Shri. K. C. Singhal, former Vice President of the ITAT, has opined that certain provisions in the Finance Bill 2017 are unjustified and have the potential to cause immense hardhip to taxpayers. The learned author has explained with examples as to how the provisions not only defeat the legislative intent but also put onerous burden on the taxpayer. He has urged the Government to reconsider its decision to enact these provisions into law
Finance Bill 2017 contains huge proposals to amend the Income Tax Act 1961 having great impact. Some of the proposals are beneficial to the taxpayers while some of these are to curb the misuse of the existing provisions. Apart from this, certain proposals, in my opinion, need urgent reconsideration by the Government.
Firstly, would refer to the provisions of sub section (5A) of section 45 proposed to be inserted by clause 22 of the Finance Bill 2017. Though the intention of the legislature appears to reduce the genuine hardship of the taxpayer but the manner in which this provision is drafted, in my opinion, would not only defeat the legislative intent but also put onerous burden on the taxpayer. Thus, in order to understand the scope of proposed sub section (5A), it would be appropriate to reproduce the relevant portion of the said subsection as under:–
(5A) Notwithstanding anything contained in sub-section (1), where the capital gain arises to an assessee, being an individual or a Hindu undivided family, from the transfer of a capital asset, being land or building or both, under a specified agreement, the capital gains shall be chargeable to income-tax as income of the previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority; and for the purposes of section 48, the stamp duty value, on the date of issue of the said certificate, of his share, being land or building or both in the project, as increased by the consideration received in cash, if any, shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset:
Provided that the provisions of this sub-section shall not apply where the assessee transfers his share in the project on or before the date of issue of said certificate of completion, and the capital gains shall be deemed to be the income of the previous year in which such transfer takes place and the provisions of this Act, other than the provisions of this sub-section, shall apply for the purpose of determination of full value of consideration received or accruing as a result of such transfer.
The moot question is what is meant by the expression “of his share” mentioned in the main provisions of this sub section. Whether it includes the built up portion of his share excluding the land OR the entire share in the project including portion of land and building? The literal construction, in my opinion, would mean the entire share in the project including portion of land and building. If so construed, it will lead to more hardship than under the existing law in as much as the portion of land retained with the owner cannot be said to have been transferred.
Let me explain through example—
Example-1: A is the owner of land who agrees to transfer the possession of land to a developer to develop the same by leveling, providing roads, laying of water & sewerage pipelines, erecting electric poles and transmission lines as well as converting the land in to residential plots of various sizes. Under the terms of the registered agreement, the owner of the land will get 70% of the plots while the remaining 30% will go the developer. In such a scenario, as per the new provisions, stamp duty value of 70% of plots will be treated as full value of consideration received u/s 48 instead of 30% of plots actually transferred to the developer. By any logic, no person can be taxed on the income arising from the deemed consideration relating to property retained by him since u/s 45, tax is to levied only on the income arising property transferred and not from property retained with the transferor.
Example-2: A is the owner of land of 500 sq yard in Mumbai on which a small residential house is built in which the owner resides. Suppose, an agreement is executed between him and the developer under which developer is required to demolish the existing structure and construct 5 storied building thereon and out of the said building, 3 stories would be given to the land owner and remaining top 2 stories would go to the developer. Under such agreements, the corresponding share in land also gets transferred to the parties. Hence, in such cases, the land owner will retain 3 stories of building along with 3/5th share in the land while the developer will get ownership rights in 2 stories of building along with 2/5th share in the land . In such case, as per the proposed provisions, the land owner shall be taxed on the income arising from the deemed consideration relating to 3/5th share even though 2/5th share is actually transferred to the developer. Such conclusion will be illogical and against the legislative intent since no income can be said to arise from the portion of land which continue to remain with the land owner.
Under the existing law, it is cost of development incurred by the developer which can be considered as full consideration of the portion of land which gets transferred under the agreement from the land owner to the developer. If the intention of the legislature is to reduce the hardship then the value of land remaining with the land owner must be excluded while determining the full value of the consideration u/s 48.
Hope, that suitable amendment/ clarification is made in the proposed legislation before it is made the law of land.
Another proposal in Finance bill 2017 which requires reconsideration is the amendment of existing provisions of section 10(38) of the Act by clause 6 of the proposed Bill by inserting a proviso to the above section which reads as under:-
“Provided also that nothing contained in this clause shall apply to any income arising from the transfer of a long-term capital asset, being an equity share in a company, if the transaction of acquisition, other than the acquisition notified by the Central Government in this behalf, of such equity share is entered into on or after the 1st day of October, 2004 and such transaction is not chargeable to securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004.”
The existing provision provides exemption to the income by way of capital gain arising from the transfer of long term capital asset being an equity share in a company subject to the conditions that (i) sale of such share is effected on or after 1.10.2004 and (ii) such transaction is chargeable to security transaction tax (STT). As such, if the shares purchased off market without paying STT on or after 1.10.2004 and sold thereafter through stock exchange after paying STT, the profit arising from sale of shares (being long term) was exempt from income tax. Even such shares sold upto March 2017 will continue to be exempt from income tax.
However, as per the proposed amendment, such exemption would not be available if shares purchased off market on or after 1.10.2004 but on or before 31.3.2017 without paying STT and sold on or after 1.4.2017. In my opinion, it would be illogical by any standard to deny exemption on sale of shares which were purchased off market on or after 1.10.2004 but on or before 31.3.2017 without paying STT even though profit on sale of such shares prior to 1.4.2017 is not chargeable to income tax as per the existing law.
The memorandum to the proposed Bill says that such exemption was being misused by certain persons for declaring their unaccounted income by entering into sham transactions. This statement itself shows that all the transactions entered into on or after 1.10.2004 but on or before 31.3.2017 are not sham. In other words, the taxpayers, who made genuine purchases made after 1.10.2004, will be subjected to severe hardships since the existing provisions promised exemption from tax. If the proposed amendment is allowed to become law, it would be opposed to the principle of promissory estoppel.
In fact, the income tax deptt. had been denying exemption in the past where investigation revealed that transactions of purchase and sale were sham. There is no logic to assume that all the transactions of purchase were sham. It would also be illogical to visualize the scenario that profits on sale of shares acquired before 1.10.2004 would continue to be exempt while profit on sale of shares acquired after such date without STT would be denied exemption particularly when such transactions were not illegal.
Therefore, in my view, there is no need to insert such proviso since deptt can always deny exemption in case of sham transactions. Alternatively, the proviso should be made applicable to future transactions of purchase and sale i.e. effective after 31.3.2017.
The next proposal which needs reconsideration is insertion of new section234F which mandates payment of fees in case where return is filed after the prescribed date due u/s 139. It provides that fee of Rs.5000/- to be paid where return is filed after due date but by 31st December of the assessment year and Rs.10,000/- if return is filed after this date. However, where total income does not exceed five lakh rupees, such fee would not exceed one thousand rupees.
Under the existing law, no such fee is payable. In case return is filled after the end of assessment year, penalty not exceeding five thousand is leviable in the absence of reasonable cause (section 271F).
In my opinion, such levy is unreasonable for the reasons—
(i) Under the general law, the fee is leviable for the services rendered while the tax is leviable compulsorily. On the other hand, penalty is leviable for contravention of law. Since no service is involved, the levy of fee is unlawful;
(ii) In case of delay in filing return, the assessee is bound to pay interest for such delay and the govt. is compensated on that account and thus there is no loss to the exchequer;
(iii) Even where the assessee has paid excess tax by way of advance tax or TDS, he will have to pay fees despite there may be some reasonable cause for such delay;
(iv) There is no provision to take care of reasonable cause for delay on the part of assessee;
(v) The existing law is sufficient to care of such situation.
In view of the above, it is hoped that Central Govt. will consider sympathetically and take the corrective measures.
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Singhal Sahab very interesting article and good views but the position yet not clear what the intention of the Legislature behind the introduction of section 45(5A). No doubt one fact that is clear about the period of taxability in such collaboration development cases. The second thing which about the computation of consideration value not clear as it was in earlier that if land owner entered in an agreement with developers for developing the land in flats and in consideration of cost of development the land transfer undivided share in land and part of the flats out of total constructed flats. In such case the construction cost of flats acquired by the land owner from developers and cash consideration if any would be the consideration value of transfer of share in land to the developers or his agents. But now it is not clear which share (being land or building or both in the project) stamp duty value would be taken for computing the consideration. Whether it would be the cost of his share construction received from developers or tranfer of his undivided share in land to developers or both or the stamp duty value of constructed portion taken by the developers with share in land or otherwise.
In my opinion either the cost of the construction received (stamp duty value or actual cost incurred which ever is higher)by the land owner plus cash consideration if any or the stamp duty value of his undivided share transfer in land to the developers. Because, what the land owner has transferred is the share of land in consideration of construction of flats received only nothing otherwise.
Refer: Mohinder Kaur Josh Vs ITO, ITAT Amritsar and CIT Vs Gita Duggal, Delhi HC.
An UPDATE
https://www.linkedin.com/pulse/2017-budget-amendment-sec-55-swaminathan-venkataraman
Dear Sir/s
Finance Bill 2017 Praposal….. regarding un paid STT, at the time of getting the shares will be the cause of rejection of capital gains….will create a mess and this pre-facto praposed law will crash the besic concept of LTCG specialy in the case of IPO…Bonous…Rights….ESOPs….and for those who purchased the shares without involving STOCK EXCHANGE….on other hand I have in my memory that when Mr. CHIDAMBARAM introdused these STT exemption in parliament….very precicly he repeted that it will applicable only when these shares will be sold only through recognised STOCK EXCHANGES….here it’s also very important that the STT is only chargeble through stock exchanges.. and any legal off transfer of shares can not be backed by paid STT because there was no means to pay STT other than exchange by a honest tax payer and he was not in anticipation that his those LTCG which is exmpted up to 31/03/2017…. will be taxed after 31/03/2017 because he had not paid STT in this presumption that after more than a decade a baseless rule will come and will ruin his or her dreames with free LTCG.
In extracting money from the citizens in the shape of fees, penalties, interest and mistakes due to misintrepretation of complicated rules,the government of Arun Jaitley (AJ) has surpassed the historical rule of Auranjeb(AJ). Three cheers.
Dear Sir
The amendment by way introduction of penalty will also cause undue hardship on the assessee’s whose total income consists of contract or sub-contract work or professionals who donot fall within the tax audit but their principal or to whom the services rendered are subjected to audit under the provisions of Income -tax Act, 1961. I wish to bring the amendment to provisions of remittance of TDS under chapter XVII B is allowed upto the date filing return of income for those who are liable to deduct TDS.
These contractors or sub-contractors or professionals who have to file their return by July have to necessarily wait till September for their TDS Certificates and if such delay of the principal will cause them to pay the penalty under section 234F compulsorily.
As regards the proposed insertion under section 45 i.e. sub-section 5A, the legislators have to step into the shoes of a common man and understand the implications of this insertion. As rightly pointed out by the author the valuation of the project is a ambiguous terminology and require a clarity. The word “his share” will always mean in totality rather than the value addition to the property under the agreement. Thus there will be a levy of tax on one’s own property without factual transfer effected except the development. The creation of new property in the form of building should be put in place as “his share of value addition through improvement to the property retained by him” and will lead to proper taxing of the income. Otherwise this will only lead to unwanted litigation causing more nuisances over this insertion of provision.
Deleting section 10(17) which provided exemption to salaries and allowances of MPs/MLAs/Judges of High Courts & Supreme Courts is essential to bring the law in confirmity with constitutional principle of equality. That is to say this provision is ultra-vires the constitution.
yes CA M R Hundiwala . The words his share in the project is important and when the land is transfered in pursuance of development agreement, capital gain arises but postponed till the time of receiving certficate.
There could be a little bit of misunderstanding about of the proposed sub sec. 5A of sec. 45 by the learned Writer. As I understand , The new provision is applicable only to those cases where there is sharing of construction (that would be built under the Development Agreement ) between the land owner and the builder. This could be fortified from the fact that the words used in section are “Project”, “develop a real estate” ( refer specified agreement ) and “competent authority” ( refer explanation ……. an authority empowered to approve building plan ). Thus agreements to develop mere plotting are not covered in my opinion. So far as “his share” is concerned, after development of project, the land looses it’s independent identity and the owner gets “his share” in the constructed property, hence the deemed value of “his share” is brought to tax along with cash consideration , if any. By introducing this provision, great relief would be provided from the mischief played under the garb of 2(47)(v) and decision of Chaturbhuj Dwarkadas.
There are other provisions which need to be incorporated such as:
a) Deleting section 10(17) which provided exemption to salaries and allowances of MPs/MLAs/Judges of High Courts & Supreme Courts. If this lot of people are children of a bigger god then the entire nation is not the child of a lesser god who pays taxes. This lot of people call themselves as ” janta ka sevak”, and if this is true then why do they need salaries and if they require salaries, then they should also contribute to the nation building and welfare. They themselves are the employees and their masters too and when it comes to increase of salaries, they all unite despite their differences and this proposal gets a priority,
Sir,the unlimited powers to A O such as, not to record satisfaction,not to provide reasons for action,pre attachment to protect revenue,to open assessments for more than six years etc under survey of search are nothing but the TAX TERRIRISON. How to deal ?????????
The transfer of capital asset of HIS SHARE only. So there is capital gain on HIS SHARE transfered and not retained.
other immoral amendment is deleting of section 197(c) of the Finance Act, 2016 (IDS), w e f 01-06-2016, After the insertion of the said clause there were two FAQs issued where it was stated that the department has powers to reopen any of the past years under the said section and in FAQ it was illustrated that even AY 2001-02 can also be reopened and it was explained that it will override section 148 of the I T Act as IDS is later statue. Based on this clarifications many people have honestly declared income for earlier years. And now the Government is deleting this provision. Why it was not thought of at the time of issuing FAQs? what about those declraent who have in good faith declared for past years (which had other wise became time barred). In all fairness the Government should refund an amount already paid by these declarents for these years and instruct further that remaining insttalments for these years may not be paid. It is requested that these honest declarents should be protected as they acted on the basis of FAQs and now the law is reversed.
Less than a fortnight after the historic merger of the Rail Budget with the Union Budget, the Railways and Finance Ministries are not seeing eye-to-eye on some critical issues, including finance
To supplement:
Another Budget proposal, which happens to have been misconstrued and consequently given rise to controversies of a serious nature , in certain closed quarters,-besides in the print media, also in a professional’s write-up – is the amendment of section 48 to “replace the reference of 1st day of April, 1981 with the 1st day of April, 2001” and certain other amendments of sec 55. For more, reference be made to the related Posts on Facebook and Linkedin; for instance, the comment recently posted wrt – https://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=7277
As suggested,the amended wording in sec 55 needs to be reviewed and modified,suitably,forthwith; so as to bring about clarity, thereby nip in the bud any scope for dispute even at this stage.
By the way, personally, fail to see /reason out,- rather been wondering,- why at all any such change of base year to 2001-02 /the amendments were considered necessary hence proposed!
(Open to be enlightened, by experts of eminence at large, if there be scope for a different perspective !)
As regards Author’s comments on Proviso to sub-section (5A) i.e. proposed to be inserted in section 45, it merely states that deferment of tax proposed in new Bill will NOT apply if the share (70% as per example taken) is itself transferred by the land owner. In such as case the existing law will apply to the share so transferred. There is no proposal to tax any deemed income as apprehended in the article. Learned Author is requested to reconsider and clarify.
Sir,
The learned author has correctly interpreted the amendment. Please refer to clause 25 of FB. A new sub-section (7) is inserted in section 49.
“(7) Where the capital gain arises from the transfer of a capital asset, being share in the project,
in the form of land or building or both, referred to in sub-section (5A) of section 45, not being the
capital asset referred to in the proviso to the said sub-section, the cost of acquisition of such asset, shall be the amount which is deemed as full value of consideration in that sub-section.’”