Issue No. 175 / Feb 2nd, 2019
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The Interim Budget 2019 announced on 1st of February 2019, witnessed some unprecedented proposals such as rebate for individual taxpayers having taxable income upto Rs. 5 lakhs and increase in standard deduction for salaried taxpayers to Rs. 50,000, TDS threshold for rent to Rs. 2.4 lakhs and bank interest to Rs. 40,000, exemption from on notional rent on second self occupied house property and exemption on purchase of two house properties out of capital gain upto 2 Crores.
In this Budget special edition of Orange Bulletin, we bring to you articles by three authors discussing the important proposals of the Budget.
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Expert Columns on Interim Budget 2019!
 Mr. Prakash Sinha, CA (Partner, Prakash Sachin & Co.) discusses the amendment proposed in Sec. 54 i.e., benefit of re-investment of capital gains in two residential houses and examines a critical question viz., whether this amendment is prospective or retrospective. The author states that the fact that the amendment is brought out by way of a proviso would have its repercussions in its interpretation and states that an amendment which affect the existing rights or creating new obligations to be applied prospectively only. He brings out the law in respect of retrospectivity of amendments as laid down by SC in Vatika Township wherein it was held that no statute shall be construed to have a retrospective operation unless such a construction appears very clearly in the terms of the Act or arises by necessary and distinct implication. Accordingly, the author signs off opining that the amendment “is not clarificatory or declaratory but a substantial provision and in the case of the substantial provision ...even though it is beneficial provision may not be applied retrospectively”
Click here to read the article titled “Proposed amendment to Sec. 54 - Retrospective or Prospective?”
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 Mr. Mukesh Kumar.M, CA (Partner, M2K Advisors P Ltd) discusses the ‘sops’ proposed in the interim budget such as the direct income support to farmers having cultivable land upto 2 hectare under Pradhan Mantri Kisan Samman Nidhi of Rs. 6000 p.a., extension of interest subvention of 2% to farmers pursuing animal husbandry and fisheries on loan availed through Kisan Credit Card and 3% additional subvention in case of timely repayment of loan, monthly pension for unorganised sector workers of Rs. 3,000 under Pradhan Mantri Shram Yogi Maandhan etc. Stating that the Central Government seems to have used the Interim Budget to woo voters, author opines that “Overall, the reliefs proposed in the interim budget are certainly welcome and would bring cheers to the common man.”
Click here to read the article titled “An “unconventional” Interim Budget 2019”
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 Mr. Mahesh Chhajed, CA (Partner, M. S. Chhajed & Co) classifies and highlights the important proposals in the areas of real estate and residential houses, small and medium income earners, TDS and income tax assessments. Author highlights exemption from notional interest on 2nd self occupied property and properties held as stock-in-trade during the 2nd year, extension of time limit for approval of affordable housing projects, enjoying tax exemption u/s. 80IBA and benefit of re-investment of capital gains u/s. 54 in two residential houses. He further points out Government’s aims for electronic scrutiny assessments with anonymity, restricting human interface within two years. Appreciating the Budget to be favourable to small and middle class families, the author signs off with a suggestion that “instead of proposing rebate, tax slabs may be changed so that the benefit is passed on to the general public at large rather than to a restrictive category”
Click here to read the article titled “Interim Budget, 2019 - Impact on Real Estate, Small earners, TDS and Assessments” |
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Important Budget Documents:
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Issue No. 174 / Jan 25th, 2019
One of the most significant developments in 2017 and 2018 has been the nation-wide investigation into Shell Companies and Penny Stock companies. Several thousands of cases have been re-opened citing bogus capital gains and penny stocks. This has even led to the Government introducing a provision that Sec 10(38) can only be enjoyed if STT has been paid on purchase of the share, as well, with certain exceptions. Dr. Abhishek Murali (Chartered Accountant, Partner, Victor Grace & Co.) in his 2-part article makes a comprehensive analysis of taxation of Penny Stocks and Shell Companies. The author points out that the Department has three significant assessment points in the process viz., (i) Issue of shares at a premium by Shell companies, (ii) Benefit of business loss on sale of shares purchased at inflated prices and (iii) Benefit of Capital gains exemption on sale of shares at a high price.
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Issue of shares at a premium by Shell companies
After discussing the nitigrities of the first limb i.e., Issue of shares at a premium by Shell companies in Part-I, the author discusses the nuances of the other two limbs. While discussing circumstances which the AO must consider before denying the benefit of business loss on sale of shares holding it as bogus, the author refers to 2 recent ITAT decisions in cases of Late Ugama Kavar and Abhimanyu Soin and points out that the number of years of assessee’s engagement, history of profits/losses, Income Tax Returns and genuineness of the transactions must be considered. Further, author contemplates that in 2019, taxation of Shell Companies will be a priority. The author also discusses the recent decision in case of Shaan Constructions wherein while rejecting assessee’s stand that assessee is not required to prove ‘source of the source’, Delhi ITAT concluded that depositors were mere entry providers and the balance sheets and income tax returns of depositor companies do not inspire any confidence in the whole transaction. Further discussing the basics of spot transactions, the author signs off with a remark that “It appears there is no quick solution for Penny Stock cases and only a detailed order of the Supreme Court will help in settling the matter.”
Click here to read the article titled “Comprehensive Analysis of Taxation of Penny Stocks and Shell Companies-Part II”
Click here to read the Part-I of the article
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Key Takeaways from Handpicked rulings
1. [TS-5052-ITAT-2019(JAIPUR)-O] : Forfeiture of advance on property purchase : Forfeiture of amount advanced for purchase of property by assessee engaged in real estate, is an allowable business loss - ITAT allows assessee’s claim of forfeiture of advance as a an allowable claim u/s 37 as it is a business loss occurred during the course of business activity of the assessee being business of real estate; Stating that the law provides Sec. 51 as a safeguard against the loss of revenue on account of such forfeiture, ITAT observes that “the said claim of forfeiture of Rs. 7.00 crores is not a revenue affecting transaction but it will be taken into consideration at the time of sale of the property by the seller” and hence, it is only a matter of different assessment year when finally the properties in question are to be sold by the seller;
Click here to read the Ruling Copy
2. [TS-5013-HC-2019(BOMBAY)-O] : Reopening-Reasonable belief : Although AO is entitled to rely upon subsequent year assessment order as tangible material to initiate reassessment proceedings, the same must be ‘processed’ as to its applicability for the subject AY so as to form a reasonable belief that income chargeable to tax has escaped assessment - HC allows assessee’s writ, quashes Sec. 148 notice for AY 2011-12 issued to bring to tax assessee’s expenditure of Rs. 3.24 crores under the head “Colour Idea Concept” holding it to be capital in nature; Rejects AO’s reasoning based on assessment for AY 2015-16, where, on perusal of the agreement for the expenditure on “Colour Idea Concept”, it emerged that the agreement was for creation of 'fixed assets' for promoting their business interest under the concept of “Colour Idea Store” and so the expenditure was held to be capital in nature and capitalised under furniture and fixture; Noting that the agreement was entered in year 2014, i.e., subsequent to the year under consideration, states that though the AO is entitled to rely upon the order passed in assessment proceedings for the subsequent year as tangible material to initiate reassessment proceedings, “the tangible material so obtained must be processed i.e. its applicability to the assessee for the subject assessment year is to be examined so as to form a reasonable belief that income chargeable to tax has escaped assessment”;
Click here to read the Ruling Copy
3. [TS-5003-SC-2019-O] : Penalty u/s. 271D for breach of Sec. 269SS - Reasonable cause : SC dismisses Revenue’s appeal against HC ruling reported in [TS-7278-HC-2018(BOMBAY)-O] wherein penalty u/s. 271D was deleted, upholding ITAT order that assessee had reasonable cause as provided u/s. 273B for non-compliance of Sec. 269SS; HC had referred to co-ordinate bench ruling in Triumph International wherein it was observed that “journal entries constituted a recognized modes of recording of transactions and in the absence of any adverse finding by the authorities that the journal entries were made with a view to achieve purposes out side the normal business operations or there was any involvement of money, then, in these facts there was a reasonable cause for not complying with Section 269SS of the Act”; Rejecting Revenue’s submission for distinguishing the decision in Triumph International in view of the large number of entries in this case as compared to only one entry in the case, HC had clarified that “If there was a reasonable cause for making the journal entries, then, the number of entries made, will not make any difference.”;
Click here to read the Ruling Copy
4. [TS-5006-ITAT-2019(BANGALORE)-O] : Sec. 68-Cash deposits/Unexplained credits : Absent evidence to substantiate KSRTC employee’s claim of agricultural income to be the source of cash deposits, addition u/s. 68 is sustained - ITAT upholds addition of unexplained credits u/s 68 in case of a KSRTC employee for AY 2014-15; Notes that assessee had made a cash deposit of Rs. 10 lakhs in his bank account, states that “except for making claims, the assessee has not been able to file any proof like copies of sale bills of agricultural produce to evidence that the assessee was carrying on agricultural operations”; Grants part relief to the extent of 5 lakhs considering assessee’s claim of cash deposit out of savings from salary for earlier and current years.
Click here to read the Ruling Copy
5. [TS-5051-ITAT-2019(PUNE)-O] : Transfer u/s. 2(47)(v) : No transfer absent handover of possession and receipt of complete consideration, mere Deed of Assignment does not suffice - ITAT allows assessee’s appeal, deletes the addition of tax on long term capital gains made by AO, sustained by CIT(A); Noting that a Deed of Assignment was entered into by assessee for sale of property during the subject year, but possession was not handed over and complete consideration was not given, states that “There may be a document by which certain rights were transferred but once the possession of property has not been handed over, the assessee does not become liable to pay capital gains tax on such transaction as the conditions laid down in section 2(47)(v) of the Act have not been fulfilled”; Referring to the provisions of Sec. 2(47)(v), ITAT explains that “So, the requirement is that the transfer in relation to capital asset which takes cognizance of sale, exchange or relinquishment of any asset or extinguishment of any right, also recognizes any transaction, under which possession of any immovable property is given or retained by the buyer”
Click here to read the Ruling Copy |
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CBDT Updates:
1. CBDT takes third shot at Sec. 56(2)(viia) cherry, directs officers to ignore 'incorrect' view- Circular No. 3/2019
2. CBDT issues Corrigendum to annual TDS circular for salary for FY 2018-19 (issued vide Circular No. 1/2019)- Circular 275/192/2018-IT(8)
3. CBDT identifies non-filers, gives 21 days time to file online-response
4. CBDT clarifies regarding issue of Prosecution Notices
5. Ministry of Finance - Withdrawal from New Pension Scheme
6. Shri Piyush Goyal appointed interim Finance Minister in addition to his existing portfolios
7. CBDT identifies non-filers, gives 21 days time to file online-response Click here to read more latest news
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Issue No. 173 / Jan 19th, 2019
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Expert Column:
One of the most significant developments in 2017 and 2018 has been the nation-wide investigation into Shell Companies and Penny Stock companies. Several thousands of cases have been re-opened citing bogus capital gains and penny stocks. This has even led to the Government introducing a provision that Sec 10(38) can only be enjoyed if STT has been paid on purchase of the share, as well, with certain exceptions. Dr. Abhishek Murali (Chartered Accountant, Partner, Victor Grace & Co.) in his 2-part article makes a comprehensive analysis of taxation of Penny Stocks and Shell Companies. The author points out that the Department has three significant assessment points in the process viz., (i) Issue of shares at a premium by Shell companies, (ii) Benefit of business loss on sale of shares purchased at inflated prices and (iii) Benefit of Capital gains exemption on sale of shares at a high price. Issue of shares at a premium by Shell companies
In Part-I, the author discusses the nitigrities of the first limb i.e., Issue of shares at a premium by Shell companies. The author studies some of the most recent decisions on this aspect such as Bangalore ITAT decision M K Rajeshwari vs ITO reported in [TS-9007-ITAT-2018(BANGALORE)-O] where after studying the financial worth and share price movement of the company, ITAT held that it was not worth investing in and upheld Revenune’s stand that unaccounted money was introduced in the form of long-term capital gains. Referring to the different views by ITAT in different jurisdictions, author signs off stating “It appears a solution will only be obtained when the Apex Court considers the matter and provides a judgement on the same, that can help resolve the issue pan-India.” Click here to read the article titled “Comprehensive Analysis of Taxation of Penny Stocks and Shell Companies - Part I” |
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Key Takeaways from Handpicked rulings
1. [TS-6810-HC-2018(RAJASTHAN)-O] : Sec. 50C on transfer of capital asset/rights : Rajasthan HC upholds applicability of Sec. 50C to assessee, distinguishes Bombay HC ruling in case of Greenfield Hotels & Estates [TS-6112-HC-2016(Bombay)-O]; Examines the provisions of Sec. 50C, and states that the section is clearly applicable to assessee in view of the facts that assessee executed and registered a sale deed for sale of the land and received consideration; Holds that ITAT rightly upheld application of Sec. 50C inasmuch as sale deed was made on consideration of Rs.11,70,000/-, whereas, value of the property taken by the Sub-Registrar IV, Jaipur for registration of sale deed was at Rs.53,11,367/-; Rejects assessee’s submission that the land sold by assessee was purchased from the khatedar having rights like a leaseholder and further that the vesting and possession of land was with RIICO (State Govt.) and hence, there was no transfer of capital asset, rather, it was only transfer of rights in the property; Distinguishes Bombay HC decision in Greenfield Hotels & Estates [TS-6112-HC-2016(Bombay)-O] wherein it has been held that Section 50C would not be applicable when there is a transfer of lease hold rights of the land. Click here to read the Ruling Copy
2. [TS-5023-ITAT-2019(JAIPUR)-O] : TDS on employees’ LTC claim on foreign travel : Assessee-bank held assessee-in-default for short-deduction of TDS on LTC claim relating to foreign leg of the travel of its employees, being not eligible for exemption u/s. 10(5) r/w Rule 2B - Jaipur ITAT dismisses assessee’s appeal for AY 2013-14, upholds Revenue’s stand that the employees were not eligible for exemption u/s. 10(5) on foreign travel made by them and hence, the payments made towards the LTC claim to that extent were chargeable to tax and assessee was under obligation to deduct TDS on such payments; Owing to non-deduction of tax at source on reimbursement made to its employees to the extent of foreign travel leg of their LTC claim, ITAT upholds order passed u/s. 201(1)/201(1A) holding assessee as assessee-in-default; Follows Coordinate Bench decision in case of SBI [TS-5711-ITAT-2017(Jaipur)-O]
TS Note : Recently, Jaipur bench of ITAT in the case of SBI, deleted penalty u/s. 271C for non-deduction of tax on leave travel payment to employees with respect to foreign leg of travel, accepting assessee’s ‘reasonable cause’ plea u/s 273B
Click here to read the Ruling Copy
3. [TS-5022-ITAT-2019(MUMBAI)-O] : Interest-free deposit from tenant; Notional rent : Sudden reduction in rentals post receipt of interest-free advance from tenant, a colourable device to reduce overall tax burden, upholds addition; Corporate entity, a separate legal entity, notional rent on premises used for business of a company in which assessee is a director, liable to tax as income from house property; Business of a partnership-firm, is business of the partner, deletes notional rent addition on premises used by one of assessee’s partnership firms - ITAT upholds Revenue’s bringing to tax differential rent, accepts its view that sudden, drastic reduction of rent from Rs. 2 lakhs p.m to Rs. 25,000 p.m on receipt of an interest-free deposit of Rs. 4 crores from the tenant nothing but a colourable device to reduce overall tax burden, also notes that interest free security deposit received by the assessee was advanced to sister concerns without any interest and no income has been reflected by the assessee against the same; Further, upholds Revenue’s taxation of notional rent on assessee’s premises used for business of a company in which assessee is director, holds that “corporate entity is a separate legal entity in the eyes of law and the business carried out by the corporate entity could not be said to be the business of shareholders / directors”; However, declines Revenue’s similar notional rent claim from a premises in which assessee’s partnership firm is running its business, notes that “since a firm is constituted, collectively by its partners and the business of the firm could be said to be the business of its partner”; Remits to AO, the issue of estimation of rent used by corporate entity and other other claims of the assessee; Separately, upholds Revenue’s view that notional rental value of the premises not let out since inception is to be brought to tax and vacancy allowance u/s. 23(1)(c) is not available to assessee, notes that “since under law only one property, at the option of the assessee, could be termed as self-occupied property whereas all the other properties are deemed to be let out”
Click here to read the Ruling Copy
4. [TS-5001-HC-2019(MADRAS)-O] : Sec. 40A(3)-Cash Payments : Absent cogent reason compelling assessee to make cash payments, disallowance u/s. 40A(3) is sustainable - HC dismisses assessee’s appeal, sustains disallowance of cash payments of Rs. 34.68 crores made in bidding processes; Considers ITAT’s finding that assessee failed to demonstrate that the conditions of the bid required the assessee to effect payments in cash then and there and payments could not have been made by cheque or Demand Draft or any other mode; Upholds Revenue’s stand that considering the nature of transaction done by the assessee, it would not fall under any one of the exceptional clauses under Rule 6DD; Rejects assessee’s submission that in the auction of old gold conducted by finance company for which assessee bids, as soon as the auction is confirmed, the highest bidder has to remit part of the amount in cash and the amount which has to be paid is not known to the assessee earlier and therefore, the payments cannot be made through banking channel.
Click here to read the Ruling Copy
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CBDT Updates:
1. CBDT notifies annual circular for TDS on salary for FY 2018-19 - Circular No. 1/2019 2. CBDT: Withdraws circular on Sec. 56(2)(viia) applicability to ‘fresh’ issuance of shares; Cites subjudice matters - Circular No. 2/2019 3. CBDT notifies interest at 7.90% on deposits made under the Senior Citizens Welfare Fund w.e.f. 1.4.2018 - Notification 13/20/2014-NS 4. CBDT notifies National Iranian Oil Company for the purposes of Sec. 10(48) exemption - Notification No. 91/2018 5. CBDT notifies Procedure, Formats and Standards of issue of Permanent Account Number (PAN) - Notification No.7/2018 6. CBDT specifies the procedure, format and standards for the purpose of electronic filing of Form No. 13 and generation of certificate under sub-section (1) of section 197 / sub-section (9) of section 206C through TRACES - Notification No.8/2018 7. CBDT notifies conditions for Start-Ups to be eligible for approval u/s. 56(2)(viib) - Notification 5(4)/2018-SI 8. CBDT : Gross direct Tax Collections 14.1% higher than the last year 9. CBDT: Carves out exceptions from online application for nil/lower TDS / TCS Certificates Click here to read more latest news |
Issue No. 172 / January 11, 2018
We are glad to present to you the 172th edition of ‘Taxsutra Database Special’ which comprises of Part-III of the series of articles on Section 56(2)(viib)
Section 56(2)(viib) which was introduced by Finance Act, 2012 has been subject matter of a lot of controversy recently. Huge additions were made to the returned income in some of the cases in the recent past during the regular assessment proceedings, notwithstanding the availability of judicial precedents on the subject matter. In this three-part article series titled Section 56(2)(viib) of Income Tax Act, 1961 - a Legal Conundrum, authors Mr. Prashanth (Partner, Guru & Jana, Chartered Accountants) and Mr. Sidanna Baradar (Practice Leader, Guru & Jana) explain the practical difficulties which the taxpayers face while complying with the law, recent decisions on the issues and developments in terms of notifications, etc. The series will be published in three parts, namely:
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1. Part I – Introduction to the section, its literal understanding and the issues involved.
2. Part II - Discussion on the issues on the strength of the available precedence.
3. Part III- Recent Rulings and Notifications - Number G.S.R. 364(E), Notification No. 24/2018, Letter (Instruction) (File No. 173/14/2018-ITA.I) dated 06.02.2018 and other aspects.
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  Part III – Recent Rulings and Notifications
After discussing the intricacies encompassing determination of FMV of shares, applicability of Sec. 56(2)(viib) to preference shares allotment and several other important aspects supported by judicial precedents in Part I and Part II, authors in the third and the last leg of the series, discuss two of the most recent and important rulings of the Income Tax Tribunal bench of Bangalore in cases of Innoviti Payment Solutions [TS-4-ITAT-2019(Bang)] and 2M Power Health Management Services [TS-756-ITAT-2018(Bang)]. In the former decision, ITAT inter alia laid down the criteria for valuation of shares of start-ups while stating that AO cannot change the method of valuation adopted by assessee. The authors further review the most recent circulars by CBDT on the subject. They highlight instruction dated 6th February 2018 which instructed the IT officers that no coercive recovery of demand shall be made against ‘start-ups’ where demands arise consequent to additions made u/s. 56(2)(viib). Examining the notification No. 24/2018 which provides for exemptions from the section and the tedious conditions therefor, authors opine that it is really a cumbersome process to get the benefit of the said notification. Stating the need for a lot of clarity to settle the dust, the authors sign off remarking that “On one hand the government is trying to promote the startup ecosystem, which will bring in new ideas, innovation, employment, etc, but on the other hand there is a uncertainty looming around in the form of so called Angel tax(Sec.56(2)(viib)”
Click here to read Part-III of the Article Series titled “Section 56(2)(viib) of Income Tax Act, 1961 - a Legal Conundrum”
Click here to read Part-II of the Article Series titled “Section 56(2)(viib) of Income Tax Act, 1961 - a Legal Conundrum”
Click here to read Part-I of the Article Series titled “Section 56(2)(viib) of Income Tax Act, 1961 - a Legal Conundrum” |