The efforts of the Government in promoting the Income Declaration Scheme, 2016 (‘Scheme’) and to make the same a grand success are quite visible. CBDT has already issued various clarifications vide Circular no. 17 dated May 20, 2016, Circular no. 24 dated June 27, 2016, Circular no. 25 dated June 30, 2016 and Circular no. 27 dated July 14, 2016. I have already dealt with the same in my articles titled ‘The Income Declaration Scheme, 2016 – will it boomerang?’ dated June 20, 2016, ‘The Income Declaration Scheme, 2016 – analysis of additional clarifications’ dated July 4, 2016, ‘CBDT settles 31% IDS tax rate controversy’ dated July 15, 2016 and ‘The Income Declaration Scheme, 2016 – Saga of CBDT Clarifications’ dated July 19, 2016.

CBDT has come out with fresh set of clarifications vide Circular No. 29 of 2016 dated August 18, 2016. The Government has also notified amended rules (Notification No. 74 dated August 17, 2016) for determining valuation of immovable properties in certain situations. In this article we shall be dealing with the above mentioned recent updates.

CBDT has clarified that where undisclosed income is represented by certain fictitious loans, creditors, liabilities etc. and there is no direct nexus between liability and acquisition of any assets, then a declarant can disclose such liabilities under the Scheme without linking the same with any investment. However, in cases where there is a direct link between the fictitious liability and asset acquired then the amount to be declared shall be the fair market value of the acquired asset as on June 1, 2016. Corollary amendments have been made in Form No. 1.

This clarification is in stark contrast with an earlier clarification issued by the Board that whenever undisclosed income is invested in any asset, the declarant will have to disclose the value of the asset and not the underlying undisclosed income. Thus, the instant clarification has the effect of not burdening the declarant further to carry out an exercise to find out the value of investment linked with the liabilities. In any case, as already specified in my earlier articles, language of the Scheme does not warrant disclosure of the value of the asset, rather it gives an option to the declarant to disclose either the underlying income or the value of the investment.

On a lighter note, fortunately, the CBDT has given relief by this clarification that the declarant can disclose liabilities instead of linking it with any investment as the Board could have easily deployed a method of finding out investment made out of the fictitious liabilities similar to one given in Rule 8D for calculating interest to be disallowed.

The Board has also clarified that once a declaration is made under the Scheme for an income in respect of a year, and then the declarant can make use of the income so declared to explain any transaction which have taken place in the subsequent years provided there is a nexus between income declared and transactions of subsequent assessment years. However, based on the facts of the case, one has to analyse the implications of penalty in subsequent years.

In reply to question no. 6 of Circular No. 24, CBDT had clarified that the declarants are not supposed to attach valuation report to the declaration in Form-1 even though such form requires one to attach the valuation report. However, they had specified that the jurisdictional Pr. CIT/ CIT may require such valuation report to be filed in order to ascertain the correctness of the value before issuing acknowledgment in Form – 2. Now, the Board has gone one step further to clarify that, once the value is disclosed as per the valuation report, the Board shall not question the said valuation, provided the same is true and correct and in accordance with the accepted principles of valuation. In case of any misrepresentation, the Board has warned that appropriate action as per law shall be taken against the registered valuer. Thus, it seems that the Board is willing to sacrifice their right of verifying whether the valuation is fair or not in order to make the Scheme a success. It will be for one to watch as to the Board’s approach once the declaration is filed, whether they are going into the correctness of the valuation or not.

In my article ‘The Income Declaration Scheme, 2016 – will it boomerang?’, I had raised an issue that in Circular 17, in reply to question no. 1, the Board stated that period of holding shall begin from June 1, 2016 in case of assets declared under this Scheme. Further, I had also pointed out that a problem will arise in case if a house property is held by the assessee for more than 3 years prior to the applicability of the Scheme, then declaration under the Scheme would disentitle him to reckon the period from the original date of acquisition and if such asset was sold within 3 years from June 1, 2016, then the person shall not be entitled to deduction u/s 54 on purchase of new residential house property.

A welcome clarification is issued by the Board in reply to question no. 4 in this regard. The Board has, in wake of representations received from various quarters has clarified that once an asset is declared under the Scheme, instead of considering the period of holding of such asset from June 1, 2016, period of holding shall be calculated from actual date of acquisition. However, even though the period of holding shall be reckoned from actual date of acquisition, indexation benefit will be available only from June 1, 2016. Thus, though the asset shall be treated as long term capital asset if it has been transferred after 3 years from the actual date of acquisition, indexation benefit will be available from June 1, 2016. The benefit of this clarification is that if an asset is transferred within 3 years from June 1, 2016 and if the period of holding of the asset from the actual date of acquisition till the date of transfer is more than 3 years then the declarant shall be able to claim all the reliefs attached to a long term capital asset or long term capital gain like deduction u/s 54, 54F, 54EC etc. as well as the beneficial rate of 20% u/s 112.

Logic given by the Board for the above clarification is that investment in an asset may be funded partially from undisclosed and partially from disclosed sources. In such cases, if property is sold in near future, gains from part of the property may be long term and balance may be short term. This shall cause undue hardship to the declarant.

Though the Board has clarified that the aspect of period of holding of assets whose cost is only partially disclosed, however, cost of such assets in computing capital gains is still a matter of controversy. Apparently, it may be computed by taking the original disclosed cost after indexing the same from the actual date of acquisition plus the fair market value of the balance undisclosed cost, which is declared under the Scheme, after indexing from June 1, 2016.

Surprisingly, the Board has issued a Press Release dated August 18, 2016, wherein they have restricted the scope of the above given clarification to immovable properties as the date of acquisition in such case can be evidenced by a deed registered with any authority of the State Government.

Accordingly, the period of holding in case of a movable property will be determined from June 1, 2016 only. However, as clarified earlier also, the said issue that the period of holding shall be reckoned from June 1, 2016 is emanating from the Circular without any legal backing. Thus, the said Circular, in absence of its binding nature on the assessee, may not hold water and the declarant may still argue that even in case of a movable property, the period of holding should be reckoned from the actual date of acquisition provided the same may be evidenced from some material/ document.

The Board has clarified that the tax to be paid under the Scheme can be paid by depositing cash. Further, they have also requested the RBI to issue instruction to all the banks to allow payment of tax under the Scheme by cash. They have also clarified that the declarant can deposit cash in the bank which is declared as undisclosed income under the Scheme and as a corollary, they have clarified that if cash is deposited in the bank as a consequence of declaration made under the Scheme, then no adverse action shall be taken against the declarant by FIU or the income-tax department solely on the basis of the information regarding cash deposit made consequent to the declaration under the Scheme.

Contrary to the practice adopted by the Department while dealing with the Trust cases, the CBDT has made an exceptional clarification that if a Trust registered u/s 12AA files a declaration under the Scheme, then the registration of the Trust will not be cancelled solely on the basis of the information furnished in the declaration. This is quite surprising as the Board is making all sorts of accommodations to make the Scheme a success. A Trust which is registered u/s 12AA has no need to venture into any transaction giving rise to an undisclosed income as the income of the Trust is exempt u/s 11. Therefore, once a Trust declares undisclosed income, it apparently destroys all the bonafides of the Trust thus, sealing the way for cancelling registration u/s 12AA. However, the Board has clarified that mere declaration of the undisclosed income under the Scheme would not be the sole ground for cancelling the registration of the trust.

The Board, dealing with different situations giving rise to undisclosed income, has clarified that where a person has claimed weighted deduction, say 175%, on account of making bogus donation, then the person should disclose the entire amount of 175% as undisclosed income. Logically the person claims deduction of 175% of the amount paid, without incurring a penny and therefore, the undisclosed income will be the entire deduction claimed by the declarant.

The Board has also clarified that even in cases where the time limit for filing a return u/s 139 of the Act has not expired, the declaration under the present Scheme can be filed. This query seems surprising as, if the return has not been filed, then the same can be filed disclosing undisclosed income and legitimate taxes should be paid @ 30% and interest amount. The incentives given by the Government in the Scheme especially the promise of secrecy are such that the declarants are planning to disclose income under the Scheme rather than under the normal route.

To do away with any misunderstanding as to the status of filing a declaration when a survey has taken place, the Board has categorically clarified that declaration can be filed by the such declarant however, income of the year in which survey takes place shall be outside the purview of such declaration and income of other years can well be disclosed under the Scheme. 

The Government has recently notified Income Declaration Scheme (Third Amendment) Rules, 2016 vide Notification no. 75 dated August 17, 2016. In the said notification an additional option is given to the declarants to derive the Fair market Value of an immovable property. The Government has notified that where the acquisition of immovable property by the declarant is evidenced by a registered deed, then the fair market value of such property shall, at the option of the declarant, maybe taken to be the stamp duty value as on the date of acquisition as increased by the same proportion as cost inflation index for the year 2016-17 bears to the cost inflation index for the year in which the property was registered.

For example if a declarant acquires a property in FY 2005-06 for Rs. 10 lakhs (disclosed amount) and Rs. 5 lakhs in cash (undisclosed amount). The Stamp Duty Value as on the date of acquisition is Rs. 16 lakhs.  In such a situation, the declarant can calculate the fair market value as under:

Rs. 16 lakhs (SDV)  X            cost inflation index of 2016-17

                                               cost inflation index of 2005-06

The value so obtained shall be then be shall be reduced by an amount which bears to the value of the asset as on the June 1, 2016, the same proportion as the assessed income bears to the total cost of the asset as per Rule 3(2).

Thus, FMV so computed shall be apportioned in the ratio of 10:5 (disclosed income: undisclosed income) and the amount so obtained shall be reduced from the FMV so as to arrive at the value of the undisclosed portion of the property.

Thus, the above rules do away with the requirement of getting a registered valuer’s report and the authenticity of the value shall also not be questioned by the Government.

The amended Rules have also provided that where the immovable property was acquired before the April 1,1981, the declarant has the option to determine its FMV in accordance with the following formula:

FMV as on April 1,1981 X            cost inflation index of 2016-17

                                                cost inflation index of 1981-82 (i.e. 100)

Though the Government has provided an alternative to the declarant to find out the FMV, however, in this option unlike in the earlier one, the declarant would have to get a valuation report for FMV as on April 1,1981 from a registered valuer. Necessary amendments have been made in Form 1 to give effect to the above amendments in the valuation rules.

The CBDT has in no uncertain terms specified that the option to calculate the FMV by taking into account the SDV shall be available only if the acquisition is evidenced by a registered deed. Explaining it further, the CBDT has given an example that if a person purchases a plot of land with a registered deed and constructs two storey building on the said land, which is not evidenced by the registered deed. In such a situation FMV of the entire immovable property shall be calculated as A + B, wherein:

A will be the FMV of land, which can be calculated by taking the indexed SDV as per the amended rules since the acquisition of land is evidenced by a registered deed.