Query No. 1: (Fair Market Value of flat on surrender of tenancy right to be taken)
An old lady was residing at Malad in tenanted chawl having about 1000 sq. ft. area. After her death her daughter-in-law became successor and continued to live there.
Subsequently the building was re-developed and she was allotted two flats of 650 sq. ft. each in her name in exchange of surrender of tenancy right. Out of which one was sold by her at an handsome price.
Now the ITO wants to tax the whole sum as long term capital gain without allowing any deduction as purchase value or cost price plus index cost.
Kindly advice whether the AO is correct?
Answer
The Finance Act, 1994 has amended the provisions relating to capital gains for the purpose of taxing the capital gains arising from transfer of tenancy right. For this purpose, the amendment provides that the cost of acquisition of the tenancy right be taken at NIL.
From the facts, it is clear by surrendering the tenancy right, the lady got in exchange two flats. So on surrender of tenancy right the cost of tenancy right was Nil. But, here the consideration for surrender of tenancy right was in – kind i.e. by way of exchange of two flats. Therefore, the fair market value of the property exchanged to be ascertained in order to arrive at the figure of consideration as per the Bombay High Court in Baijunath Chaturbhuj v. CIT [31 ITR 643].
Out of the two flats received, the lady sold one flat at handsome price. So for purpose of calculation the capital gains the index cost of this sold flat has to be ascertained and deducted. The flat being long-term, the index cost has to be worked out on the basis of fair market value of the flat in exchange of tenancy right at the date of surrender. Therefore, the view of the AO is not correct.
Query No. 2 (Amount deposited in bank)
In the new ITR forms provision has been made to mention aggregate amounts deposited in the banks during November 9, 2016 to December 30, 2016:
1. Whether only deposits of specified bank notes (SBN) or all types of notes has to be mentioned?
2. Whether aggregate of deposits in all bank accounts or in a single bank account i.e. ₹ 2/- lakh and above.
Answer
In ITR, details of all bank accounts held in India at any time during the previous year (excluding dormant accounts) are to be given, wherein details in respect of cash deposited during November 9, 2016 to December 31, 2016 of aggregate cash deposits during the period ₹ 2/- lakh or more is required to be given.
Thus the details are not restricted to specified bank notes (SBN), but it covers all types of notes.
Further aggregate cash deposited during that period is to be given in all bank accounts.
Query No. 3: (Violation of principles of Natural Justice)
When a closely held company receives share application money with premium in A.Ys. 2009-10, 2010-11 & 2011-12, he files Form 2, confirmation, address, PAN, bank account details etc during the course of assessment. AO doubts the capacity of share applicants and adds back u/s. 68 based on statement recorded of accommodation entry provider to share applicants. Assessee company asked for a copy of statement recorded and cross examination of entry provider, which was not provided by the AO. Please also refer proviso to section 68. Is the assessment valid.
Answer
Assessment is not valid, as it violates the principles of natural justice. The Supreme Court in R. B. Shreeram Durga Prasad v. Settlement Commission [176 ITR 169] has held that the order made in violation of principles of natural justice is void and nullify.
The Supreme Court in CIT v. Lovely Exports (P) Ltd. [216 ITR 195] has held that if share application money is received by the assessee company from alleged bogus shareholders, whose names are given to Assessing Officer, then Department is free to proceed to reopen their individual assessments in accordance with law but this amount of share money cannot be regarded as undisclosed income under section 68 of the assessee–company.
Provisos to section 68 was inserted by the Finance Act, 2012 w.e.f. April 1, 2013 i.e. from assessment year 2013-14 and therefore the provisos are not applicable to earlier assessment years.
Query No. 4 (Chargeability of share application money)
Share application money which is taxed as Undisclosed in the hands of a private company can also be taxed as undisclosed income in the hands of applicants by issuing notice u/s. 148?.
Answer
The broad scheme of the Act is to charge all income to tax but only in the hands of the same person.
So share application money received by Private Limited Company has to be taxed in whose hands? The Supreme Court in CIT v. Steller Investment Ltd. [251 ITR 263] has given answer by stating that even if it be assumed that the subscribers to the increased capital are not genuine, under no circumstances could the amount of share capital be regarded as undisclosed income in the hands of the company.
Thereafter, the Supreme Court in CIT v. Lovely Exports (P) Ltd. [216 CTR 195] has held that, if share application money is received by assessee – company from alleged bogus shareholders, whose names are given to Assessing Officer, then Department is free to proceed to reopen their individual assessment in accordance with law but this amount of share money cannot be regarded as undisclosed income under section 68 of assessee-company.
However, from the facts, it is clear that it has been wrongly taxed in the hands of the company instead of in the hands of applicant shareholders. Therefore, Assessing Officer can tax undisclosed income in the hands of applicant shareholders by reopening the assessment as per law.
At this juncture, it is necessary to refer the judgement of the Supreme Court in ITO v. Ch. Atchaiah [218 ITR 239], wherein the Hon’ble Court has observed that “where a person is taxed wrongfully, he is no doubt entitled to be relieved in accordance with law but that is different matter altogether. The person lawfully liable to be taxed can claim no immunity because the Assessing Officer has taxed the said income in the hands of another person contrary to law”.
Query No. 5: (Rectification on cash transaction)
If an invoice of ₹ 5,00,000/- of jewellery is adjusted by exchange of old gold worth of ₹ 3,00,000/- and balance ₹ 2,00,000/- is paid off in cash is hit by section 269ST?
Answer
Section 269 ST is inserted by the Finance Act, 2017 w.e.f. April 1, 2017 i.e. effective from Assessment Year 2017-18.
The object for introducing this provision has been explained in the Memorandum Explaining the Provisions relating to Direct Taxes. The Memorandum states that in India, the quantum of domestic black money is huge which adversely affects the revenue of the Government creating resource crunch for its various welfare programmes. Black money is generally transacted in cash and large amount of unaccounted wealth is stored and used in form of cash.
In order to achieve the mission of the Government to move towards a less cash economy, to reduce generation and circulation of black money inserted section 269ST in the Act to provide that no person shall receive an amount of two lakh rupees or more –
a) In aggregate from a person in a day; or
b) In respect of single transaction; or
c) In respect of transactions relating to one event or occasion from a person
Otherwise than by an account payee cheque or an account payee bank draft or use of electronic clearing through a bank account.
Thus, from reading the fact it is clear that jewellery worth of ₹ 5,00,000/- is adjusted by exchange of old gold worth of ₹ 3,00,000/- and balance ₹ 2,00,000/- has been paid by cash. Thus the provisions of section 269ST are clearly applicable.
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