CA H. N. Motiwalla

Query No. 1:

If an assessee has sold a depreciable asset which was held for more than 3 years, the resultant gain has to be assessed as LTCG as held in Smita Conducters Ltd v. Dy. CIT (2015) 152 ITD 417 (Mum.)(Trib.) and other judgements. However, it appears that the Form prescribed for filing the Income Tax Return does not permit the gain to be offered as a LTCG. If the gain is not shown as STCG, the Form will not validate and the return cannot be filed. What is the remedy ? How to fill the return form ?

Answer

This view has been confirmed by the Supreme Court in CIT v. V. S. Dempo Company Ltd [(2016) 387 ITR 354]. Wherein the Supreme Court has approved the judgement of the Bombay High Court in CIT v. ACE Builders Pvt. Ltd. [(2006) 281 ITR 598]. In the aforesaid judgement the Bombay High Court has observed:

“In our opinion, the assessee can not be denied exemption under section 54E, because, firstly, there is nothing in section 50 to suggest that the fiction created sub section 50 is not only restricted to sections 48 and 49 but also applied to other provisions” On the contrary sub section 50 makes it explicitly clear that the deemed fiction created in sub sections (1) and (2) of section 50 is restricted only to the mode of computing capital gains contained in section 48 and 49. Secondly, it is well established in law that a fiction created by the Legislature has to be confined to the purpose for which it is created. In this connection, we may refer to the decision of Apex Court in the case of State Bank of India v. D. Hanumatha Rao (1998) 6 SCC 183. In that case, the service rule framed by the bank for providing for granting extension of service to those appointed prior to July 19,1969. The respondent who has jointed the bank in July 01,1972 claimed extension of service because he was deemed to be appointed in the bank with effect from October 26,1965. For the purpose of seniority, pay and pension on account of his past service in the army as short service commissioned Officer. In that context, the Apex Court has held that the legal fiction created for the limited purpose of seniority pay and pension cannot be extended for other purpose. Applying the ratio of this judgement, we are of the opinion, that the fiction created under section 50 is confined to the computation of capital gains only and can not be extended beyond that. Thirdly, section 54E does not make any distinction between depreciable asset and non depreciable asset and therefore, the exemption available to the depreciable asset under section 54E cannot be denied by referring to fiction created under section 50. Section 54E specifically provides that where capital gains arising on transfer of a long term capital asset is invested or deposited (whole or any part of the net consideration) in the specified assets, the assessee shall not be charged to capital gains. Therefore, the exemption under section 54E of the Income tax Act can not be denied to the assessee on account of fiction created in section 50”.

No software provides for such situation, however we can work out as under :

Now, for this purpose in the return of income under the column “Deprecation as per Income tax Act” WDV is to be shown as sale value. So short term capital gain would be Nil. Then under the column “Long Term Capital Gain” in other asset, full consideration is to shown and cost of asset is to be shown as WDV. So long term gain would be calculated.

Query No. 2: (Old Regime to New Regime switchover for asst. yr. 2023/24)

The original return was filed under old regime within the timeline of Sec 139(1). The revised return was filed with substantial increase in income under new regime. The intimation was processed under old regime with consequential demand. Is there any way out please.

Answer

Section 115BAA applied to tax on income of certain domestic companies. While section 115BCA applies to tax on income of individuals and Hindu Undivided Family

Sub section (5) of section 115BCA reads as under:

“Nothing contained in this section shall apply unless option is exercised in the prescribed manner by the person –

1. having income from business or profession, on or before the due date specified under sub section (1) of section 139 for furnishing the return of income for any previous year relevant to the assessment year commencing on or after the 1st day of April,2021 and such option once exercised shall apply to subsequent assessment years,
2. having income other than the income referred to in clause (i) along with the return of income to be furnished under sub section (1) of section 139 for a previous year relevant to the assessment year.

Provided that the option under clause (i) once exercised for any previous year can be withdrawn only once for a previous year other than the year in which it was exercised and thereafter, the person shall never be eligible to exercise option under this section, except where such person ceases to have any income from business or profession in which case, option under clause (ii) shall be available.

Sub section (5) of section 115 BAA provides similarly.

So, it is clear that the return of income in new regime has to be filed on or before “due date” of filing the return of income under section 139(1). Thus, it not clear from the question, how he can shift to the new regime..

In fact, the assessee has filed the return under old regime within the timeline of section 139(1). Now, he can file revised return under section 139(5) before three months prior to the end of the relevant assessment year or before the completion of assessment, whichever is earlier, under the old regime. At this juncture he can not shift to new regime because under new regime, he has to file return of income under sector 139 (1) alongwith form No. 10-IC or 10- IE according to the status of the assessee.

Therefore, intimation was correctly processed under the old regime ignoring the return filed in new regime.

Query No. 3:

Can a private limited company issue shares to a founder at NAV method or at face value if the company has already raised substantial amount of money and has a 250 times valuation compared to the NAV? Can the company do rights issue and allot shares to promoter? Such shares are given as a compensation to her commitment.

Answer

A Private Ltd can make initial issue to promoters at face value. Later on, when company create genuine reserve out of profit, it can issue share to promotes as well as members to its Net Asset Value (NAV) method. Net Asset Value method has been prescribed by Rule 11UA of the Income tax Rules 1962.

Last part of the query is not clear. However, if shares are issued to the promoters or members free or less than Fair Market Value, then, under section 56(2)(x) of the Income tax Act, the same will be taxable in the hands of the promoters or members

Section 56(2) reads as under:

“In particular, and without prejudice to the generally of the provisions of sub section (1), the following incomes, shall be chargeable to income tax under the head :Income from other sources”, namely –

i.  —–

        ia. —–

(x) Where any person receives, in any previous year, from any person or persons on or after the 1st day of April, 2017

a. —-

b. —–

c. Any property, other than immovable property-

(A) Without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property;

(B) For a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration

Query No. 4:

1. Whether section 9(1)(viii) is applicable for assessment year 2024/25?
2. How the Amendment to section 9(1) dealing with deemed accrual will impact the taxation of any income chargeable on receipt basis?

Answer

Section 9(1)(viii) has been substituted by the Finance Act 2023 w.e.f. April 01, 2024. Which reads as under:

“income arising outside India, being any sum of money referred to in sub clause (xviia) of clause 24 of section 2 paid by a person resident in India-

1. On or after the 5th day of July 2019 to a non resident, not being a company or to a foreign company ; or
2. On or after the 1st day of April 2023 to a person not ordinarily resident in India within the meaning of clause (b) of section 6”

1. Yes, this sub section is applicable from assessment year 2024/25, as it is with effect from April 01,2024. Sub section (9) of section 2 defines “assessment year” which means the period of twelve months commencing on the 1st day of April.
2. Section 9 is deeming provision of the Income shall be deemed to accrue or arise in India. Section 9(1)(viii)(a) to tax gift received by non residents from Indian residents and clause (b) of the said section to tax gift received by “not ordinary resident” from Indian residents.

It covers only receipt of money and not property. It applies to any sum of money paid by a person resident in India to a “non resident” and “not ordinarily resident”

An individual is said to be resident in India in any previous year, if he –

1. Is in India in that year for a period or periods amounting in all to one hundred and eighty two days or more; or
2. ——
3. Having within the four years presiding that year been in India for a period or periods amounting in all to three hundred and sixty five days or more, is in India for a period or periods amounting to all to sixty days or more in that year

An individual would be “not ordinarily resident”, if he fulfils either of the alternative conditions set out below :

1. An individual who has been a non resident in India in nine out of the ten previous year preceding that year; or
2. Has during the seven previous years preceding that year been in India for a period or periods amounting in all to, seven hundred and twenty nine days or less.

The effect of two clauses is that an individual is said to be ordinary resident only when both the following conditions are fulfilled.

1. He has been resident in India in nine out of ten years preceding the year, and
2. He has during the seven years preceding that year been in India for a period of or for periods amounting in all at lease 730 days.

Thus individual is said to be “not ordinary resident” if either of these conditions is not fulfilled.

So the gift received by the “Non Resident” and “Not Ordinary Resident” from “Resident” of India would be liable to tax on the receipt basis.

Query No. 5:

One trust got its mutual fund redeemed and earned Long Term Capital Gain of ₹ 5,50,000/- during the current year. The Trust reinvested the full consideration / proceeds in another Mutual Fund. The Income from Long Term Capital Gain of the Trust is deemed to have been applied for charitable purpose if the whole net consideration is used to acquire new capital asset. Mutual Fund units are capital asset. Hence it should be deemed as utilization and no capital gains liability?

Answer

Yes, the expression ‘Capital asset’ has a wide connotation. Therefore, it includes Mutual Fund, which is not excluded from definition of capital asset. Hence, charitable trust transfers a capital asset and makes a capital gain, such capital gain be deemed to be applied to the purpose of the trust if the proceeds of such transfer are utilized for acquiring a new capital asset for the trust as per section 11 (1A) of the Act.

Query No. 6:

Can a company offer its consultancy income u/s. 44ADA @ 50% of gross receipts. Further can the assessee declare income @ 50% even if the actual profit / earning during the year is higher than 50%.

Answer

Section 44ADA reads as under:

“Notwithstanding anything contained in sections 28 to 43C, in case of an assessee, being an individual or a partnership firm, other than limited liability partnership firm, as defined in clause (n) of sub section (1) of section 2 of the Limited Liability Partnership Act,2008, who is a resident in India and is engaged in a profession referred to in sub section (1) of section 44AA and whose total gross receipts do not exceed fifty lakh rupees in a previous year, a sum equal to fifty percent of the total gross receipts of the assessee in the previous year on account of such profession or, as the case may be, a sum higher than the aforesaid sum claimed to have earned by the assessee, shall be deemed to be the profits and gams of such profession chargeable to tax under the head “Profit and gains of business or profession”

Thus reading the section, it is clear that it applies only to an individual or a partnership firm; other than Limited Liability Partnership as defined under section 2(1)(n) of the Limited Liability Partnership Act, 2008, who is resident in India.

Further, reading the section, it is obvious that if income is more than 50% of the gross receipt than the same has to be offered to tax.