adequate machinery

1. Computerisation is the need of the day in all walks of life. Even various government departments are gradually (in fact, in some sectors, rapidly) thrusting e-compliance on citizens. In the context of income-tax, it all started with e-filing of Quarterly TDS Statements, then e-filing of Returns, followed bye-payment of Taxes, e-filing of remittance certificate (S. 195) and now forthcoming is e-credit of Taxes (Form 26AS). This article examines certain grievances faced by tax practitioners and taxpayers at large in the context of e-compliance under Income-tax Act, 1961.

2. E-payment  of taxes:

E-payment has been made mandatory for all corporate assessees (and those non-corporate assessees who are liable for audit u/s.44AB) w.e.f. 1-4-2008. The general difficulties faced in e-payment are:

2.1 On the NSDL website, once we click the relevant link for e-payment, a web-page appears where we have to fill up the basic information like PAN I TAN, Assessment Year, Name, Address etc. After filling all these details, we have to click to the relevant link, submit to the bank and then proceed with the e-payment gateway.

If at all in this whole process, there is any interruption due to whatever problem like power failure, internet connection failure, bank password mis-match etc., then the whole process is to be restarted from filling of the Basic data. Even otherwise, when multiple payments for different sections (TDS) are to be made; for all the challans, one has to fill up the basic data like name, address, etc. over and again. There should be a facility that once PAN I TAN is entered all the Basic data should automatically appear because it is already in the database of the department.

2.2 At present, there are only 30 banks which are authorised to accept e-payment of taxes ..This creates practical difficulties for taxpayers who are not maintaining account with these Banks. Though, in practice, certain other Banks are also accepting e-payment of taxes but since they are not authorised, ultimately they also have to route it through one of the authorised Banks. This, at times, results in de-lay in credit of tax-payments, with consequential loss of interest u/s.234A, u/s.234B, u/s.234C, u/s. 201 etc. and at times may become a cause of 40a(ia) disallowance.

3. e-filing    of quarterly TDS  statements:

3.1 Once a quarterly TDS statement is uploadedl filed with NSDL, if any corrections are to be done, deductor has to upload/file a correction statement. For this, first of all he has to give the link of fvu file of original statement. Once this is done, the original statement appears on the screen, which can be corrected and new fvu file is generated. There are instances, where the deductor has lost the original fvu file due to computer problem etc. There is no procedure to get the lost fvu file back either from NSDL web site or income tax department’s website. In such a scenario, as the correction statement can never be filed, the deductee will lose the credit for taxes?

3.2 There was a suggestion from NSDL official that, if 95% PAN compliance is not possible, the deductor should submit only those deductee records where PAN is available. As and when other PANs are obtained, correction statement should be filed. This may create 3 difficulties. Firstly, the Challan Details and Deductee Details amount will not match. Secondly, it may amount to a default on the part of deductor of not submitting the details of all tax deducted. Thirdly, filing correction statements repeatedly, is a cumbersome process, as explained in para 3.1 and also it comes at a cost every time.

4.  Form 26AS :

It is proposed that in the near future, even credit for tax deducted will be based on Form 26AS which is electronically generated by NSDL, based on data submitted by deductor. If PAN is wrongly given by deductee, it will not be reflected in his Form 26AS. The deductee will, therefore, have to request the deductor to file a correction statement. In case of large deductors, especially government departments or public sector banks, the feasibility of filing such correction statement, at the instance of a large number of deductees, is really a question mark. Admittedly, there is a facility on the NSDL website to verify PAN, but it comes at a huge cost of Rs.12,OOO. Should there be such a huge charge for statutory compliance?

5. Conclusion:
It is rightly said that change is the only constant in life and generally, change is for the better. Admittedly, even if e-compliance is for the better, the transition should be pain-free and at least in the transitional period, the system should not be faceless. There has to be a sort of ombudsman for handling these technical grievances of the taxpayer.