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The provisions of sec. 56(2) are introduced as anti abusive measures to counter evasive mechanism and to prevent laundering of income. Though some AOs wanted to tax the amounts under the circumstances mentioned in the problem, in my personal opinion, it may not get the support of appellate forum as circular no. 5/2005, circular 1/2011 and cir 3/2012 clearly enunciated  the parameters under which these provisions were enacted. To comprehend the provisions correctly, sometimes, the intention of the legislature is also required to be noted. In the given examples, though the incometax AOs wanted to extend their arms to cover the transactions, the intended goal may not be achieved by them, if the real intention behind enacting the provisions are correctly brought out by legal luminaries. Anyhow, let us wait and see how such transactions are treated and how the experts will argue..............................

In my opinion, the Bombay TRibunal has not looked into the logic involved in a proper perspective. If that is correct, then there is no need to bring the amendment in sec. 40a(ia) and sec. 201(1). When the section i.e. 40a(ia) has been introduced, it was stated that only to enforce TDS provisions the said section has been brought into statue. Therefore, a hormonious reading of sections 40a(ia), 201(1)  and 191 is compulsory to understand the implications because they are interdependent on each other. There are numerous instances where higher appellate authorities have reversed the decisions given by lower courts. Of course, I dont say that we need not follow the decision of an high Court or supreme Court. My request is that the sections in Act are logical unless it is a charging section. Normally, they follow logic and made enactments. But in order to get benefit to revenue, this time sec. 201(1A) and 209(1)(d) have been amended without following the logic i.e. date of payment by the deductee and has been enacted till the date of filing return of income. Of course, 201(1A) is also a charging section and therefore, we should not see on logic basis.

Though I have expressed my opinion long back with regard to requirement of an amendment in 40a(ia), somebody in the law makers forum had thought in similar way and in the budget announced today, the amendment is brought in. But when I found that it is applicable with effect from 01.04.2013, I felt a little bit disappointed. Had it been given retrospective effect, it would have been more logical. Thnak God! Atleast now, the amendment has come.

I think I have wrongly quoted the decision in the above mentioned reply. The correct decision is
IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH 'B' SPECIAL BENCH: NEW DELHI
Before Shri. R P Garg, VP, A D Jain and Rajpal Yadav, JM
ITA No. 87/Del/2008
Assessment Year: 2004-05
M/s Cheminvest Ltd
Max House, 1 Dr Jha Marg, New Delhi -
110003
PAN NO: AAACC0912A
ITO, Ward 3(3), New Delhi

which is available on this site also.

With  regards..................................,

though different members have expressed dissent, I have been consistently arguing that though exemtped income is not received in the year, the related expenditure is not allowable. Now this issue has been set at rest by the special bench constituted for this purpose in Bombay, the decision of which is available on Taxindiaonline.com. I hope the discussion will stop here regarding this issue.

in the recently announced budget, there was an amendment proposed with regard to Sec. 50C. only to plug the loopholes and stop the revenue leakeges, it is proposed to extend 50C to the payable transactions. I am not sure whether the said amendment is prospective or retrospective. If  it is retrospective, nobody can save the assessee in the given problem. If it is prospective and proved that the said amendment is not clarificatory in nature then there is a possibility. Look for the exact wording and go ahead cautiously.

may be you are right. Since returns have become annexure less, this section has been incorporated only to call for the documents which are supposed enclosed till the time returns have been made annexureless. In my opinion also, this section doesnot give powers to the IT authorities to call for all the information. Under the guise of this section, if it is permitted to call for any information then there is no need for scrutiny. Thus it is very clear that information what can be called for is only that information which assessee is supposed to file before the return is made annexureless. However, this argument is not accepted by some of the IT authorities and they say that it gives unbridled powers to the IT authorities to call for any sort of information. Even now the IT authorities are not accepting the returns without original TDS certificates. What a common can do in this regard when litigation has become so costly and the higher authorities are not willing to take judicious view considering the merits of the case. Let us all pray the almighty to save the country.

if TDS is deducted, in my opinion, expenses cannot be disallowed. proportinate disallowance is not envisaged in sec 40a(ia). for earlier years it can be argued that the tax liability is already discharged by the deductee. For currrent year the deductee can be convinced and tax can be deducted at the rate of 20% as has been held by the High Court. Any demand u/s 201 raised for current year  cannot be avoided. There is no ground to argue against the said demand. For other earlier years, proportinate disallowance cannot be made u/s 40(ia). Demands u/s 201(1) cannot be raised for ealier years as the deductees must have already discharged their liabiity.

However, the profits earned by the branch are taxable in India also. But the taxes paid outside India will be given credit proportinate to the income offered here in India. Therefore, there is no injustice done in any manner.

There is one more circular with regard to issuance of refund when excess TDS is deducted ie. no. 769. Further, Circular no. 790 is followed by circular no. 7/2007. I think there is a solution to your problem in this circular. If, not this should be brought to the notice of CBDT so that appropriate instructions will be issued.

The situation of the assessee is more pathetic because though the expenditure is disallowed u/s 40a(ia) again the demands are being raised u/s 201(1) & 201(1A). It appears to be more illogical at least to me. As  TDS,  government will get only 10%( maximum rate of TDS) when the relevant expenditure is disallowed it gets 30%. So where is the question of demand u/s 201(1). The government has got more than what it is entitled to( leaving the loss making assessees). When the expenditure is allowed in subsequent years, it only allows the expenditure and there is no provision to allow any interest like 244A. When the government has collected more money then where is the question of charging interest u/s201(1A). Since both these provisions are exist in the statute, the revenue is raising demands even u/s 201(1) & 201(1A). They cannot be blamed for this. Proper representation of the facts should go to the law makers so that they can think about this anomaly.

Sorry, I am unable to accept the earlier argument. In the amendment also, it is clearly mentioned that TDS is deductible in the month of March and deducted then the time allowed to deposit the same is before the due date of filing the return of income. The proviso is meant for allowing the expenditure which is disallowed for the purpose of non deduction of TDS. It doesnot, in any way, communicate the meaning that though TDS is deductible during the months of April to Feb but the same can be deducted only during the month of March in order to get the extended time to deposit the deducted TDS into Governement's kitty. There is every possibility to take above stand by the revenue to disallow the relevant expenditure.

With regards.........................

I think I have communicated my conclusion at the end of my uploading. That is unabsorbed or current depreciation cannot be set off against salaries as per the restriction enacted through 71(2A) of the Act.

I think there is no such provision which allows the exempted loss to be set off against the taxable income. Since from 2001 onwards, Sec 10A has undergone a change and hither to exemption u/s10A has become therefrom  a deduction. However, the intention of legislature is not clear as to why it continues to be in chapter III. But infact it should have been shifted to chapter VIA. As per Sec. 10A(6), the losses incurred by 10A unit can be set off against the taxable income of the assessee.( See 13 sot 470). NOw coming to the problem expressed, only the long term capital gains arisen on account of the transaction made thru recognised stock exchanges are only exempted. In other wards, if the transaction is made outside the stock exchange purview, then it will not be exempted. Therefore, it is always advisable to sell the loss making shares outside the stock exchanges provided the buyer is ready. It really happens. You, still, can convert your demat shares into physical form and transfer the same in the name of the buyer as it was done earlier. If explained, the buyer will also be ready because, there was no STT involved in this transaction and he will not lose anything out of this transaction. Further, the buyer of such shares should sell the said shares through stock exchanges only in order to get exemption/less rate of taxation in respect of the long term/ short term capital gains in order to get the benefit. I think it will solve the problem expressed.

I, personally, cannot subscribe to the argument that depreciation or unabsorbed depreciation can be set off against salary income since it is not covered by sec. 72. Income of the assessees is computed under five heads. needless to mention that depreciation comes under business head. Therefore, depreciation, either current or unabsorbed comes under this head and to that extent loss will be arrived. Section 32 also comes in between  section 30 to 38 thorugh which varisous expenses incurred by the assessee are allowable. Therefore, the depreciation either current or brought forward will be computed under the head business and after arriving at a loss under this head the will go to adjust the income arrived under other heads. Income is to be computed as per the provisions of the act. If sections 70 to 80 are not there in the statute then there is no possibility claiming any set off. Therefore, the income is to be first arrived at under each head and then set off. Therefore, the depreciation cannot be set off against salary. If courts decideds otherway, then it will be accepted.