Credit notes under GST

Query

Whether credit notes issued subsequent to tax invoice are allowable as deduction under GST?

Reply: General Scheme of credit notes under GST can be discussed as under:

Credit note for discount under GST

Section 34 of the CGST Act, 2017 provides for issuance of credit note and debit note under GST. The said Section 34 is reproduced below for ready reference:

“34. (1) Where a tax invoice has been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the registered person, who has supplied such goods or services or both, may issue to the recipient a credit note containing such particulars as may be prescribed.

(2) Any registered person who issues a credit note in relation to a supply of goods or services or both shall declare the details of such credit note in the return for the month during which such credit note has been issued but not later than September following the end of the financial year in which such supply was made, or the date of furnishing of the relevant annual return, whichever is earlier, and the tax liability shall be adjusted in such manner as may be prescribed:

Provided that no reduction in output tax liability of the supplier shall be permitted, if the incidence of tax and interest on such supply has been passed on to any other person.

(3) Where a tax invoice has been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to be less than the taxable value or tax payable in respect of such supply, the registered person, who has supplied such goods or services or both, shall issue to the recipient a debit note containing such particulars as may be prescribed.

(4) Any registered person who issues a debit note in relation to a supply of goods or services or both shall declare the details of such debit note in the return for the month during which such debit note has been issued and the tax liability shall be adjusted in such manner as may be prescribed.

Explanation.–– For the purposes of this Act, the expression “debit note” shall include a supplementary invoice.”

Thus, as per Section 34(1), a registered person can issue credit note where the tax invoice has been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply.

At this point it is relevant to note Section 15(3) of the CGST Act, 2017 which provides for discount to be excluded from value of supply. The relevant provision of Section 15(3) is extracted below for ready reference:

“(3) The value of the supply shall not include any discount which is given––


(a) before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and

(b) after the supply has been effected, if—

(i) such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and

(ii) input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.”

On a plain reading of Section 15(3)(a), it is clear that value of supply shall not include any discount which is given before or at the time of supply, if such discount is duly recorded in the invoice issued in respect of such supply.

In case of post supply discount, the same shall be excluded from the value of supply under Section 15(3)(b) only if such discount is established in terms of the agreement entered into at or before the time of supply and such discount is specifically linked to relevant invoices. The recipient of supply shall be obligated to reverse the input tax credit attributable to such post supply discount.

On reading of the above provisions relating to discount and credit note harmoniously, it can be said that when supplier is providing the discount before finalisation of the sale price itself, it should mention the said discount and deduct it from the supply invoice at first instance. Since the said discount is a pre-supply discount, as per Section 15(3)(a), supplier should record the discount in the supply invoice itself.

Same analogy will apply for cash discount as well as trade discount. If the amount of discount is known at the time of issuing the sales invoice, the discount needs to be incorporated in the invoice itself and net consideration will be the value of taxable supply liable to GST.

Supplier can also raise the invoice for full amount and then he can raise the credit note for the discount under Section 34(1) as the taxable value charged in the tax invoice exceeds the taxable Value payable in respect of supply. It should be pre agreed discount.

However, while issuing the credit note, it shall be obligatory for supplier as well as the customer to ensure that the ITC to the extent of the discount passed in the credit note is reversed by the recipient.

Issuing credit note for Discount and reversing GST therein is valid under GST Law irrespective of the status of registration of the recipient (Customer).

In case of registered customer who takes set off of GST, condition of reversal under Sec 15(3) (b) must be complied.

Compliance of above condition under Sec 15(3)(b) is not applicable in case of Unregistered customer or Registered customer who do not take set off of GST, and in such cases proper documents to be kept to evidence that discount is as per agreement entered into at or before the time of supply and linked to relevant Invoice and Ledger Confirmation or corresponding debit note to be received from Customer as per documentation, as evidence of receipt of discount.

Credit note for contractual penalty / deductions

The agreement with customer may provide for penalty for delay in delivery/deficiency in goods/services. The customer may deduct the penalty from the payment made to supplier as per the terms of the agreement.

As per Section 34(1), a registered person can issue a credit note where goods or services or both supplied are found to be deficient. The credit note shall be issued in the prescribed format and against the relevant invoices.

The Credit Notes shall be reported in the return for the month in which the said credit note has been issued or any time before the September following the end of the financial year or date of filing of annual return whichever is earlier. In other words, the credit note against a particular invoice contained in one financial year shall be considered for GST adjustment and reduction in output tax liability only up to September following the end of such financial year or date of filing of annual return, whichever is earlier. For example, if a credit has to be issued against an invoice dated 31-3-2018, the said credit note has to be issued before 30th September 2018 or the date of filing of annual return.

Query No. 1

Whether GST is covered u/s. 43B of the Income tax Act, 1961?

Answer

GST (Goods & Services Tax ) is applicable from July 1, 2017. GST has replaced the Excise Duty, Service Tax, Countervailing Duty (CVD), Special Additional Duty of Customs (SAD), Value Added Tax (VAT), Central Sales Tax (CST), Octroi, Entry Tax, Purchase Tax, Luxury Tax, Taxes on Lottery, States cesses and surcharges and Entertainment Tax (other than tax levied by the Local Bodies). Thus GST is one tax which covers all the above taxes and which is destination based tax.

Now Section 43B of the Income-tax Act, 1961 reads as under:

“Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of –

(a) Any sum payable by the assessee by way of tax, duty, cess or fee by whatever name called, under any law for the time being in force, or ………………………….

shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income refer to in section 28 of that previous year in which such sum is actually paid by him, ………… …………………………………………………………”

Thus you will appreciate that GST is tax and if it is paid during the previous year and same shall be allowed in the year of payment, irrespective of the liability of any year.

Query No. 2

P. Pvt. Ltd. wants to convert its status to status of Limited Liability Partnership (LLP), for which it has submitted that its total turnover is less than ₹ 60,00,000/- and total value of the assets does not exceed ₹ 5,00,00,000/- as appearing in the audited books of account of last three previous years.

How to covert status of Pvt. Co. into LLP without any tax implication as the word “value” appearing in sub clause (ea) of clause (xiiib) of section 47 means “Fair Market Value” or “book value”?

Answer

Chapter IV E – of the Income-tax Act, 1961 provide for “ Capital Gains”, which inter alia states for Transactions not regarded as transfer”.

Section 47 reads as under:

“Nothing contained in Section 45 shall apply to the following transfers:-

(xiiib) any transfer of a capital asset or intangible asset by a private company or unlisted public company (hereinafter in this clause referred to as the company) to a limited liability partnership or any transfer of a share or shares held in the company by a shareholder as a result of conversion of the company into a limited liability partnership in accordance with the provisions of section 56 or section 57 of the Limited Liabilities Partnership Act, 2008 (6 of 2009)”

Provided that—

(a) all the assets and liabilities of the company immediately before the conversion become the assets and liabilities of the limited liability partnership;

(b) all the shareholders of the company immediately before the conversion become the partners of the limited liability partnership and their capital contribution and profit sharing ratio in the limited liability partnership are in the same proportion as their shareholding in the company on the date of conversion;

(c) the shareholders of the company do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of share in profit and capital contribution in the limited liability partnership;

(d) the aggregate of the profit sharing ratio of the shareholders of the company in the limited liability partnership shall not be less than fifty per cent at any time during the period of five years from the date of conversion;

(e) the total sales, turnover or gross receipts in the business of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed sixty lakh rupees;

[(ea) the total value of the assets as appearing in the books of account of the company in any of the three previous years preceding the previous year in which the conversion takes place does not exceed five crore rupees; and]

(f) no amount is paid, either directly or indirectly, to any partner out of balance of accumulated profit standing in the accounts of the company on the date of conversion for a period of three years from the date of conversion.

Explanation.—For the purposes of this clause, the expressions “private company” and “unlisted public company” shall have the meanings respectively assigned to them in the 
Limited Liability Partnership Act, 2008 (6 of 2009);

These provisions have been explained by the CBDT vide Circular No. 1 of 2011 dated April 6, 2011.

From the facts, and legal provisions as well as circular, it is clear that if the company complies with all the conditions of clause (xiiib) of section 47 then the querist can convert its status to LLP without any tax implication.

Further, sub-clause (ea) of clause (xiiib) of Section 47 provides for “total value of the assets as appearing in the books of account of the company” means book value. As per J. A. Parks on “Principles and Practice of Valuation” the “Book Value” is known as the value of a property as entered in the books of a company or organisation representing its original or historical cost of acquisition as diminished by cumulative depreciation till the year where accounting is made. The market value of the property may remain constant over the period or may also increase depending on market situation, but the book value will gradually go downwards commensurate with rate of depreciation.

Furthermore, as per the said author, the basic concept in respect of “fair market value’ is that on the price which property would ordinarily fetch on sale in the open market on the date of transfer. Market value is a very generalised concept. What any particulars purchaser pay for land whether at public auction or private treaty is not itself market value.

Again, section 2(22B) of the Income-tax Act 1961 defines “fair market value” in relation to a capital asset, means –

(i) The price that the capital asset would ordinarily fetch on sale in the open market on the relevant date; and

(ii) Where, the price referred to in sub-section (i) is not ascertainable, such price as may be determined in accordance with the rules made under this Act.

Thus, there is clear difference between “total value of the assets appearing in the books of account” i.e., book value and “ fair market value” So wherever the legislature wanted to use “fair value” or “fair market value” it has specifically stated like section 50D, which reads as under:

“Where the consideration received or accruing as a result of the transfer of a capital asset by an assessee is not ascertainable or cannot be determined, then, for the purpose of computing income chargeable to tax as capital gains, the fair market value of the said asset on the date of transfer shall be deemed to be the full value of the consideration received or accruing as a result of such transfer.”

Thus according to the author, the wordings “total value of the assets appearing in the books of account” means “book value” as appearing in the books of account and not the fair market value or fair value.

Query No. 3

I had sold 4 of vacant sites during the financial year and earned capital gains on each of them. Thereafter, I purchased a residential property for ₹ 1,50,00,000/- in the same financial year. My total long term capital gains was ₹ 36,72,000/-, on the sale of said sites. How to reflect in I. T. Return.

Answer

From the query it is clear that land was long term capital asset and on sale of land (4 sites) long term capital gain of ₹ 36,72,000/- arose which was invested in residential house amounting to ₹ 1,50,00,000/-, hence no tax is payable.

In the return of income, you have to disclose under the head “capital gains”. You have to give working under “schedule CG” in schedules to the Return Form.

Query No. 4

X require certified copy of entire file of assessment, recovery proceeding and prosecution proceeding including proceeding sheet.

But the authority is of the opinion that certified copy of proceeding sheet cannot be issued as the same is confidential.

Answer

You should ask authority under which law or rule or circular it is confidential, when you are seeking details about your own assessment records.

In fact, it is prudent to obtain the certified copy of the order sheet (proceeding sheet) after the assessment is over, especially when, you intend to file the appeals before higher authorities.

A discussion about various penal provisions under GST

Under GST Act most of the penal provisions are contained in Section 122 to 138 given in Chapter XIX pertaining to Offences and Penalties.

There are penal provisions u/ss. 10, 52, 73 & 74 also.

All the penalties under GST are governed by provisions of the Act, as in GST Rules there seems to be nothing much relevant about levy of penalty.

Let us first discuss the provisions of Sec. 122 to 138.

1. The offences specified u/s 122(1), include, inter alia, the following offences, where a taxable person,-

– supplies any goods or services without issue of any invoice; or

– issues an incorrect or false invoice with regard to any supply;

– issues any invoice or bill without supply of goods or services in violation of provisions of the Act;

– fails to pay the tax collected beyond 3 months from its due date of payment;

– fails to deduct tax as per Sec. 51(1) or deducts less tax or fails to pay the tax deducted;

– fails to collect tax as per Sec. 52(1) or collect less tax or fails to pay the tax collected;

– fraudulently obtains refund of tax – clause (viii);

– takes or distributes ITC in contravention of Sec. 20, or the rules made therefor;

– falsifies or substitutes financial records or produces fake accounts or documents or furnishes any false information or return with an intention to evade payment of tax due under this Act – clause (x); or

– suppresses his turnover leading to evasion of tax under this Act – clause (xv).

2. Sec. 122(1) provides that the person committing any of the listed offence shall be liable to pay a penalty of ₹ 10,000/- or an amount equivalent to the tax evaded or the amount of tax not deducted or short deducted u/s. 51 or deducted but not paid, or tax not collected or short collected u/s. 52 or collected but not paid, or ITC irregularly availed or passed on or distributed, or refund claimed fraudulently, whichever is higher.

3. It is to be noted that except in clause (x) & (xv) of Sec. 122(1), there is no reference of tax evasion. But, the penalty is linked with the amount of tax evaded. Therefore, penalty u/s. 122(1) for offences other than offence in clause (x) & (xv) should be ₹ 10,000/- only, unless tax evasion is established, except in case of offence pertaining to tax deduction or tax collection or input tax credit, where penalty is not based on the amount of tax evaded.

For offence in clause (x) & (xv), even the penalty of ₹ 10,000/- should not be leviable unless the intention to evade the tax is established.

4. Offence in clause (viii) of Sec. 122(1) shall be deemed to have been committed only when a person fraudulently obtains refund of tax. Such offence is covered by Sec. 122(2) also.

However, the offence of claiming an incorrect refund without any fraudulent intention should be covered by Sec. 122(2).

5. Offences u/s. 122(2)

If a registered person has not paid or has short-paid the tax payable by him or has claimed refund of tax erroneously, or has wrongly availed or utilized the ITC, then he is liable for penalty u/s. 122(2).

If an offence specified u/s. 122(2) is committed for any reason (other than the reason of fraud or wilful misstatement or suppression of facts to evade the tax), then it is liable for penalty of ₹ 10,000/- or 10% of the tax due, whichever is higher.

However, if such offence is committed by fraud or wilful misstatement or suppression of facts to evade the tax, then it is liable for penalty of ₹ 10,000/- or 100% of the tax due, whichever is higher.

The offence of fraudulently claiming any refund is covered by clause (viii) of Sec. 122(1) also.

6. If a person,-

(a) aids or abets any of the offences specified in Sec. 122(1), or

(b) in any manner deals with any goods which he knows or has reason to believe that they are liable for confiscation, or

(c) receives or in any manner deals with the supply of services which he knows that it is in contravention of any provisions of GST Act or rules, or

(d) fails to appear before Central tax Officer, when issued a summon for this purpose; or

(e) fails to issue invoice as per provisions of GST Act or rules, or fails to account for an invoice, he is liable for a penalty which may extend up to ₹ 25,000/-.

7. Sec. 123 provides for penalty up to ₹ 5,000/- for failure to submit information return u/s 150.

8. Sec. 124 provides for fine up to ₹ 10,000/- and further fine up to ₹ 100/- per day subject to maximum of ₹ 25,000/- in case of failure to furnish information or return u/s. 151 without reasonable cause, or for wilfull furnishing of false information or return u/s. 151.

9. Sec. 126 provides that no penalty shall be levied for minor breaches of tax regulations or procedural requirements like any omission or mistake in documentation which is easily rectifiable, provided there is no fraudulent intention or gross negligence.

It also provides that the amount of penalty shall depend on the facts and circumstances of each case, and shall be commensurate with the degree and severity of the offence. However, provisions of Sec. 126 are not applicable where the penalty specified in other Sections is a fixed sum or is expressed as a fixed percentage.

10. Sec. 127 empowers the proper officer to levy penalty on any person for any offence which is not covered under any proceedings u/s. 62, 63, 64, 73, 74, 129 or 130.

The provisions of Sec. 127 are more or less similar to Sec. 125, except that in Sec. 127 no outer limit of penalty is prescribed.

11. Sec. 128 empowers the Govt. to waive, in part or full, any penalty leviable u/ss. 122, 123 or 125 or any late fee in Sec. 47 on the recommendations of the Council for any class of taxpayers under mitigating circumstances.

12. Sec. 129 provides for detention, seizure and levy of penalty in case of contravention of any provision of the Act while transporting or storing the goods in transit.

Before levy of penalty u/s. 129 a notice must be issued and an opportunity of hearing must be given to the concerned person.

Proviso to Sec. 129(1) specifically provides that any goods or conveyance shall not be detained or seized without serving an order of detention or seizure on the person transporting the goods – Sec. 129(1).

Where the owner of goods comes forward, then applicable tax and penalty equal to 100% of tax will be leviable.

If owner of the goods does not come forward, then applicable tax and penalty equal to 50% of value of goods reduced by tax amount paid can be levied.

In case of exempted goods, penalty is 2% of value of goods or ₹ 25,000/- whichever is less, if owner comes forward; and 5% of value of goods or ₹ 25,000/- whichever is less, if owner does not come forward.

If penalty levied u/s. 129 is not paid within 7 days of detention or seizure, than further proceedings shall be initiated u/s. 130 for confiscation of goods and conveyance. This period of 7 days can be reduced by proper officer if the goods are of perishable or hazardous nature.

13. As per Sec. 129(2) provisions of Sec. 67(6) shall, mutatis mutandis, apply for detention and seizure of goods u/s. 129.

Sec. 67(6) provides that the goods seized shall be released, on a provisional basis, upon execution of a bond and furnishing of a security, in such manner and of such quantum, as may be prescribed or on payment of applicable tax, interest and penalty payable, as the case may be.

Rule 140 of CGST Rules provides for submission of such bond and security.

14. Interpretation of the expression “person transporting the goods”

The proviso to Sec. 129(1) provides that no goods or conveyance shall be detained or seized without serving an order of detention or seizure on the “person transporting the goods”.

Similarly, Sec. 129(6) provides that if the person transporting the goods, or the owner of the goods fails to pay the tax and penalty levied within 7 days of such detention or seizure, further proceedings shall be initiated in accordance with the provisions of Section 130.

A question may arise what is correct interpretation of the expression “person transporting the goods”. Whether it is driver of the vehicle, or the owner of the vehicle, or the person who issued the related MTR, if any, and is answerable to the consignor/consignee for transportation of the goods.

In my opinion the person who issued the MTR, if any, and is answerable to the consignor / consignee for transportation of the goods, should be treated as “person transporting the goods”, and if no such person comes forward, then only the owner of the vehicle should be treated as the “person transporting the goods” and if the owner of the vehicle also does not come forward, then the driver of the vehicle can be treated as the “person transporting the goods”

The above interpretation seems to be logical also, considering the requirement of payment of tax and penalty by the person transporting the goods, and the necessity of filing the appeal against the levy of penalty, etc., which may not be possible by the driver of the vehicle or the owner of the vehicle who may not be in a position to deposit the amount of tax and penalty, and may also not be willing to get involved in the lengthy process of filing of 1st appeal, second appeal, or appeal to High Court, if required.

Moreover, even if the owner of the vehicle or the driver of the vehicle is ready to get involved in the lengthy process of appeals, etc. then also when the appeal is favourably decided by the higher forum say after 2-3 years, then at that time it may be extremely difficult to get back the amount refunded in the name of the driver or the owner of the vehicle.

15. Sec. 130 provides for confiscation of goods or conveyances and levy of penalty, if a person –

(i) supplies or receives any goods against the provisions of the GST Act or Rules with intent to evade payment of tax; or

(ii) does not account for any goods on which he is liable to pay tax; or

(iii) supplies any goods liable to tax without getting registration; or

(iv) contravenes the provisions of the GST Act or Rules to evade payment of tax; or

(v) uses any conveyance for transportation of goods in contravention of provisions of the GST Act or Rules. However, in such cases the penalty shall be leviable u/s. 122 – Sec. 130(1).

For clauses (i) & (iv) intention to evade the tax must be there, without that no penalty should be leviable in these clauses.

16. Sec. 130(2) provides that in lieu of confiscation of any goods or conveyance, the proper officer shall give to the owner of the goods an option to pay, in lieu of confiscation, such fine as the said officer thinks fit, which shall not exceed market value of the goods confiscated, less the tax chargeable thereon.

However, the aggregate of the fine and penalty leviable shall not be less than the amount of penalty leviable u/s. 129(1).

In case of conveyance used for carriage of goods or passengers for hire, in lieu of confiscation of the conveyance, the owner of the conveyance shall have an option to pay a fine equal to the tax payable on the goods being transported thereon.

17. Sec. 130(3) provides that owner of the goods and the vehicle liable for confiscation shall be liable to pay tax, penalty and charges payable in respect of such goods and conveyance, irrespective of option to pay fine u/s. 130(2) in lieu of confiscation.

Thus, when tax and penalty shall be payable even after availing option of fine, then no one should be willing to avail the option of fine u/s. 130(2), particularly, when there is a specific provision u/s. 129(1)(c) for release of the seized goods and conveyance on furnishing of a bond and security.

18. Offences liable for prosecution

Sec. 132 has specified certain offences which are liable for imprisonment, where the amount of tax evasion or ITC wrongly availed or utilised, or refund wrongly taken, exceeds ₹ one crore, which will include amount of Central and State tax, ITC and Compensation Cess, as the case may be.

Sec. 132(6) provides that a person shall not be prosecuted u/s. 132 for any offence without previous sanction of the Commissioner.

Sec. 138 provides for compounding of certain offence listed u/s. 132.

The amount for compounding of an offence shall be such as may be prescribed, subject to minimum of ₹ 10,000/- or 50% of tax involved, whichever is higher, and maximum ₹ 30,000/- or 150% of tax, whichever is higher – Sec. 138(2).

Application for compounding shall be filed in Form CPD- 01 to the Commissioner, which shall be decided within 90 days after giving an opportunity of hearing to the applicant.

The compounding shall be allowed only after making payment of tax, interest and penalty liable to be paid in respect of said offence.

Any compounding u/s. 138 shall not affect the proceedings instituted under any other law.

19. Sec. 133 to 137 are not very much relevant for the purpose of this Article.

Other penal provisions

20. Composition wrongly availed

If a taxable person has opted for composition u/s. 10 despite not being eligible for the same, then in addition to tax, he shall be liable for penalty.

Provisions of Sec. 73 & 74 shall, mutatis mutandis, apply for determination of such penalty – Sec. 10(5)

21. Failure to furnish information by e-commerce operator

If the e-commerce operator fails to furnish the information required from him within 15 working days from the date of service of notice, he shall be liable for penalty u/s. 52(14) which may extend up to ₹ 25,000/-, without prejudice to any action which may be taken u/s. 122 – Sec. 52(14)

22. Sec. 73 & 74 : Penalty for tax not paid or short paid or tax erroneously refunded or input tax credit wrongly availed or utilised

In case of tax not paid or short paid or tax erroneously refunded or input tax credit wrongly availed or utilised (other than by reason of fraud or wilful mis-statement or suppression of facts to evade tax), a notice is served on such person requiring him to show cause why he should not pay the such amount with interest u/s. 50 and penalty – Sec. 73(1).

Before issue of notice u/s. 73(1) such person may pay the amount of tax with interest payable u/s. 50 at his own, and can inform the proper officer in writing about such payment. In that case no notice shall be issued u/s. 73(1) – Sec. 73(5).

Even if within 30 days of issue of notice u/s. 73(1) the amount of tax is paid by such person with interest payable u/s. 50, no penalty shall be payable and all proceedings in respect of the said notice shall be deemed to be concluded – Sec. 73(8).

But, Sec. 73(11) provides that notwithstanding anything contained in Sec. 73(6) or 73(8), penalty u/s. 73(9) shall be payable if the amount of self-assessed tax or amount collected as tax has not been paid within 30 days from the due date of its payment.

If tax is not paid by such person even after issue of notice, then the proper officer, after considering the representation of such person, shall pass order for tax, interest, and penalty equivalent to 10% of tax or ₹ 10,000/-, whichever is higher, payable by such person – Sec. 73(9).

Order u/s. 73(9) shall be passed within 3 years from the due date for furnishing of annual return for the relevant financial year to which such amount relates – Sec. 73(10).

23. The provisions of Sec. 74 are applicable when tax is not paid or short paid or tax erroneously refunded or input tax credit wrongly availed or utilised by reason of fraud or any wilful misstatement or suppression of facts.

The provisions of Sec. 74 are more or less similar to Sec. 73.

Such person at his own may pay tax along with interest payable u/s. 50, and penalty equivalent to 15% of tax, and can inform proper officer in writing about such payment, in that case no notice shall be issued u/s. 74(1).

If amount of tax is paid with interest payable u/s. 50 & penalty equivalent to 25% of tax, within 30 days of issue of notice u/s. 74(1), then all proceedings in respect of said notice shall be deemed to be concluded – Sec. 74(8).

If tax, interest and penalty is not paid as per provisions of Sec. 74(5) or 74(8) even after issue of notice, then the proper officer shall pass order for tax, interest and penalty payable by such person.

In Sec. 74(11) it is mentioned that if amount of tax is paid with interest payable u/s. 50 & penalty equivalent to 50% of tax, within 30 days of receipt of order passed u/s. 74, all proceedings in respect of the said notice shall be deemed to be concluded.

For the purpose of Sec. 73 & 74 ‘all proceedings in respect of the said notice’ shall not include proceedings u/s. 132 – Explanation 1(i) to Sec. 74.

[Source : Article printed in the souvenir of 2 Day National Tax Conference held on 5th & 6th May, 2018 at Indore]

1. Introduction

1.1 Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts in a particular country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, sometimes, a standard of deferred payment. Any item or verifiable record that fulfills these functions can be considered as money.

1.2 OECD paper “ The Bitcoin question: Currency v. trust less Transfer Technology”-Money is historically an emergent market phenomenon establishing a commodity money, but nearly all contemporary money systems are based on fiat money. Fiat money, like any check or note of debt, is without use value as a physical commodity. It derives its value by being declared by a government to be legal tender; that is, it must be accepted as a form of payment within the boundaries of the country, for “all debts, public and private”. The money supply of a country consists of currency (banknotes and coins) and, depending on the particular definition used, one or more types of bank money (the balances held in checking accounts, savings accounts, and other types of bank accounts). Bank money, which consists only of records (mostly computerised in modern banking), forms by far the largest part of broad money in developed countries.

1.3 Before introduction of money, barter system was in existence. The use of barter-like methods may date back to at least 100,000 years ago, though there is no evidence of a society or economy that relied primarily on barter. Instead, non-monetary societies operated largely along the principles of gift economy and debt. When barter did in fact occur, it was usually between either complete strangers or potential enemies.

1.4 On the face of it crypto-currencies could be thought of as meeting all of these “money” roles. They are (as are many things) a potential store of value, albeit a very unstable one. They could be used as a unit of account and, as the earliest known use of a bitcoin retail transaction was to buy a pizza, they can be used as a medium of exchange for anyone willing to accept them. In this latter role they have significant advantages, as they can be divided digitally for any size of transaction and they avoid the high fees charged by credit card companies. But it is likely that the main reason crypto-currencies are ‘taking off’ in acceptability as a means of payment is due to the anonymity feature. The high degree of anonymity feature has great advantages for illegal activities such as money laundering, avoiding financial regulations, terrorist financing and evading taxes.

1.5 The financial crisis led to a loss of trust in many financial intermediaries, trading platforms and payment systems. The main innovation of crypto-currencies is the feature of trust-less transactions (the ability to avoid the need for a trusted third party). Barter is always possible – window cleaners could negotiate with shops, doctors’ surgeries and farms to exchange hours or cleaning for goods and services. However, barter is a poor medium of exchange and cleaning cannot be meaningfully stored (and hence isn’t a store of value). Casino chips, airline miles, Amazon credits, Disney money could also be used for some functions outside of their primary intended use, but not with the potential usability features of crypto-currencies in the digital age.

1.6 Crypto-currencies can never become an alternative to legal tender, for the simple reason (as will be explained below) that people have to pay their taxes. This protects existing fiat currencies from being displaced, and the fear of loss of monetary control should not be used as an argument to prevent bitcoins from circulating as parallel currencies. However, the technology of the digital payment protocols should not be confused with the parallel currency issue.

1.7 With respect to the currency function, there are two potential policy issues: (a) consumer protection issues: e.g., electronic theft; a collapse in value of crypto coins say due to the emergence of substitutes; the use of government plenary powers to ban them, etc.; and (b) anonymity features permitting an expansion of socially unacceptable activities such as tax evasion and money laundering. The digital transfer technology, on the other hand, could play highly-socially useful roles.

2. Digital currency v. Cryptocurrency?

2.1 Digital currency, or Digital Money, is defined as a means of payment or exchange that occurs in electronic form, with transactions recorded electronically. The traits of digital currency are similar to traditional currencies in that they can be used for payments on purchase or sale of physical goods & services, transferred across locations, and stored in wallets or accounts.

2.2 According to Financial Crimes Enforcement network (FinCEN), digital currencies are categorised into two broad categories – virtual currencies and crypto-currencies.

2.3 Virtual currencies are defined as the digital representation of unregulated money that is neither issued by a Central authority nor associated with “Fiat currency”(currency established by government regulations) and which are used and accepted among members of specific groups. Examples of virtual currencies are loyalty points, Facebook credits, amazon coins and frequent flyer programmes.

2.4 Crypto-currencies on other hand, are a class of digital monies that use cryptography as a means to protect monetary interactions and monitor the generation of crypto-currency units. Some of the widely used crypto-currencies are Bitcoins, Ethereum, and Litecoin. I am
focusing the paper considering crypto-currency viz., Bitcoin.

3. Bitcoins & blockchain

3.1 Bitcoin a compendium of conceptions, software engineering, cryptography and economics that form the fundament of a digitally workable money schema. Bitcoin works on a concept so mathematically impregnable that once you dive to interpret the working, it will only leave you awestricken. It is indeed hard to apprehend its kernel and significances with only a picayune look at it, as is typically seen by almost all of us.

3.2 It was in the year 2008 when a paper titled ”Bitcoin-A Peer to Peer Electronic Cash System” got published under the pseudonym Satoshi Nakamoto via the Cryptography mailing list. The most adept thing about the concept knowm as Bitcoin is that, it doesn’t need Satoshi Nakamoto anymore to survive, continue and exist. It is purely peer-to-peer version of electronic cash that would facilitate online payments to be sent instantly from one party to another without the burdens of going through a financial institution.

3.3 Bitcoin is a decentralised crypto-currency and a peer-to-peer payment system released as open source software wherein transactions, duly verified by network nodes are recorded in a public distributed ledger called a Block chain takes place between users directly, without an intercessor or third party engagement.

3.4 Bitcoin isn’t like some gilded piece of metal or like distinctive paper money either. No one prints it, no one server or person controls it, is hard to counterfeit but instead, bitcoin counts exclusively on a decentralized computer network and some awe-inspiring efforts of cryptography. As mentioned above, the entire bitcoin system runs on P2P(peer-to-peer) network that is similar to file sharing networks like the ones that allow people to distribute data of all kinds, including copyrighted music, movies or more.

3.5 Bitcoin actually works on the concept of Blockchain.

4. Can Bitcoin be treated as a currency in India?

4.1 We have to look at the definition of currency given in Indian Laws. Indian laws do not define digital currency or virtual currency, so we will have to look at the traditional definition of currency to see if Bitcoin falls in that definition. The term currency is defined in section 2(h) of the Foreign Exchange Management Act, 1999 (“FEMA”) in the following words:“currency” includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank.

4.2 It is notable here that this is an inclusive definition which means that it has a large scope for expansion. The legislature has consciously made the definition capable of further expansion by making it inclusive and also by giving the Reserve Bank of India (“RBI”) the authority to notify other similar instruments. This means that if any instrument which is being used as a currency is not covered by the definition as it stands, then the RBI is free to notify it and include it in the definition of currency. All “currency” other than Indian currency is considered by the FEMA as “foreign currency” which would have to then comply with various rules and regulations under FEMA. This means that if Bitcoin is classified as a “currency”, it would have to come under the definition of “foreign currency” and Bitcoin transactions would therefore have to comply with the entire foreign exchange regime under FEMA.

4.3 It is clear that Bitcoin is not really similar to any of the instrume5 | CA.Shweta Ajmera

4.6 Bitcoin is a reward for the mining activity being conducted by the professional or programmer. In our view it is an asset received by the professional after completing mining process. The asset is in intangible form. Therefore Bitcoin is classified as an intangible asset, which is being earned by the professional. The process of mining needs proper instruments and proper professionals, who will understand the process and earn reward in form of Bitcoin and therefore it is being classified as an intangible asset and not lottery (luck by chance).

5. Is Bitcoin Legal in India?

5.1 Reserve Bank of India is the regulatory authority to regulate currency. The Central Regulatory, Legal and Operational Risks. Founded in 2009, Bitcoins are digital currencies that are not issued by any central bank or other centralised authority but by an open source software through a process called ‘mining’. RBI has till date said that Bitcoin is neither legal nor illegal. As the regulatory body has not come out with conclusion, therefore the opinion shared by us is our personal opinion which cannot be challenged or submitted in court of law.

5.2 As a layman or in common parlance, people understand Bitcoin as a currency and which is creating a wrong impression in the mind of regulatory. Bitcoin sometimes donot have a trail which will lead on money laundering and therefore regulatory bodies have not given permission for the same.

5.3 Till date Bitcoin has not been declared as legal or illegal in India.

6. Regulatory aspect of Bitcoin in India:

6.1 Income Tax Act, 1961

6.1.1 As per section 28 of the Income-tax Act 1961, sale of the data mined will be taxable as business income. Profits and gains from business is calculated after allowing deduction under the Income-tax Act.

6.1.2 As per section 2(14) of the Income-tax Act 1961, a capital asset means a property of anykind held by a person, whether or not connected with his business or profession. Therefore Bitcoins are treated as capital asset if held for investment purpose. Therefore any gain arising from transfer of Bitcoin will attract capital gains.

6.2 Goods & Services Tax

GST on Bitcoin – In case of mining -(Product in electronic form can be classified as “Information technology software services – section 2(102) of the CGST Act defines “services” means anything other than goods, money or securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged. The term service as defined above is very broad and covers all services including information technology/ software service.

The term “Information Technology software” has been defined “Explanation (v) at para 4 of notification number 11/2017- Central Tax (Rate) dated 28-06- 2017 as “ any representation of instructions, data, sound or image, including source code and object code, recorded in machine readable form and capable of being manipulated or providing interactivity to a user, by means of a computer or an automatic data processing machine or any other device or equipment.”

Rate of tax of GST on Information technology / software service is 18%. Assessee is eligible to take input tax credit.

7. Conclusion

Reserve Bank of India is the regulatory authority to regulate currency. The Central Bank that is RBI acknowledged that virtual currencies pose challenges in form of Regulatory, Legal and Operational Risks. Founded in 2009, Bitcoins is digital currency that is not issued by any central bank or other centralised authority but by an open source software through a process called ‘mining’. RBI has till date said that Bitcoin is neither legal nor illegal. As a layman or in common parlance, people understand Bitcoin as a currency and which is creating a wrong impression in the mind of regulatory. Bitcoin sometimes do not have a trail which will lead on money laundering and therefore regulatory bodies have still no clear opinion for the same.

[Source : Article printed in the souvenir of 2 Day National Tax Conference held on 5th & 6th May, 2018 at Indore]

With technological synergies coupled with information gathered Annual Information returns and data mining the department is flooded with information overload about the undisclosed transactions of assessees which may or may not be inferring in tax evasion. To tap the unexplored potential tax evasion the chief weapon in armoury of exchequer is power to reopen the cases. The power to reopen is a special power which is given with great responsibility to the Assessing Officer and has to be exercised judiciously and based on the precedents explaining the scope of such law. The casual and mechanical approach adopted by the Department of late has resulted in a deluge of notices more with an intention to carry out enquiries and investigations at the fag end of March for period getting lapsed in limitation. The Assessing Officer is empowered to reopen the case if he has reason to believe that income which has escaped assessment and not in any other case. Each and every word used has its relevance which have been dealt and explained by Courts and have evolved the law on this subject. In this article I have tried to discuss the recent developments in this subject with cardinal precedents. At the outset the procedure of making a valid reassessment is described as follows:

1. The initiation of reopening proceedings gets triggered when some new tangible material of income escaping assessment comes into knowledge of AO

2. Such information is perused and after necessary application of mind a belief is formed which is recorded as reasons for reopening on which necessary sanction of competent authority is taken.

3. Based on such reasons notice for reopening is issued under Section 148 within the limitation period and served in reasonable time to the right person.

4. In response to such notice return has to be filed by the assessee and then request to the AO to provide the reasons for reopening.

5. On receipt of return and request for providing reasons it is mandatory on part of AO to provide the verbatim copy of reasons for reopening.

6. The assessee has to peruse the reasons and file legal and factual objections against the reasons if the same is not acceptable.

7. The AO has to reject the objections by way of a speaking order and wait for the assessee for four weeks if assessee wants to challenge the rejection order in writ jurisdiction.

8. If the rejection of objections is not challenged in writ then the AO has to issue statutory notices and carryout the assessment to complete it within limitation period.

The above procedure has to be followed by the AO and Assessee in letter and spirit and any deviation could be prejudicial to their cases in law. Critical issues arising in the above procedure and the jurisprudence thereof is discussed hereinafter.

Sufficiency vs. Existence of Reasons

Once there exists reasonable grounds to form the subject belief, that would be sufficient to clothe him with jurisdiction to issue notice. The adequacy or sufficiency of reasons cannot be challenged in law, however, the existence of the belief can be challenged by the assessee. The expression “reason to believe” does not mean a purely subjective satisfaction on the part of the ITO. The reason must be held in good faith. It cannot be merely pretence. It is open to the Court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section. To this limited extent, the initiation of reopening proceedings in respect of income escaping assessment is open to challenge in a Court of law.

Providing reasons for reopening

It is an admitted concept that when the assessee makes a request to provide reasons for reopening it is mandatory for the AO to provide the reasons for reopening to the assessee after filing of return of income in response to Section 148 of the Act. The act of AO in not providing of such reasons would render the reassessment as invalid even in case when the assessor is stated to know the assessee.

Interestingly in case of Balwant Rai Wadhwa v. ITO (ITA 4806/Delhi/2010) it is held that despite service of s. 148 Notice on time, non-supply of ‘Reasons For Reopening’ within limitation period renders the reopening void.

Therefore if in a case reasons are given after a six years it can be contended that if the reasons are not provided immediately on filing of return the reassessment may get void.

Change of opinion

Indeed you won’t find anywhere in the bare statute to restrict reopening based on change of opinion, however, this is the most cited argument taken against reopening. This is a Judge made law which has its birth in the observations of Mr. Justice Rowlatt in Anderton and Halstead Ltd. v. Birrell [1932] 1 K.B. 271. The same was first cited in India by K. N. Rajagopala Sastri in the case of Maharaj Kumar Kamal Singh v. CIT [1959] 35 ITR 1 (SC). This concept is held to be an in-built test to check abuse of power by Assessing Officer and that the reasons must have a live link with formation of belief. Reason to believe and change of opinion are contrary and therefore the existence of words reasons to believe prohibits any review or change of opinion in an already completed assessment.

Most important decision on change of opinion is CIT v. Kelvinator of India Ltd. [2010] 320 ITR 561 (SC) where the concept of reason to believe was explained and it was observed that ‘Change of Opinion’ rebuts the formation of ‘Reason to Believe’ which is the crux. If there is “Change of opinion” it is essentially a review which cannot be done as it is a separate statutory process.

Very recently Supreme Court in case of ITO v. TechSpan India Private Ltd (order dated 24.04.2018) has laid down that what would be change of opinion. In order to constitute “change in opinion”, the assessment earlier made must either expressly or by necessary implication have expressed an opinion on the subject matter of reopening. If the assessment order is non-speaking, cryptic or perfunctory in nature, it may be difficult to attribute to the AO any opinion on the questions that are raised in the proposed reassessment proceedings. The reassessment cannot be struck down as being based on “change of opinion” if the assessment order does not address itself to the aspect sought to be examined in the reassessment proceedings.

Similarly in case of Rajesh Jhaveri Stock Brokers Pvt. Ltd (291 ITR 500) the Apex Court has laid down that in summary assessment under Section 143(1) no opinion is formed and therefore the argument of change of opinion is not available in such cases. However this does not mean that reassessment can be done in all cases where no scrutiny assessment is done. This is dealt in detail in next para.

Reopening based on no new material/ facts

There are two arguments against reopening without any new material on record. First that the same is nothing but a change of opinion as held by Bombay High Court in case of Asian Paints Ltd. v. DCIT (308 ITR 195) (Bom) as it was merely a fresh application of mind by the AO to the same set of facts and that since the AO had failed to apply his mind to the relevant material while framing the assessment order u/s. 143(3), he could not take advantage of his own wrong and reopen the assessment under section 147 of the Act.

However another argument prevailing in cases where no scrutiny assessment is done coins that as per decision of SC in case of Kelvinator (supra) the term “reason to believe” means that there is “tangible material” and not merely a “change of opinion” and this principle will apply even to s. 143(1) Intimations. This principle is also explained in a third member decision (having judicial precedence equal to Special Bench) in case of Telco Dadajee Dhackjee Ltd v. DCIT that while in that case of a s.143(1) intimation, the assessee cannot challenge the reopening on the ground of ‘change of opinion”, he can challenge it on the ground that there were no “reasons to believe” that income had escaped assessment or that the said reasons did not have a live link with the formation of the belief. Even in the case of a s. 143(1) intimation, the AO must have “tangible material” that income has escaped assessment. Similarly Mumbai Tribunal accepting this proposition in case of Aipita Marketing Pvt. Ltd. v. ITO (21 SOT 302) has held that in the absence of any new material, the AO is not empowered to reopen an assessment irrespective of whether it is made under section 143(1) or 143(3)of the Act.

Reopening based on information from investigation wing

As stated earlier the challenge to reopening cannot be made on sufficiency of reasons but can be made to existence of reasons. One should be very careful to deal with cases where reopening is made based on information from investigation wing or similar cases. Any action taken in haste by challenging the initiation in writ may not yield desired results however systematic rebuttal and patient approach may bring success in such cases.

Recently many writ petitions were filed in cases where notice for reopening was issued based on information from wing however the same were rejected. In case of Yogendra Kumar Gupta vs. ITO [2014] 366 ITR 186 (Gujarat) such information was held to be a fresh information and reopening was upheld. Further in case of Jayant Security & Finance Ltd [2018] 91 taxmann.com 181 (Gujarat) a very clear message comes out that till the completion of reassessment it cannot be said that the AO has not applied his mind and reasons are merely on basis of information from wing. However where the reassessment gets completed it is easier to make an inference from the actions and proceedings as to whether the AO has applied his mind or not.

These kind of information whether or not sustainable on other counts does constitute failure on part of assessee to disclose any material facts and therefore in such cases where the reopening is beyond four years and case was assessed under Section 143(3) of Act the challenge would not sustain based on view taken in case of Phool Chand Bajrang Lal 203 ITR 456 (SC). The famous finding of this decision is reproduced herewith:

“One of the purposes of section 147 appears to be to ensure that a party cannot get away by wilfully making a false or untrue statement at the time of original assessment and when that falsity comes to notice, to turn around and say ‘you accepted my lie, now your hands are tied and you can do nothing’. It would, be travesty of justice to allow the assessee that latitude.”

Be that as it may, where after completion of reassessment it is demonstrated that the proceedings were completed based on information from investigation wing only but no further inquiry was undertaken by Assessing Officer, said information could not be said to be tangible material per se and, thus, reassessment on said basis was not justified as held by Delhi HC in case of PCIT v. RMG Polyvinyl (I) Ltd [2017] 83 taxmann.com 348 (Delhi). Similarly in case of PCIT v. Meenakshi Overseas (P.) Ltd. [2017] 82 taxmann.com 300 (Delhi) it was held that where reassessment was resorted to on basis of information from DIT (Investigation) that assessee had received accommodation entry but and there was no independent application of mind by AO to tangible material and reasons failed to demonstrate link between tangible material and formation of reason to believe that income had escaped assessment, reassessment was not justified.

Again in case of Haryana Acrylic Manufacturing Co. v. CIT [2008] 175 Taxman 262 (Delhi) Delhi High Court held that notice under section 148, giving reason that it had come to his notice that assessee had taken accommodation entries from ‘H’ during relevant year when assessee, in course of original assessment proceedings, had supplied all relevant details; in assessment order which were verified and moreover, in reasons supplied to assessee there was no allegation that it had failed to disclose fully and truly all material facts necessary for assessment and because of its failure there had been an escapement of income chargeable to tax, reopening of assessment after expiry of four years from end of relevant assessment year was without jurisdiction. In such case since the allegation of failure to disclose material fact on assessee was not made by the department therefore the ratio of Phoolchand Bajranglal (supra) did not save the case of department.

Belief of escapement of income

It is generally seen that the completed assessment are reopened based on the audit objections of the Revenue audit party. Admittedly where reopening cannot be done based on legal audit objections however the reopening based on factual audit objections may prevail. But the important aspect here is that the belief of escapement of income should be genuine. In most of the cases it is seen that on one hand the AO agitates against the audit objection, however, under pressure from audit party he has to reopen the case. The correspondences between audit party and AO forms internal correspondence however the same exists in the records which can be verified in inspection of file which is a right of assessee. Though the copy of such confrontation between AO and Audit party would obviously not be provided to assessee but if the assessee makes sure of such existence then the same records can be called before Appellate Authorities which would sufficiently strike down the purported reason to belief. Gujarat HC in case of Raajratna Metal Industries Ltd vs. ACIT (reported on itatonline.org) has categorically held for such cases that if AO contests the audit objection but still reopens to comply with the audit objection, it means he has not applied his mind independently and the reopening is void. Failure on part of the assessee to disclosed fully and truly all material facts beyond four years

Proviso to section 147 clearly provides that if the original assessment was completed u/s. 143(3), reassessment can be done only where there was a failure on part of the assessee to disclose fully and truly all material facts necessary for assessment. However many times it is seen that the reasons do not expressly allege or state about such failure on part of Assessee which is a sine qua non and absence thereof renders the reopening as void.

In case of HCL Technologies Ltd [2017] 397 ITR 469 (Delhi) it is held that for complying with the jurisdictional requirement under the first proviso to Section 147 of the Act, the reasons would have to show in what manner the Assessee had failed to make a full and true disclosure of all the material facts necessary for the assessment. Similarly in case of Vareli Weavers Pvt. Ltd. vs. DCIT (1999) 240 ITR 77 (Guj) the HC had quashed the notices under section 148 read with section 147 of the Act observing that there being no whisper in the reasons recorded by the AO about failure on the part of the assessee to disclose truly and fully all material facts. Also Delhi high Court in CIT v. DCM Ltd., (2009) 24 DTR(Del) 72 found that there was no allegation in this regard in the reasons recorded by the AO and thus the reopening of the assessment was not valid.

Invalid assumption of Jurisdiction u/s. 148 instead of Section 153C

Recently it is seen that reopening of cases follows as a consequence of search instead of express provisions of Section 153C in case of persons other than person searched. In case of incriminating material is found during search pertaining to another person the proceedings are required to be initiated under section 153C of the Act and not under Section 147 of the Act. This is due to the fact that Section 153C starts with the non obstante clause i.e. “Notwithstanding anything contained in section 139, section 147, section 148,…… where the Assessing Officer is satisfied………” Therefore the overriding provisions of Section 153C prevail over the Section 147 and the assumption of jurisdiction under Section 148 becomes invalid. This view has been upheld in case of Rajat Saurabh Chatterji v. ACIT (ITA 2430/Del/2015) and ACIT v. Arun Kapur – 140 TTJ 249 (Amritsar).

No reopening for roving enquiries or investigation

Section 147/148 of the Act is not meant for reopening an already concluded assessment by first issuing notice and then proceeding to investigate and find out if there was any lacuna in the accounts. If such further investigation, by reopening a concluded assessment, is permitted, it would give rise to fishing and roving enquiries, because, in every case, the Assessing Officer can then issue notice for the purpose of investigation, and thus reopen any concluded assessment. This principle is very relevant in today’s context where notices are issued to make inquiries and verify facts and details of investments in property or cash deposits as to whether they are commensurate with the income. This principle has been strongly laid down by Karnataka High Court in case of C M Mahadeva v. CIT and Bombay High Court in case of Bhor Industries Ltd. v. ACIT (2004) 267 ITR 161 and Hindutan Lever Ltd.’s case (2004) 268 ITR 332 (Bom).

Notice to non existent persons

A notice issued to a non-existent person is prima facie invalid. The existence has to be seen on the date of issue of notice. If a person is deceased on the date on which notice is issued the same would become invalid and void and a fresh notice would be required to be issued to legal heirs. The decisions of Vipin Walia v. ITO (Del HC) and Shaikh Abdul Kadar v. ITO, 34 ITR 451 (MP) have followed this view. However it is pertinent here to peruse the decision of Madhya Pradesh High Court in case of Smt. Kaushalyabai v. CIT, 238 ITR 1008 (MP) where the notice was issued to a deceased person however considering Section 292BB of the Act since the widow of deceased co-operated in the proceedings therefore the proceedings were held to be valid. All these decisions have been considered by the Agra Bench of Tribunal in case of ITO v. Sikandar Lal Jain (ITA Nos. 196, 197 and 405/Agra/2007) which explains the law on this subject and decides in favour of assessee. The correct approach arising from harmonious reading of these decisions comes out that the AO should be informed about the fact of death of the assessee prior to the issue of notice along with copy of death certificate and do not participate in such illegal proceedings till notice is issued to legal heirs within limitation period.

Very recently Supreme Court in case of Skylight Hospitality LLP v. ACIT (order dated 6-4-2018) has held that S. 148 notice issued in the name of a company which does not exist upon its conversion into a LLP is valid if there is material to show that the issue in the name of the company was a clerical mistake. The object and purpose behind s. 292-B is to ensure that technical pleas on the ground of mistake, defect or omission should not invalidate the assessment proceedings, when no confusion or prejudice is caused due to non-observance of technical formalities.

This was the case of conversion of company into LLP and the ratio may be extended by courts to the cases of successions like amalgamations, etc however the issue of notice to a deceased person cannot be considered akin thereto and would still be invalid in eyes of law.

Minimising the impact

Many a times on receipt of notice the assessee realises the mistake or mischief which he regrets but the notice is issued and there is no reversal. In such cases the last legal recourse is to offer such escaped income in response to the return filed in response to Section 148 of the Act. However the concern is regarding the levy of penal provisions under Section 271(1)(c) of the Act. In such cases it needs to be appreciated that the return is filed before the reasons are disclosed to the assessee and therefore it cannot be said to be in response to detection and any action to come forward and offer income may be considered as bonafide to not attract penalty. This contention has been accepted by various courts and can be helpful to those who want to avoid litigatious approach on debatable issues. In the following decisions it is held that penalty is not leviable when income is offered in response to Section 148 of Act and such income is accepted in assessment:

• CIT v. Suresh Chandra Mittal 251 ITR 963 (SC)

• Meeta Gutgutia ITA No. 327/Del/2014

• CIT v. Rajiv Garg [2009] 313 ITR 256 (P&H)

• Swati Pearls (ITA 1401/Hyd/2014)

Therefore it would be advisable in appropriate cases to offer the income in response to Section 148 of Act if the assessee is doubtful about the merits of the case or expects prolonged litigation based on risk appetite of assessee.

Conclusion

The above discussion highlights that the power to reopening is not fullproof and can be rebutted on various counts if due diligence is exercised at every stage by the assessee along with due legal recourse. At every stage assessee has to adopt a systematic approach and maintain proper records of all proceedings to take a conscious decision and decide the course of action in the proceedings.

Hope this article proves useful to all.

[Source : Article printed in the souvenir of 2 Day National Tax Conference held on 5th & 6th May, 2018 at Indore]

Family Settlement & Wills

Family arrangements are governed by principles which are not applicable to dealing between strangers. When deciding the rights of parties under a family arrangement or a claim to upset such an arrangement, the court considers what in the broadest view of the matter is most in the interest of the family, and has regard to considerations which, in dealing with transactions between persons not members of the same family, would not be taken into account (para 304 of Halsbury’s Laws of England).

Should be bona fide

Since the consideration for a family arrangement is partly value and partly love and affection, the pecuniary worth of the consideration is not regarded too closely. The court will not, as a general rule, inquire into the adequacy of the consideration, but there is an equity to set aside a family arrangement where the inadequacy of the consideration is so gross as to lead to the conclusion that the party either did not understand what it was about, or was the victim of some imposition (see para 312 of Halsbury’s Laws of England).

What is family

The word “family” is not to be interpreted in the narrow sense of members of a joint Hindu family as defined in Hindu Law but it would include wide range of persons who belong to one family in its comprehensive sense. The basis on which such family settlements are held as valid and binding between all parties is the mutual consideration which flows between the parties while putting an end to the claims and counter claims between them. It has been held under the law of contract that it is lawful consideration for a party when he gives up his claim to any property in return for any payment or transfer of property made to him or any obligation undertaken by the party. Existence of the right in the property is not necessary in order to make the family settlement valid and binding for a valuable consideration. The existence of the dispute or a threatened dispute between the members of the family is considered to be a precondition for a valid family settlement and such disputes and the consequent giving up of claims and counter-claims between the various members of the family constitutes good and valid consideration between the parties for enforcement of the rights and obligations created by such a family settlement. The family settlement, therefore, is not founded on existing rights or liabilities but rather on existing claims and disputes between the parties which are amicably resolved; notices may be given by contending parties, even suits may be filed matters may be referred to arbitration and award may work out as family settlement.

Some principles governing family arrangements

Except where there is a specific provision of the IT Act which derogates from any other statutory law or personal law, the provision will have to be considered in the light of the relevant branches of law. – CIT v. Bhagyalakshmi & Co., 55 ITR 660 (SC). In other words, while construing family settlements for tax purposes, the courts would apply the settled principles applicable to such settlements.

1) In Maturi Pullaiah & Anr. v. Maturi Narasimham & Ors. AIR 1966 SC 1836, the Apex Court has held as follows :

“Briefly stated, though conflict of legal claims in praesenti or de futuro is generally a condition for the validity of a family arrangement, it is not necessarily so. Even bona fide disputes, present or possible, which may not involve legal claims will suffice. Members of a joint Hindu family may, to maintain peace or to bring about harmony in the family, enter into such a family arrangement. If such an arrangement is entered into bona fide and the terms thereof are fair in the circumstances of a particular case, Courts will more readily give assent to such an arrangement than to avoid it.”

2) The real consideration in a family arrangement is based upon a recognition of a pre-existing right hence, there is no transfer of property at all. The Hon’ble Apex Court in CGT v. NS Getti Chettiar 82 ITR 599 (SC) based its observation on that ground in a case of unequal family partition and held that it is not transfer, hence no gift tax liability is attracted.

3) The Hon’ble Supreme Court in Sahu Madho Das v. Pandit Mukand Ram AIR 1955 SC 481 has laid down the principles of family settlement and the requirement of registration of a document of family settlement. The Hon’ble Apex Court observed as under:

“It is well-settled that a compromise or family settlement is based on the assumption that there is an antecedent title of some sort in the parties and the agreement acknowledges and defines what that title is, each party relinquishing all claims to property other than that falling to his share and recognising the right of others, as they had previously asserted it, to the portions allotted to them respectively. That explains why no conveyance is required in these cases to pass the title from the one in whom it resides to the person receiving it under the family arrangement. It is assumed that the title claimed by the person receiving the property under the arrangement had always resided in him or her so far as the property falling to his share is concerned and therefore no conveyance is necessary. But, in our opinion, the principle can be carried further and so strongly do the courts lean in favour of family arrangements that bring about harmony in a family and do justice to its’ various members and avoid in anticipation, future disputes which might ruin them all, and we have no hesitation in taking the next step (fraud apart) and upholding an arrangement under which one set of members abandons all claim to all title and interest in all the properties in dispute and acknowledges that the sole and absolute title to all the properties resides in only one of their number and are content to take such properties as are assigned to their shares as gifts pure and simple from ……..”.

4) A family arrangement does not result into a transfer or a conveyance Ramcharan Das v. Girija Devi AIR 1966 SC 323. In this case, the Hon’ble Apex Court held as under:

In Mst. Hiran Bibi v. Mst. Sohan Bibi AIR 1914 PC 44 (3) L.R. 53 I. All approving the earlier decision in Khunni Lal v. Govind Krishna Narain IL..R. 33. An. 356, the Privy Council held that a compromise by way of family settlement is in no sense an alienation by a limited owner of family property. Once it is held that the transaction being a family settlement is not an alienation, it cannot amount to the creation of an interest. As the Privy Council pointed out in Mst. Hiran Bibi’s (supra), case, in a family settlement each party takes a share in the property by virtue of the independent title which is admitted to that extent by the other parties.

5) It is not necessary, as would appear from the decision in Rangasami Gounden v. Nachiappa Gounden L.R. 46 I.A. 72, that every party taking benefit under a family settlement must necessarily be shown to have, under the law, a claim to a share in the property. All that is necessary is that the parties must be related to one another in some way and have a possible claim to the property or a claim or even a semblance of a claim on some other ground as, say, affection.

6) That apprehended conflict can also be a ground for such settlement – AIR 1932 Cal 600, AIR 1932 Cal 664.

7) Even the parties to family settlement need not belong to the same family. The word ‘family’ in this context is quite flexible. The family is not to be taken in its rigid connotation in common parlance. It is enough if the parties are relations. Even collaterals having a remote common ancestor may join in an arrangement and can have relinquished or altered even their interest in expectancy – Krishna Baharilal v. Gulab Chand & Ors. AIR 1971 SC 104. The court, in that case, encountered by the question whether the want of direct family bond amongst the parties to the settlement detracts from the family character of the settlement. The answer is in the negative. Even though the parties were nothing but mere relations and not members of the same family, the dispute between the parties was in respect of certain property which was originally owned by their common ancestors, that was considered sufficient for a family settlement or arrangement. Thus, the family for the purpose of such settlement has a broad sense to embrace parties not belonging to the family.

Registration of the family deed

8) Section 17 of the Registration Act, 1908 enlists the documents which shall be registered under the Act. Clause (b) of Section 17(1) reads:

Other non-testamentary instruments which purport or operate to create, declare, assign, limit or extinguish, whether in present or in future, any right, title or interest, whether vested or contingent, of the value of one hundred rupees and upwards, to or in immovable property.

Section 17(2), inter alia, provides that nothing in clause (b) of Section (1) of Section 17 applies to:

(v) Any document other than the documents specified in sub-section(1A)] not itself creating, declaring, assigning, limiting or extinguishing any right, title or interest of the value of one hundred rupees and upwards to or in immovable property, but merely creating a right to obtain another document which will, when executed, create, declare, assign, limit or extinguish any such right, title or interest; or

(vi) any decree or order of a Court [except a decree or order expressed to be made on a compromise and comprising immovable property other than that which is the subject- matter of the suit or proceeding].

9) Section 49 of the Registration Act provides that no documents required by Section 17, inter alia, to be registered shall affect any immovable property comprised therein; confer any power to adopt; or be received as evidence of any transaction affecting such property or conferring such power, unless it has been registered. Consequently, unlike under Section 35 of the Stamp Act, an instrument/document that is compulsorily registrable, but is not so registered, is denuded of its efficacy and it is not receivable in evidence, and the law does not enable the party relying upon the instrument/document to unilaterally get the same subsequently registered.

10) It is settled position that a family settlement does not require registration- Kale v. Dy. Director AIR 1976 SC 807; Shahu Madho das v. Mukand Ram AIR 1955 SC 804. Hence no registration is required since there is no conveyance involved in this family settlement; the right/title/interest of the all the family members already existed in the property.

11) In Tek Bahadur Bhujil v. Debi Singh Bhujil AIR 1966 SC 292 it was observed that where the document was drawn up only to serve the purpose of proof or evidence of what had been decided by the parties, and not to form the basis of their rights in any form over the property, the same constitutes a mere memorandum recording something that has already taken place, and such a document would not require registration or stamping. Same view
in Roshan Singh v. Zile Singh AIR 1988 SC 881.

12) In K. Panchpagesa Ayyar & Anr. v. Kalyansundaram Ayyar & Ors. AIR 1957 Madras 472, it was observed:

“If the parties elect to reduce the transaction of partition into writing with the intention that the document itself should constitute the sole repository and the only appropriate evidence of the partition and to serve, so to speak, as a document of title, the writing must be regarded as the formal and operative deed of partition and as such requiring registration under Section 17, Cl. (b), provided the property affected is of the value of over ₹100. It is not the less a partition deed because its terms and contents were previously discussed and decided upon and then alone put into writing. But if the document is drawn up only with the intention of reciting an already completed oral partition and is merely in the minutes or incidental recital of a fait-accompli it is not compulsorily registrable.”

12) Thus documents so drawn up may fall under two heads viz.,

(a) a document may be drawn up with the intention of reciting an already completed oral partition or

(b) with that of superseding the oral bargain and formally reducing the terms of the partition to the form of a document.

In the former case when the document itself does not effect any partition but which maintains a partition already effected, or which simply acknowledges, or makes an admission, as to a prior partition, or which merely gives a right to have a document of partition executed it is not an instrument of partition which is compulsorily registrable.

But when the document is not intended by the parties to be merely the minutes or incidental recital of a fait accompli, i.e., of a partition that had already taken place, perhaps by oral arrangement, and was complete when the document was executed but forms an integral and essential part of the partition transaction i.e., of the process of dividing the property and was intended to be the only evidence of and to be the formal instrument of partition superseding and embodying the oral bargain and was intended to serve as the sole repository of the arrangement of partition arrived at by them, and to be the only evidence, the document would undoubtedly require registration. The question to be determined in effect is, does the document constitute a bargain between the parties i.e., is it a deed of partition effected in praesenti or is it merely the record of an already completed transaction, i.e., partition or to put it shortly is it a speaking partition instrument.

13) In The Chief Controlling Revenue Authority v. Rasikchandra Tulsidas Patel (1958) 50 Bom. L.R. 1379, the Court broadly classified deeds pertaining to partitions as
follows:

• When you have a joint Hindu family, you may have a partition effected, which partition may only result in a division of interest. Members of the joint family may not specifically divide the joint family property. The result of this would be that the members of the joint family would cease to be co-parceners and would become tenants-in-common and would hold the property as tenants-in-common. At a subsequent stage by a document the tenants-in-common may specifically divide the property. In such a case, although in one sense the partition has already taken place, still the fact that the tenants-in-common are specifically dividing the property would attract the application of Section 2(15).

• You may have another case where a partition may take place not only in interest but also a specific partition of property. The co-parceners may by this partition divide the property which belongs to the joint family and then you may have a subsequent document which may recite the fact not only of partition in interest but the actual partition specifically of the property of the joint family. In such a case it is difficult to understand how the document which merely admits and acknowledges a past event, which recites a partition which has already taken place, and which does not in any sense of the term bring about a partition, can be considered to be an instrument of partition under Section 2(15).

• The third case may be where the document itself may bring about both a division in interest and a partition with regard to specific property. That would be a clear case of an instrument of partition partitioning the joint family property. If these principles are understood and appreciated, then there is not much difficulty in deciding in which category the document we are considering falls.

The Court further emphasised on one of the tests which may be safely applied, that is:

• Has everything which is necessary to be done in order to bring about a partition been done before the document is executed? If everything has been done, then there is nothing which the document brings about. If something is left to be done which is done by the document, then the document may be considered as an instrument of partition.

The court held that members of a joint family who have effected a partition, though not an actual physical partition by metes and bounds, cease to be co-parceners but continue to be tenants in common. If, at a subsequent stage the tenants in common specifically divide the property, the document by which the property is partitioned would attract the application of Section 2(15) of the Stamp Act as it would be an instrument of partition.

14) Where one of the brothers relinquishes all right/title/interest in an inherited property, in favour of another brother, in consideration of certain amount, Article 52 (a) of the Stamp Act is applicable. Under this article, the stamp duty will be
₹ 200/- .

15) Article 34-Amendment from April 2015 – if residential & agricultural property is gifted to husband, wife, son, daughter, grand son, grand daughter, wife of deceased son, the duty would be ₹ 200/-.

Provided further that, if the residential and agricultural property is gifted to husband, wife, son, daughter, grandson, grand-daughter, wife of deceased son, the amount of duty chargeable shall be rupees two hundred.”

INCOME-TAX ACT

1) A reference may be made here to the decision of the Hon’ble Madras High Court in the case of KAY ARR Enterprises 299 ITR 348 (Mad.). In this case there was a rearrangement of share holding between the family to avoid disputes. The Hon’ble Madras High Court held that this was not a case of ‘transfer’. Also a reference may be made to the decision of the Hon’ble Apex Court in the case of Kale v. Dy. Director {1976} 3 SCC 119 – family arrangements are governed by a special equity peculiar to themselves and that the Courts should endeavour to enforce such arrangements if made honestly. Also see: Sachin Ambulkar (Bom. HC) – Does NOT amount to transfer and hence not exigible to capital gains – CIT v. Sachin Ambulkar ITXA/6975 of 2010 (decided on 23rd Oct. 2012); R. Nagaraja Rao 352 ITR 565 (Kar.). Ashwani Chopra 352 ITR 620 (P&H.).

2) Relative – Section 2(41) – “relative”, in relation to an individual, means the husband, wife, brother or sister or any lineal ascendant or descendant of that individual.

Explanation, clause (e) of section 56:

For the purposes of this clause, “relative” means—

(i) spouse of the individual;

(ii) brother or sister of the individual;

(iii) brother or sister of the spouse of the individual;

(iv) brother or sister of either of the parents of the individual;

(v) any lineal ascendant or descendant of the individual;

(vi) any lineal ascendant or descendant of the spouse of the individual;

(vii) spouse of the persons referred to in clauses (ii) to (vi)

3) HUF is a relative – Where individual received gift from its HUF – B.Dhanalaxmi ITA/897/Hyd./2012 dated 24th February 2016. Same in Vineet Kumar Bhalodia 140 TTJ (Raj.) 58.

4) Where HUF received gift from an uncle of its Karta – Harshadbhai Dahayabhai Vaidya HUF – 155 TTJ (Ahmd.) 71.

TRUSTS

1) For income tax purposes a private trust is treated as individual

Since the trusts represents individual(s), tax is to be levied & recovered from the representative, in the like manner & to the same extent as it would be leviable upon & recoverable from the person represented – Arundhati Balkrishna 177 ITR 275 (SC). There should be as many assessments as the no. beneficiaries – CWT v. Trustees of H.E.H. Nizam’s Family Trust 108 ITR 555 (SC).

2) As a corollary, a trust is entitled to the benefit of Sec.54- Amy Cama 237 ITR 82 (Bom.). Similarly, advance tax paid by the beneficiaries should be set off against the trustee –Trustees of Late Sir R.J. Vakil 33 ITR 517 (Bom.).

3) The underlying principle is that the object of the scheme of taxing a representative assessee is that the state should be able to secure a proportion of profits & this purpose is served by taxing them wherever they are found. – Executors of the Estate of K. Dubash 19 ITR 182 (SC).

4) Even though, by virtue of s. 166, the Revenue has an option in the case of a discretionary trust either to make an assessment upon the trustees or to make an assessment upon the beneficiaries, both the trustee and the beneficiary cannot be simultaneously taxed in respect of the same income. {See: Jyotendrasinghji v. S.I. Tripathi 201 ITR 611 (SC)}.

5) The Hon’ble Supreme Court has held that Section 166 is clarificatory. It does not empower any assessment or recovery by itself. It only makes it clear that Sections 160 – 165 do not bar the direct assessment of the person on whose behalf or for whose benefit the income is receivable or the recovery from such person of the tax payable thereon, provided that is permissible under any other provisions of the Act. Even so, since the word used in Section 166 is ‘receivable’, it cannot apply to a discretionary trust, for it cannot be said that the income thereon is receivable for one or more beneficiaries, it being left to the discretion of the trustees whether or not the income should be distributed to one or more of the beneficiaries or not at all”. Kamalini Khatau 201 ITR 101 (SC); D.P. Agarwal v. DCIT ITA/4591-4592/Mum./2016 dt. 5th Oct., 2017.

6) Income distributed by a trust settled by employer, to the beneficiaries/employees, does not attract sec. 56(2)(vi) i.e. receipt without consideration – Mrs. Sharon Nayak v. DCIT ITA/1594/Bang./2014. Dt. 27th May 2016. Reference made to CIT v. Managing Trustee, Nagore Dargha 57 ITR 321(SC) wherein it was held that the trust and beneficiaries were not two different entities.

7) CBDT has issued a Circular No.157, dated 26th December, 1974 very dearly states that even though the assessing officer has a discretion under Section 166, the same can be invoked only at the time of raising an initial assessment either by the Trust or the beneficiary and whichever may be beneficial to the Revenue. Having once exercised the option it will not be open to the ITO to assess the same income for the same period in the hands of other persons namely the beneficiary or the trustee.

8) Taxabiility of trust income at maximum marginal rate ITAT Mumbai held in the case of Mahindra & Mahindra Employees Stock Option Trust vs. ADCIT {2015} 128 DTR (Mum.) 49. Relying on the judgment of Bombay Bench of ITAT in the case of Jamsetji Tata Trust v. JDIT (Exemption) 148 ITD 388 it was held that the long term capital gains on shares is chargeable to tax at maximum marginal rate which cannot exceed the rate provided u/s. 112.

[Source : Paper printed in the souvenir of 2 Day National Tax Conference held on 5th & 6th May, 2018 at Indore]

Vide Finance Act, 2017, sub-section (5) has been inserted in section 23 of the Income-tax Act, which reads as under:

“(5) Where the property consisting of any building or land appurtenant thereto is held as stock-in-trade and the property or any part of the property is not let during the whole or any part of the previous year, the annual value of such property or part of the property, for the period up to one year from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority, shall be taken to be nil.”

Section 22 of the Income-tax Act provides for chargeability of income from house property. It provides that annual value of the property owned by an assessee, other than the property occupied for the purpose of any business or profession carried on by the assessee, is chargeable to income-tax under the head “Income from House Property”.

Section 23 of the Income-tax Act provides the determination of annual value of the property which is chargeable as income from house property. Sub-section (1) of section 23 reads as under:

“23. (1) For the purposes of section 22, the annual value of any property shall be deemed to be:

(a) the sum for which the property might reasonably be expected to let from year-to-year; or

(b) where the property or any part of the property is let and the actual rent received or receivable by the owner in respect thereof is in excess of the sum referred to in clause (a), the amount so received or receivable; or

(c) where the property or any part of the property is let and was vacant during the whole or any part of the previous year and owing to such vacancy the actual rent received or receivable by the owner in respect thereof is less than the sum referred to in clause (a), the amount so received or receivable”

As a general rule clause (a) of sub-section (1) provides that annual value of the property shall be the same for which the property might reasonably be occupied to let from year-to-year. Clauses (b) and (c) provide for modification in the amount of annual value determined in terms of clause (a). Clause (b) provides that where the actual rent received or receivable is higher, same will be determined to be annual value. Clause (c) provides for where property remains vacant and for that reason the amount of rent received is less than the sum referred in clause (a), such lower amount will be determined to be annual value. There are also certain provisions contained in proviso and explanation to sub-section (1) and also in sub-section (2), (3) and (4) which provide for certain exemption, etc. in determination of annual value in terms of sub-section (1). Same, however, are not relevant for the issue under consideration and, therefore, are not being discussed herein.

As stated hereinabove vide Finance Act, 2017, sub-section (5) has been inserted in section 23 to provide that for a period of one year from end of the financial year in which completion certificate has been obtained, the annual value of the property, which is held as stock-in-trade shall be determined to be nil. Provisions of sub-section (5) as inserted in the section, envisage that annual value in respect of property held by a builder as stock-in-trade, is subject to taxability on notional basis in terms of sub-section (1) of section 23 of Income-tax Act. Till the stage of completion of a property, income is not chargeable to tax for the reason that the property can neither be occupied nor can be let out and, therefore, even on notional basis income from there is not chargeable under the head “Income from House Property”. As and when the property is ready for occupation and completion certificate has been obtained, income becomes chargeable to tax in terms of section 23 of Income-tax Act. In case of builders, however, the property is constructed / developed by them for the purpose of sale. The property is held as stock in trade. The property is sold by the builders either before completion of property or after completion of property as and when the buyers are available for the property. Income from the business of building construction is chargeable under the head “Profit from Business or Profession”. Since the builder does not have an intention to let out the property and its purpose of holding the property is to sell the same, it has never been considered, even by the department that income from the property held by a builder as stock-in-trade is chargeable to tax on notional basis in terms of section 23 of Income-tax Act. In case the property held by a builder, may be in the nature of stock in trade, has actually been let out, the issue has been for consideration whether such actual income derived by a builder on letting out the property is chargeable to tax under the head “Income from house property”, or under the head “Profits of business or Profession”. The courts from time-to-time have taken a view in one way or other. This, however, has not been an issue generally that income is chargeable on notional basis. The issue regarding chargeability of income on notional basis had come up for consideration before High Court of Delhi in the case of Commissioner of Income-tax v. Ansal Housing Finance and Leasing Co. Ltd. and Ors (2013) 354 ITR 180. The facts in the aforesaid case have been that the assessee company was engaged in the business of development of Mini Township, construction of house property, commercial and shop complexes, etc. The Assessing Officer while passing the order of assessment for the relevant year assessed the annual letting value of the flats which the assessee had constructed, but were lying unsold under the head “Income from House Property”. The assessee had contended that such flats were its stock-in-trade and, therefore, the annual letting value of the flats could not be brought to tax under the head “income from house property”. CIT(A) deleted the addition. Tribunal also confirmed the order of CIT(A) in appeal filed by the Revenue. In appeal filed by the department before the Hon’ble Delhi High Court, the Hon’ble Court uphold the taxability of income on notional basis after discussing the case law in regard to taxability of income from house property whether chargeable under the head “Income from House Property” or as “Business Income”. During the course of arguments the contentions were raised before the Hon’ble Court that since flats were held as part of inventory and same were not meant for let out, no income was chargeable on notional basis. It was also contended that the property should be deemed to have been occupied for the purpose of business and, therefore, same is not chargeable under the head “Income from House Property”. It was also contended that under the Act income cannot be held to be chargeable on notional basis since income tax is leviable on actual income and the method of determination of annual value is only to arrive at a figure on which the income is chargeable. The Hon’ble Court, however, did not agree with the contentions and held that income in this case, like several other cases is chargeable on presumptive basis and annual letting value is taxable regardless of whether actual income is received or not. The Hon’ble Court also did not accept the alternate argument that properties were occupied for the purpose of business. Against the aforesaid decision of Hon’ble Delhi High Court, SLP was file before the Hon’ble Supreme Court. Hon’ble Supreme Court has granted leave and presently the appeal (CA No.727/2013) is pending for adjudication.

In view of aforesaid decision of Delhi High Court holding that income is chargeable in terms of section 23 of the Income-tax Act on notional basis in case of property held by a builder as stock-in-trade, the Government has taken a view that the income is chargeable in such cases in terms of sub-section (c) of section 23 of the Income-tax Act. Since as per the general rule income will be chargeable on notional basis from the date on which completion certificate has been obtained by the builder, with a view to provide relief to the builder for a period of one year, sub-section (5) has been inserted, which provides that for a period of one year from end of the financial year in which completion certificate has been obtained annual value on notional basis in terms of sub-section (1) shall be taken to be nil.

Now the question for consideration is that whether in view of aforesaid decision of Hon’ble Delhi High Court and the implied assumption by the Government that income is chargeable on notional basis in case of builders, the builders have to declare income on notional basis in terms of sub-section (1) of section 23 of the Income-tax Act in respect of all the properties which are held by them as stock-in-trade and meant for sale but have not been actually sold after the expiry of period of one year from the year in which completion certificate is obtained. There are certain issues for consideration in this regard, which are as under:

1. Always in the past, prior to the decision of Hon’ble Delhi High Court in the aforesaid case of Ansal Housing (supra), it was the understanding of the assessees as well as of the Department that income on notional basis is not chargeable in the case of builders in respect of property held by them as stock-in-trade. In the facts of Ansal Housing also, addition made by the Assessing Officer was deleted by CIT(A) and ITAT in view of aforesaid understanding of legal position. Though the Hon’ble Delhi High Court has taken a view that income is chargeable on notional basis matter is still pending for decision before the Hon’ble Supreme Court. Therefore, at present, it cannot be said with certainty that income in case of builders in respect of such properties is chargeable on notional basis in terms of sub-section (1) of section 23 of Income-tax Act and all the builders should include the income on this basis in their returns of income.

2. Though, the Hon’ble Delhi High Court has not accepted the contentions of the assessee in the case of Ansal Housing that income is not chargeable in case of a builder since the property is not meant for letting out and same is held for sale, clause (a) of sub-section (1) of section 23 of Income-tax Act envisages that the property should be in a position to let out and, therefore, it has been provided that annual value is to be taken equivalent to the sum for which the property might reasonably be expected to be let out. The use of the words “expected to be let out” would mean that the property should be meant for let out or it can be let out. In case of a builder, the property is not meant for let out and since his intention is to sell the property he cannot let out the property otherwise it will be difficult for him to sell the property for which he had constructed the same. Therefore, it cannot be said that such case is covered in clause (a) of sub-section (1) of section 23 of the Act. In case clause (a) is not applicable, income will not be chargeable to tax on notional basis.

3. As per clause (c) of sub-section (1) of section 23 of Income-tax Act in a case where property is let out or meant for let out but same remains vacant, the rental value on notional basis is not to be considered as income for the period during which the property had remained vacant. In view of above clause it can be contended that if it is said that property can be let out by the builder since the property remains vacant, no income should be chargeable to tax for the reason that property has remained vacant and, therefore, no income will be chargeable in terms of clause (c) of sub-section (1) of section 23 of the Act.

4. Again it is stated that though the Hon’ble Delhi High Court has not accepted the contentions of the assessee in the case of Ansal Housing and has held that income of builders can be taken on notional basis, it is stated that as per the scheme of Income-tax Act, what is chargeable to tax is the income. Notional basis has been provided for in the Act only with a view to determine actual income on a presumptive basis. In case the property held by a builder as stock-in-trade, there is no question of rental income since the property is meant for sale and profit earned by the builder on sale of the property is chargeable under the head “Profit for Business”. Further, even in the cases where the property has actually been let out by the builder, the only issue has been for consideration before the courts whether actual income earned by the builder is chargeable under the head “Income from House Property” or under the head “Profits or Gains from business or Profession”. It has never been an issue that income is chargeable in case of builder in respect of such properties on notional basis in terms of section 23(1) of the Income-tax Act.

5. Lastly, the issue is also for consideration whether a builder should include the income on notional basis in the return of income to be filed for Assessment Year 2018-19 since the provisions of sub-section (5) have been inserted vide Finance Act, 2017 w.e.f. 1-4-2018. In this regard, it is stated that sub-section (5) only provides for exemption from chargeability of the income in respect of property for a period of one year from end of financial year in which completion certificate has been obtained. Since there is no amendment in sub-section (1) of section 23 of the Act, the legal position continues to be same as has been prior to A.Y. 2018-19. Therefore, it cannot be said that in view of the amendment a builder has become liable to disclose income on notional basis in the return of income to be filed for A.Y. 2018-19. In case the income is taxable on notional basis it has been taxable in all the years even prior to A.Y. 2018-19. Since Department has not taken such view in most of the cases while completing the assessment for earlier years and there is no specific amendment in sub-section (1) of section 23 of Income-tax Act, income is not chargeable on notional basis, even in respect of A.Y. 2018-19. Hence, income is not required to be included in the return on notional basis by a builder in respect of such properties and same contentions as were available for non-taxability of income on notional basis will continue to be available even in respect of A.Y. 2018-19 onwards.

In view of above legal position, with due respect to decision of Hon’ble Delhi High Court in the case of Ansal Housing, it appears that income in case of builders is not chargeable to tax on notional basis in respect of properties held as stock-in-trade which is meant for sale and has not actually been let out by the builders. This position, however, is subject to decision of Hon’ble Supreme Court in the case of Ansal Housing, which is pending in appeal. In case Hon’ble Supreme Court also upheld the decision of Hon’ble Delhi High Court, it will amount to enunciation of legal position which has all along been existing and in that case all such assessees will be liable to tax on notional basis in respect of properties held by them even as stock-in- trade in all assessment years even prior to A.Y. 2018-19.

V. P. Gupta
Advocate