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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