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Preface

Dear friends

It is a great pleasure in presenting this Summary Book on Direct


Tax Laws & International Taxation CA Final Old and New Syllabus.
This Book is mainly prepared to read the entire syllabus of Direct
Tax Laws & International Taxation one day before the exam. It can
be used by students to revise the subject in very less time.

I am thankful to my friend Prof. S. S. Rajagopal FCA, Grad CMA, for


helping me in compiling this work book.

I wish the students all the best for their future endeavors. Students
can approach me for any queries on the subject at the mail id given
below.

R. Soumyanarayanan FCA, Grad CMA

Chennai,

14/04/2019

EMAIL: krsn5976@yahoo.co.in

reachssr@yahoo.co.in
Direct Tax Laws & International
Taxation
(Summary Book)
Index
S.No Chapter Name Page No
1 Basic concepts 1-6

2 Issues in Salary 7-8

3 Issues in IFHP 9-10

4 Taxation of gifts 11-13

5 Capital gains 14-58

5A Chapter VI A deductions 59-67

5B MAT 68-72

5C Miscellaneous amendments 73-73

6 S. 269SS, S.269T, S. 269ST 74-76

7 Business Trust 77-79

8 Mutual fund 80-81

9 New Pension Scheme 82-82

10 Electoral Trust 83-83

11 Taxation of NRI 84-85

12 Taxation of non-resident sportsmen etc 86-86


13 Taxation of FII 87-87

14 Taxation of overseas financial organization 88-88

15 Assessment of Co-operative society 89-90

16 Taxation of dividend 91-95

17 Assessment of Trust 96-108

18 Assessment of political parties 109-109

19 Clubbing provisions 110-114

20 Assessment procedure 115-151

21 Advance tax Interest under S. 234A, S. 234B and 152-157


S. 234C

22 Refund and interest under S. 244A 158-160

23 Revisionary Powers of CIT 161-164

24 Assessment of AOP & BOI 165-168

25 Assessment of Firm 169-172

26 Investment fund 173-174

27 Securitisation Trust 175-175

28 Collection and recovery 176-182

29 Liabilities in special cases 183-187

30 TDS 188-205

31 TCS 206-210

32 Set off and carry forward of losses 211-215

33 Restriction on carry forward of losses 216-217


34 Tonnage taxation 218-219

35 Settlement commission 220-227

36 Advance Ruling 228-231

37 Appeals 232-238

38 Profit linked deductions and investment linked 239-249


deductions

39 Alternate minimum tax 250-251

40 Double Taxation Avoidance Relief 252-256

41 Transfer pricing 257-272

42 GAAR 273-276

43 Taxation of non-residents 277-300

44 PGBP 301-341

45 Penalty for under-reporting and mis-reporting 342-349

46 Equalisation levy 350-350

47 Statement of financial transaction or reportable 351-352


account
Chapter-1: Basic concepts

1. Tax rates applicable for AY 2019-20:


(a) Individual (not covered by (b) & (c)) /HUF/ AOP & BOI (not covered by S. 167B) and every AJP:
Total income Rate of income-tax
Where the TI does not exceed Rs. 2.50L Nil
Where the TI exceeds Rs. 2,50,000 but does not 5% of the amount by which the TI exceeds Rs. 2,50,000
exceed Rs. 5,00,000
Where the TI exceeds Rs. 5,00,000 but does not Rs. 12,500 plus 20% of the amount by which the TI exceeds
exceed Rs. 10,00,000 Rs. 5,00,000
Where the TI exceeds Rs. 10,00,000 Rs. 1,12,500 plus 30% of the amount by which the TI
exceeds Rs. 10,00,000

Note: AOP/BOI covered by S. 167B shall suffer tax @ MMR (35.88%) / Higher rate / combination thereof.
(b) Senior citizen:
Total income Rate of income-tax
Where the TI does not exceed Rs. 3L Nil
Where the TI exceeds Rs. 3,00,000 but does not 5% of the amount by which the TI exceeds Rs. 3,00,000
exceed Rs. 5,00,000
Where the TI exceeds Rs. 5,00,000 but does not Rs. 10,000 plus 20% of the amount by which the TI exceeds
exceed Rs. 10,00,000 Rs. 5,00,000
Where the TI exceeds Rs. 10,00,000 Rs. 1,10,000 plus 30% of the amount by which the TI
exceeds Rs. 10,00,000
Note: The aforesaid slab rates apply to those resident individuals who attained the age of 60 years on or before 01.04.2019.
[CBDT Circular 28 /2016].

(c) Super-senior citizen:


Total income Rates of income-tax
Where the TI does not exceed Rs. 5L Nil
Where the TI exceeds Rs. 5,00,000 but does not 20% of the amount by which the TI exceeds Rs. 5,00,000
exceed Rs. 10,00,000
Where the TI exceeds Rs. 10,00,000 Rs. 1,00,000 plus 30% of the amount by which the TI
exceeds Rs. 10,00,000
Note: The aforesaid slab rates apply to those resident individuals who attained the age of 80 years on or before 01.04.2019.
[CBDT Circular 28 /2016].

(d) Co-operative society:


Total income Rate of tax
Where the TI does not exceed Rs. 10000 10% of TI
Where the TI exceeds Rs. 10000 but does not Rs. 1000 plus 20% of the amount by which the TI exceeds Rs.
exceed Rs. 20000 10000
Above Rs. 20,000 Rs. 3000 plus 30% of the amount by which the TI exceeds Rs.
20000.

(e) Firm/Indian LLP:


Tax rate is 30% on the whole of the TI of the firm. This would apply to an Indian LLP also.

(f) Local authority:


The rate of tax for a local authority is 30% on the whole of the total income.

(g) Company:
(i) Domestic company whose turnover or gross receipt in the 25% of the TI
PY 16-17 ≤ Rs. 250 Crores
(ii) Any other domestic company 30% of the TI (Subject to S. 115BA)
(iii) Foreign company 40% of the TI

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Chapter-1: Basic concepts

Provisions of S. 115BA:
S. 115BA provides that the income-tax payable in respect of the total income of a domestic company for any PY relevant to
AY 2017-18 and thereafter, shall be computed @ 25% (subject to the other provisions of Chapter XII), at the option of
the company, if:
1 The company has been set up and registered on or after 01.03.2016;
2 The company is not engaged in any business other than the business of manufacture or production of any article or
thing and research in relation to, or distribution of, such article or thing manufactured or produced by it; and
3 The company while computing its TI has not claimed any benefit S. 10AA, S. 32 (1) (iia), S. 32AD, S. 33AB, S. 33ABA,
S. 35 (1) (ii)/(iia)/(iii), S. 35 (2AA), S. 35 (2AB), S. 35AD, S. 35CCC, S. 35CCD, under Chapter VI-A Part-C (other than
S. 80JJAA).
4 The option is exercised in the prescribed manner on or before the due date specified U/s 139 (1) for furnishing the first
of the returns of income which the person is required to furnish under the provisions of the Act.
5 However, once the option has been exercised for any PY, it cannot be subsequently withdrawn for the same or any
other PY.

Applicability of surcharge:
(i) Individual/HUF/AOP/BOI/AJP TI doesn’t exceed Rs. 50L No surcharge
TI exceeds Rs. 50L but doesn’t exceed Rs. Surcharge = 10%
100L
TI exceeds Rs. 100L Surcharge = 15%
(ii) Co-operative society / Local authority / TI doesn’t exceed Rs. 100L No surcharge
Firm / LLP TI exceeds Rs. 100L Surcharge = 12%
(iii) Domestic company TI doesn’t exceed Rs. 100L No surcharge
TI exceeds Rs. 100L but doesn’t exceed Rs. Surcharge = 7%
1000L
TI exceeds Rs. 1000L Surcharge = 12%
(iv) Foreign company TI doesn’t exceed Rs. 100L No surcharge
TI exceeds Rs. 100L but doesn’t exceed Rs. Surcharge = 2%
1000L
TI exceeds Rs. 1000L Surcharge = 5%

Applicability of Health & Education cess (HEC):

(a) Health & Education cess is leviable in case of all assessees (irrespective of the amount of total income)
(b) It shall be quantified by applying 4% on tax plus surcharge.

2. Rebate U/s 87A:


1 Person eligible for rebate Resident individual whose total income does not exceed Rs. 350000.
2 Quantum of rebate Income tax payable or Rs. 2500 (whichever is less)
3 Treatment of rebate It should be reduced against income-tax.

3. Marginal relief:
A. Computation of MR in case of Individual /HUF/AJP/AOP & BOI (not covered by S. 167B):
TI > Rs. 50L but doesn’t exceed Rs. 100L TI > Rs. 100L
1 Tax on TI + surcharge @ 10% ***** 1 Tax on TI + Surcharge @ 15% *****
2 Tax on Rs. 50L (****) 2 Tax on Rs. 100L + Surcharge @ 10% (****)
3 TI – Rs. 50L (****) 3 TI – Rs. 100L (****)
4 Marginal relief (1-2-3) ***** 4 Marginal relief (1-2-3) *****
B. Computation of marginal relief in case of Co-operative society / Local authority / Firm:
1 Tax on TI + surcharge @ 12% *****
2 Tax on Rs. 100L (****)
3 TI – Rs. 100L (****)
4 Marginal relief (1-2-3) *****

C. Computation of marginal relief in case of domestic companies:


TI > Rs. 100L but doesn’t exceed Rs. 1000L TI > Rs. 1000L
1 Tax on TI + surcharge @ 7% ***** 1 Tax on TI + Surcharge @ 12% *****
2 Tax on Rs. 100L (****) 2 Tax on Rs. 1000L + Surcharge @ 7% (****)

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Chapter-1: Basic concepts

3 TI – Rs. 100L (****) 3 TI – Rs. 1000L (****)


4 Marginal relief (1-2-3) ***** 4 Marginal relief (1-2-3) *****

D. Computation of marginal relief in case of foreign companies:


TI > Rs. 100L but doesn’t exceed Rs. 1000L TI > Rs. 1000L
1 Tax on TI + surcharge @ 2% ***** 1 Tax on TI + Surcharge @ 5% *****
2 Tax on Rs. 100L (****) 2 Tax on Rs. 1000L + Surcharge @ 2% (****)
3 TI – Rs. 100L (****) 3 TI – Rs. 1000L (****)
4 Marginal relief (1-2-3) ***** 4 Marginal relief (1-2-3) *****

4. Tax treatment of various receipts:


1 (i) Lottery winnings (ii) horse race winnings (iii) winning Taxable on gross basis U/H IFOS @ 30%. [S. 115BB].
from cross word puzzles (iv) card game winnings (v)
winnings from betting (vi) winnings from gambling (vii)
winnings from game shows etc.
2 Benefit arising on account of cessation or remission of Capital receipt – not income – not taxable. [Mahindra and
non-trading liability. Mahindra (SC)].
3 Benefit arising on account of cessation or remission of Taxable U/H PGBP. [S. 41 (1)].
trading liability.
4 Forfeiture of advance on a/c of failed negotiation Taxable U/H IFOS. [S. 56 (2) (ix)]. [If the date of forfeiture ≥
relating to transfer of a capital asset. 01.04.2014].
Reduced from the COA of the capital asset. [S. 51]. [If the date
of forfeiture < 01.04.2014].
5 (a) Non-compete fees; (b) Fee for exclusivity of rights; Taxable U/H PGBP. [S. 28 (va)].
6 (a) Retrenchment compensation; (b) Voluntary Profit in lieu of salary. [S. 17 (3) (ii)] – Taxable U/H Salary.
retirement compensation;
7 (a) Compensation paid for termination of agency or Taxable U/H PGBP. [S. 28 (ii)].
modification of the terms of agency to the detriment of
the agent; (b) Compensation to managerial personnel
for loss of office
8 Liquidated damages Capital receipt – not income – not taxable. [Saurashtra
Cement & Chemicals Industries Ltd (SC)].
9 Compensation for loss of profit Revenue receipt – income – Taxable. [Shree Dig Vijay
Cement Co. Ltd (Guj)].
10 Realisation from trial run production Capital receipt – Reduced from the cost of the asset. [Food
specialities Ltd (Del)].
11 Incidental receipts arising from the activities directly Capital receipt – Reduced from the cost of construction.
and inextricably linked to construction. [Bokaro steels (P) Ltd (SC)].
12 Revenue receipts arising from the activities which are Taxable. [Tuticorin Alkali Chemicals & Fertilizers Ltd (SC)].
not directly and inextricably linked to construction.
13 Receipts incidental to acquisition of fixed asset Capital receipt – Reduced from the cost of the asset. [Karnal
Co-operative Sugar Mills Ltd (SC)].
14 Key-man insurance policy proceeds Income – taxable in the hands of business man U/H PGBP. [S.
28 (vi)].
If it is received by the keyman, it is taxable U/H Salary (if there
exists employer-employee relationship). [S. 17 (3)]. Otherwise it
is taxable U/H IFOS. [S. 56 (2) (iv)].
15 Gifts covered by S. 56 (2) (x) Income – Taxable.
16 FMV of inventory as on the date on which it is Income – Taxable U/H PGBP. [S. 28 (iva)].
converted into, or treated as a CA, determined in
the prescribed manner.
17 Any compensation or other payment, due to or Income – Taxable U/H IFOS. [S. 56 (2) (xi)].
received by any person, by whatever name called,
in connection with termination of his employment
or the modification of the terms and conditions
relating thereto.
18 Any compensation or other payment due to or Income – Taxable U/H PGBP. [S. 28 (ii) (e)].
received by any person, by whatever name called,
at or in connection with the termination or the

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Chapter-1: Basic concepts

modification of the terms and conditions of any


contract relating to his business.
19 Claim for export incentives Deemed to be the income of the PY in which reasonable
certainty of its realization is achieved. [S. 145B (2)].
Taxable U/H PGBP.
20 Grants or subsidies [ICDS VII] Income.
Recognition cannot be postponed after receipt though
there is no reasonable assurance regarding compliance
with the conditions. [S. 145B (3)].
Exceptions: (a) asset specific subsidies; (b) Corpus subsidy
received from CG by the trusts created by the CG/SG.
21 Subsidy related to depreciable asset (GG-1) Reduced against the cost of the asset. [S. 43 (1) Explanation-
10]
22 Subsidy related to non-depreciable asset (GG-2) Taxed upon receipt (if no conditions attached)
Taxed over the over the same period over which the cost of
meeting the obligation attached to the grant is incurred (if
conditions are attached).
23 Government grants being compensation for expenses Taxed as income in the period in which it is receivable.
or losses incurred in a PY or for the purpose of giving
immediate financial support with no further related
cost. (GG-3)
24 Other government grants. (GG-4) Taxed as income over the periods necessary to match them
with related costs which they are intended to compensate.

25 Tax treatment of refund of GG-1 Increase the actual cost or WDV.


Claim depreciation on the revised actual cost or WDV
prospectively at the prescribed rate.
26 Tax treatment of refund of GG-3 Charge it to the P&L statement.
27 Tax treatment of refund of GG-2 and GG-4 First charge it against the unamortized deferred credit
remaining in respect of the grant.
If the sum refundable exceeds the deferred credit the balance
shall be charged to the P&L Statement.
28 Income from sale of carbon credits Taxable on gross basis @ 10%. [S. 115BBG].

5. Basic principles clarifying the concept of income:


1 Illegal income Also taxable
2 Real income theory Only real income is taxable and not notional or fictional income
3 Application of income Income applied shall not be excluded while computing the taxable income.
4 Diversion of income by over-riding Income over which any person other than the assessee has over-riding title shall
title be excluded while computing the taxable income of the assessee.
5 Surplus reported by mutual ≠ Income.
concern from mutual activities

6. Important rulings in mutuality:


1 Bankipur club (SC) If a club (Non-profit organisation) receives any surplus arising from sale of drinks,
refreshments etc, or amount by way of rent for letting out the building or amount by
way of admission fees, periodical subscription, then these are not taxable since these
were only charges for the privileges, conveniences and amenities provided to
members, which they are entitled as per the rules and regulations of the club.
2 Chelmsford Club (SC) Annual value of building owned by a mutual concern is also exempt based on the
doctrine of mutuality.
3 Venkatesh Premises Co- Transfer charges, non-occupancy charges common amenity fund charges and
operative Society Ltd (SC). other charges are exempt owing to application of the doctrine of mutuality.
4 Common effluent treatment Interest earned by a mutual concern on short-term deposit placed with non-member
plant Thane-Belapur (Bom) banks out of surplus arising from mutual activities = income. It is taxable.
5 Bangalore club (SC) Also interest earned by a mutual concern on short-term deposit placed with member-
banks out of surplus arising from mutual activities = income. It is taxable. This is
because placing such deposits enables some members (banks) to do profiteering
which results in breach of mutuality.

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Chapter-1: Basic concepts

7. Statutory exceptions to mutuality:

(i) S. 2 (24) (v) + S. 28 (iii) Any surplus arising on account of rendering specific services to its members by a
trade or professional association, though a surplus from mutual activities, still, is
deemed to be income.
It is chargeable to tax U/H PGBP.
(j) Provisions of S. 44A Where the receipts pertaining to general activities carried out by a trade or
professional association exceeds the corresponding expenditure (not being
capital expenditure), there is deficiency.
Such deficiency could be adjusted against the taxable income in the following
manner:
Deficiency could be adjusted only to the extent of 50% of TI.
Before adjusting the deficiency, priority should be given to brought forward losses
and unabsorbed depreciation.
Deficiency should be 1st adjusted against income U/H PGBP. Thereafter, it could be
adjusted against any other income.
Unadjusted deficiency can’t be C/F to the next year.
(k) Provisions of S. 2 (24) (viia) Profits and gains of business of banking (including providing credit facilities) carried
on by a co-operative society with its members = income.

8. Irrelevance of method of accounting in certain cases:


The newly inserted S. 145B provides that the chargeability of the following incomes are not governed by the
method of accounting followed by the assessee:
Income PY of chargeability
Interest received by an It is deemed to be income of the PY in which it is received. [S. 145B (1)].
assessee on any
compensation/enhanced
compensation
Claim for escalation of price in It is deemed to be income of the PY in which reasonable certainty of its
a contract or export incentive realization is achieved. [S. 145B (2)].
Government assistance/ grants It is deemed to be income of the PY in which it is received, if it was not charged
to income tax in any earlier PY. [S. 145B (3)].

9. Important points relating to ICDS:


1 Applicability of ICDS The ten ICDS are to be followed by all assessees (other than an individual or
HUF who is not required to get his accounts of the PY audited in accordance with
the provisions of S. 44AB) following the mercantile system, for the purposes of
computation of income chargeable to tax U/H PGBP and IFOS from AY 2017-18.
2 Chamber of Tax Consultants ICDS cannot over-ride the IT Act and the judicial interpretations thereon.
(Del)

10. Scheme of partial integration (SOPI):


1 Steps involved in 1 Find out the tax payable on Ʃ (AI + NAI)
SOPI 2 Find out the tax payable on Ʃ (AI + BEL)
3 Tax payable on NAI = (Tax in Step 1) – (Tax in Step 2)
4 Add surcharge (if the NAI is more than Rs. 50L)
5 Add HEC @ 4%.
6 Tax liability = Step 3 + Step 4 + Step 5.
2 When SOPI does 1 If the assessee is a firm or a company or a local authority or a co-operative society or
not apply? an AOP or BOI (covered by S. 167B), the SOPI does not apply. That is, simply the AI
has to be ignored and it has no relevance in computing the tax liability on NAI.
2 If the NAI doesn’t > BEL, then also the SOPI does not apply.
3 If the net AI is less than or equal to Rs. 5000, then also the SOPI does not apply.
4 If the NAI purely consists of income suffering at flat rate (like winnings from lottery etc),
then also the SOPI does not apply.
3 Disintegration of Nature of business NAI AI
composite income Growing and manufacturing tea in India (R. 8) 40% 60%
into agricultural and

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Chapter-1: Basic concepts

non-agricultural Growing and manufacturing rubber in India (R. 7A) 35% 65%
Sale of coffee grown and cured by seller (R. 7B (1)) 25% 75%
Sale of coffee grown, cured, roasted and grounded by seller in India 40% 60%
with or without mixing chicory or other flavoring ingredients (R. 7B
(1A))
4 R. M. Chidambaram Salary and interest received by a partner out of AI of the firm is to be regarded as AI. It is
Pillai (SC) exempt in the hands of partner U/s 10 (1). However, while computing tax on his NAI using
SOPI, salary and interest (supra) are considered.
5 Tax treatment of Salary and interest received by a partner from a firm (engaged in tea business or rubber
interest & business or coffee business) is taxable only to the extent of 40 or 35 or 25 or 40% and the
remuneration paid to balance is treated as AI. This agricultural component will be considered while computing tax on
partners out of AI of the NAI of the partner using the SOPI.
firm
6 Dividend is declared It is NAI in the hands of shareholders. This is because the proximate source for this dividend is
out of its AI. investment in shares and not the agricultural activity. [Kumara swami (Mad) + Tata Tea and
others [2017] (SC)].
7 Income from nursery Yes, as per Explanation 3 to S. 2 (1A), income derived from saplings or seedlings grown in
constitutes AI? nursery would be deemed to agricultural income, whether or not the basic operations were
carried out on land.

8 Indirect connection Income from breeding of livestock, income from poultry farming, income from fisheries, income
with agricultural land from dairy farming, income from allowing cinema shooting etc ≠ agricultural income. Indirect
is not enough. connection with agricultural land is not enough to regard an income as AI

11. Latest from Judiciary regarding the scope of CBDT Circulars:


SV Gopala and Others [2017] (SC).
Facts The CBDT had issued a Circular invoking the powers U/s 119. The Circular amended the provisions
contained in Rule 68B of the Second Schedule to the Act relating to time limit for sale of attached
immovable property.
Decision of The SC observed that the CBDT does not have the power to amend legislative provisions in
the SC exercise of its powers U/s 119 by issuing a Circular.

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Chapter-2: ESOP, KMIP & Recent case laws and Notifications in ‘Salary’

1. ESOP – S. 17 (2) (vi):


1 Employee stock Employer may offer stock options to his employee. Stock option means the right (not obligation) to
option subscribe to specified number of shares or securities of the employer-company at a specified price
(called strike price which is less than the FMV of the shares or securities) on a future date upon
fulfillment of vesting conditions.
2 Perquisite U/s Perquisites include the value of any security or shares allotted, directly or indirectly, by the
17 (2) (vi) employer, or former employer, free of cost or at concessional rate to the assessee under ESOP.
3 PY of PY of allotment of shares or securities.
chargeability
4 Quantum of [FMV of share or security on the date of exercise of option – strike price paid] * Number of shares
perquisite or securities allotted.

Computation of FMV of equity shares allotted or transferred under ESOP – R. 3 (8):


SN Situation FMV on the date of exercise of Remarks
option (DOE)
1 Equity shares are Average of opening sell price and If on the DOE, there is no trading in shares, the FMV
listed on a single closing sell price of shares on the DOE shall be the closing sell price of the share on RSE on
RSE a closest date immediately preceding the DOE.
2 Equity shares are Average of opening sell price and If on the DOE there is no trading in shares, the FMV
listed on more closing sell price of shares on the DOE shall be the closing sell price of the share on a RSE
than one RSE on a RSE which records the highest which records the highest volume of trading on the
volume in trading in the shares closest date immediately preceding the DOE.
3 Equity shares are Value on specified date as determined Specified date means: (a) The date of exercise of
not listed on a by a category I Merchant banker option or (b) any date earlier than the DOE not being
RSE registered with SEBI a date which is more than 180 days earlier than the
DOE.

Computation of FMV of securities other than equity shares allotted under ESOP – R. 3 (9):
The FMV of any specified security, not being an equity share in a company, on the date on which the option is exercised by
the employee, shall be such value as determined by a merchant banker on the specified date.

2. Key man insurance policy – Tax implications:


1 Tax implications in the Premium paid = Business expense deductible U/s 37 (1). [B.N Exports (Bom) + CBDT
hands of businessman Circular 762 + M/s Ramesh Steels Ltd (2015) (P&H) + CBDT Circular 38/2016].
Businessman will receive the proceeds of policy upon maturity of the policy or death of
keyman. Such proceeds are income in view of S. 2 (24) (xi). It is taxable U/H PGBP. [S. 28
(vi)]. No exemption is available U/s 10 (10D). It shall be subjected to TDS U/s 194DA @ 1%
if it is not less than Rs. 1L.
2 Tax implications in the Businessman may assign the policy in favour of keyman. In such case, the keyman may
hands of keyman receive the proceeds of the policy from the insurance company upon surrender or maturity of
the policy. Such proceeds are income in view of S. 2 (24) (xi).
It is taxable in the hands of keyman U/H salary if the keyman is employee. (S. 17 (3) (ii)). If
keyman is not an employee, it shall be taxed in the hands of keyman U/H IFOS. [S. 56 (2)
(iv)].
No exemption is available U/s 10 (10D). It shall be subjected to TDS U/s 194DA @ 1% if it is
not less than Rs. 1L.
3 Upon assignment also Explanation-1 to S. 10 (10D) clarifies that the KMIP continues to be KMIP even after the
policy continues to be businessman assigns it in favour of keyman during the term of the policy, whether with or
KMIP without consideration.
This Explanation prevents keyman from claiming exemption on KMIP proceeds U/s 10 (10D)
on the ground that upon assignment the policy has lost the character of KMIP and has
become an ordinarily life insurance policy.

3. Recent case laws:

1 ITC Gurgaon Tips collected by the Hotel-employer from the customers and distributed to the waiters does not
(2016) (SC) stem from the contract of employment. Waiters have no enforceable right. This represents
voluntary-gratuitous payment made by customers to waiters through the conduit pipe of Hotel which
collects it in fiduciary capacity. Therefore, such tips are not taxable in the hands of waiters U/H

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Chapter-2: ESOP, KMIP & Recent case laws and Notifications in ‘Salary’

Salary. It is taxable U/H IFOS. Hotel has no TDS obligation U/s 192.
2 Director, Delhi Rs. 1000 per month per child referred to in R. 3 (5) represents threshold limit and not standard
Public School deduction.
(2011) (P&H)
3 Shankar Concept of fair rent is alien to R. 3. So it cannot be imported into R. 3. Accordingly, where the
Krishnan employer has given an interest-free security deposit to the landlord for securing an accommodation
(2012) (Bom) to be given as rent-free accommodation to the employee, for determination of perquisite in the
hands of employee U/s 17 (2) (i), the rent paid by the employer shall not be stepped up by notional
interest on the deposit (supra).

4. Amendments in Salary chapter:

1 Amendment Amount of any contribution to an approved superannuation fund by the employer in respect of
brought out by FA the assessee, to the extent it exceeds Rs. 1.50L is perquisite U/s 17 (2) (vi) and hence, it is
2016 taxable U/H Salary. The limit was Rs. 1L earlier. It got enhanced to Rs. 1.50L by the Finance
Act 2016.
2 Amendments S. 16 (ia) has been inserted w.e.f AY 2019-20 to allow a standard deduction of lower of
brought out by FA (a) Rs 40,000 or (b) the amount of salary.
2018 The exemption in clause (v) of first proviso to S. 17 (2) in respect of reimbursement of
medical expenditure up to Rs. 15,000 is withdrawn w.e.f AY 2019-20.
Exemption in respect of transport allowance U/s 10 (14) + R. 2BB (2) shall stand
withdrawn w.e.f AY 2019-20. However, the transport allowance up to Rs. 3,200 p.m to
differently abled person will continue to be exempt.

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Chapter-3: Amendments and Recent case laws in IFHP:

1. Amendments in IFHP:
A Amendment Where the property is held as stock-in-trade and is not let during the whole or any part of the PY,
brought out by the annual value of such property for the period up to 1 year from the end of the FY in which the
FA 2017 certificate of completion of construction of the property is obtained from the competent authority,
shall be taken to be nil.
B Amendment brought out by FA 2016
1 Amendment in If the borrowing is in connection with construction or purchase of the property and the borrowing is
S. 24 (b) made after on or 01.04.1999, then the ceiling in respect of deduction U/s 24 (b) is Rs. 200000, if
the gap between the end of the FY of borrowing and the date of completion of construction or
purchase is not more than 5 years (3 years).
2 Insertion of S. As per S. 25A (1), the amount of rent received in arrears from a tenant or the unrealised rent
25A realised subsequently from a tenant by an assessee shall be deemed to be IFHP in the FY in
which such rent is received or realised, and shall be included in the TI of the assessee U/H IFHP,
whether the assessee is the owner of the property or not in that FY.
S. 25A (2) provides a deduction of 30% of arrears of rent or unrealised rent realised subsequently
by the assessee.
3 Insertion of S. Conditions to 1 Assessee = Individual.
80EE be fulfilled for 2 He has taken loan for acquisition (purchase or construction) of a
enjoying residential house property.
deduction U/s 3 Loan is taken from a bank or housing finance company.
80EE 4 Loan has been sanctioned by bank or housing finance company
during the FY 2016-17.
5 Loan sanctioned ≤ Rs. 35L.
6 Value of residential house property ≤ Rs. 50L.
7 The assessee does not own any residential house property on the
date of sanction of loan.
Quantum of Interest payable on the above loan or Rs. 50000 (whichever is less).
deduction
Bar on double If deduction is claimed U/s 80EE, no deduction will be allowed in respect of
deduction interest (to that extent) under any other provisions of the Act for the same or
any other AY.

2. Recent case laws:


1 Chennai Properties Income from letting out of properties by a company, whose main object as per its MOA is to
and Investments Ltd acquire and let out properties and whose entire income as per its ROI was only from letting
(2015) (SC) out of properties, shall be taxable as its business income.
2 Rayala Corporation The assessee had stopped its other business activities and continued only the business of
(P) Ltd (2016) (SC) leasing out its properties and earning rent therefrom. If an assessee is engaged in the
business of letting out house property on rent, then, the income from such property, even
though in the nature of rent, should be treated as business income.
3 Raj Dadarkar and In this case, on account of lack of sufficient material to prove that substantial income of the
Associates [2017] assessee was from letting out of property, the SC held that the rental income has to be
(SC) assessed as IFHP.
4 New Delhi Hotels Ltd The rental income derived from the unsold flats which are shown as stock-in-trade in the
(2014) (Delhi] books of the assessee would be taxable U/H IFHP. This is view is fortified by S. 23 (5).

5 NDR Warehousing P The assessee, as stipulated in the object clause of MOA, was engaged in the business of
Ltd (2015) (Mad) warehousing, handling and transport. It was not just letting out warehouses but provided
storage of goods with rendering of several auxiliary services such as pest control, rodent
control and fumigation service to prevent the goods stored from being affected by vagaries of
moisture and temperature. Further, service of security and protection was also provided to
the goods stored. These activities were carried on an organized manner. These activities are
more than mere letting out of the godown for tenancy. Therefore, the income of the assessee
from letting out of warehouses and godowns is chargeable U/H PGBP and not IFHP.
6 Hariprasad HUF is a group of individuals related to each other either by blood relationship or by marital
Bhojnagarwala (2012) tie. In other words, HUF is a group of natural persons and it can’t consist of artificial persons.
(Guj) (Full Bench It can reside a house belonging to it. Therefore, even HUF can enjoy self-occupied property
benefit contemplated in S. 23 (2).

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Chapter-3: Amendments and Recent case laws in IFHP:

7 Asian Hotels Ltd. Notional interest on interest-free deposit received by an assessee in respect of a shop let out
(2010) (Del) on rent cannot be brought to tax as business income or IFHP.
8 Shri. Champalal In, it was observed that where the Karta of the HUF is a partner in the firm in his representative
Jeevraj (1995) (Mad) capacity and the firm occupied a portion of the house belonging to the HUF, the benefit of
exclusion U/s 22 was available to the HUF.

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Chapter-4: Taxation of gifts:

S.56 (2) (x) (a): Monetary gifts:


Where any person receives during the PY any sum of money without any consideration from any other person(s) and the
aggregate of such sum of money exceeds Rs. 50000, then the whole of such sum of money shall be charged to tax U/H
IFOS in the PY of receipt.

S. 56 (2) (x) (b) (A): Gift of immovable property:


Where any person receives during the PY any immovable property (being a CA) without consideration from any other
person the SDV of which exceeds Rs. 50000, then such SDV shall be charged to tax U/H IFOS in the PY of receipt.

S. 56 (2) (x) (b) (B): Benefit on a/c of acquisition of immovable property for inadequate consideration:
Where any person receives during the PY any immovable property (being a CA) for a consideration which is less than SDV
and (SDV – Consideration) is more than the higher of [(a) 5% of consideration; (b) Rs. 50000], then the (SDV –
Consideration) shall be charged to tax U/H IFOS in the PY of receipt.

Points common for S. 56 (2) (x) (b) (A)/(B):


1 If the SDV on the DOA is different from the SDV on the DOR, then the SDV on the DOR shall be considered. However,
where the amount of consideration, or a part thereof, has been paid by way of an APC or APBD or use of ECS through
a bank account, on or before the DOA, then the SDV on the DOA is to be taken.
2 If the assessee feels that the SDV of the immovable property received without consideration or received for an
inadequate consideration is more than its FMV, then he can challenge the SDV through an appeal under the Indian
Stamp Act.
3 If the SDV is revised by an order passed by the appellate authority under the Indian Stamp Act, then the AO shall
amend the order of assessment passed in respect of AY relevant to the PY in which the immovable property was
received to re-compute the income chargeable U/H IFOS.
4 This amendment order shall be passed within 4 years from the end of the PY in which the SDV was revised by the
appellate authority under the Indian Stamp Act.
5 Alternatively, the assessee, instead of challenging the SDV in appeal under the Indian Stamp Act, can approach the AO
and request him to determine the FMV.
6 Thereafter, the AO has to refer the matter to the DVO who will determine the FMV. If the FMV is less than the SDV, then
the FMV shall be assessed to tax U/H IFOS. However, if the FMV is more than the SDV, then the AO shall assess the
SDV U/H IFOS.

S. 56 (2) (x) (b) (A): Gift of specified movable property:


1 Where any person receives during the PY any specified movable property(s) without consideration from any other
person(s) and the aggregate FMV of which exceeds Rs. 50000, then the aggregate of such FMV shall be charged to tax
U/H IFOS in the PY of receipt.
2 Specified movable property means the following capital assets of the assessee namely: (a) Shares and securities; (b)
jewellery; (c) archaeological collections; (d) drawings; (e) paintings; (f) sculptures; (g) any work of art; (h) Bullion.

S. 56 (2) (x) (b) (A): Benefit on a/c of acquisition of specified movable property for inadequate consideration:
Where any person receives during the PY any specified movable property(s) for a consideration which is less than the FMV
by an amount exceeding Rs. 50000, then [∑FMV - ∑consideration] shall be charged to tax U/H IFOS in the PY of receipt.

Receipts not covered by S. 56 (2) (x) – Proviso to S. 56 (2) (x):


1 Receipts from relatives;
2 Receipts on the occasion of marriage of individual;
3 Receipts under will or by way of inheritance;
4 Receipts in contemplation of death of the donor;
5 Receipts from local authorities;
6 Receipts from S. 10 (23C) institutions;
7 Receipts from trusts registered U/s 12AA;
8 Receipts by institutions referred to in S. 10 (23C) (iv)/(v)/(vi)/(via);
9 Receipts from an individual by a trust created solely for the benefit of relative of the individual.
10 Receipts by member upon partition of HUF.
11 Receipts by amalgamated Indian company from amalgamating company pursuant to the scheme of amalgamation.
12 Receipts by resulting company being Indian company on demerger of demerged company.
13 Receipt of capital asset being shares in Indian company by foreign company on amalgamation of another foreign
company.
14 Receipt of capital asset being shares in Indian company by the resulting foreign company from the demerged foreign

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Chapter-4: Taxation of gifts:

company upon demerger.


15 Receipt of shares from resulting company on demerger of undertaking by the shareholders of demerged company.
16 Receipt of shares from amalgamated company being an Indian company by the shareholders of the amalgamating
company.
17 Receipts by holding company from wholly-owned subsidiary (Provided the holding company is an Indian
company);
18 Receipts by wholly-owned subsidiary from holding company (Provided the wholly-owned subsidiary is an
Indian company).

Points requiring attention:


1 Relative in relation to individual means (a) Spouse; (b) brother or sister; (c) brother or sister of the spouse; (d) brother or
sister of either of the parents; (e) any lineal ascendant or descendant; (f) any lineal ascendant or descendant of the
spouse; (g) Spouse of the person referred to above other than spouse.
2 Relative in relation to HUF means any member of HUF.
3 Lineal descendents of brothers and sisters + Lineal descendents of brothers and sisters of spouse + Brother and sisters
of grandparents ≠ relative.
4 Gift on the occasion of marriage anniversary is not exempt.
5 To avail exemption, the donee should be bride or bridegroom whose marriage is solemnized. [Rajinder Mohan Lal
[P&H]].

Determination of FMV – R. 11UA:


1 Valuation of jewellery, archaeological collections, drawings, paintings, sculptures or any work of art
The FMV of jewellery, archaeological collections, drawings, paintings, sculptures or any work of art (hereinafter
referred as artistic work) shall be estimated to be price which it would fetch if sold in the open market on the valuation
date;
In case these are received by the way of purchase on the valuation date, from a registered dealer, the invoice value
shall be the FMV;
In case these are received by any other mode and the value exceeds Rs. 50000, then assessee may obtain the report
of registered valuer in respect of the price it would fetch if sold in the open market on the valuation date;
2 Valuation of quoted shares and securities
The FMV of quoted shares and securities shall be determined in the following manner, namely:
(i) if the quoted shares and securities are received by way of transaction carried out through any RSE, the FMV
of such shares and securities shall be the transaction value as recorded in such RSE;
(ii) if such quoted shares and securities are received by way of transaction carried out other than through any
RSE, the FMV of such shares and securities shall be:
(a) the lowest price of such shares and securities quoted on any RSE on the valuation date, and
(b) the lowest price of such shares and securities on any RSE on a date immediately preceding the
valuation date when such shares and securities were traded on such RSE, in cases where on the
valuation date there is no trading in such shares and securities on any RSE;
3 Valuation of non-quoted equity shares
FMV = (A+B+C+D-L)*PV/PE
A = Book value of all assets (other than bullion, jewellery, precious stone, artistic work, shares, securities and
immovable properties).
B = The price which the jewellery and artistic work would fetch if sold in the open market on the basis of the valuation
report obtained from a registered valuer;
C = FMV of shares &securities as determined in the manner provided in this rule;
D = SDV in respect of the immovable property;
L = Book value of liabilities not being contingent or unascertained liabilities.
PE = Total amount of paid up equity share capital as shown in the B/s.
PV = Paid up value of such equity share.
4 Valuation of unquoted shares and securities other than equity shares
FMV = Price it would fetch if sold in the open market on the specified date on the basis of valuation report from a
merchant banker or FCA.

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Chapter-4: Taxation of gifts:

Consideration received in excess of FMV of shares issued by a CHC to be treated as income of such company,
where shares are issued at a premium [S. 56 (2) (viib)]:
A. Applicability:
S. 56 (2) (viib) applies if the following conditions are satisfied:
1 A company receives consideration for issue of shares from a resident.
2 Such company is not a company in which public are substantially interested.
3 The consideration received exceeds the face value of the shares.
4 The consideration received exceeds the FMV of the shares.

B. Impact of S. 56 (2) (viib):


If the aforesaid conditions are satisfied, the excess of consideration over the FMV of the shares issued shall be regarded as
income of the issuing company (S. 2 (24) (xvi)) and shall be assessed to tax U/H IFOS (S. 56 (2) (viib).

C. Determination of FMV for the purpose of S. 56 (2) (viib) – R. 11UA:


Option- FMV = (A-L)*PV/PE
1 A = Book value of all assets (other than fictitious assets).
L = Book value of liabilities not being contingent or unascertained liabilities.
PE = Total amount of paid up equity share capital as shown in the B/s.
PV = Paid up value of such equity share.
Option- The FMV of the unquoted equity shares determined by a merchant banker as per the Discounted Free Cash
2 Flow method.

D. FMV for this purpose:


The FMV of the shares shall be the higher of
(a) the value as may be determined in accordance with the method as may be prescribed; or
(b) the value as may be substantiated by the company to the satisfaction of the AO, based on the value of its assets,
including intangible assets, being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any
other business or commercial rights of similar nature.

Note: S. 56 (2) (viib) shall not apply where the consideration for issue of shares is received—
(i) by a VCU from a VCC or a VCF; or
(ii) by a company from a class or classes of persons as may be notified by the CG in this behalf.

Notification No. 45/2016 & Notification no. G.S.R. 364(E) dated 11.04.2018:
1 S. 56 (2) (viib) shall not apply when a resident makes payment of an amount exceeding the face value of shares of the
“startup” company, as consideration for issue of such shares.
2 A company may be regarded as “startup” up to a period of 7 years from the date of incorporation (10 years in case the
company is engaged in bio-technology sector) if the following conditions are fulfilled:
1 It should be a private company.
2 It is not formed by splitting up or reconstruction of an existing business.
3 The aggregate amount of paid up share capital and share premium of the startup after the proposed issue of
shares should not exceed Rs. 10 Crores.
4 It has obtained a report from a merchant banker specifying the FMV of shares in accordance with R. 11UA
5 The investor who proposes to subscribe to the issue of shares shall have:
(i) an average returned income of Rs. 25L or more for the preceding 3 FYs; or
(ii) a net worth of Rs. 2 Crores or more as on the last date of the preceding FY, and
6 It is working towards innovation, development or improvement of products or processes or services, or if it is a
scalable business model with a high potential of employment generation or wealth creation.
7 Turnover for any of the FYs since incorporation has not exceeded Rs. 25 Crores;
8 It is approved by the Ministry of Commerce and Industry, Department of Industrial Policy and Promotion (‘DIPP’).

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Chapter-5: Capital gains - Summary

1. Charging section – S. 45 (1):


1 Any profits or gains arising from the transfer of a capital asset effected during the PY shall be chargeable to income-tax
U/H CG and shall be deemed to be the income of the PY in which the transfer took place.
2 However, the profits or gains (supra) shall not be charged to tax to the extent to which it is exempt U/s 54, 54B, 54D,
54EC, 54EE, 54F, 54G, 54GA, 54GB, 10 (37), 10 (37A) and S. 115F.

Points requiring attention:


1 Meaning of capital “Capital asset” means property of any kind held by an assessee, whether or not connected with
asset his business or profession. [S. 2 (14)].
2 Exclusions from (a) Stock-in-trade (SIT); (b) Personal effects; (c) Rural agricultural land; (d) Gold bonds issued
‘capital asset’ under the Gold Deposit Scheme 1999; (e) Deposit certificates issued under the Gold
Monetisation Scheme, 2015 notified by the CG (interest thereon is exempt U/s 10 (15)).
3 Inclusion in ‘Capital Any securities held by a Foreign institutional investor which has invested in such securities in
asset’ accordance with the SEBI Regulations shall be regarded as CA (even if such securities are held
by it as SIT).
4 Assets ≠ personal (a) Jewellery; (b) Archaeological collections; (c) Drawings; (d) Paintings; (e) Sculptures; (f) Any
effect work of art.
5 CBDT Circular Where the assessee itself, irrespective of the POH of the listed shares and securities, opts to
6/2016 treat them as SIT, the income arising from transfer of such shares or securities would be treated
as its business income.
In respect of listed shares and securities held for a period of more than 12 months immediately
preceding the DOT, if the assessee desires to treat the income arising from transfer thereof as
CG, the same shall not be put to dispute by the AO. However, this stand, once taken by the
assessee in a particular AY, shall remain applicable in subsequent AYs also and the taxpayers
shall not be allowed to adopt a different stand in this regard in subsequent years;
6 Letter F. No. Income arising from transfer of unlisted shares would be considered U/H CG, irrespective of
225/12/2016 POH, with a view to avoid disputes or litigation and to maintain uniform approach.
7 Meaning of transfer (a) Sale; (b) Exchange; (c) Relinquishment; (d) Extinguishment of rights; (e) Conversion of CA
[S. 2 (47)]. into SIT; (f) Compulsory acquisition; (g) power of attorney transactions; (h) Transaction having
the effect of transferring or enabling the enjoyment of any immovable property; (i) Maturity of
ZCB.
8 K. R. Srinath (Mad) Sum received for relinquishing the right of specific performance in a contract shall be charged to
tax U/H CG.
9 Karthikeya. V. Reduction of share capital results in extinguishment of rights of shareholders in the shares held
Sarabhai (SC) by them.
10 When transfer Transfer of movable property becomes effective and complete upon delivery pursuant to
becomes effective contract of sale.
and complete? Transfer of immovable property becomes effective after registration of conveyance deed but
with effect from the date of execution of the conveyance deed.
In case of power of attorney transactions, transfer becomes effective once possession is handed
over upon receipt of consideration.

2. Mode of Computation of capital gains – S. 48:


1 Full value of consideration XXX
2 Expenditure incurred wholly and exclusively in connection with transfer (XXX)
3 Net consideration (1-2) XXX
4 Cost of acquisition (XXX)
5 Cost of improvement (XXX)
6 Capital gain (3-4-5) XXX

A. Full value of consideration:


1 FMV of the capital asset transferred has no relevance in computation of capital gains.
2 Only actual consideration received or receivable is relevant for computing capital gains. However, exceptions are
contemplated in S. 50C, S. 50CA and S. 50D.

Full value of consideration in case of real estate transaction: (S. 50C):


SN Situations FVC
1 SDV ≤ 105% of Actual sale consideration (ASC) ASC
2 SDV > 105% of ASC SDV

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Chapter-5: Capital gains - Summary

3 SDV > 105% of ASC - the assessee challenged the SDV in appeal under the Indian ASC (See note below)
Stamp Act – SDV is revised – Revised SDV ≤ 105% of ASC
4 SDV > 105% of ASC - the assessee challenged the SDV in appeal under the Indian Revised SDV (See note
Stamp Act – SDV is revised – Revised SDV > 105% of ASC below)
5 SDV > 105% - the assessee does not challenge the SDV before the court or any FMV determined by VO (See
other authority – note below)
but he pleads before the assessing officer (AO) that SDV > fair market value on the
date of transfer (FMV) - AO refers the matter to the valuation officer (VO) - FMV
determined by VO < SDV – FMV > 105% of ASC
6 SDV > 105% - the assessee does not challenge the SDV before the court or any ASC
other authority - but he pleads before the assessing officer (AO) that SDV > fair
market value on the date of transfer (FMV) - AO refers the matter to the valuation
officer (VO) - FMV determined by VO < SDV – FMV ≤ 105% of ASC
7 SDV > 105% of ASC - the assessee does not challenge the SDV before the court SDV
or any other authority - but he pleads before the AO that SDV>FMV on the date of
transfer - AO refers the matter to the VO - FMV determined by VO > SDV

Note:
1 The AO shall amend the order of assessment passed in respect of AY relevant to the PY in which transfer of immovable
property took place to re-compute the capital gains by taking the ASC or SDV as revised by the appellate authority, as
the case may be.
2 The amendment order shall be passed within 4 years from the end of the PY in which the appellate authority has
passed order revising the SDV. [S. 155 (15)].
3 The AO is bound to consider the report of the VO when it is on record. The CG shall be computed in conformity
with the value determined by the DVO. [Ravjibhai Nagjibhai Thesia (2016) (Guj)].
4 Where the amount of consideration, or a part thereof, has been paid by way of an account payee cheque or account
payee bank draft or use of electronic clearing system through a bank account, on or before the date of the agreement
for the transfer of such immovable property, then the SDV on the date of agreement fixing the consideration is to be
taken into account.
5 Otherwise, the SDV on the date of registration shall be taken into account.
6 S. 43A plays exactly the same role U/H PGBP which S. 50C plays U/H CG.
TDS on payments on transfer of certain immovable property -S. 194-IA:
1 Payment to be Consideration for transfer (not being compulsory acquisition) of any immovable property
subjected to TDS (other than agricultural land situated in rural area).
2 Payee Resident (Transferor).
May be dealer or investor
3 Payer May be a dealer or investor.
4 Threshold limit If the consideration is less than Rs. 50L, there is no TDS obligation.
5 TDS rate 1% [Subject to S. 206AA]
6 Timing of TDS At the time of credit to the account of payee in the books of the payer or at the time of
payment (whichever is earlier).
7 Time limit for 30th of the month succeeding the month of deduction of tax at source.
remittance of TDS
8 No TAN required Payer need not have TAN for deducting tax under this section.

Points requiring attention:


1 S. 194-IA does not apply if the payee is a non-resident. In such case, tax shall be deducted at source U/s 195 using
rates in force (20% + Surcharge if applicable + EC).
2 Persons jointly purchasing immovable property from a resident shall deduct tax at source U/s 194-IA, if the
consideration payable by them put together is Rs. 50L or more, though individually is less than Rs. 50L.
3 Rs. 50L is to be compared with the actual consideration and not the SDV.
4 THL of Rs. 50L is to be applied in respect of each and every property purchased separately.
5 Where the immovable property is purchased along with some movable assets, then the consideration attributable to the
immovable property alone is to be compared with the threshold limit of Rs. 50L (for deciding the applicability of S. 194-
IA).

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Chapter-5: Capital gains - Summary

FVC in case of transfer of unquoted shares – S. 50CA:


(i) Applicability Capital asset being share in a company (not being quoted share) is transferred for a
consideration less than the FMV of such share determined in accordance with R. 11UA.
(ii) Impact of S. 50CA FMV of such share shall be regarded as FVC. Actual consideration is to be ignored.
(iii) Meaning of quoted Quoted share means share quoted on a RSE with regularity from time to time.
share
(iv) Determination of FMV For the purposes of S. 50CA, the FMV of the share of a company other than a quoted
(R. 11UAA) share, shall be determined in the manner provided in R. 11UA (1) (c) as on the date of
transfer.

FVC in case of transaction where the consideration is not determinable – S. 50D:


Where the consideration involved in transfer of capital asset is not ascertainable, then for the purpose of computing income
chargeable to tax as capital gains, the FMV of the said asset on the date of transfer shall be deemed to be the FVC.

B. Expenses on transfer:
(a) In computing capital gains, the expenditure incurred wholly and exclusively in connection with transfer is allowed as
deduction from the FVC.
(b) However, STT paid in relation to transfer of equity shares/equity oriented units/units of BT shall not be eligible for
deduction while computing CG U/s 48. [Proviso-7 to S. 48].

C. COA of CA:

1 Incidental expenses All expenses incidental to acquisition of the CA shall be added to arrive at the COA. Example:
(a) Advertisement expenses; (b) Travelling expenses; (c) Brokerage; (d) Stamp duty; (e)
Registration charges; (f) legal fee.
2 STT However, STT shall not be added to arrive at the cost of acquisition. [Proviso-7 to S. 48].
3 Option U/s 55 (2) (b) Where the CA transferred was acquired by the assessee before 01.04.2001, the assessee
has option to take the FMV as on 01.04.2001 as the COA. However, such option is not
available in respect of intangible CA.
4 Forfeiture of advance Advance forfeited before 01.04.2014 shall be deducted against COA. [S. 51]. However,
advance forfeited by the previous owner shall not be deducted against COA.
Advance forfeited on or after 01.04.2014 shall be taxed U/H IFOS in the PY of forfeiture. [S. 2
(24) (xvii) + S. 56 (2) (ix)]. It is not adjusted against the COA. [Proviso to S. 51].
5 S. 49 (1) Where the assessee has obtained the asset U/s 49 (1) mode (Say distribution by HUF, will,
inheritance, gift etc), the COA is COA to the previous owner who had not obtained it U/s 49
(1) mode.
If the previous owner has acquired the CA before 01.04.2001, then the COA in the hands of
assessee is higher of the following: (a) COA in the hands of previous owner; (b) FMV as on
01.04.2001. [S. 55 (2) (b)].
6 COA of CA obtained SDV on the DOG (in case the gifted asset = immovable property). [Where the assessee had
by way of gift suffered tax U/s 56 (2) (x)]. [S. 49 (4)].
FMV on the DOG (in case the gifted asset = specified movable property referred to in S. 56
(2) (x)). [Where the assessee had suffered tax U/s 56 (2) (x)]. [S. 49 (4)].
COA to the previous owner. [S. 49 (1)]. [Where the assessee had not suffered tax U/s 56 (2)
(x)]. [S. 49 (4)].
7 COA of CA acquired SDV on the DOA (in case the asset acquired = immovable property). [Where the assessee
for inadequate had suffered tax U/s 56 (2) (x)]. [S. 49 (4)].
consideration. FMV on the DOA (in case the asset acquired = specified movable property referred to in S.
56 (2) (x)). [Where the assessee had suffered tax U/s 56 (2) (x)]. [S. 49 (4)].
Actual COA. [Where the assessee had not suffered tax U/s 56 (2) (x)].
D. COI:
1 Meaning It means any capital expenditure incurred by an assessee in making any additions or
improvement to the capital asset. In other words, any expenditure incurred to increase the value
of capital asset is treated as COI.
2 Exclusion COI incurred by the assessee or previous owner before 01.04.2001 shall be ignored.
Any expenditure deductible in computing the income chargeable U/ H IFHP, PGBP or IFOS shall
not be eligible for deduction in computing income U/H CG.
3 Miss. Piroja C. Expenditure incurred in securing vacant possession of plot (subjected to tenancy) for the purpose
Patel (Bom) of effecting sale amounts to COI.

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Chapter-5: Capital gains - Summary

E. Classification of capital gains based on its nature:


Capital assets (Group-I) POH ≤ 12 POH > 12
months months
(1) Securities (not being units) listed on RSE in India STCA LTCA
(2) Equity oriented units of Mutual fund
(3) Zero coupon bonds
Capital assets (Group-II) POH ≤ 24 POH > 24
months months
(1) Shares of companies not listed on RSE in India STCA LTCA
(2) Immovable property being land or building or both (located in India or in foreign
country)
Capital assets (Group-III) POH ≤ 36 POH > 36
months months
Any other capital asset STCA LTCA

Points requiring attention:


1 POH in S. 49 (1) mode of Starts on the DOA by the previous owner who had not obtained the CA U/s 49 (1) mode.
acquisition [S. 2 (42A) Explanation].
2 POH of gifted asset Starts on the DOG. [Where the assessee had suffered tax U/s 56 (2) (x)].
Starts on the DOA by the previous owner. [Where the assessee had not suffered tax U/s
56 (2) (x)].
3 Smt. Rama Rani Kalia (All) Where the assessee converts his lease hold interest in a property to free hold interest
and subsequently effects sale, the POH starts on the date of taking the property on lease.
Assessee need not be the owner of the CA through the POH. Note the word ‘held’.

F. Benefit of indexation:
1 S. 48 Proviso-2 While computing CG arising on account of transfer of a LTCA, ICOA and ICOI shall be allowed as
deduction.
2 Numerator index Index pertaining to the PY of transfer.
3 Denominator index Situation Denominator index (COA)
(for COA) CA was not obtained U/s 49 (1) Base index (if DOA < 01.04.2001)
mode Index relating the PY of acquisition (if DOA ≥
01.04.2001)
CA was obtained U/s 49 (1) mode Base index (if DOA (by the previous owner) <
(gift) 01.04.2001)
Index relating the PY of acquisition by the previous
owner (if DOA (by the previous owner) ≥ 01.04.2001)
CA was obtained by way of gift + Base index (if DOA (by the previous owner) <
assessee did not suffer tax U/s 56 01.04.2001)
(2) (x) Index relating the PY of acquisition by the previous
owner (if DOA (by the previous owner) ≥ 01.04.2001).
[Manjula Shah (Bom)]
CA was obtained by way of gift + Index relating to the PY of gift.
assessee suffered tax U/s 56 (2)
(x)
4 Denominator index Index pertaining to the PY of incurrence.
(for COI)
5 S. 48 proviso-4 For debentures or bonds, no indexation.
Exception: Indexation is available for (a) SGB issued by RBI; (b) Capital indexed bonds issued by
CG.
6 S. 48 Proviso-3 For equity shares, EOU and units of BT covered by S. 112A, no indexation.
7 S. 47 (viic) No CG in the hands of individuals upon redemption of SGB by RBI.

G. Exchange neutralization benefit - S. 48 Proviso-1 & R. 115A:


1 Applicability Assessee = NR
CA transferred = Shares in, or debentures of, Indian company
CA (supra) was obtained utilizing foreign currency
2 Manner of computation of CG

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Chapter-5: Capital gains - Summary

SN Particulars Amount Procedure Basis of Relevant date


conversion
1. FVC xxx Convert into foreign Average DOT
currency exchange rate
2. COA xxx Convert into foreign Average DOA
currency exchange rate
3. Expenditure on sale xxx Convert into foreign Average DOT
currency exchange rate
4. CG xxx Convert into Indian TTBR Quoted by DOT
currency SBI
3 Meaning of average exchange rate (TTBR quoted by SBI + TTSR Quoted by SBI) / 2.
4 Same procedure for every subsequent The same aforesaid procedure shall be applicable in respect of CG
reinvestment in shares or debentures of an accruing or arising from every reinvestment thereafter in, and sale of,
Indian company shares in, or debentures of, an Indian co.

5 No indexation benefit In a case where S. 48 Proviso-1 applies, even if the shares or


debentures are LTCA, indexation benefit is not available.
6 Non-applicability of S. 48 Proviso-1 in 1st Proviso to S. 48 (benefit of indexation) shall not apply to the CG
cases covered by S. 112A. arising from transfer of a LTCA being an equity share or EOU or a
unit of BT referred to in S. 112A. [S. 48 Proviso-3].
7 Relief to the NR investor who bears foreign In case of NR assessees, any gains arising on account of rupee
currency fluctuation risk. [5th proviso to S. appreciation against foreign currency at the time of redemption of
48] RDB of an Indian company subscribed by him shall not be included in
computation of FVC.
8 Immunity from capital gains in respect of off- Any transfer, made outside India, of a CA being RDB of an Indian
shore transfer – S. 47 (viiaa): company issued outside India, by a NR to another NR shall not be
regarded as transfer. It does not attract CG tax.

3. Computation of CG under special circumstances:

A. Computation of CG upon transfer of assets declared under the Income Declaration Scheme, 2016: [S. 49 (5) + S.
2 (42A) Explanation-1 (i) + R. 8AA (3)]:
1 COA of assets declared under the scheme FMV as on 01.06.2016. [S.
49 (5)].
2 POH of assets (supra) – R. 8AA (3):
Asset declared ≠ immovable property POH starts on 01.06.2016
Asset declared = immovable property (the date of acquisition of which is evidenced by a POH starts on the actual
deed registered with any authority of a SG) DOA.
Asset declared = immovable property (in other cases) POH starts on 01.06.2016

(B) Computation of capital gains upon receipt of insurance compensation on account of destruction of capital
asset: [S. 45 (1A)]:
1 When S. 45 (1A) could be Capital asset gets destroyed or damaged.
invoked? Destruction or damage is due to: (a) Flood; (b) Typoon; (c) Hurricane; (d) Cyclone; (e)
Earth quake; (f) Other convulsion of nature; (g) Riot; (h) Civil disturbance; (i) Accidental
fire; (j) Accidental explosion; (k) Action by enemy; (l) Action taken in combating enemy
On account of destruction or damage, the assessee receives compensation from the
insurer.
2 PY of transfer PY in which damage or destruction took place.
3 PY of chargeability PY in which money or other asset is received from the insurer.
4 POH DOA to the day preceding the date of damage/destruction.
5 FVC Money received from insurer or
FMV of asset (on the date of receipt) received from the insurer (where the
compensation is in kind).
6 Depreciable asset In case of depreciable asset, the computation of capital gains is subject to S. 50
7 COA of the new asset The FMV of such asset on the date on which it was received should be taken as its cost
(received as compensation of acquisition.
from the insurer)

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Chapter-5: Capital gains - Summary

(C) Computation of CG upon conversion of capital asset into stock-in-trade S. 45 (2):


As per S. 2 (47), even conversion of capital asset into stock in trade amounts to transfer and hence, CG needs to be
computed. In this regard, the following matters require attention:
1 PY of transfer PY in which capital asset got converted into stock in trade.
2 PY of chargeability PY in which such stock in trade was sold.
3 POH DOA to the day preceding the date of conversion
4 FVC FMV on the date of conversion
5 Numerator index Index relating to the PY in which capital asset got converted into stock in trade.
6 Computation of business In the PY in which the SIT was sold, in addition to the CG, the difference between
income the sale proceeds of SIT and the FMV on the date of conversion shall be assessed
to tax U/H PGBP.

Conversion of stock-in-trade into capital asset – tax implications:


1 S. 2 (24) (xiia) + S. PGBP = FMV on the DOC – Carrying amount of inventory
28 (via)
2 PY of chargeability PY in which entry is passed. [If the assessee follows mercantile system].
PY of realisation. [If assessee follows cash system of accounting].
3 FMV for this Nature of asset FMV
purpose. [R. 11UB]. Immovable property SDV on the DOC
Jewellery, archaeological collections, drawings, Price that could be fetched if sold in
paintings, sculptures, any work of art, shares or the open market on the date of
securities etc conversion
4 Explanation-1A to Upon conversion of inventory into capital asset, if the capital asset is used for the business or
S. 43 (1) profession, depreciation shall be allowed on it. For this purpose, the actual cost is the FMV
referred to in R. 11UB.
5 COA [S. 49 (9)]. FMV referred to in R. 11UB.
6 POH POH starts on the DOC. [Clause (ba) of Explanation-1 to S. 2 (42A)].
7 Denominator index Index relating to the PY of conversion.

(D) Computation of CG on transfer of dematted securities - S. 45 (2A):


1 How to find POH and COA? FIFO basis
2 FIFO method in case of FIFO method shall be applied account-wise. [CBDT Circular- no. 768].
multiple accounts
3 FIFO method on Where in an existing account, old physical securities are dematerialized and entered at
dematerialization of old a later date, under the FIFO method, the basis for determining the movement out of the
physical securities in existing accounts is the date of entry into the account. [CBDT Circular- no. 768].
account

(E) Computation of CG upon transfer of CA by partner/member to a firm/AOP by way of capital contribution or


otherwise - S. 45 (3):
1 CG in the hands of CG is chargeable to tax in the hands of the partner.
partner
2 FVC Amount for which the transferred asset is recorded in the books of the firm.
3 COA of such CA in Amount at which the CA is recorded in the BOA of the firm. [Rajdoot Hotel enterprises (MP)]
the hands of the firm

(F) Computation of CG upon distribution of CA by firm/AOP on dissolution or otherwise: S. 45 (4):


1 Charging CG in the hands of CG is chargeable to tax in the hands of the firm.
firm
2 PY of chargeability PY of distribution (not the PY of dissolution) [Vijayalakshmi metal industries (Mad)]
3 FVC FMV on the date of distribution.
4 A. N. Naik Associates (2004) S. 45 (4) can be invoked even if the firm distributes CA to the partner at the time of
(Bom). his retirement to settle his dues. Note the word ‘otherwise’ in S. 45 (4).
5 COA of the CA in the hands of Value agreed for such asset as per the dissolution deed.
the partner
6 Lingamallu Raghu Kumar (SC) When assets are distributed to the retiring partner upon retirement, what transpires is
the realisation of his pre-existing right to get a share in the net assets of the firm.
Therefore, the question of computing CG in the hands of retiring partner on the

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Chapter-5: Capital gains - Summary

ground that the retiring partner has assigned his interest in the partnership does not
arise.
7 J.M. Mehta and Brothers As per S. 17 (1) (b) of the Registration Act, common immovable properties can’t be
(Bom) divided, possessed and enjoyed severally without a duly executed and registered
document. Therefore, partners of a firm cannot take out immovable property from the
ownership of firm by mutual agreement and by passing entries in the BOA of the firm.
8 Sivalingam Nadar (SC) In case of dissolution of firm, there is no need for a separate document. The
dissolution deed itself stands as a proof of title to the partners.

(G) Computation of capital gains upon compulsory acquisition of capital asset - S. 45 (5):

(i) Computation of capital gains upon receipt of original compensation – S. 45 (5) (a):
S. 2 (47) defines transfer to interalia include compulsory acquisition of capital asset. Where a capital asset is compulsorily
acquired, capital gains shall be computed in accordance with the provisions of S. 45 (5). In this regard, the following matters
require attention:
1 PY of transfer PY in which capital asset is compulsorily acquired.
2 PY of chargeability PY in which the compensation (or part thereof) is first received. .
3 Period of holding Date of acquisition to the date preceding the date of compulsory acquisition
4 FVC Compensation determined under the corresponding law
5 Numerator index Index relating to the PY in which capital asset was compulsorily acquired.
6 Denominator index Index relating to the PY in which the asset was first held by the assessee.

(ii) Tax treatment of enhanced compensation – S. 45 (5) (b):


Where the compensation is enhanced by the court or tribunal or any other authority, capital gains shall be computed and in
this regard, the following points require attention:
1 Year of chargeability PY in which the additional compensation is received.
2 Cost of acquisition Nil
3 Cost of improvement Nil

4 Taxability of additional When the transferor dies before the receipt of additional compensation, the additional
compensation upon death of compensation shall be assessed to tax in the hands of the recipient U/H “CG”.
the transferor
5 Deductibility of litigation Litigation expenses incurred in getting the compensation enhanced shall be allowed
expenses as a deduction in computing the capital gains.
6 Nature of capital gain The capital gains computed upon receipt of additional compensation take the
character of capital gains computed in the first instance.

(iii) Tax treatment of additional compensation received pursuant to interim order of a Court or Tribunal or other
authority – Proviso to S. 45 (5) (b):
Where the assessee receives additional compensation pursuant to interim order of a Court or Tribunal or other authority, it
shall not be charged to tax U/H CG in the PY of receipt, but in the PY in which final order of such Court or Tribunal or other
authority is made.

(iv) Recomputation of capital gains upon subsequent reduction of compensation/consideration by the court/
tribunal/any other authority – S. 45 (5) (c):
Where in the assessment for any year, the capital gain arising from the transfer of a capital asset is computed by taking the
compensation or, as the case may be, enhanced compensation, and subsequently such compensation is reduced by any
Court, Tribunal or other authority, such assessed capital gain of that year shall be recomputed by taking the compensation
as so reduced by such Court, Tribunal or other authority to be the full value of the consideration.

Time limit for Re-computation -S. 155 (16):


The AO can re-compute the CG within 4 years from the end of the PY in which the order reducing the compensation was
passed by the Court or tribunal or any other authority.
Tax treatment of interest on compensation or enhanced compensation – S. 145B (1) +_S. 56 (2) (viii) + S. 57 (iv):
(i) Income by way of interest received on compensation or on enhanced compensation shall be taxable U/H IFOS
in the PY of receipt. [S. 145B (1) + S. 56 (2) (viii)].
(ii) In case of income of nature referred to above, a deduction of sum equal to 50% of such income shall be allowed. No
other deduction shall be allowed against it. [S. 57 (iv].

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Chapter-5: Capital gains - Summary

Connected sections:

(i) Exemption of CG arising on a/c of compulsory acquisition of urban agricultural land - S. 10 (37):
1 Person eligible for Individual or HUF
exemption
2 CA to be transferred for Urban agricultural land.
availing exemption It may be a LTCA or STCA.
(referred to as original It should have been used for agricultural purpose either by the assessee or by his parents
asset) during the period of two years immediately preceding the date of its transfer.
It should have been compulsorily acquired or the consideration for its transfer should have
been determined or approved by the CG or RBI.
3 Condition to be satisfied The compensation or consideration should have been received on or after 01.04.2004.
for availing exemption.

Latest from Judiciary:


Receipt of higher compensation on account of negotiations does not transform the character of compulsory acquisition into a
voluntary sale, so as to deny exemption U/s 10 (37) (iii). [Balakrishnan (2017) 391 ITR 178 (SC)]:

CBDT Circular 36/2016:


The compensation received U/s 96 of RFCTLARR Act even in respect of compulsory acquisition of non-agricultural land is
exempt even if there is no specific provision for providing exemption under the IT Act.

(ii) TDS on payment of compensation on compulsory acquisition – S. 194LA:


1 Payment subjected to TDS Sum being compensation or enhanced compensation on account of compulsory
acquisition of immovable property (not being agricultural land (rural or urban)).
2 Payee Resident
3 Threshold limit Sum paid during a FY > Rs. 2.50L, then there is TDS obligation. Otherwise, there is
no TDS obligation.
4 TDS rate 10% (Subject to S. 206AA)
5 Timing of TDS At the time of payment.

Note It provides that no tax shall be deducted from the compensation awarded U/s 96 of RFCTLARR Act.

Latest from Judiciary:


1 Interest U/s 28 of the Land Acquisition Act, 1894 which represents enhanced value of land and thus, partakes the
character of compensation and not interest. Hence, the interest U/s 28 is liable to be taxed U/H CG and not U/H IFOS.
2 On the other hand, interest U/s 34 of the Land Acquisition Act, 1894 is for the delay in making payment after the
compensation amount is determined. Such amount is liable to be taxed U/H IFOS. [Movaliya Bhikhubhai Balabhai
(2016) 388 ITR 343 (Guj)].

(iii) Exemption of capital gains arising from compulsory acquisition of land and buildings forming part of an
industrial undertaking - S. 54 D:
1 Person eligible for exemption Any assessee owning industrial undertakings.
U/s 54D
2 Capital asset to be transferred Land or building.
for availing exemption (referred It may be LTCA or STCA.
to as original asset) It should have been used for purpose of business of the industrial undertaking for
a period of atleast two years immediately preceding the date of its transfer.
It should have been compulsorily acquired under any law for the time being in
force.

3 Conditions to be fulfilled for The assessee should invest in another land or building (referred to as new asset)
availing exemption within the stipulated time.
Such land or building should be used for the purpose of re-establishing the
aforesaid industrial undertaking or for the purpose of setting up of a new industrial
undertaking.
4 Manner of investment The assessee can purchase land or building or
He can construct building.
5 Time limit for investment in new The assessee can purchase the new asset within a period of 3 years from the date

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Chapter-5: Capital gains - Summary

asset (S. 54H) of receipt of compensation.


6 Quantum of exemption Lower of (i) CG or (ii) Amount invested in new asset.
7 Depositing in capital gains Where it is not possible for the assessee to make investment in the new asset
account scheme within the due date for filing ROI (U/s S. 139 (1)), still he can avail exemption if he
deposits the amount proposed to be invested in new asset under the “Capital
gains deposit account scheme”.
8 Utilization of amount deposited The amount so deposited should be utilized for investment in the new asset within
the aforesaid time limit.
9 Consequences of non-utilization If the amount deposited is not fully utilized for investment in the new asset within
or partial utilization the aforesaid time limit, then the unutilized amount should be treated as CG of the
PY in which the period of 3 years from the date of receipt of compensation expires.
10 Withdrawal of unutilized amount The assessee can withdraw the unutilized amount from the deposit account for
any other purpose only after a period of 3 years from the date of receipt of
compensation.
11 Withdrawal of exemption upon The exemption granted will be withdrawn if the new asset is transferred within 3
sale of the new asset years from the date of its acquisition.
12 PY in which the exemption is The exemption will be withdrawn in the PY in which the new asset is transferred.
withdrawn
13 Manner of withdrawal of See the table given below
exemption

Computation of capital gains upon transfer of new asset within 3 years from the date of its acquisition and
withdrawal of exemption:
1 Full value of consideration for new asset *****
Less: Expenses wholly and exclusively incurred in connection with transfer of new asset *****
2 Net sale consideration *****
3 Cost of acquisition of new asset *****
Less: Exemption U/s 54D (to the extent remaining unwithdrawn) *****
4 Net cost of acquisition of new asset *****
5 Cost of improvement of new asset *****
6 STCG / LTCG (2-4-5) *****
(H) Special provisions for computation of capital gains in case of joint development agreement – S. 45 (5A) + S. 49
(7):
1 Notwithstanding anything contained in S. 45 (1), where the capital gains arises to an assessee being an individual or a
HUF from transfer of a capital asset, being land or building or both, under a specified agreement, the capital gains shall
be chargeable to tax as income of the PY in which the certificate of completion for the whole or part of the project is
issued by the competent authority (i.e. authority empowered to approve the building plan by or under any law for the
time being in force). [S. 45 (5A)].
2 For this purpose, the SDV 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 FVC received or accruing
as a result of the transfer of the capital asset.
3 However, the provisions of S. 45 (5A) shall not apply where the assessee transfers his share in the project on or before
the date of issue of the said certificate of completion, and the CG shall be deemed to be the income of the PY in which
such transfer takes place and the provisions of the Act, other than the provisions of S. 45 (5A), shall apply for the
purpose of determination of FVC. [Proviso to S. 45 (5A)].
4 For this purpose, ‘specified agreement’ means a registered agreement in which a person owning land or building or
both, agrees to allow another person to develop a real estate project on such land or building or both, in consideration of
a share, being land or building or both in such project, whether with or without payment of part of the consideration in
cash;
5 Where the capital gains arises from the transfer of a capital asset, being share in the project, in the form of land or
building, referred to in S. 45 (5A), not being the capital asset referred to in the proviso to S. 45 (5A), the cost of
acquisition of such asset shall be the amount which is deemed as FVC in S. 45 (5A). [S. 49 (7)].

TDS on payment under specified agreement – S. 194-IC:


1 Payment to be subjected Any sum by way of consideration, not being consideration in kind, under the agreement
to TDS referred to in S. 45 (5A).
2 Payee Resident
3 Payer Developer
4 TDS rate 10% (Subject to S.206AA)

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Chapter-5: Capital gains - Summary

5 Timing of TDS At the time of credit to the account of the payee in the books of accounts of the payer or at
the time of payment (whichever is earlier).
6 Threshold limit Not prescribed.

(I) Special exemption to specified people of Andhra Pradesh – S. 10 (37A):


1 Any income chargeable U/H CG in respect of transfer of specified capital asset arising to an assessee, being an
individual or a HUF, if he transfers that specified capital asset under the Land Pooling Scheme of AP Government shall
be exempt from tax.
2 Explanation to S. 10 (37A) defines the term ‘specified capital asset’.
3 ‘Specified capital asset’ means
(a) Land or building or both owned by the assessee as on 02.06.2014 and which has been transferred under the
scheme; or
(b) Land Pooling Certificates issued under the scheme to the assessee in respect of land or building or both
referred to in (a); or
(c) the reconstituted plot or land, as the case may be, received by the assessee in lieu of land or building or both
referred to in (a) in accordance with the scheme, if such plot or land, as the case may be, so received is
transferred within 2 years from the end of the FY in which the possession of such plot or land was handed over
to him.

COA in case of specified CA referred to in Clause (c) of Explanation to S. 10 (37A)- S. 49 (6):


Where the capital gains arise from the transfer of a specified capital asset referred to in clause (c) of Explanation to S. 10
(37A), which has been transferred after the expiry of 2 years from the end of the FY in which the possession of such asset
was handed over to the assessee, the cost of acquisition of such specified CA shall be deemed to be its SDV as on the last
day of the second FY after the end of the FY in which the possession of the said specified capital asset was handed over to
the assessee.

(J) Conversion of bonds, debentures or deposit certificates into shares or debentures – Tax implications: S. 47 (x) +
S. 49 (2A) + R. 8AA (2):
1 Conversion of debentures, bonds or deposit certificate of a company into shares or debentures of that company does
not amount to transfer. [S. 47 (x)]. Hence, the question of computing capital gains does not arise.
2 The cost of acquisition of shares or debentures which the assessee received upon conversion is that part of the cost of
debenture, bond or deposit certificate in relation to which the shares or debentures aforesaid were allotted. [S. 49 (2A)].
3 The period of holding of shares or debentures aforesaid shall include even the period for which the debentures or bonds
or deposit certificate in relation to which the shares or debentures aforesaid were allotted were held. [R. 8AA (2)].
4 If the gain arising from transfer of the aforesaid shares or debentures happens to be long-term, then for indexing the
COA, the denominator index is the index pertaining the PY in which the debentures or bonds or deposit certificate in
relation to which the shares or debentures aforesaid were allotted were acquired.

(K) Conversion of preference shares into equity shares – Tax implications: S. 47 (xb) + S. 49 (2AE) +_ S. 2 (42A)
Explanation-1 Clause (hf):
(i) Conversion of preference shares of a company into equity shares of that company does not amount transfer. [S. 47
(xb)]. Hence, the question of computing capital gains does not arise.
(ii) COA of the aforesaid equity shares = that part of the cost of preference shares in relation to which the equity shares
were allotted. [S. 49 (2AE)].
(iii) Period of holding of the equity shares shall commence on the date of acquisition of the preference shares. [S. 2 (42A)
Explanation-1 Clause (hf)].
(iv) If the gain arising from transfer of equity shares happens to be long-term, then for indexing the COA, the denominator
index is the index pertaining the PY in which the preference shares in relation to which the equity shares were allotted
were acquired.

(L) Computation of capital gains on account of transfer of bonus shares:


In computing the capital gains arising on account of transfer of bonus shares, the following points are to be considered:
1 Cost of acquisition (S. 55 (2) (aa) Nil (if the bonus shares were allotted on or after 01.04.2001)
(iia)) FMV on 01.04.2001 (if the bonus shares were allotted before 01.4.2001)
2 Period of holding - Sub clause (f) of Date of allotment of bonus shares to the day preceding the date of transfer.
clause (i) of Explanation-1 to S. 2
(42A):

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Chapter-5: Capital gains - Summary

Connected provision – S. 94 (8):


Applicability of S. 94 (8):
S. 94 (8) will apply if the following cumulative conditions are satisfied:
1 The assessee purchases units within a period of 3 months prior to the record date.
2 He is allotted additional units without any payment on the basis of holding of units on such date.
3 He sells all or any of the units referred to in (2) within a period of 9 months after the record date.
4 On the date of sale, he shall hold at least one of the additional bonus units allotted.

Effect of S. 94 (8):
Loss arising on account of such purchase and sale of units shall be ignored. However, such loss will be considered to be the
COA of the bonus units held on the date of sale.

(M) Computation of CG on account of transfer of right shares and right entitlement:

Tax implications in the hands of renouncer on account of renouncing the right entitlement in favour of any other
person:
Right entitlement is a capital asset. Renouncing right entitlement amounts to relinquishment of capital asset. CG needs to be
computed in the hands of the renouncer and the following points require attention:
1 COA of right entitlement Nil. (S. 55 (2) (aa) (ii)).
2 Period of holding Date of offer of the right to the day preceding the date of transfer. [Sub clause (e) of
clause (i) of Exp-1 to S. 2 (42A)].
3 Criterion for deciding the 36 months.
nature of capital asset
4 Nature of capital gain Invariably the gain is a STCG, since the offer cannot be kept open for a long period.

Tax implications in respect of transfer of right shares subscribed using the right entitlement:
In computing the CG arising on account of transfer of right shares the following points require attention:
1 COA of right shares Amount actually paid for acquiring such shares. S. 55 (2) (aa) (iii).
2 Period of holding Date of allotment of right shares to the day preceding the date of transfer. Sub clause
(d) of clause (i) of Exp-1 to S. 2 (42A).

Tax implication in the hands of renouncee in the event of sale of shares subscribed using the right entitlement:
In computing the capital gains arising on account of transfer of shares subscribed by the renouncee using the right
entitlement, the following points require attention:
1 Cost of acquisition of Amount paid to the company for acquiring such shares + amount paid to the renouncer for
shares acquiring the right entitlement. [S. 55 (2) (aa) (iv)].
2 Period of holding Date of allotment of shares by the company to the day preceding the date of transfer. [Sub
clause (d) of clause (i) of Exp-1 to S. 2 (42A)].

(N) Computation of CG arising on account of shares or securities allotted under ESOP – S. 49 (2AA):
(i) COA of shares or securities allotted under ESOP = FMV on the date of exercise of option. [S. 49 (2AA)]. Actual COA
shall be ignored. This is intended to avoid over-lapping taxation.
(ii) Period of holding of such shares or securities shall commence on the date of allotment. [S.2 (42A) Explanation-1
Clause (hb)].

(O) Cost of acquisition of intangible capital assets – S. 55 (2) (a):


Capital asset COA (if self-generated) COA (if acquired)
Goodwill of a business Nil Actual COA
Trade mark associated with a business
Brand name associated with a business
Right to manufacture, produce or process an article or
thing
Right to carry on a business or profession
Tenancy rights
Stage carriage permits (i.e. Route permits)

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Chapter-5: Capital gains - Summary

Points requiring attention:


Even if these capital assets were acquired before 01.04.2001, there is no option to take the FMV as on the 01.04.2001.

(P) Cost of improvement of certain intangible capital assets – S. 55 (1) (b) (1):
Capital asset Cost of improvement
Good will of a business Nil
Right to manufacture, produce or process an article or thing Nil
Right to carry on a business or profession Nil

(Q) Transfer of capital asset between holding company and its WOS:

S. 47 (iv) + S. 47 (v) + S.49 (1) + S. 2 (42A) Explanation-1:


1 Where a capital asset is transferred as a capital asset by holding company to its WOS (being an Indian company), this
shall not be regarded as transfer. [S. 47 (iv)]. Hence, the question of computing capital gains does not arise.
2 Where a capital asset is transferred as a capital asset by WOS to its holding company (being an Indian company), this
shall not be regarded as transfer. [S. 47 (v)]. Hence, the question of computing capital gains does not arise.
3 Where the capital asset is acquired by way of transfer referred to in S. 47 (iv) or S. 47 (v), the cost of acquisition of such
capital asset is the cost of acquisition to the previous owner. [S. 49 (1)].
4 The period of holding of such capital asset shall also include the period for which the capital asset was held by the
previous owner. [S. 2 (42A) Explanation-1].

Withdrawal of exemption granted U/s 47 (iv) / (v) – S. 47A (1) & S. 155 (7B):
1 Circumstances in which the Subsidiary company ceases to be WOS within 8 years from the date of
exemption granted U/s 47 (iv) / (v) transfer of capital asset. (or)
could be withdrawn U/s 47A (1) Transferee-company converts the transferred capital asset into stock-in-trade
within 8 years from DOT.
2 Manner of withdrawal The order of assessment passed in respect of AY relevant to the PY of
transfer in respect of transferor shall be amended to re-compute the total
income on account of withdrawal of exemption granted U/s 47 (iv) or S. 47
(v).
The order of amendment shall be passed within 4 years from the end of the
PY of violation. [S. 155 (7B)].
3 COA of capital asset in the hands of Actual cost of acquisition. [S. 49 (3)]. Provisions of S. 49 (1) shall not apply.
transferee (post withdrawal of
exemption through S. 47A (1)).
4 Period of holding of capital asset in the Starts on the actual date of acquisition. Provisions of Explanation-1 to S. 2
hands of transferee (post withdrawal (42A) shall not apply.
of exemption through S. 47A (1)).

(R) Amalgamation and capital gains:

1. Conditions to be fulfilled to be regarded as amalgamation under the Act – S. 2 (1B):


Mergers to be regarded as amalgamation, the following conditions are to be satisfied:
(a) All the properties of the amalgamating company before amalgamation shall become properties of the amalgamated
company.
(b) All the liabilities of the amalgamating company before amalgamation shall become liabilities of the amalgamated
company.
(c) Shareholders holding atleast 75% in the value of shares in amalgamating company shall become shareholders in the
amalgamated company by virtue of amalgamation.

2. Transfer of capital asset to the amalgamated company pursuant to the scheme of amalgamation – S. 47 (vi) + S.
49 (1) + S. 2 (42A) Explanation-1:
1 Where a capital asset gets transferred from the amalgamating company to the amalgamated company (being an India
company) pursuant to the scheme of amalgamation, it shall not be regarded as transfer. [S. 47 (vi)]. Hence, the
question of computing capital gains does not arise.
2 The cost of acquisition of such capital asset in the hands of amalgamated company is the cost of acquisition to the
previous owner (i.e. amalgamating company). [S. 49 (1)].
3 While computing the period of holding of such capital asset in the hands of amalgamated company the period for which

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Chapter-5: Capital gains - Summary

the capital asset was held by the amalgamating company shall also be included. [S. 2 (42A) Explanation-1].
4 Subsequently, if these assets are transferred by the amalgamated company, for computing the capital gains, if the COA
is to be indexed, the denominator index is the index pertaining to the PY in which these assets were acquired by the
amalgamating company. [M. Sankar Trading Corporation and Consultancy (P) Ltd. ITA. No. 2103/Mds/2012]

3. Transfer of shares held in amalgamating company pursuant to amalgamation – S. 47 (vii):


(a) Where amalgamation takes place, the amalgamating company comes to an end. The shares in the amalgamating
company will become valueless. The rights of the shareholders in the amalgamating company get extinguished.
(b) Extinguishment of rights is transfer as per S. 2 (47). If the amalgamated company allots its shares to the shareholders
of amalgamating company as a consideration for such extinguishment of rights, no CG shall be computed in the hands
of such shareholders. This is because S. 47 (vii) provides that nothing contained in S. 45 shall apply to such
extinguishment.
(c) However, this exemption is available only if the amalgamated company is an Indian company.
(d) The consideration for extinguishment shall be only in the form of shares in the amalgamated company. If the
consideration is not in the form of shares in the amalgamated co, the aforesaid exemption is not available. In other
words, CG shall be computed in the hands of the shareholders of the amalgamating company. (Gautham Sarabhai
Trust (Bom))
(e) For example, if the amalgamated company allots debentures to the shareholders of the amalgamating company, the
fair market value of such debentures should be taken as full value of consideration for computing capital gains in the
hands of the shareholders of amalgamating company.
(f) S. 47(vii) was amended with effect from AY 13-14 so as to exclude the requirement of issue of shares to the
shareholder where such shareholder itself is the amalgamated company. However, the amalgamated company will
continue to be required to issue shares to the other shareholders of the amalgamating company.

4. Transfer of shares allotted by amalgamated company to the shareholders of amalgamating company:


Where, pursuant to the scheme of amalgamation, shares are allotted by the amalgamated company to the shareholder of an
amalgamating company and such shares are transferred by such shareholder, capital gains shall be computed and charged
to tax in his hands in the PY of transfer. In this regard, the following points require attention:
1 POH of shares in amalgamated company – DOA of shares in the amalgamating company to the day preceding the
S. 2 (42A) Explanation 1 Clause (i) Sub DOT.
clause (c).
2 Cost of acquisition of shares in the Cost of acquisition of shares in the amalgamating company.
amalgamated company (S. 49 (2))
3 Denominator index for indexing COA of Index of the PY in which the shares were allotted by the amalgamating
shares in amalgamated company for company. (Decision of Bombay HC in Manjula Shah case applied).
computing CG arising on account of transfer
of such shares.
However, the aforesaid provisions are applicable only if the amalgamated company is an IC.

5. Transfer of shares held in an Indian company by one foreign company to another foreign company in a scheme
of amalgamation – S. 47 (via):
If the following conditions are satisfied, nothing is chargeable to tax U/s 45:
(a) Shares held in an Indian company are transferred by one foreign company to another foreign company in a scheme of
amalgamation.
(b) Atleast 25% of the shareholders of the amalgamating company shall become the shareholders of the amalgamated
company.
(c) This transfer shall not attract tax on capital gains in the country, in which the amalgamating company is incorporated.

Note:
COA of shares in Indian company in the hands of COA to the previous owner (i.e. amalgamating foreign
amalgamated foreign company = company). [S. 49 (1)].
Period of holding of shares (supra) for amalgamated Starts on the DOA by the previous owner (i.e. amalgamating
foreign company FC). [S. 2 (42A) Explanation-1].
Denominator index for indexing COA of shares (supra) Index pertaining to the PY in which the shares (supra) were
for computing CG in the hands of amalgamated foreign acquired by the amalgamating foreign company. (Decision of
company arising on account of transfer of shares (supra) Bombay HC in Manjula Shah case applied).

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Chapter-5: Capital gains - Summary

(S) Demerger & Capital gains:

1. Meaning of Demerger, Demerged company & Resulting Company:


(a) The term ‘Demerger’ means transfer, by one company, of its one or more undertakings to another company. Here,
undertaking means a business activity. (S. 2 (19AA).
(b) The transfer of undertaking should be pursuant to a scheme of demerger referred to in S. 391 to S. 394 of the
Companies Act 1956 (i.e. S. 230 to S. 232 of the Companies Act 2013).
(c) The company which transfers the undertaking(s) is called as demerged company. (S. 2 (19AAA).
(d) The company to which the undertaking of the demerged company is transferred is called as resulting co. The resulting
company may or may not be a WOS of the demerged company. (S. 2 (41A)).

2. Conditions to be satisfied to be called as demerger – S. 2 (19AA):


(a) All the properties of the undertaking transferred by the demerged company shall become the properties of the resulting
company.
(b) All the liabilities which arise out of the activities or operations of the undertaking transferred, shall become the liabilities
of the resulting company.
(c) Assets & liabilities are to be transferred to the resulting company at such values appearing in the books of a/c of the
demerged company immediately before demerger (figures before any revaluation shall be taken).
(d) The resulting company shall issue shares to the shareholders of the demerged company on a proportionate basis as a
consideration for demerger.
(e) Shareholders holding atleast 75% in the value of shares in demerged company shall become shareholders in the
resulting company by virtue of demerger
(f) The demerged company shall transfer its undertaking as a going concern. That is the business should be continuing at
the time of demerger.
(g) U/s 72A (5), the CG has powers to notify in the official gazette such conditions as it considers necessary to ensure that
the demerger is for genuine business purposes. Thus, the demerger should be in accordance with the conditions, if
any, notified U/s 72A (5).
(h) S. 2 (19AA) is amended with effect from AY 2013-14 so as to exclude the requirement of issue of shares where
resulting company itself is a shareholder of the demerged company. However, the requirement of issuing shares would
still have to be met by the resulting company in case of other shareholders of the demerged company.

Note: The reconstruction or splitting up of a company, which ceased to be a PSC as a result of transfer of its shares by the
CG, into separate companies, shall be deemed to be demerger, if such reconstruction or splitting up has been made to give
effect to any condition attached to the said transfer of shares and also fulfills such other condition as may be notified by the
CG in the official gazette. [Explanation-5 to S. 2 (19AA)].

3. Transfer of capital asset by the demerged company to the resulting company pursuant to demerger – S. 47 (vib):
1 Pursuant to demerger, all assets of the undertaking transferred become the assets of the resulting company. Such
assets may interalia include CA.
2 No CG shall be chargeable to tax in the hands of the demerged company on account of this transfer. This is because S.
47 (vib) provides that nothing in S. 45 shall apply to such transfer.
3 However, this exemption is available only if the resulting company is an Indian company. The demerged company may
be an Indian company or otherwise.
4 The COA of such capital asset in the hands of resulting company is the COA to the previous owner (i.e. demerged
company). [S. 49 (1)].
5 While computing the period of holding of such capital asset in the hands of resulting company the period for which the
capital asset was held by the demerged company shall also be included. [S. 2 (42A) Explanation-1].
6 Subsequently, if these assets are transferred by the resulting company, for computing capital gains, if the COA needs to
be indexed, the denominator index shall be the index pertaining to the PY in which these assets were acquired by the
demerged company. (Decision of Bombay HC in Manjula Shah case applied).

4. Issue of shares in resulting company pursuant to the scheme of demerger – S. 47 (vid):


1 On account of demerger, the networth of the demerged company gets reduced. Hence, it is followed by reduction of
share capital of demerged company. This results in extinguishment of rights in shares of demerged company which
comes within the transfer definition contemplated in S. 2 (47). The resulting company allots its shares to the
shareholders of demerged company as a consideration for such extinguishment.
2 However, there will be no capital gains computation since such extinguishment is not to be regarded as transfer for the
purpose of S. 45. [S. 47 (vid)].

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Chapter-5: Capital gains - Summary

5. Computation of capital gains arising from transfer of shares in demerged company & resulting company – S. 49
(2C) + S. 49 (2D):
The following points require attention for computation of capital gains arising on account of transfer of shares in the
demerged company and in the resulting company:
SN Particulars Shares in demerged company Shares in resulting (Indian) company
1 POH Date of acquisition of shares in the demerged Date of acquisition of shares in the demerged
company to the date of transfer. company to the date of transfer
2 COA See table given below. (S. 49 (2D)) See table given below. (S. 49 (2C))
3 Denominator Index of the PY in which the shares were Index for the PY in which the shares were
index allotted by the demerged company. allotted by the demerged company.

Cost of acquisition of shares in the resulting company and the demerged company:
1 COA of original shares held by the assessee in the demerged company ****
2 Net book value of assets transferred pursuant to demerger ****
3 Net worth of the demerged company immediately before demerger ****
4 Cost of acquisition of shares in the resulting company (1*2/3) (as per S. 49 (2C)) ****
5 Cost of acquisition of shares in the demerged company (1-4) (as per S. 49 (2D)) ****

Net worth = paid up share capital + General Reserves (immediately before demerger).

6. Transfer of shares held in an Indian company by one foreign company to another foreign company in a scheme
of demerger – S. 47 (vic):
If the following conditions are satisfied, nothing is chargeable to tax U/s 45:
(a) Shares held in an Indian company are transferred by one foreign company to another foreign company pursuant to the
demerger of the undertaking owned by the former.
(b) Shareholders holding not less than 75% in value of the shares of the demerged foreign company continue to remain
shareholders of the resulting foreign company.
(c) This transfer shall not attract tax on capital gains in the country, in which the demerged foreign company is
incorporated.

Note:
Cost of acquisition of shares in Indian company in the hands Cost of acquisition to the previous owner (i.e. Demerged
of Resulting foreign company = foreign company). [S. 49 (1)].
Period of holding of shares (supra) for Resulting foreign Starts on the date of acquisition by the previous owner (i.e.
company Demerged foreign company). [S. 2 (42A) Explanation-1].
Denominator index for indexing COA of shares (supra) for Index pertaining to the PY in which the shares (supra) were
computing capital gains in the hands of Resulting foreign acquired by the Demerged foreign company. (Decision of
company arising on account of transfer of shares (supra) Bombay HC in Manjula Shah case applied).

(T) Reduction of share capital – Tax implications:


1 Dividend U/s 2 (22) (d) Where a company, upon reduction of its share capital, makes any distribution to its
shareholders, such distribution to the extent attributable to the accumulated profits of the
company on the date of distribution shall be regarded as dividend.
Accumulated profits, for this purpose, shall include capitalised profits also. That is, share
capital to the extent attributable to issue of bonus shares shall also be regarded as part
of AP.
If the company reducing share capital happens to be a domestic company, then it has
obligation to pay DDT U/s 115-O.
Dividend U/s 2 (22) (d) is exempt in the hands of shareholders U/s 10 (34). (Subject to S.
115BBDA).
2 Widening the scope of New Explanation 2A is inserted in S. 2 (22) w.e.f 1st April 2018 to widen the scope
meaning of ‘accumulated of the term 'accumulated profits' so as to provide that in the case of an
profits’ for the purpose of amalgamated company, its accumulated profits, whether capitalized or not, or
dividend U/s 2 (22). losses as the case may be, shall be increased by the accumulated profits of the
amalgamating company, whether capitalized or not, on the date of amalgamation.
3 Exclusions from S. 2 (22) Any amount distributed to the preference shareholders upon reduction of preference
(d) shares is not to be regarded as dividend U/s 2 (22) (d). However, in the hands of
preference shareholder, capital gains need to be computed in view of decision of the
SC in Anarkali Sarabhai case.

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Chapter-5: Capital gains - Summary

Any amount distributed to the SH upon buy back of shares by the company shall not be
regarded as dividend U/s 2 (22) (d).
4 Computation of capital When the share capital is reduced by paying off a part of the capital by reducing the face
gains in the hands of value of the share, the share remains but the right of the shareholder to dividends on his
shareholder share capital and the right to share in the distribution of the net assets upon liquidation is
extinguished proportionately to the extent of reduction in capital. Thus, the reduction in
share capital amounts to transfer. (Karthikeya. V. Sarabhai (SC)).
Accordingly, CG needs to be computed in the hands of shareholder.
FVC = Money distributed + FMV of assets distributed – Dividend U/s 2 (22) (d). [G.
Narasimhan (SC)].
Cost of acquisition = COA of share to the extent attributable to extinguished part.

(U) Buy back of shares – Tax implications:


1 S. 2 (22) (d) defines ‘Dividend’ to include any distribution by a company to its shareholders upon reduction of its share
capital to the extent of its accumulated profits.
2 However, S. 2 (22) (iv) specifically excludes from the ambit of the term ‘dividend’ any distribution by a company to its
shareholders upon buy back of its shares in accordance with the provision of the Companies Act. Hence, if a company
makes any distribution pursuant to buy back of its own shares, it is not liable to DDT U/s 115-O.
3 Where a company buys back its shares in accordance with the provisions of the Companies Act, S. 46A requires
computation of capital gains in the hands of the shareholder. The capital gains are to be taxed in the PY of buy-back.
4 For the purpose of S. 48, the FVC is the amount received by the shareholder from the company.
5 However, if a domestic company buys back its unlisted shares, there shall be no computation of capital gains in the
hands of shareholder invoking S. 46A. Exemption is provided in S. 10 (34A).
6 However, the domestic company has to pay an additional income tax (called buy-back distribution tax) U/s 115QA
within 14 days of distribution.
7 Quantum of buy-back distribution tax = (Distributed income * 23.296%).
8 Distributed income = [A –B].
9 A = Consideration paid by the company to its shareholders upon buy back of its shares.
10 B = Amount received by the company for issue of such shares determined in a manner prescribed U/R 40BB.
Determination of amount received by the company for issue of shares – R. 40BB:

R. 40BB (2):
Situation Amount received by the company for issue of shares bought
back
Shares (which are bought back) have been issued by Amount actually received by the company in respect of such
the company to any person by way of subscription. shares including amount received by way of premium.

R. 40BB (3):
Situation Amount received by the company for
issue of shares bought back
Company had at any time, prior to the buyback of share, returned any sum Amount received in respect of such share (–
out of the amount received in respect of such share. ) amount so returned.

Note: If the sum or any part of it so returned was chargeable to DDT U/s 115-O and the company has paid such DDT then
such sum or part thereof, as the case may be, shall not be reduced. [Proviso to R. 40BB (3)].

R. 40BB (4):
Situation Amount received by the company for issue of shares bought back
Shares (which are bought back) were issued by FMV (determined U/R 3 (8)) to the extent credited to the share capital
the company under ESOP and share premium by the company.

R. 40BB (5)
Situation Amount received by the amalgamated company for issue of
shares which are bought back by it
Shares (which are bought back) were issued by Amount received by the amalgamating company in respect of
amalgamated company, under a scheme of shares in amalgamating company in lieu of which shares were
amalgamation, in lieu of shares in amalgamating allotted by the amalgamated company.
company.

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Chapter-5: Capital gains - Summary

R. 40BB (6):
Situation Amount received by the Resulting company for issue of
shares which are bought back by it
Shares (which are bought back) were issued by Resulting Amount received by the Demerged company in respect of
company, under a scheme of demerger, for shares in Demerged company * (Net book value of assets
extinguishment of rights in shares in Demerged company transferred pursuant to demerger/Net worth of Demerged
company immediately before demerger).

R. 40BB (7):
Situation Amount received by the Demerged company for issue of shares which are
bought back by it
Shares of Demerged company Amount received by the Demerged company in respect of original shares in Demerged
(after demerger) are bought back company – [Amount received by the Demerged company in respect of original shares in
by the Demerged company Demerged company * (Net book value of assets transferred pursuant to demerger/Net
worth of Demerged company immediately before demerger)].
R. 40BB (8):
Situation Amount received by the company for issue of shares
which are bought back by it
Shares (which are bought back) have been issued or allotted X÷Y
by the company as a part of consideration for acquisition of
any asset or settlement of any liability

X= An amount being lower of the following amounts:


(a) [FMV of the asset or liability, as determined by a merchant banker] * Part of consideration being paid by issue of
shares/ total consideration;
(b) the amount of consideration for acquisition of the asset or settlement of the liability to be paid in the form of
shares, to the extent credited to the share capital and share premium account by the company;
Y= The number of shares issued by the company as part of consideration;

R. 40BB (9):
Situation Amount received by the company for issue of shares
which are bought back by it
Firm or SPC gets converted into Company (X-Y)/Z
X= Book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at
source or as advance tax payment as reduced by the amount of tax claimed as refund under the IT Act and any
amount shown in the balance-sheet as asset including the unamortized amount of deferred expenditure which
does not represent the value of any asset.
For determining book value of the assets, any change in the value of the assets consequent to their revaluation
shall be ignored.
Y= Book value of liabilities shown in the balance-sheet, but does not include the following amounts, namely:
(a) capital, by whatever name called, of the proprietor or partners of the firm, as the case may be;
(b) reserves and surpluses, by whatever name called, including balance in P&L a/c;
(c) any amount representing provision for taxation, other than amount of tax paid, as deduction or collection at
source or as advance tax payment as reduced by the amount of tax claimed as refund under the IT Act, if any, to
the extent of the excess over the tax payable with reference to the book profits in accordance with the law
applicable thereto;
(d) Any amount representing provisions made for meeting liabilities, other than ascertained liabilities; and
(e) any amount representing contingent liabilities,
Z= Number of shares issued on conversion

R. 40BB (10):
Situation Amount received by the company for issue of shares which
are bought back by it
Shares (which are bought back) have been issued or Nil
allotted without consideration, on the basis of existing
shareholding in the company.

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Chapter-5: Capital gains - Summary

R. 40BB (11):

Situation Amount received by the company for issue of shares which


are bought back by it
Shares (which are bought back) have been issued on Amount received by the company in respect of such instrument
conversion of preference shares or bond or debenture, as so converted
debenture-stock or deposit certificate in any form or
warrants or any other security issued by the company

R. 40BB (12):
Situation Amount received by the company for issue of shares which
are bought back by it
Share being bought back is held in demat form and the The amount received by the company in respect of such share
same cannot be distinctly identified shall be the amount received for the issue of share determined
in accordance with this rule on the basis of FIFO method.

R. 40BB (13):
In any other case, the face value of the share shall be deemed to be the amount received by the company for issue of the
share.

Points requiring attention:


1 Obligation to pay BBDT is independent of whether the company has obligation to pay tax on its TI computed in
accordance with the provisions of this Act.
2 BBDT payment is a final payment in respect of which no credit is allowed to the company or the shareholder.
3 BBDT is neither eligible for deduction in the hands of the company nor in the hands of shareholders.
4 If there is delay in payment of BBDT, interest is levied @ 1% p.m or part thereof for the period beginning with 15th day
from the date of distribution to the date of payment. [S. 115QB].
5 If there is a default in payment of BBDT, the company and its principal officer becomes assessee in default. Collection
and recovery proceedings could be initiated against them. [S. 115QC].

Summary:
Tax implications Company which buys back shares = Company which buys back shares =
Domestic listed company Domestic unlisted company

In the hands of Distribution pursuant to buy back ≠ Dividend [S. Distribution pursuant to buy back ≠ Dividend
company 2 (22) (iv)]. Company has no DDT obligation U/s [S. 2 (22) (iv)]. Company has no DDT
115-O. obligation U/s 115-O.
No BBDT obligation U/s 115QA. There is BBDT obligation U/s 115QA.
In the hands of Capital gains are computed U/s 46A. Capital gains on buy back of shares are
shareholders exempt U/s 10 (34A).

(V) Distribution of assets by company upon liquidation – Tax implications:


1 Immunity from capital gains tax for the Where a company, upon liquidation, distributes capital assets to its
company in liquidation shareholders, it shall not be regarded as transfer for the purpose of
S. 45 and accordingly, there is no capital gains tax liability in the
hands of company. [S. 46 (1)].
However, if the company sells CAs and distributes the sale
proceeds among the shareholder, the immunity from S. 45 shall not
apply. In other words, the company shall be liable to CG tax. [Shri
Kannan Rice Mills Ltd (Mad)].
2 DDT obligation U/s 115-O for the company Dividend includes any distribution made to the shareholders of a
company on its liquidation, to the extent to which the distribution is
attributable to the accumulated profits of the company immediately
before its liquidation. [S. 2 (22) (c)].
For this purpose, accumulated profits shall include even capitalised
profits.
If the company under liquidation is a domestic co, then it has
obligation to pay DDT U/s 115-O.

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Chapter-5: Capital gains - Summary

Dividend U/s 2 (22) (c) is exempt in the hands of shareholders U/s


10 (34) [Subject to S. 115BBDA].
3 Capital gains in the hands of shareholders. Where a shareholder on the liquidation of a company receives any
money or other assets from the company, he shall be chargeable to
income-tax U/H CG in respect of the money so received or the
market value of the other assets on the date of distribution, as
reduced by the amount assessed as dividend within the meaning of
S. 2 (22) (c) and the sum so arrived at shall be deemed to be the
FVC for the purposes of S. 48. [S. 46 (2)].
4 Manner of computation of capital gains U/s 46 (2) (on a/c of extinguishment of rights in shares in company in
liquidation).
(a) PY of transfer PY of liquidation
(b) PY of chargeability PY of distribution
(c) POH Date of acquisition of shares in the company to the date on which
company goes into liquidation.
(d) Criterion for deciding the nature of CA. 12 months or 24 months (depending upon whether shares are listed
or unlisted).
(e) Full value of consideration Money + FMV of assets distributed – Dividend U/s 2 (22) (c).
(f) Logic behind deducting dividend U/s 2 (22) (c) To the extent of accumulated profits, the assets distributed are to be
regarded as dividend U/s 2 (22) (c) and is traceable to the head
IFOS. Accordingly, the assets distributed to the extent not regarded
as dividend U/s 2 (22) (c) shall alone qualify as FVC. Though
dividend U/s 2 (22) (c) is exempt U/s 10 (34), it gets taxed in the
hands of the company U/s 115-O.
(g) Cost of acquisition Cost of acquisition of shares in the company.
(h) Numerator index Index related to the PY in which company goes into liquidation.
(i) Denominator index Index related to the PY in which shares were acquired.
7 Manner of computing capital gains on account of transfer of capital assets distributed by the company in liquidation.
(a) COA of acquisition of distributed capital asset in the hands of FMV on the date of distribution by the
shareholder company. [S. 55 (2) (b) (iii)].
(b) Period of holding of such capital asset in the hands of shareholder Starts on the date of distribution by the
company.

(X) Reverse mortgage – tax implications:


1 S. 47 (xvi) clarifies that any transfer of a CA in a transaction of reverse mortgage under a scheme made and notified by
the CG would not amount to a transfer for the purpose of capital gains.
2 S. 10 (43) provides that the amount received by the senior citizen as a loan, either in lumpsum or in installments, in a
transaction of reverse mortgage would be exempt from income-tax.
3 Capital gains tax liability would be attracted only at the stage of alienation of the mortgaged property by the bank or
housing finance company for the purpose of recovering the loan.

Points requiring attention:


1 RM. Arunachalam When the previous owner had mortgaged the property, then after his death the legal heir
(SC) inherits only the mortgagor’s interest in the property. By discharging the mortgage debt his
heir who has inherited the property acquires the interest of mortgagee in the property. As a
result of such payment made for clearing off the mortgage, the interest of the mortgagee is
acquired by the heir. The said payment is, therefore, regarded as cost of acquisition.
Therefore, the cost of acquisition to the legal heir is the aggregate of the cost to the previous
owner and the amount paid to clear the mortgage.
2 V. S. M. R. Where the mortgage is created by the assessee himself, there will be no tax treatment of
Jagadishchandran discharge of mortgage debt and the same cannot be said to be cost of acquisition or cost of
(SC) improvement of the property.
3 Conclusion There is distinction between the obligation to discharge the mortgage debt created by the
previous owner and the obligation to discharge the mortgage created by the assessee
himself.
Where the property acquired by the assessee is subject to the mortgage created by the
previous owner, the assessee acquires absolute interest in that property only after the interest
created in the property in favour of the mortgage is transferred to the assessee, that is, after
the discharge of mortgage debt. In such case, the expenditure incurred by the assessee to

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Chapter-5: Capital gains - Summary

discharge the mortgage debt created by the previous owner to acquire absolute interest in the
property is treated as cost of acquisition.
However, the expenditure incurred by the assessee to remove the encumbrance created by
the assessee himself on the property which was acquired by the assessee without any
encumbrance is not allowable as deduction U/s 48.

(Y) Depreciation & Capital gains:

(i) Classification of depreciable assets:


1 Meaning of depreciable asset Depreciable asset means asset in respect of which depreciation allowance is
quantified for claiming deduction U/s 32 (1).
2 Classification of depreciable Depreciable assets are classified into (a) tangible; (b) intangible.
assets
3 Tangible depreciable assets (a) Building; (b) furniture (assets for convenience or decoration); (c) Plant &
machinery.
4 Intangible depreciable assets (a) Patent; (b) know-how; (c) trade-mark; (d) copy-right; (e) licence; (f) franchise;
(g) any other business of commercial rights of similar nature.
5 Building includes (a) Roads laid within factory premises for providing approach to building; [Gwalior Rayon (SC)];
(b) bridges/culverts; (c) wells; (d) tube wells.
6 Furniture It means assets meant for convenience and decoration.
It includes electrical fittings such as (a) Switches; (b) wiring; (c) sockets; (d) fans; (e) other
electrical fittings.
7 Machinery It means assets used in manufacturing or production or processing of goods or articles.
8 Plant It means any tool that is necessary for carrying on business or profession.
It includes (a) Ships; (b) aircrafts; (c) vehicles; (d) books; (e) surgical equipments; (f) scientific
apparatus. [S. 43 (3)].
9 Plant excludes Livestock. [S. 43 (3)].
Building, furniture &fittings. [S.43 (3)]
10 Treatment of loss Loss on sale of animals used for the purpose of business or profession upon their death or they
on sale of becoming permanently useless is allowed as deduction U/s 36 (1) (vi) while computing income
animals used for U/H PGBP.
business.

(ii) Judicial ruling in respect of depreciable assets:


1 Payments made Intangible assets are invaluable assets which are required for carrying on the business acquired
for Goodwill by the assessee without interruption.
In their absence, the assessee would have to commence the business from scratch and go
through the gestation period, whereas by acquiring these intangible assets along with tangible
assets, the assessee got a running business.
Thus, these intangible assets are, therefore, comparable to a license to carry on the existing
business of the transferor.
Therefore, payments made for securing goodwill are eligible for depreciation U/s 32 (1) (ii).
B. Raveendran Pillai (2011) (Ker) + Areva T and D India Ltd (2012) (Del) + Smifs Securities
Ltd (SC) + Mis Bharti Teletech (2015) (Del).
2 Abkari licence It is issued by the Kerala Government under the Foreign liquor Rules to the person carrying on
liquor trade. It is renewed every year unless a general policy decision is taken against it. It is
transferrable. It is, undoubtedly, an intangible depreciable asset which is eligible for depreciation
U/s 32 (1) (ii). [S. Ambika (2011) (Ker)].
3 Non-compete This is payment made for warding off or eliminating competition for a substantially long period. It
fees results in enduring benefit in capital field. Therefore, it is a capital expenditure. It is a payment
made for securing the right to operate in competition-free environment. Thus, it is a payment
made for securing a business or commercial right. Therefore, it is eligible for depreciation U/s 32
(1) (ii). [Medicorp Technologies India (P) Ltd (Chennai ITAT)].
4 Membership card It is a licence to trade in the floor of BSE. Therefore, it is also eligible for depreciation U/s 32 (1)
in BSE (ii).
5 Expenditure on Assessee was engaged in the business of ‘Aquaculture’. It grew prawns in specially designed
specially ponds. Assessee claimed depreciation on the expenditure incurred on pond, treating it as plant.
designed ponds The claim of the assessee was upheld by the SC in Victory Aqua Farm Ltd.

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(iv) Conditions to be fulfilled for the purpose of availing deduction in respect of depreciation allowance:
1 Depreciable asset shall be owned by the assessee. The ownership may be complete or partial.
2 Depreciable asset shall be used for the purpose of business or profession carried on by the assessee.

(v) Issues relating to ownership:


1 Beneficial ownership or economic ownership is suffice
Mysore Minerals Ltd ‘Ownership’ for the purpose of S. 32 should be understood in a broader sense. Beneficial or
(SC) + Podar Cements economic ownership is sufficient.
(P) Ltd (SC) + Smt. A.
Sivakami (Mad).
2 Significance of To become entitled to depreciation, it not necessary that the assessee should be a complete
‘Owned wholly or owner. Depreciation can be allowed even on assets partially owned by the assessee, to the
partly’ extent of his share in such assets.
3 Ownership of land not In case of buildings, the assessee must own the superstructure and not necessarily the land
prerequisite on which the building is constructed.
Assessee can claim depreciation on building which he has constructed in a lease hold land,
provided the building is used for the purpose of business or profession carried on by him.
[Revathi C. P. Equipments Ltd (Mad) + Chandra Agro (P) Ltd (All)].
Lease premium paid for securing lease hold interest in the land on which building which is
used for business is constructed cannot be added to the cost of construction of building for
the purpose of claiming depreciation. [Indian Oil Corporation (Bom)].
4 Concept of deemed If the assessee is occupying any building as a tenant for the purpose of carrying on his
building [Explanation- business or profession, any capital expenditure incurred towards renovation, extension or
1 to S. 32 (1)]. improvement to such building can be treated as value of building belonging to him and
depreciation can be claimed on such amount.
Note: This is an exception to the rule that the depreciation is allowed only with respect to the assets owned by the
assessee. This is called the concept of deemed building, since the capital expenditure incurred in construction etc of a
structure in a building taken on lease is regarded as a separate building in itself and is eligible for depreciation.
5 Depreciation on In case of assets purchased on installment basis, ownership passes on to the assessee
assets purchased on immediately. Even if the assessee commits default in paying the installments, the asset
installment basis cannot be repossessed. Only suit can be filed for recovery of arrears of installments. Hence,
depreciation can be allowed on the entire amount agreed to be paid to be paid as price.
[CBDT Circular 9 dated 23.03.1943].
7 Depreciation on Where the terms of agreement provide that the asset shall eventually become the property of
assets purchased on hirer or confer on the hirer an option to purchase an asset, the transaction should be
hire purchase basis regarded as one of hire purchase. In such case, depreciation shall be allowed on the cash
price (i.e. the amount for which the hired asset would have been sold for cash at the date of
agreement.
The difference between the aggregate of periodical payments and the cash price (referred to
as hire charges) shall be allowed as deduction equally over the period of agreement.
6 Depreciation on In case of lease transaction, irrespective of whether it is finance lease or operating lease,
assets taken on lease depreciation shall be allowed only to lessor and not to lessee, since the ownership is only
with lessor. [CBDT circular 2/2001].
If leasing of asset constitutes business, depreciation is to be allowed U/s 32. Even if it
doesn’t constitute business, it shall be allowed as deduction U/s 57 (ii) while computing
income U/H IFOS.

(vi) Issues relating to usage:


1 Depreciation on decoders given to cable Allowable. [Turner International (P) Ltd (Del)].
operators on loan.
2 Even usage of machine for trial run amounts [Ashima Syntax Ltd (Guj) + Mentha and allied products (All) +
to usage for the purpose of S. 32. Vindhyachal Distilleries Ltd (MP) + Chamundeshwari Sugar Ltd (Kar)
+ Escorts Tractors Ltd (Del) + Kosha Cubidor Containers Ltd (Guj)].

3 Passive user - enough


(a) The user of the asset should be understood in a wider sense so as to embrace passive as well as active user.
(b) Specific nature of business of certain assessees requires them to keep stand-by-equipments or spares.
(c) For example, additional boilers are kept as stand-by in factories driven by steam power. Stand-by generators are kept
by electricity supply companies. Spare engines are kept in stores by transport companies. Fire extinguishers,

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Chapter-5: Capital gains - Summary

projectors, visualizers, mike and sound system etc are held by MT educare.
(d) When an asset is devoted to the needs of business, it is actually used for the needs of business, as it is required for
efficient conduct of business. Thus, the same qualifies for depreciation U/s 32. [Pepsu Road Transport Corporation
(P&H) + Shahbad Co-operative Sugar Mills Ltd (2011) (P&H)].
(e) Likewise, machinery spares which can be used only in connection with an item of tangible fixed asset and their use is
expected to be irregular, has to be capitalised.
4 Whether depreciation is available on assets Yes. [Chennai Petroleum Corporation Ltd (2013) (Mad)].
which were not put to use throughout the
relevant PY due to paucity of raw materials?
5 Some machines forming part of block are U/s 32 (1) (ii), depreciation is allowed on WDV basis in respect of
under repairs throughout the PY. Are these block of asset and not in respect of individual assets.
eligible for depreciation? Therefore, the test of user should be applied not in respect of
individual assets forming part of a block but in respect of block as a
whole.
If the block as a whole is used for the purpose of business, though
some assets being part of it were not put to use, it does not affect
the claim of depreciation.
6 Are discarded assets forming part of block Depreciation is allowable on the WDV of the entire block, even
eligible for depreciation U/s 32 (1) (ii)? though the block includes some machinery which has already been
discarded and hence, can’t be put to use during the relevant PY.
The expression ‘used’ in S. 32 in respect of discarded machinery
would mean the use in the business, not in the relevant PY, but in
earlier PYs. [Yamaha Motor India (P) Ltd (2010) (Del)].
Even if the Department wants to disallow depreciation attributable to
discarded machines, there is no computational mechanism available
in this regard. Asset added to the block loses its identity.
(vii) Restriction of the quantum of depreciation U/s 32 (1) Proviso-2:
1 To avail depreciation, the asset need not be put to use throughout the year.
2 Even if the asset is put to use or made available for use during a part of the PY, the assessee would be entitled to claim
depreciation for the whole year.
3 However, an exception is contemplated in the 2nd proviso to S. 32 (1).
4 If the asset is put to use for a period of less than 180 days in the previous year in which it is acquired, the deduction U/s
32 shall be restricted to 50% of the amount of depreciation.
5 The aforesaid restriction is applicable only in the year in which the asset is acquired and not in subsequent years.
6 In other words, in the subsequent years, full deduction will be allowed with respect to depreciation, even if the asset is
put to use for a period of less than 180 days.
7 In the PY of transfer of depreciable asset, assessee is not eligible for depreciation.

(viii) Used partly for business purpose - (S. 38 (2)):


1 Where the building, machinery, plant or furniture is not exclusively used for the purpose of business or profession (say,
the assets are partly used for business or professional purpose and partly for personal purpose), the assessee will not
get deduction with respect to the full depreciation allowance.
2 In view of S. 38 (2), the AO will restrict the depreciation allowance to a fair proportionate part having regard to the user
of the assets for the purpose of business or profession.

(ix) Computation of depreciation:


Classification of depreciable assets for the purpose of computation of capital gains:
For the purpose of computation of depreciation, depreciable assets are divided into two:
(i) Depreciable assets covered by S. 32 (1) (i).
(ii) Depreciable assets covered by S. 32 (1) (ii).

Which depreciable assets are covered by S. 32 (1) (i)?


Tangible DA acquired on or after 01.04.1997 which are used by power generating units and in respect of which option U/R 5
(1A) has not been exercised to depreciate them U/s 32 (1) (ii) are covered by S. 32 (1) (i).

Which depreciable assets are covered by S. 32 (1) (ii)?


All depreciable assets (which are not covered by S. 32 (1) (i)) are covered by S. 32 (1) (ii).

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Chapter-5: Capital gains - Summary

Points requiring attention:


1 Option referred to U/R 5 (1A) shall be exercised on or before the due date for filing return for the AY relevant to the
PY in which power generation commences.
2 Once the option is exercised, it shall be final and shall apply to all the subsequent years.

Purpose of classification of depreciable assets as those covered by S. 32 (1) (i) & S. 32 (1) (ii):
SN DA covered by S. 32 (1) (i) DA covered by S. 32 (1) (ii)
1 These assets are depreciated on an asset to These assets are depreciated on block basis.
asset basis.
2 Straight line method is used for computation WDV method is used for computation of depreciation.
of depreciation.
3 For these assets depreciation rates are given For these assets depreciation rates are given in Appendix-I
in Appendix-IA of IT Rules. of IT Rules.
4 Gain or loss on transfer of these assets are Gain or loss on transfer of these assets are treated U/s 50.
treated U/s 32 (1) (ii), S. 41 (2) and S. 50A.
5 These assets are not eligible for additional These assets may be eligible for additional depreciation U/s
depreciation U/s 32 (1) (iia) 32 (1) (iia) subject to conditions stipulated therein.

Computation of depreciation in respect of assets covered by S. 32 (1) (i):


SN Particulars Amount
1 Actual cost ****
2 Depreciation rate (as per Appendix-1A of IT Rules) **
3 Depreciation (1*2) ***

Tax implications on account of transfer of depreciable assets covered by S. 32 (1) (i):


SN Situation Treatment
1 Moneys payable > Original cost Moneys payable – Original cost = CG; Taxable in the PY of transfer.
Original cost – Opening WDV = Balancing charge (which is charged to tax
U/H PGBP in the PY in which moneys payable becomes due – Vide S. 41
(2)).

2 Moneys payable Moneys payable > Moneys payable – Opening WDV = Balancing charge (which is charged to
< Original cost Opening WDV tax U/H PGBP in the PY in which moneys payable becomes due – Vide S.
41 (2)).
Question of computing capital gains does not arise.
3 Moneys payable Moneys payable < Opening WDV – Moneys payable = Terminal depreciation. It is allowed as
< Original cost Opening WDV deduction U/s 32 (1) (iii) while computing income U/H PGBP in the PY of
transfer.
Question of computing capital gains does not arise.

Note:
Balancing charge is to be taxed in the PY in which moneys payable becomes due U/H PGBP even though the business
does not exist in that PY.

Meaning of moneys payable:


SN Situation Moneys payable
1 Asset is sold Net sale proceeds
2 Asset gets destroyed or demolished Insurance compensation
3 Asset is discarded Realisable scrap value

Format for computing capital gains in case of transfer of assets covered by S. 32 (1) (i):
SN Particulars Amount
1 FVC ****
2 Expenses incurred in relation to transfer (***)
3 Net consideration (1-2) ****
4 COA (= Adjusted WDV) (S. 50A) ***
5 STCG (deemed) (3-4) ****

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Chapter-5: Capital gains - Summary

Meaning of Adjusted WDV:


SN Situation Adjusted WDV
1 Where terminal depreciation arises Opening WDV – Terminal depreciation
2 Where balancing charge arises Opening WDV + Balancing charge

Depreciable assets covered by S. 32 (1) (ii):


In respect of DA covered by S. 32 (1) (ii), both depreciation as well as capital gains are computed only in respect of block of
asset and not in respect of individual assets forming part of block.

Concept of block of asset [S. 2 (11)]:


(i) The term ‘block of assets’ is defined in S. 2 (11). It means group of assets falling under a class of asset being building,
plant, machinery, furniture, know-how, patent, trade mark etc having same rate of depreciation.
(ii) Thus, a group of assets will be regarded as a block of assets if the following cumulative conditions are satisfied:
1 The assets which form the group fall within a class of assets mentioned above.
2 All assets within this group have the same rate of depreciation.

Computation of depreciation in respect of depreciable assets covered by S. 32 (1) (ii): S. 43 (6):


1 Opening WDV of the block ****
2 Actual cost of assets acquired during the PY and falling within ****
this block
3 ‘Moneys payable’ in respect of any asset in the block which is ****
sold, discarded, demolished or destroyed, together with the
scrap value, if any.
4 WDV for the purpose of depreciation (1+2-3) ****
5 Depreciation (4*prescribed rate of depreciation) ****
6 Closing WDV of the block (4-5) ****

Points requiring attention:


1 Netting off Where an asset belonging to the block is sold, in computing the monies payable, we should not
expenses in take the take the gross consideration received from the assessee. All expenses incidental to sale
connection with should be reduced from the gross consideration.
transfer
2 Negative WDV If the WDV for the purpose of depreciation is a negative figure, it shall be taken as nil.

Situations under which no depreciation is admissible:


1 WDV of the block for the purpose of depreciation = 0
2 Block is empty (That is, none of the assets belonging to the block exists on the last day of the PY).
Computation of CG on a/c of transfer of depreciable assets covered by S. 32 (1) (ii) – S. 50:

When S. 50 (1) can be invoked?


S. 50 (1) can be invoked if the following conditions are satisfied:
1 The capital asset transferred should be a depreciable asset.
2 It shall belong to a block to which depreciation has been allowed in earlier years.
3 The block is not empty after the sale of this capital asset. In other words, the block exists at the end of the PY.
4 Sale consideration of the asset transferred > [Opening WDV of the block + cost of additions + expenses wholly and
exclusively for the purpose of transfer].

Computation of capital gains U/s 50 (1):


The capital gains shall be computed as under:
1 Full value of consideration of the asset transferred ****
2 Expenses wholly and exclusively for the purpose of transfer ****
3 Opening WDV of the block ****
4 Cost of assets added to the block during the previous year ****
5 STCG (1-2-3-4) ****

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Chapter-5: Capital gains - Summary

When S. 50 (2) is applicable?


S. 50 (2) can be invoked if the following conditions are satisfied:
1 All assets belonging a block of asset are transferred during the PY.
2 Depreciation has been allowed with respect to this block in earlier years.
Computation of capital gains U/s 50 (2):
The capital gains shall be computed as under:
1 Full value of consideration of the assets transferred ****
2 Expenses wholly and exclusively for the purpose of transfer ****
3 Opening WDV of the block ****
4 Cost of assets added to the block during the PY ****
5 STCG/STCL (1-2-3-4) ****

(x) Additional depreciation – S. 32 (1) (iia):


Eligibility
(i) In addition to normal depreciation allowed U/s 32 (1) (ii), an assessee is entitled to get additional depreciation u/s 32
(1) (iia) in the year in which the asset is first put to use. It is not allowed in the subsequent years. In other words, it is a
one-time benefit.
(ii) However, the additional depreciation is available only upon fulfillment of the following conditions:
1 The assessee must be engaged in manufacture or production of an article or thing or generation or
transmission or distribution of power.
2 The assessee should purchase and install a new plant and machinery.
3 Such plant and machinery should be an eligible plant and machinery.

Quantum of additional depreciation


(i) The quantum of additional depreciation is 20% of the actual cost of the eligible plant and machinery.
(ii) In the year of acquisition, if the plant and machinery is put to use only for a period of less than 180 days, the additional
depreciation should be computed at the rate of 10%. This is because the 2nd proviso to S. 32 (1) provides so.
(iii) The unallowed additional depreciation shall be allowed in the immediately succeeding PY. [Proviso-3 to S. 32 (1)].
(iv) However, if the plant and machinery is first put to use in a year subsequent to the year of acquisition, the 2nd proviso to
S. 32 (1) shall not apply. That is, the additional depreciation is to be computed at the rate of 20%.

Plant and machinery not eligible for additional depreciation


1 Ships
2 Aircrafts
3 Any machinery or plant which, before the installation by the assessee, was used either within or outside the India by any
other person
4 Any machinery or plant which is installed in any office premises or any residential accommodation or accommodation in
the nature of a guest house.
5 Any office appliances or road transport vehicles.

6 Any machinery or plant, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation
or otherwise) in computing the income chargeable U/H PGBP of any one PY.

Points requiring attention:


1 No additional depreciation is available in respect of building or furniture even if the aforesaid conditions are satisfied.
2 No additional depreciation is available in respect of old plant and machinery.

CBDT Circular 15/2016:


Whether or not an assessee engaged in printing or printing and publishing is eligible for grant of additional
depreciation U/s 32 (1) (iia)?
(I) Printing or printing and publishing amounts to manufacturing activity.
(ii) Assessee engaged in printing or printing and publishing is eligible for grant of additional depreciation U/s 32 (1) (iia).

Points requiring attention:


1 Does fork-lift truck Fork-lift-truck used inside the factory would not fall within the definition of ‘vehicle’. Hence, it
eligible for additional is eligible for additional depreciation U/s 32 (1) (iia).
depreciation? As per S. 2 (28) of Motor Vehicles Act 1988, the definition of a vehicle excludes interalia a

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Chapter-5: Capital gains - Summary

vehicle of special type adapted for use only in a factory or in any enclosed premises.
Therefore, fork-lift-truck used within factory ≠ Vehicle.
2 Computers installed at Computers used in factory or in production system are eligible for additional depreciation
factory. U/s 32 (1) (iia). These are not to be viewed as additional depreciation. These are integral
part of production system.
3 WDV of the block can’t The sum total of normal depreciation and additional depreciation can’t exceed the WDV of
be negative. the block and make it negative. In such a case, the additional depreciation shall be
restricted to such figure which makes WDV of the block nil.

(xi) Enhanced additional depreciation – S. 32 (1) (iia) Proviso-1:


If the following conditions are fulfilled, additional depreciation shall be calculated @ 35% on the actual cost:
(i) Assessee sets up an undertaking or enterprise for manufacture or production of an article or thing, on or after
01.04.2015 in any backward area notified by the CG in Andhra Pradesh, Telangana, Bihar or West Bengal.
(ii) Assessee acquires and installs any eligible machinery or plant for the purposes of said undertaking or enterprise
during 01.04.2015 to 31.03.2020 in the said backward area.

Points requiring attention:


(i) Assessee may be a corporate assessee or a non-corporate assessee.
(ii) If the assessee is owning an undertaking or enterprise which is engaged in manufacturing or production in such
backward area even before 01.04.2015, additional depreciation shall be computed only at the rate of 20%.
(iii) If the assessee sets up an undertaking or enterprise in the aforesaid backward areas to carry on the business of
generation or transmission or distribution of power on or after 01.04.2015, still additional depreciation is to be
computed only at the rate of 20%.
(iv) If, in the PY of acquisition, the eligible plant or machinery was put to use for less than 180 days, then the enhanced
additional depreciation is to be calculated at the rate of 17.5%. [In view of S. 32 (1) Proviso-2].
(v) The unallowed additional depreciation shall be allowed in the immediately succeeding PY. [Proviso-3 to S. 32 (1)].

(xii) Additional investment allowance – S. 32AD:


S. 32 AD Applicability Assessee (corporate or non-corporate) sets up an undertaking or enterprise for
(1) manufacture or production of an article or thing, on or after 01.04.2015 in any
backward area notified by the CG in Andhra Pradesh, Telangana, Bihar or West
Bengal.
Assessee acquires and installs any eligible machinery or plant for the purposes of
said undertaking or enterprise during 01.04.2015 to 31.03.2020 in the said
backward area.
Benefit provided under this While computing income U/H PGBP, an additional investment allowance is
section available as deduction.
Quantum of deduction 15% of actual cost of eligible plant or machinery.
PY of deduction PY in which eligible plant or machinery is installed.
Additional benefit Benefit under this section is in addition to the benefit of additional depreciation @
35%.
Quantum unrestricted The quantum of additional investment allowance is not restricted U/s 32 (1)
Proviso-2. In the PY of acquisition, even if the eligible plant or machinery was put
to use for less than 180 days, additional investment allowance is not restricted to
50%.
Block value - not affected Additional investment allowance does not reduce the block value (unlike additional
depreciation).
Eligible plant or machinery Same meaning as in additional depreciation.
Assessees in power sector Not entitled to benefit U/s 32AD.
S. 32 AD Lock-in-period The eligible plant or machinery shall not be transferred within 5 years from the date
(2) & (3) of its installation.
Violation of lock-in-period If the lock-in-period condition is violated, then (a) the amount of deduction allowed
condition (not on account of U/s 32AD (1) in respect of eligible plant or machinery shall be deemed to be
business reorganisation) income of the assessee chargeable U/H PGBP of the PY in which the eligible plant
or machinery is sold or transferred; (b) STCG shall also be computed within the
parameters of S. 50.
Violation of lock-in-period If the lock-in-period condition is violated on account of (a) amalgamation; or (b)
on account of business re- demerger; or (c) conversion of firm into company; or (d) conversion of sole
organisation proprietary concern into company; or (e) conversion of company into LLP, then the

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Chapter-5: Capital gains - Summary

amalgamated company, resulting company or company or LLP, as the case may


be shall not transfer the eligible plant or machinery within the aforesaid 5 years.
If it is transferred, then the deduction allowed U/s 32AD (1) in respect of eligible
plant or machinery (in the hands of amalgamating company or demerged company
or firm or SPC or company) shall be deemed to be income of the amalgamated
company or resulting company or company or LLP in the PY in which the eligible
plant or machinery is sold. In addition, STCG is computed within the parameters of
S. 50.

Points requiring attention:


(i) Fork-lift-truck used inside the factory would not fall within the definition of ‘Vehicle’. Hence, it is eligible for additional
investment allowance U/s 32AD.
As per S. 2 (28) of Motor Vehicles Act 1988, the definition of ‘vehicle’ excludes interalia, a vehicle of special type
adapted for use only in a factory or in an enclosed premises. Therefore, fork-lift-truck used within factory is not vehicle.
(ii) Computers used in factory or in production system are eligible for deduction U/s 32AD. These are not to be regarded
as office appliances.

(xiii) Depreciation in case of succession in business:


(i) On account of amalgamation, demerger, conversion of firm into company, conversion of SPC into company or
conversion of company into LLP, there will be succession in business.
(ii) Income from such business up to the date of succession shall be charged to tax in the hands of predecessor (i.e.
amalgamating company, demerged company, firm or SPC or company). Income thereafter shall be charged to tax in
the hands of successor (i.e. amalgamated company, resulting company, company or LLP). [S. 170 (1)].
(iii) Depreciation on block of assets shall be computed as if there is no succession and it shall be apportioned between the
predecessor and successor based on the number of days of usage of assets.

(xiv) Actual cost – S. 43 (1):


1 ‘Actual cost’ means actual cost of the asset to the assessee as reduced by that portion of the cost thereof, if any, as has
been met directly or indirectly by any other person or authority. [S. 43 (1)].
2 However, where an assessee incurs any expenditure for acquisition of any asset in respect of which a payment or
aggregate payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or
account payee bank draft or use of electronic clearing system through a bank account, exceeds Rs. 10000, such
expenditure shall not form part of actual cost of such asset. [Proviso to S. 43 (1)].

Components of actual cost:


All cost incurred in bringing the asset to be present location and working condition shall be capitalised. An illustrative list of
items of costs which shall form part of actual cost is as under:
1 Purchase price ****
2 Taxes & duties (for which credit is not availed) [Explanation-9 to S. 43 (1)] ****
3 Cost of placing order ****
4 Travelling cost [L. G. Balakrishnan & Bros (P) Ltd (Mad) + J. M. A. Industries Ltd (Del)] ****
5 Loading charges ****
6 Transportation charges ****
7 Transit insurance ****
8 Unloading charges ****
9 Inspection charges ****
10 Interest on borrowing up to the date on which the asset is first put to use [Proviso to S. 36 (1) + Explanation-8 ****
to S. 43 (1)].
11 Erection-commissioning-installation expenses ****
12 Trail run expenses (net of realisation from trial run) ****
13 Subsequent price adjustments ****
14 Adjustment on account of change in duties or taxes ****
15 Trade discounts (****)
16 Asset specific subsidy [S. 43 (1) Explanation-10 and the proviso thereunder] (****)
17 Refund of asset specific subsidy ****
18 Receipts incidental to acquisition of asset (****)
19 Adjustment U/s 43A ****
20 Portion of cost of the asset met by any other person (****)
21 Actual cost of the asset ******

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Points requiring attention:


1 Tax paid on fee for technical services availed in connection with installation of machinery which is paid pursuant to tax
insulation clause in the agreement, is also a consideration for the engineering services availed in connection with
installation of machinery. It becomes part and parcel of the installation cost which needs to be capitalised. [Standard
polygraph machines (P) Ltd 243 ITR 788 (Mad)].
2 Expenses incurred in training employees for installation of machinery forms part of actual cost of the asset. [Sunil
Synchem Ltd 163 ITR 0467 (Raj).].
3 Expenditure incurred on account of the foundation stone laying ceremony is to be added to the cost of the factory
building as the foundation is a part of the construction and forms part of the actual cost of the assets for the grant of
depreciation allowance. [Nirlon synthetic fibres & chemicals Ltd 137 ITR 1 (Bom)].
4 A residential building could be used for commercial purpose only after converting into a commercial building. In this
regard, if commercialization charges are paid, it shall form part of actual cost. [Hindustan Times Ltd 231 ITR 741 (SC].

Addition or extension to an existing asset – Tax treatment:


1 ICDS V provides that the cost of an addition or extension to an existing tangible fixed asset which of capital nature and
which becomes an integral part of the exiting tangible fixed asset is to be added to the actual cost.
2 However, if the addition or extension has a separate identity and is capable of being used after the existing tangible
fixed asset is disposed off, it shall be treated as separate asset.

Acquiring assets for consolidated price – Determination of actual cost:


1 Where several assets are purchased for a consolidated price, then the consideration paid shall be apportioned to
various assets on fair basis. [ICDS V].
2 In slump sale, the entire undertaking is transferred by way of sale for a lump sum consideration without values being
assigned to the individual assets and liabilities in such sales.
3 The Act does not prescribe as to what will be the actual cost of the assets transferred pursuant to slump sale in the
hands of the transferee. ICDS V fills this gap.

Fixed assets acquired for non-monetary consideration – What is the actual cost?

SN ICDS-V
1 When a tangible fixed asset is acquired in exchange for another asset, the fair value of the tangible fixed asset so
acquired shall be its actual cost
2 When a tangible fixed asset is acquired in exchange for shares or other securities, the fair value of the tangible fixed
asset so acquired shall be its actual cost.

Special provisions consequential to changes in rate of exchange of currency – S. 43A:


1 S. 43A applies only in respect of assets acquired for the purpose of business or profession from a country outside India
through a loan in foreign currency or foreign supplier’s credit.
2 In consequence of a change in exchange rate during the PY after the acquisition of such asset there is an increase or
decrease in the liability of the assessee as expressed in Indian currency (as compared to the liability existing at the time
of acquisition of the asset) at the time of making payment:
(a) towards the whole or part of the cost of the asset.
(b) towards the repayment of the whole or part of the moneys borrowed by him from any person directly or indirectly, in
any foreign currency specifically for the purpose of acquiring the asset along with interest, if any.
3 The amount by which the liability as aforesaid is so increased or reduced during the PY and which is taken into account
at the time of payment shall be added to the actual cost of the asset or reduced from the actual cost of the asset, as the
case may be.

Points requiring attention:


1 The adjustments referred to in S. 43A shall be made only in the PY in which actual payment is made to the foreign
supplier or repay the foreign currency loan.
2 The adjustments referred to in S. 43A shall not be made if the foreign currency loan or supplier’s credit is re-instated at
the rate of exchange prevailing on Balance sheet date each year and no actual payment is made.

Explanation-3 to S.43A:
Where the assessee has entered into a contract with an authorised dealer for providing him with a specified sum in foreign
currency on or after a stipulated future date at the rate of exchange specified in the contract to enable him to meet the whole
or any part of the liability aforesaid, the amount, if any, to be added to or deducted from, the actual cost of the asset U/s 43A

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Chapter-5: Capital gains - Summary

shall, in respect of so much of the sum specified in the contract is available for discharging the liability aforesaid, be
computed with reference to the rate of exchange specified therein.

Explanation-2 to S. 43 (1):
Where an asset is acquired by the assessee by way of gift or inheritance, the actual cost of the asset to the assessee shall
be the WDV in the hands of the previous owner at the time of transfer of asset computed by assuming that the asset was
the only asset in the block of assets.

Explanation-3 to S. 43 (1):
Where before the date of acquisition by the assessee, the assets were at any time used by any other person for the purpose
of his business or profession and the AO is satisfied that the main purpose of the transfer of such assets, directly or
indirectly to the assessee, was the reduction of income tax liability (by claiming depreciation with reference to enhanced
cost), the actual cost to the assessee shall be such an amount as the AO may determine with the previous approval of JCIT.

Explanation-4 to S. 43 (1):
Where any asset which had once belonged to the assessee and had been used by him for the purposes of his business or
profession and thereafter ceased to be his property by reason of transfer or otherwise, is re-acquired by him, then the actual
cost of the asset to the assessee shall be the lower of the following:
(a) WDV of asset at the time of transfer by the assessee computed by assuming that the asset was the only asset in the
block of assets.
(b) the actual price for which the asset is re-acquired by him

Explanation-4A to S. 43 (1):
Where before the date of acquisition by the assessee (referred to as first person), the assets were at any time used by any
other person (referred to as second person) for the purposes of his business or profession and depreciation has been
claimed in respect of such assets by the second person and such second person acquires on lease, hire or otherwise,
assets from the first mentioned person, then notwithstanding anything contained in Explanation-3, the actual cost of the
transferred assets, in case of first person, shall be the WDV of the said assets at the time of transfer thereof by the second
person.
Explanation-5 to S. 43 (1):
Where a building previously the property of the assessee is brought into use for the purpose of business or profession of the
assessee, the actual cost to the assessee shall be the actual cost of the building to the assessee as reduced by an amount
equal to the depreciation calculated at the rate in force on that date that would have been allowable had the building been
used for the purpose of business or profession since the date of its acquisition.

Explanation-11 to S. 43 (1):
Where an asset which was acquired outside India by an assessee, being a non-resident, is brought by him to India and used
for the purposes of his business or profession, the actual cost of the asset to the assessee shall be the actual cost to the
assessee, as reduced by an amount equal to the amount of depreciation calculated at the rate in force that would have been
allowable had the asset been used in India for the said purposes since the date of its acquisition by the assessee.

Actual cost of a block of asset transferred between holding and WOS companies – Explanation-2 to S. 43 (6):
Where in any PY, any block of assets is transferred by a holding co to its subsidiary or by a subsidiary to its holding co and
the conditions of S. 47 (iv) or S. 47 (v) are satisfied, then the actual cost of the block of assets in the case of the transferee-
co shall be the WDV of the block of assets as in the case of the transferor-co for the immediately preceding PY as reduced
by the amount of depreciation actually allowed in relation to the said preceding PY.

Actual cost of a CA transferred between holding and WOS companies – Explanation-6 to S. 43 (1):
When any capital asset is transferred by a holding company to its subsidiary or by a subsidiary to its holding company, then,
if the conditions of S. 47 (iv) or (v) are satisfied, the actual cost of the transferred capital asset to the transferee-co shall be
taken to be the same as it would have been if the transferor-co had continued to hold the capital asset for the purposes of its
business.

Explanation-2 to S. 43 (6):
Where any block of assets is transferred by the amalgamating company to amalgamated company and the amalgamated
company is an Indian company, then the actual cost of the block of assets in case of amalgamated company shall be the
WDV of the block of assets in the hands of the amalgamating company for the immediately preceding PY as reduced by the
amount of depreciation actually allowed in relation to the said preceding PY.

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Explanation-7 to S. 43 (1):
Where, in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the amalgamated
company and the latter is an Indian company, then the actual cost of the capital asset to the amalgamated company shall be
taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the
purposes of its business.

Explanation-2B to S. 43 (6):
Where any asset forming part of a block of assets is transferred by a demerged company to the resulting company, the
WDV of the block of assets in the case of resulting company shall be the WDV of the transferred assets of the demerged
company immediately before demerger.

Explanation-2A to S. 43 (6):
Where in any PY, any asset forming part of a block of assets is transferred by a demerged company to the resulting
company, then the WDV of the block of assets of the demerged company at the beginning of the PY shall be reduced by the
WDV of the assets transferred to the resulting company pursuant to demerger.
Explanation-7 to S. 43 (6):
Where the income of an assessee is derived, in part from agriculture and in part from business chargeable to income-tax
U/H PGBP, for computing the WDV of assets acquired before the PY, the total amount of depreciation shall be computed as
if the entire income is derived from the business of the assessee U/H PGBP and the depreciation so computed shall be
deemed to be the depreciation actually allowed under this Act.

Leased commercial vehicles used by lorry operators for running them on hire – Whether eligible for higher
depreciation:
1 Even when commercial vehicles are leased by owner thereof and the lessee uses the same for running them on hire,
the owner will be eligible for depreciation @ higher rate of 30%.
2 The expression ‘Motor buses, lorries and taxis used in business of running on hire’ would not only cover the case
of use by the owner for the business of running on hire, but also use by lessee for business of running on hire. [Bansal
Credits Ltd 259 ITR 69 (Del) + Madan & Co 254 ITR 445 (Mad) + Agarwal Finance Co. (P) Ltd 332 ITR 549 (Cal)].
3 Higher depreciation is with reference to the vehicle and not with reference to the nature of business.

Some additional issues relating to depreciation rates:


1 ‘Router’ and ‘Router’ and ‘switches’ can be classified as computer hardware when they are used along with
‘switches’ a computer and when their functions are integrated with a computer. In such a situation, routers
and switches are to be included in block of ‘computer’ for purpose of determining rate of
depreciation applicable to them. [DCIT Vs Data craft India Ltd 40 SOT 295 (Mum-SB)].
2 EPABX and EPABX and mobile phones are communication equipments. Therefore, they cannot be treated
mobile phones as computers to be entitled to higher depreciation at 40%. They are eligible for depreciation at
normal rate of 15% applicable to plant and machinery. [Federal Bank Ltd Vs ACIT [2011] 332
ITR 319 (Ker)].
3 Computer Computer accessories and peripherals (such as printers, scanners, servers etc) form an integral
accessories and part of computer system and they can’t be used without computer. Therefore, these are also
peripherals eligible for higher rate of depreciation of 40%. [BSES Yamuna Powers Ltd (2013) (Del)].
4 UPS UPS is also eligible for higher rate of depreciation @ 40% and not @ general rate of 15%. [Same
reasoning]. [Orient Ceramics and Industries Ltd (Del)].

Depreciation allowance – mandatory – S. 32 (1) Explanation-5:


Depreciation shall be allowed to the assessee in computing his total income whether or not he has claimed it. In other
words, depreciation allowance is mandatory.

(N) Tax treatment of unabsorbed depreciation – S. 32 (2):


Covered in Set off chapter

16. Slump sale – Tax implications:


(A) Meaning of slump sale – S. 2 (42C):
(i) “Slump sale” means the transfer of one or more undertakings as a result of the sale for a lump sum consideration
without values being assigned to the individual assets and liabilities in such sales:
(ii) Undertaking means a business activity.
(iii) The determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees
or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities;

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(B) Computation of capital gains in case of slump sale – S. 50B:


(i) Any profits or gains arising from the slump sale effected in the PY shall be chargeable to income-tax as capital gains
arising from the transfer of LTCA and shall be deemed to be the income of the PY in which the transfer took place. [S.
50B (1)].
(ii) However, any profits or gains arising from the transfer under the slump sale of any capital asset being undertaking(s)
owned & held by an assessee for not more than 36 months immediately preceding the date of its transfer shall be
deemed to be the capital gains arising from the transfer of STCA. [Proviso to S. 50B (1)].
(iii) In relation to capital assets being an undertaking or division transferred by way of such sale, the "net worth" of the
undertaking shall be deemed to be the COA and the COI for the purposes of S. 48 and no regard shall be given to the
provisions contained in the 2nd proviso to S. 48 (i.e. Indexation benefit). [S. 50B (2)].
(iv) ‘‘Net worth’’ shall be the aggregate value of total assets of the undertaking or division as reduced by the value of
liabilities of such undertaking or division as appearing in its books of account. [Explanation-1 to S. 50B].
(v) Any change in the value of assets on account of revaluation of assets shall be ignored for the purposes of computing
the net worth. [Proviso to Explanation-1 to S. 50B].
(vi) For computing the net worth, the aggregate value of total assets shall be, — (a) in the case of depreciable assets,
the WDV of the block of assets determined in accordance with the provisions contained in S. 43 (6) (c) (i) (C); and (b)
in the case of other assets, the book value of such assets. [Explanation-2 to S. 50B].
(vii) Every assessee, in the case of slump sale, shall furnish along with the ROI a report of a Chartered accountant (Form
3CEA) indicating the computation of the net worth of the undertaking or division, as the case may be, and certifying
that the net worth of the undertaking or division, as the case may be, has been correctly arrived at in accordance with
the provisions of this section. [S. 50B (3)].

Cost of acquisition & improvement:


1 Cost of acquisition & improvement Net worth of the undertaking

2 Net worth of the undertaking Value of assets of the undertaking transferred- Value of liabilities of the
undertaking transferred.
3 Value of assets of the undertaking Value of depreciable assets + Value of non depreciable assets.
transferred
4 Value of non-depreciable assets Sum total of book value of non-depreciable assets.
5 Value of depreciable assets Value computed as per S. 43 (6) (c) (i) (c)

Value of depreciable assets as per S. 43 (6) (c) (i) (c):


1 Actual cost of assets (transferred by way of slump sale) falling within the block ****
2 Depreciation up to the PY preceding the PY of slump sale (computed as if these assets were the only assets ****
falling within the block)
3 Value of depreciable assets determined as per S. 43 (6) (C) (i) (c). [1-2] ****

WDV of the block for the purpose of depreciation (in the year of slump sale):
1 Opening WDV of the block ****
2 Actual cost of assets acquired during the PY and falling within this block ****
3 ‘Moneys payable’ in respect of any asset in the block which is sold, discarded, demolished or destroyed, together ****
with the scrap value, if any.
4 Value determined as per S. 43 (6) (c) (i) (c) ****
5 WDV for the purpose of depreciation (1+2-3-4) ****

Points requiring attention:


1 Contingent Ignore contingent liabilities
liabilities
2 Revaluation of Revaluation of assets shall not be considered while computing NW, irrespective of the fact that
assets revaluation is done in the current year or in past years.

17. Succession of firm by company – Tax implications:


A. Immunity to the firm from capital gains tax – S. 47 (xiii):
Where a company succeeds a firm in the business carried on by the latter and as a result there is a transfer of capital asset
by the firm to the company, nothing contained in S. 45 shall apply to such transfer. That is, the firm will not be liable to
capital gains tax. However, this immunity from S. 45 is available only when the following conditions given in Proviso to S. 47
(xiii) are fulfilled:

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Chapter-5: Capital gains - Summary

(a) All assets and liabilities of the firm relating to the business immediately before succession shall be taken over by the
company.
(b) All partners of the firm immediately before succession shall become the shareholders of the company.
(c) The partners shall receive consideration only by way of shares (equity or preference) allotted in the company.
(d) The partners shall become the shareholders in the company in the same proportion in which their capital accounts
stood in the books of the firm on the date of succession.
(e) The partners shall, in aggregate, have atleast 50% voting power in the company, for a period of 5 years from the date
of succession.

B. Cost of acquisition and POH of capital asset received from firm in the hands of company:
1 Cost of acquisition of capital asset received = Cost of acquisition to the previous owner (i.e. firm). [S. 49 (1)].
from firm (in the hands of company)
2 POH Starts on the date of acquisition by the previous owner (i.e. firm). [S. 2
(42A) Explanation].
3 Denominator index for indexing COA in the = Index pertaining to the PY in which the CA was acquired by the
hands of the company previous owner (i.e. firm). [Manjula Shah (Bom)].

C. Computation of depreciation in case of succession – Proviso-5 to S. 32 (1):


Where a firm is succeeded by a company and the requirements of S. 47 (xiii) are satisfied, then in respect of assets
transferred pursuant to succession, both the firm and company are eligible for depreciation. For computing the depreciation
allowable in the hands of the predecessor (firm) and the successor (company), the following steps are to be followed:
1 Find out the depreciation on the assets as if succession had not taken place.
2 Then, apportion the depreciation between the predecessor (firm) and successor (company), in the ratio of number of
days for which the assets are used by them during the PY in which succession took place.

D. Carry forward of losses and depreciation of the firm by the company – S. 72A (6):
1 Where a firm is succeeded by a company fulfilling the conditions laid down in S. 47 (xiii), then, notwithstanding anything
contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the predecessor
firm shall be deemed to be the loss or allowance for depreciation of the successor company for the purpose of previous
year in which succession took place and other provisions of this Act relating to set off and C/F of loss and allowance for
depreciation shall apply accordingly.
2 "Accumulated loss" means so much of the loss of the predecessor firm U/H PGBP (not being a loss sustained in a
speculation business) which such predecessor firm would have been entitled to carry forward and set off U/s 72 if the
succession of business had not taken place;
3 "Unabsorbed depreciation" means so much of the allowance for depreciation of the predecessor firm which remains to
be allowed and which would have been allowed to the predecessor firm under the provisions of this Act, if succession of
business had not taken place.

E. Consequences of violation of the conditions stipulated in Proviso to S. 47 (xiii):


1 Where any of the conditions laid down in the proviso to S. 47 (xiii) are not complied with, the amount of profits or gains
arising from the transfer of such capital asset not charged U/s 45 by virtue of conditions laid down in the proviso to S. 47
(xiii) shall be deemed to be the profits and gains chargeable to tax of the successor company for the PY in which the
requirements of the proviso to S. 47 (xiii) are not complied with. [S. 47A (3)]
2 Further, the set-off of loss or allowance of depreciation made in any PY in the hands of the successor company, shall be
deemed to be the income of the company chargeable to tax in the year in which such conditions are not complied with.
[Proviso to S. 72A (6)].

18. Succession of SPC by a company – Tax implications:


A. Exemption to the SPC from capital gains tax – S. 47 (xiv) + Proviso:
Where a company succeeds a sole proprietary concern in the business carried on by the latter and as a result, there is a
transfer of capital asset by such concern to the company, nothing contained in S. 45 shall apply to such transfer. That is, the
proprietary concern will not be liable to capital gains tax. However, the following conditions stipulated in the Proviso to S. 47
(xiv) are to be satisfied:
(a) All the assets and liabilities of the sole proprietary concern in relation to the business immediately before succession
shall be taken over by the company.
(b) The sole proprietor shall receive consideration only in the form of shares in the transferee company.
(c) The sole proprietor shall have atleast 50% VP in the co for a period of 5 years from the date of succession.

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Chapter-5: Capital gains - Summary

B. Cost of acquisition and POH of capital asset received from SPC in the hands of company:
1 Cost of acquisition of capital asset received from = Cost of acquisition to the previous owner (i.e. SPC). [S. 49 (1)].
SPC (in the hands of company)
2 POH Starts on the date of acquisition by the previous owner (i.e. SPC).
[S. 2 (42A) Explanation].
3 Denominator index for indexing cost of = Index pertaining to the PY in which the CA was acquired by the
acquisition in the hands of the company previous owner (i.e. SPC). [Manjula Shah (Bom)].

C. Computation of depreciation in case of succession – Proviso-5 to S. 32 (1):


Where a SPC is succeeded by a company and the requirements of S. 47 (xiii) are satisfied, then in respect of assets
transferred pursuant to succession, both the SPC and company are eligible for depreciation. For computing the depreciation
allowable in the hands of the predecessor (SPC) and the successor (company), the following steps are to be followed:
1 Find out the depreciation on the assets as if succession had not taken place.
2 Then, apportion the depreciation between the predecessor (SPC) and successor (company), in the ratio of number of
days for which the assets are used by them during the PY in which succession took place.

D. Carry forward of losses and depreciation of the SPC by the company – S. 72A (6):
1 Where a SPC is succeeded by a company fulfilling the conditions laid down in S. 47 (xiv), then, notwithstanding
anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the
predecessor SPC shall be deemed to be the loss or allowance for depreciation of the successor company for the
purpose of previous year in which succession took place and other provisions of this Act relating to set off and carry
forward of loss and allowance for depreciation shall apply accordingly.
2 "Accumulated loss" means so much of the loss of the predecessor SPC U/H PGBP (not being a loss sustained in a
speculation business) which such predecessor SPC would have been entitled to carry forward and set off U/s 72 if the
succession of business had not taken place;
3 "Unabsorbed depreciation" means so much of the allowance for depreciation of the predecessor SPC which remains to
be allowed and which would have been allowed to the predecessor SPC under the provisions of this Act, if succession
of business had not taken place.

E. Consequences of violation of the conditions stipulated in Proviso to S. 47 (xiii):


1 Where any of the conditions laid down in the proviso to S. 47 (xiv) are not complied with, the amount of profits or gains
arising from the transfer of such capital asset not charged U/s 45 by virtue of conditions laid down in the proviso to S. 47
(xiv) shall be deemed to be the profits and gains chargeable to tax of the successor company for the PY in which the
requirements of the proviso to S. 47 (xiv) are not complied with. [S. 47A (3)]
2 Further, the set-off of loss or allowance of depreciation made in any PY in the hands of the successor company, shall be
deemed to be the income of the company chargeable to tax in the year in which such conditions are not complied with.
[Proviso to S. 72A (6)].

19. Conversion of company into LLP – Tax implications:


A. Exemption of capital gains arising from transfer of capital asset pursuant to conversion of private company/
unlisted public company into LLP - S. 47 (xiiib):
Where there is transfer of a capital asset by a private company or unlisted public company to a LLP as a result of conversion
of the company into a LLP in accordance with the provisions of S. 56 or 57 of the LLP Act, 2008, then it shall not be
regarded as transfer. S. 45 does not get invoked. The question of computing capital gains does not arise. However the
following conditions stipulated in the Proviso to S. 47 (xiiib) are to be complied with:
(a) all the assets and liabilities of the company immediately before the conversion become the assets and liabilities of
the LLP;
(b) all the shareholders of the company immediately before the conversion become the partners of the LLP and their
capital contribution and profit sharing ratio in the LLP are in the same proportion as their shareholding in the
company on the date of conversion;
(c) the shareholders of the company do not receive any consideration or benefit, directly or indirectly, in any form or
manner, other than by way of share in profit and capital contribution in the LLP;
(d) the aggregate of the profit sharing ratio of the shareholders of the company in the LLP shall not be less than
50% at any time during the period of 5 years from the date of conversion;
(e) the total sales, turnover or gross receipts in business of the company in any of the 3 PYs preceding the PY in
which the conversion takes place does not exceed Rs. 60L;
(f) the total value of assets as appearing in the books of accounts of the company in any of the three PYs
preceding the PY in which conversion takes place should not exceed Rs. 5 Crores.
(g) no amount is paid, either directly or indirectly, to any partner out of balance of accumulated profit standing in

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Chapter-5: Capital gains - Summary

the accounts of the company on the date of conversion for a period of three years from the date of
conversion.

Points requiring attention:


S. 47 (xiiib) exempts also capital gains arising to the shareholders of the converting company due to extinguishment of their
rights in the shares of the company, provided the requirements of Proviso to S. 47 (xiiib) are complied with.

B. Cost of acquisition of transferred capital assets in the hands of LLP – S. 49 (1) (iii) (e):
Where the capital asset becomes the property of LLP on account of conversion of company into LLP, the cost of acquisition
of that capital asset in the hands of LLP shall be the cost of acquisition to the previous owner (i.e. company).

C. Period of holding of the transferred asset in the hands of LLP - Sub-clause (b) of Clause (i) of Explanation to S. 2
(42A):
POH of the capital asset transferred from company to the LLP upon conversion shall start on the date of acquisition by the
previous owner (i.e. company).

Note:
The denominator index for indexing the cost of acquisition in the hands of LLP is the index pertaining to the PY in which the
CA was acquired by the previous owner (i.e. company). [Decision of Bombay HC in Manjula shah case applied].

D. Actual cost of block of assets transferred to LLP – Explanation-2C to S. 43 (6):


Where in any PY, any block of assets is transferred by a private company or unlisted public company to a LLP and the
conditions specified in the proviso to S. 47 (xiiib) are satisfied, then, notwithstanding anything contained in S. 43 (1), the
actual cost of the block of assets in the case of the LLP shall be the WDV of the block of assets as in the case of the said
company on the date of conversion of the company into the LLP.

E. Computation of depreciation in the year of conversion – Proviso-5 to S. 32 (1):


Where a company gets converted into LLP and the requirements of S. 47 (xiiib) are satisfied, then in respect of assets
transferred pursuant to conversion, both the company and LLP are eligible for depreciation. For computing the depreciation
allowable in the hands of the predecessor (Company) and the successor (LLP), the following steps are to be followed:
1 Find out the depreciation on the assets as if conversion had not taken place.
2 Then, apportion the depreciation between the predecessor (company) and successor (LLP), in the ratio of number of
days for which the assets are used by them during the PY in which succession took place.

F. Carry forward and set off of losses and depreciation of the company by LLP – S. 72A (6A):
1 Where a company is converted into LLP fulfilling the conditions laid down in S. 47 (xiiib), then, notwithstanding anything
contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the predecessor
company shall be deemed to be the loss or allowance for depreciation of the successor LLP for the purpose of PY in
which conversion took place and other provisions of this Act relating to set off and carry forward of loss and allowance
for depreciation shall apply accordingly.
2 “Accumulated loss” means so much of the loss of the predecessor company U/H PGBP (not being a loss sustained in a
speculation business) which such predecessor company would have been entitled to carry forward and set off U/s 72 if
the succession of business had not taken place;
3 “Unabsorbed depreciation” means so much of the allowance for depreciation of the predecessor company which
remains to be allowed and which would have been allowed to the predecessor company under the provisions of this Act,
if succession of business had not taken place.

G. Consequences of violation of the conditions prescribed under Proviso to S. 47 (xiiib) – S. 47A (4) + Proviso to S.
72A (6A):
1 Where any of the conditions laid down in the proviso to S. 47 (xiiib) are not complied with, the amount of profits or gains
arising from the transfer of such capital asset not charged U/s 45 by virtue of conditions laid down in the proviso to S. 47
(xiiib) shall be deemed to be the profits and gains chargeable to tax of the successor LLP for the PY in which the
requirements of the proviso to S. 47 (xiiib) are not complied with. [S. 47A (4)]
2 Further, the set-off of loss or allowance of depreciation made in any PY in the hands of the successor LLP, shall be
deemed to be the income of the company chargeable to tax in the year in which such conditions are not complied with.
[Proviso to S. 72A (6A)].
3 The capital gains which was exempt U/s 47 (xiiib) in the hands of the shareholders of the converting company will be
taxed in their hands in the PY in the conditions (s) stipulated in the Proviso to S. 47 (xiiib) are violated. [S. 47A (4)].

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Chapter-5: Capital gains - Summary

H. Cost of acquisition of rights of partner in LLP – S. 49 (2AAA):


For computation of CG arising on account of assignment of interest in LLP which was obtained upon conversion of company
into LLP, the COA of shares in converting company which enabled the shareholder to become a partner in LLP shall be
regarded as COA of the interest in LLP. [S. 49 (2AA)].

I. Period of holding of rights of partner in LLP:


It starts with the date of becoming partner in LLP and ends with the date preceding the date of transfer of interest in LLP.
The criterion for deciding whether the gain is LT/ST is 36 months.

20. Other transactions which are not to be regarded as transfer:


S. 47 Any transfer of a capital asset, being a Government security carrying a periodic payment of interest, made outside
(viib) India through an intermediary dealing in settlement of securities, by a non-resident to another non-resident ≠
Transfer.
S. 47 Any transfer of a capital asset, being any work of art, archaeological, scientific or art collection, book, manuscript,
(ix) drawing, painting, photograph or print, to the Government or a University or the National museum, National Art
Gallery, National Archives or any other public museum or institution as may be notified by the CG in the Official
Gazette to be of national importance or to be of renown throughout any state or states ≠ Transfer.
S. 47 (xii)
S. 45 will not apply in case of the following transfer and accordingly, there is no capital gains tax liability for the transferor:
1 Capital asset Land
2 Transferor Sick industrial company managed by its worker’s cooperative.
3 Transfer Transfer is made pursuant to the scheme sanctioned by BIFR.
4 Timing of The transfer takes place during the period commencing on the first day of the previous year in which
transfer the company has become sick and ending with the last day of the PY in which the net worth of the
company >= its accumulated losses.

Exemption in respect of transactions in IFSC (S. 47 (viiab)):


S. 47 (viiab) has been inserted w.e.f AY 2019-20 to provide that a transfer through IFSC will be exempt. The conditions for
exemption are as follows:
(a) There is a transfer of a CA by a NR through RSE;
(b) The capital asset is: (i) a bond referred to in S. 115AC (1); or (ii) a GDR referred to in S. 115AC (1); or (iii) a RDB of an
Indian company; or (iv) a derivative;
(c) The stock exchange is located in any IFSC;
(d) The consideration for such transaction is paid or payable in foreign currency.

21. Exemptions in respect of capital gains:


(A) Exemption of LTCG on transfer of property used for residence- U/s 54:
1 Person eligible for exemption U/s 54 Individual & HUF
2 Capital asset to be transferred for availing LTCA
exemption (referred to as original asset) Residential house whose income is assessable U/H IFHP
3 Condition to be satisfied for availing The assessee should invest the capital gain arising from transfer of
exemption original asset in one residential house located in India (referred to
as new asset).
4 Manner of investment The assessee can purchase a residential house.
Alternatively, he can also construct a residential house.
5 Within what time the new asset is to be Within 1 year before the date of transfer of original asset or
purchased? Within 2 years from the date of transfer of original asset.
6 Within what time the new asset is to be Within 3 years from the date of transfer of original asset.
constructed?
7 Quantum of exemption LTCG arising from transfer of original asset or the amount invested
in the new asset (whichever is less).
8 Depositing in capital gains account Where it is not possible for the assessee to make investment in the
scheme new asset within the due date for filing ROI (specified in S. 139 (1)),
still he can avail exemption if he deposits the capital gains under
“Capital gains deposit account scheme”.
9 Utilization of amount deposited The amount so deposited should be utilised for investment in the
new asset within the aforesaid time limit.

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Chapter-5: Capital gains - Summary

10 Consequences of non-utilization or partial If the amount deposited is not fully utilised for investment in the new
utilization of amount deposited in the asset within the aforesaid time limit, then the unutilized amount
aforesaid account should be treated as LTCG of the PY in which the period of 3 years
from the date of transfer of original asset expires.
11 Withdrawal of unutilized amount for any The assessee can withdraw the unutilised amount from the deposit
other purpose account for any other purpose only after a period of 3 years from the
date of transfer of original asset.
12 Withdrawal of exemption upon sale of the The exemption granted will be withdrawn if the new asset is
new asset transferred within 3 years from the date of its acquisition.
14 PY in which the exemption is withdrawn The exemption will be withdrawn in the PY in which the new asset is
transferred.
15 Manner of withdrawal of exemption See the table given below

Computation of capital gains upon transfer of new asset within 3 years from the date of its acquisition and
withdrawal of exemption:
1 Full value of consideration for new asset *****
Less: Expenses wholly and exclusively incurred in connection with transfer of new asset
*****
2 Net sale consideration *****
3 Cost of acquisition of new asset *****
Less: Exemption granted U/s 54 (to the extent remaining unwithdrawn) *****
4 Net cost of acquisition of new asset *****
5 Cost of improvement of new asset *****
6 STCG / LTCG (2-4-5) *****

Points requiring attention:


1 Property-let out or self occupied. Exemption is available U/s 54 in respect of a residential house which may be
let or self occupied.
2 Cost of land-to be taken The cost of the land is an integral part of the cost of the residential house,
(CBDT Circular 667 dated 18.10.1993). whether purchased or constructed. In computing the amount of capital gains
invested, this shall also be considered.
4 Time limit in case of compulsory Where the original asset is compulsorily acquired, the time limit U/s 54 shall
acquisition (S. 54 H) be reckoned considering only the date of receipt of compensation and not the
date of compulsory acquisition.
If any enhanced compensation is received, it is taxable in the year in which
such compensation is received and for acquiring the new asset, the time limit
shall be determined from the date of receipt of additional compensation.
5 Investment in HP abroad Not eligible for exemption U/s 54.
6 Investment in more than one HP Exemption is restricted to investment in any one HP of the choice of the
assessee.
7 Investment not in the name of the There is no bar in making investment in the name of close kin and kith.
assessee but in the name of his close For enjoying exemption, the Act requires investment and not investment in
kin and kith the name of assessee. [Gurnam Singh (P&H) + Ravinder Kumar Arora
(Delhi) + Mrs. Jennifer Bhide (Kar) + Kamal Wahal (Delhi) + Natarajan
(Mad)].
8 Can exemption U/s 54 be denied on the Investment of CG and not completion of construction is a pre-requisite for
ground that the construction of RHP exemption U/s 54. [Sambandam Udaykumar (Kar)].
was not completed in all aspects within
3 years from the date of transfer of
original asset?
9 Whether exemption U/s 54 could be No. [Chandru L. Raheja (Bom)].
denied merely on the ground that the
construction of new house had begun
before the sale of original asset?
10 Builder handed over the possession of If the payment is made to the builder within the time limit specified, even
flat to the assessee beyond the time- though the builder might have handed over the possession of flat to the
limit specified in S. 54. Whether CG assessee beyond the time limit specified, exemption U/s 54 is available. The
exemption would be available? word ‘purchase’ in S. 54 should not be understood in the sense of legal
transfer. [R. L. Sood (Del) + Balraj (Del)].

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Chapter-5: Capital gains - Summary

(B) Exemption w.r.t LTCG arising on account of transfer of a LTCA (not being a residential house property) – S. 54
F:
1 Person eligible for exemption Individual & HUF
U/s 54F
2 CA to be transferred LTCA
Any capital asset other a residential house
3 Condition to be satisfied for The assessee should invest in one residential house in India (referred to as new
availing exemption asset).
On the date of transfer of original asset, he should not own more than a
residential house other than the new asset.
4 Manner of investment The assessee can purchase a residential house.
Alternatively, he can construct a residential house.
5 Within what time the new asset Within 1 year before the date of transfer or
is to be purchased? Within 2 years from the date of transfer.
6 Restriction on purchasing a Assessee should not purchase a residential house other than the new asset
residential house other than the within 2 year from the date of transfer of original asset.
new asset
7 Within what time the new asset Within 3 years from the date of transfer of original asset.
is to be constructed?
8 Restriction on completion of Assessee should not complete the construction of a residential house other than
construction of a RHP other than the new asset within 3 years from the date of transfer.
the new asset
9 Quantum of exemption (LTCG arising from transfer of the original asset * Amount invested in new
asset)/Net consideration
10 Net consideration FVC accruing from transfer of original asset (Less) Expenses wholly & exclusively
incurred for the purpose of transfer of original asset.
11 Depositing in capital gains Where it is not possible for the assessee to make investment in the new asset
account scheme within the due date for filing ROI (U/s 139), still he can avail exemption if he
deposits the amount proposed to be invested in new asset under “CG deposit
account scheme”.
12 Utilization of amount deposited The amount so deposited should be utilised for investment in new asset within the
TL (supra).
13 Consequences of non-utilization If the amount deposited is not fully utilised for investment in the new asset within
or partial utilization the aforesaid time limit, then [(LTCG * Unutilized amount)/Net consideration]
should be treated as LTCG of the previous year in which the period of 3 years
from the date of transfer of original asset expires.
14 Withdrawal of unutilised amount The assessee can withdraw the unutilised amount from the deposit account for
any other purpose only after a period of 3 years from the DOT of original asset.
15 Withdrawal of exemption upon If the new asset is transferred within 3 years from the date of its acquisition, the
sale of the new asset. LTCG which arose on transfer of original asset and which got exempted U/s 54F,
would be assessed to tax as LTCG in the PY in which the new asset is sold.
In addition, in that year, LTCG or STCG arising on account of transfer of the new
asset, will also be assessed to tax.
16 Consequences of assessee If the assessee purchases a residential house, the income of which is chargeable
purchasing a residential house U/H IFHP, other than the new asset within 2 years from the date of transfer of
other than the new asset within original asset, LCTG, exempted earlier, will be assessed to tax as LTCG of PY in
two years from date of transfer which the residential house is purchased
of original asset
17 Consequences of assessee If the assessee completes the construction of a residential house, the income of
completing the construction of a which is chargeable U/H IFHP, other than the new asset within 3 years from the
residential house other than the date of transfer of original asset, LCTG, exempted earlier, will be assessed to tax
new asset within three years as LTCG of the PY in which the construction of residential house is completed.
from date of transfer of original
asset

Note:
Where the SDV U/s 50C has been adopted as the FVC, the reinvestment made in acquiring a residential property, which is
in excess of the actual net sale consideration, can be considered for the purpose of computation of exemption U/s 54F,
irrespective of the source of funds for such reinvestment. [Gouli Mahadevappa (2013) 356 ITR 90 (Kar)].

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Chapter-5: Capital gains - Summary

(C) Exemption w.r.t capital gain arising on transfer of land used for agricultural purposes - S. 54B:
1 Person eligible for exemption U/s 54B. Individual & HUF.
2 Capital asset to be transferred for Urban agricultural land.
availing exemption under this section It may be a LTCA or STCA.
(referred to as original asset) It should have been used for agricultural purposes either by the
assessee or by his parents or by HUF during the period of 2 years
immediately preceding the date of its transfer.
3 Conditions to be satisfied for availing The assessee should invest in an agricultural land (referred to as new
exemption asset).
The agricultural land may be urban or rural.
4 Within what time the new asset is to be Within 2 years from the date of transfer of original asset.
purchased?
5 Quantum of exemption CG or Amount invested in new asset (whichever is less)
6 Depositing in capital gains account Where it is not possible for the assessee to make investment in the new
scheme asset within the due date for filing ROI (U/s S. 139 (1)), still he can avail
exemption if he deposits the amount proposed to be invested in new
asset in “Capital gains deposit account scheme”.
7 Utilization of amount deposited The amount so deposited should be utilized for investment in new asset
within the time limit (supra).
8 Consequences of non-utilization or partial If the amount deposited is not fully utilized for investment in the new
utilization asset within the aforesaid time limit, then the unutilized amount should be
treated as CG of the previous year in which the period of 2 years from
the date of transfer of original asset expires.
9 Withdrawal of unutilized amount The assessee can withdraw the unutilized amount from the deposit a/c
for any other purpose only after a period of 2 years from the date of
transfer of original asset.
10 Withdrawal of exemption upon sale of the The exemption granted will be withdrawn if the new asset is transferred
new asset within 3 years from the date of its acquisition.
13 PY in which the exemption is withdrawn The exemption will be withdrawn in the previous year in which the new
asset is transferred.
14 Manner of withdrawal of exemption See the table given below

Computation of capital gains upon transfer of new asset within 3 years from the date of its acquisition and
withdrawal of exemption:
1 Full value of consideration for new asset *****
Less: Expenses wholly and exclusively incurred in connection with transfer of new asset *****
2 Net sale consideration *****
3 Cost of acquisition of new asset *****
Less: Exemption U/s 54B (to extent remaining unwithdrawn) *****
4 Net cost of acquisition of new asset *****
5 Cost of improvement of new asset *****
6 STCG / LTCG (2-4-5) *****

(D) Exemption of capital gains arising on account of transfer of a LTCA upon investment in certain bonds (S. 54EC):
1 Person eligible for exemption under this Any assessee.
section
2 Capital asset to be transferred for Any LTCA being land or building or both.
availing exemption (referred to as original
asset)
3 Conditions to be fulfilled for availing The assessee should invest in specified assets within 6 months from the
exemption date of transfer of the asset.
4 Specified asset Bonds issued by NHAI or REC or any other bond notified by the CG in
the official gazette by the CG redeemable after 3 years. (If investment is
made before 01.04.2018).
Bonds issued by NHAI or REC or any other bond notified by the CG in
the official gazette by the CG redeemable after 5 years. (If investment is
made on or after 01.04.2018).
4A Bonds notified by the CG Bonds issued by Power finance corporation.
Bonds issued by Indian railway finance corporation.

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Chapter-5: Capital gains - Summary

5 Quantum of exemption LTCG or Amount invested in specified asset (whichever is less).


6 Ceiling on investment in specified asset Investment in specified asset in a financial year shall not be more than
Rs. 50L
Investment in specified asset in the financial year of transfer and in the
succeeding financial year, out of capital gains arising on account of
transfer of LTCA, shall not exceed Rs. 50L.
7 Withdrawal of exemption upon transfer of If the specified assets are transferred within 3 years from the date of their
specified assets acquisition, the LTCG arising from the transfer of original asset which
was not charged to tax, will be deemed to be the LTCG of the PY in
which specified assets are transferred.
In addition, the capital gains arising on account of transfer of the
specified assets shall also be assessed to tax.
8 Availing loan or advance on the security If loan or advance is taken on the security of specified assets within a
of specified asset within 3 years – period of 3 years of its acquisition, the exemption granted U/s 54EC shall
impact. be withdrawn. (if investment was made before 01.04.2018)

If loan or advance is taken on the security of specified assets within a


period of 5 years of its acquisition, the exemption granted U/s 54EC shall
be withdrawn. (if investment was made on or after 01.04.2018)

Some important judicial pronouncements:


1 Exemption U/s 54EC cannot be denied on account of the bonds being issued after six months of the date of transfer
even though the payment for the bonds was made by the assessee within the six month period. [Hindustan Unilever
Ltd (2010) 325 ITR 102 (Bom)].
2 An assessee cannot be deprived of claiming exemption U/s 54EC, if bonds of assessee’s choice are not available or are
available only for a broken period within the period of 6m after the DOT of capital asset and the bonds are purchased
shortly after it became available next time after the expiry of the said 6m. [Cello Plast (2012) 209 Taxman 617 (Bom)].
3 In a case where a depreciable asset held for more than 36 months is transferred, the benefit of exemption U/s 54EC be
claimed, if the capital gains on sale of such asset are reinvested in long-term specified assets within the specified time.
[V.S. Dempo Company Ltd 387 ITR 354 (SC)].

(E) Exemption of capital gains arising on account of transfer of a LTCA upon investment in notified units of
specified fund (S. 54EE):
1 Person eligible for exemption under Any assessee.
this section
2 Capital asset to be transferred for Any LTCA
availing exemption (referred to as
original asset)
3 Conditions to be fulfilled for availing The assessee should invest in notified units of specified fund within 6 months
exemption from the date of transfer of the LTCA.
4 Quantum of exemption LTCG or Amount invested in notified units (whichever is less).
5 Ceiling on investment in notified units Investment in notified units in a financial year shall not be more than Rs. 50L
Investment in notified units in the FY of transfer and in the succeeding FY, out
of capital gains arising on account of transfer of LTCA, shall not exceed Rs.
50L.
6 Withdrawal of exemption upon transfer If the notified units are transferred within 3 years from the date of their
of notified units acquisition, the LTCG arising from the transfer of original asset which was not
charged to tax, will be deemed to be the LTCG of the PY in which notified
units are transferred.
In addition, the capital gains arising on account of transfer of the notified units
shall also be assessed to tax.
8 Availing loan or advance on the If loan or advance is taken on the security of notified units within a period of 3
security of notified units within 3 years years of its acquisition, the exemption granted U/s 54EE shall be withdrawn.
– impact.

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Chapter-5: Capital gains - Summary

(F) Exemption of capital gains on transfer of assets in case of shifting of industrial undertakings from urban area -
S. 54G:
1 Person eligible for exemption U/s 54G Any assessee
2 Capital asset to be transferred for It may be LTCA or STCA
availing exemption (referred to as It may be Plant, machinery, land or building or any right in land or building.
original asset) It is used for the purpose of an industrial undertaking situated in an urban
area.
It is transferred in the course of shifting of the industrial undertaking to any
area other than an urban area.
3 Condition to be satisfied for availing The assessee has to utilize the capital gains for:
exemption
(i) Purchasing of new machinery or plant for the purposes of business of the
industrial undertaking in the area to which the said undertaking is shifted.
(ii) Acquisition of land or building for the purposes of his business in the
said area.
(iii) Shifting the establishment to such area
(iv) Incurring expenses for such other purpose as may be specified in a
scheme framed by the CG.
4 Time limit for making the above Within 1 year before or 3 years after the date of transfer of original asset
expenditure
5 Quantum of exemption CG arising from transfer of original asset or the amount incurred for the
purposes mentioned in 4 (whichever is less).
6 Depositing in capital gains account Where it is not possible for the assessee to incur these expenses within the
scheme due date for filing ROI (specified in S. 139 (1)), still he can avail exemption if
he deposits the capital gains in “Capital gains deposit account scheme”.
7 Utilization of amount deposited The amount so deposited should be utilized for the purposes specified in 4
within the aforesaid time limit.

8 Consequences of non-utilization or If the amount deposited is not fully utilized for the purposes specified in 4
partial utilization within the aforesaid time limit, then the unutilized amount should be treated
as CG of the previous year in which the period of 3 years from the date of
transfer of original asset expires.
9 Withdrawal of unutilized amount for The assessee can withdraw the unutilized amount from the deposit account
any other purpose for any other purpose only after a period of 3 years from the date of transfer
of original asset.
10 Withdrawal of exemption upon sale of The exemption granted will be withdrawn if the new asset is transferred
the new asset within 3 years from the date of its acquisition.
11 Previous year in which the exemption The exemption will be withdrawn in the previous year in which the new
is withdrawn asset is transferred.
12 Manner of withdrawal of exemption See the table given below

Computation of capital gains upon transfer of new asset within 3 years from the date of its acquisition and
withdrawal of exemption:
1 Full value of consideration for new asset *****
Less: Expenses wholly and exclusively incurred in connection with transfer of new asset *****
2 Net sale consideration *****
3 Cost of acquisition of new asset *****
Less: Capital gains arising from transfer of original asset-exempted earlier *****
4 Net cost of acquisition of new asset *****
5 Cost of improvement of new asset *****
6 LTCG/STCG (2-4-5) *****

Points requiring attention:


1 Plant, machinery and building are depreciable assets. Hence, capital gains arising on account of transfer of these
assets are always STCG.
2 Land is not a depreciable asset. Hence, capital gains arising on account of transfer of land may be long term or short
term depending on the period of holding.
3 Exemption U/s 54 G is not available on transfer of furniture and is not available on purchase of furniture.

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Chapter-5: Capital gains - Summary

Fibre Boards (P) Ltd (2015) 376 ITR 596 (SC)


To avail exemption U/s 54G in respect of capital gain arising from transfer of capital assets in the case of shifting of
industrial undertaking from urban area to non-urban area, the requirement is satisfied if the capital gain is given as advance
for acquisition of capital assets such as land, building and / or plant and machinery.

(H) Exemption of capital gains on transfer of assets in cases of shifting of industrial undertaking from urban
area to any SEZ (S. 54 GA):
1. Person eligible for Any assessee
exemption under this section
2. Capital transferred It may be LTCA or STCA
(referred to as original asset) It may be Plant, machinery, land or building or any right in land or building.
It is used for the purpose of an IU situated in an urban area.
It is transferred in the course of shifting of the industrial undertaking to any Special
economic zone.
3. Condition to be satisfied The assessee has to utilize the capital gains for
for availing exemption Purchasing of new machinery or plant for the purposes of business of the industrial
undertaking in the special economic zone area to which the said undertaking is shifted.
Acquisition of land or building for the purposes of his business in the special economic
zone area.
Shifting the establishment to SEZ area
Incurring expenses for such other purpose as may be specified in a scheme framed by the
CG.
4. Time limit for making the Within 1 year before or 3 years after the date of transfer of original asset
above expenditure
5. Quantum of exemption CG arising from transfer of original asset or the amount incurred for the purposes
mentioned in 4 (whichever is less).
6. Depositing in capital gains Where it is not possible for the assessee to incur these expenses within the due date for
account scheme filing ROI (specified in S. 139 (1)), still he can avail exemption if he deposits the capital
gains in CGDS account.
7. Utilization of amount The amount so deposited should be utilised for the purposes specified in 4 within the
deposited aforesaid TL.
8. Consequences of non- If the amount deposited is not fully utilised for the purposes specified in 4 within the
utilization or partial utilization aforesaid time limit, then the unutilized amount should be treated as CG of the previous
year in which the period of 3 years from the date of transfer of original asset expires.
9. Withdrawal of unutilized The assessee can withdraw the unutilised amount from the deposit account for any other
amount for any other purpose purpose only after a period of 3 years from the date of transfer of original asset.
10. Withdrawal of exemption The exemption granted will be withdrawn if the new asset is transferred within 3 years from
upon sale of the new asset the date of its acquisition.
11. PY in which exemption is The exemption will be withdrawn in the previous year in which the new asset is transferred.
withdrawn
12. Manner of withdrawal of See the table given below
exemption

Computation of capital gains upon transfer of new asset within 3 years from the date of its acquisition and
withdrawal of exemption:
1 Full value of consideration for new asset *****
Less: Expenses wholly and exclusively incurred in connection with transfer of new *****
asset
2 Net sale consideration *****
3 Cost of acquisition of new asset *****
Less: CG arising from transfer of original asset-exempted earlier *****
4 Net cost of acquisition of new asset *****
5 Cost of improvement of new asset *****
6 LTCG/STCG (2-4-5) *****

(I) Exemption in respect of LTCG arising on account of transfer of residential property in certain cases – S. 54GB:
1 Person eligible for exemption U/s Individual or HUF
54GB
2 Capital asset transferred (hereinafter LTCA being a residential property (being a plot or house property).

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Chapter-5: Capital gains - Summary

referred to as original asset) the gain


thereof is eligible for exemption U/s
54GB
3 Conditions for availing exemption DOT of original asset ≤ 31.03.2019.
The net consideration arising from transfer of the original asset shall be
invested by subscribing to the equity shares of an eligible company on or
before the due date for filing ROI U/s 139 (1) for the AY relevant to the PY of
transfer of original asset.
The eligible company shall utilise the amount invested in its shares by the
eligble assessee to purchase new asset within 1 year from the date of
subscription to its equity shares by the eligible assessee.
4 Net consideration FVC – Expenses incurred in connection with transfer.
5 Eligible company It shall be incorporated in India.
Date of incorporation ≥ 1st day of the PY of transfer.
Date of incorporation < Due date for filing ROI for the AY relevant to the PY
of transfer.
Date of incorporation < 01.04.2019.
It is engaged in eligible business.
Total turnover of its business ≤ 25 crores in each of the PYs being PY 17-18,
PY 18-19, PY 19-20 & PY 20-21.
It holds a certificate of eligible business from the Inter-Ministerial Board of
Certification as notified by the CG in the OG.
The voting power of eligible assessee in it shall be more than 50% after the
subscription in the shares by the eligible assessee.
6 Eligible business Business which involves innovation, development, deployment or
commercialization of new products, processes or services driven by
technology or intellectual property.
7 New asset Means new plant and machinery
8 Exclusions from ‘new asset’ (i) any machinery or plant which, before its installation by the assessee, was
used either within or outside India by any other person;
(ii) any machinery/plant installed in any office premises/any residential
accommodation, including guest-house;
(iii) any office appliances including computers or computer software;
(iv) any vehicle; or
(v) any machinery or plant, the whole of the actual cost of which is allowed
as a deduction (whether by way of depreciation or otherwise) in computing
the income chargeable U/H PGBP of any PY.
9 Inclusion of computers and computer In case of eligible company being a technology driven start up so certified by
software in ‘new asset’ in certain the Inter-Ministerial Board of Certification as notified by the CG in the OG,
cases the new asset shall include computers or computer software.
10 Quantum of exemption (LTCG arising from transfer of original asset * Cost of new asset acquired by
the eligible company out of subscription money received from eligible
assessee within 1 year (supra)) ÷ Net consideration arising from transfer of
original asset.
11 Depositing net consideration in Where it is not possible for the eligible company to utilise the subscription
CGDS account money received from eligible assessee for acquiring new asset within the
due date for filing ROI for the AY relevant to the PY of transfer of original
asset, then the eligible company can open CGDS account and deposit the
amount intended to be utilised for acquiring new asset into it within the due
date (supra).
The amount so deposited shall be treated as investment in new asset and
exemption U/s 54GB shall be provided to the eligible assessee.
However, the amount so deposited shall be utilised for acquiring new asset
within 1 year (supra).
12 Consequence of non-utilisation within [(LTCG arising from transfer of original asset * Unutilised amount in CGDS
1 year (supra) account) ÷ Net consideration arising from transfer of original asset] shall be
taxed as LTCG in the PY in which 1 year (supra) expires.
13 Lock-in-period for investment in The eligible assessee shall not transfer the shares in eligible company within
shares 5 years from the date of their acquisition.

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Chapter-5: Capital gains - Summary

14 Lock-in-period for new asset The eligible company shall not transfer the new asset within 5 years from the
date of its acquisition.
15 Consequences of violation of lock-in- In the hands of the eligible assessee, the amount of capital gains exempted
period in respect of shares U/s 54GB (which is remaining unwithdrawn) shall be deemed to be LTCG of
the PY in which the shares are transferred.
In addition, capital gains shall arise in the hands of the eligible assessee on
account of transfer of shares.

16 Consequences of violation of lock-in- In the hands of eligible assessee, the amount of capital gains exempted U/s
period in respect of new asset 54GB (which is remaining unwithdrawn) shall be deemed to be LTCG of the
PY in which the shares are transferred.
In addition, in the hands of the eligible company, capital gains shall be
computed within the parameters of S. 50 on account of transfer of new
asset.

22. Computation of tax on certain STCG – S. 111A:


S. 111A (1) STCG covered by this STCG arising from transfer of STCA being (a) equity shares; or (b) EOU; or (c)
section units of a business trust which is subjected to STT.
Concessional tax rate STCG (supra) suffers tax @ 15% (flat).
Proviso-1 to Benefit of unexhausted If the BEL of a resident individual or HUF is not exhausted by income other
S. 111A (1) BEL than STCG (referred to in this section), then the unexhausted BEL shall be
adjusted against this STCG and the balance STCG shall alone be subjected
to tax @ 15%.
Proviso-2 to Relaxation in respect of Where the transaction resulting in aforesaid STCG is effected in a RSE
S. 111A transaction effected in a located in IFSC and the consideration is paid or payable in foreign currency,
RSE located in IFSC then the concessional rate stipulated in this section shall apply to such STCG
even if the transaction is not subjected to STT.
S. 111A (2) No chapter VI-A deduction. Where the GTI of the assessee includes STCG (covered by this section), then
that portion of GTI is not eligible for deduction under Chapter VI-A.

Note-1: Chapter VI-A deduction could be enjoyed against that portion of GTI which represents STCG (not covered by S.
111A).
Note-2: STCG (not covered by S. 111A) shall suffer tax at the rates given in the Finance Act.

23. Computation of tax on LTCG – S. 112:


S. 112 (1) Computation of tax on LTCG in On that portion of GTI which represents LTCG, tax shall be computed @ 20%
(a) case of a resident individual or (flat).
HUF.
Proviso to Benefit of adjustment of If the BEL of a resident individual or HUF is not exhausted by income other
S. 112 (1) unexhausted BEL. than LTCG, then the unexhausted BEL shall be adjusted against LTCG and
(a) the balance LTCG shall alone be subjected to tax @ 20%.
S. 112 (1) Computation of tax on LTCG in On that portion of GTI which represents LTCG, tax shall be computed @ 20%
(b) case of a DC. (flat).
S. 112 (1) Computation of tax on LTCG in Tax on LTCG arising from transfer of LTCA other than unlisted securities or
(c) case of a foreign company or a shares in a company not being a company in which public are substantially
non-corporate non-resident. interested = 20% of LTCG. [S. 112 (1) (c) (ii)].
Tax on LTCG arising from transfer of LTCA being unlisted securities or shares
in a company not being a company in which public are substantially interested
= 20% on LTCG computed without giving effect to S. 48 Proviso-1 (exchange
neutralization benefit) and Proviso-2 (indexation benefit). [S. 112 (1) (c) (iii)].
S. 112 (1) Computation of tax on LTCG in On that portion of GTI which represents LTCG, tax shall be computed @ 20%
(d) case of any other resident. (flat).
Proviso to Relaxation in certain cases. Where the LTCA transferred happens to be (a) listed securities (not being
S. 112 (1) units); or (b) ZCB, then the tax on LTCG computed U/s 112 (1) to the extent of
excess over 10% of LTCG computed without giving effect to S. 48 Proviso-2
(indexation benefit) shall be ignored for the purpose of computing the tax
payable by the assessee.
S. 112 (2) No chapter VI-A deduction Where the GTI of the assessee includes LTCG, then that portion of GTI is not
eligible for deduction under Chapter VI-A.

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Chapter-5: Capital gains - Summary

24. Tax on LTCG in certain cases – S. 112A:


S. 112A (1) Applicability If the following conditions are fulfilled, then the provisions of S. 112A shall apply:
C-1: The TI of the assessee includes income chargeable U/H CG.
C-2: The CG arises from the transfer of a LTCA.
C-3: LTCA = Equity share in a company or Equity oriented unit or unit of a business
trust.
C-4: In case of equity shares, STT has been paid on both acquisition as well as
transfer of shares.
C-5: In case of EOU or units of business trust, STT has been paid on transfer.
S. 112A (3) Relaxation from C-4 and C-5. If the transfer is undertaken on a RSE located in any IFSC and the consideration for
such transfer is received or receivable in foreign currency, then S. 112A shall apply
even if C-4 and C-5 are not fulfilled.
S. 112A (4) Relaxation from C-4 If the transfer is in respect of a type of acquisition of equity shares which is notified
by the CG in the OG, then S. 112A shall apply even if C-4 is not fulfilled.
S. 112A (2) Computation of tax on LTCG Tax on LTCG = [LTCG (supra) – Rs. 1L] * 10%
referred to in S. 112A (1)
Proviso to Benefit of unexhausted BEL. In case of resident individual or HUF, benefit of unexhausted BEL is available.
S. 112A (2)
S. 112A (5) No Chapter VI-A deduction No chapter VI-A deduction is available against that portion of GTI which represents
LTCG (supra).
S. 112A (6) No rebate U/s 87A Where the TI of the assessee includes LTCG (supra), then the rebate U/s 87A shall
be allowed from the income tax on the TI as reduced by tax payable on such CG.

Note:
Nothing contained in S. 48 proviso-1 and proviso-2 shall apply to the CG arising from transfer of LTCA being equity shares
or EOU or units of business trust referred to in S. 112A.

Notification of transactions in equity shares in respect of which the condition of chargeability to STT at the time of
acquisition for claiming concessional tax treatment U/s 112A shall not apply [Notification No.60/2018, dated 01-10-
2018]
The CG has, vide notification No. 60/2018, dated 1st October, 2018, notified that the condition of chargeability of STT shall
not apply to the acquisition of equity shares entered into
(i) before 1st October, 2004 or
(ii) on or after 1st October, 2004 which are not chargeable to STT, other than the following transactions.
In effect, only in respect of the following transactions mentioned in column (2), the requirement of paying STT at the time of
acquisition for availing the benefit of concessional rate of tax U/s 112A would apply. In may be noted that the exceptions are
listed in column (3) against the transaction. The requirement of payment of STT at the time of acquisition for availing benefit
of concessional tax rate U/s 112A will not apply to acquisition transactions mentioned in column(3).
(1) (2) (3)
Transaction Non-applicability of condition of chargeability of STT
(a) Where acquisition of existing listed Where acquisition of listed equity share in a company–
equity share in a company whose equity
shares are not frequently traded in a (i) has been approved by the SC, HC, National Company Law
RSE is made through a preferential Tribunal, SEBI or RBI in this behalf;
issue (ii) is by any non-resident in accordance with foreign direct
investment guidelines issued by the Government of India;

(iii) is by an investment fund referred to in clause (a) of Explanation 1


to section 115UB or a venture capital fund referred to in section
10(23FB) or a Qualified Institutional Buyer;
(iv) is through preferential issue to which the provisions of chapter
VII of the Securities and Exchange Board of India (Issue of
Capital and Disclosure Requirements) Regulations, 2009 does
not apply.
(b) Where transaction for acquisition of Following acquisitions of listed equity share in a company made in
existing listed equity share in a accordance with the provisions of the SCRA 1956:
company is not entered through a RSE (i) acquisition through an issue of share by a company other than
in India through preferential the issue referred to in (a);

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Chapter-5: Capital gains - Summary

(ii) acquisition by scheduled banks, reconstruction


or securitisation companies or public financial institutions during
their ordinary course of business;
(iii) acquisition by the SC, HC, National Company Law Tribunal,
SEBI or RBI in this behalf;
(iv) acquisition under employee stock option scheme or employee
stock purchase scheme framed under the Securities and
Exchange Board of India (Employee Stock Option Scheme and
Employee Stock Purchase Scheme) Guidelines,1999;
(v) acquisition by any non-resident in
accordance with foreign direct investment guidelines of the
Government of India;
(vi) acquisition in accordance with SEBI (Substantial Acquisition of
Shares and Takeovers) Regulation, 2011;
(vii) acquisition from the Government;
(viii) acquisition by an investment fund referred to in clause (a) to
Explanation 1 to S. 115UB or a VCF referred to in S. 10 (23FB)
or a Qualified Institutional Buyer;
(ix) acquisition by mode of transfer referred to in section 47 (e.g.,
transfer of capital asset under a gift, an irrevocable trust,
transfer of capital asset between holding company and its
subsidiary, transfer pursuant to amalgamation, demerger, etc.)
or S. 50B (slump sale) or S. 45(3) (Introduction of capital
asset as capital contribution in firm/ AOPs/ BOIs) or section
45(4) (Distribution of capital assets on dissolution of firm/ AOPs/
BOIs) of the Income-tax Act, if the previous owner or the
transferor, as the case may be, of such shares has not acquired
them by any mode referred to in (a), (b) or (c) listed in column
(2) [other than the exceptions listed in column(3)]
(c) acquisition of equity share of a company
during the period beginning from the
date on which the company is delisted
from a RSE and ending on the date
immediately preceding the date on
which the company is again listed on a
RSE in accordance with the SCRA
1956 read with SEBI Act, 1992 and the
rules made there under;

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Chapter-5A: Chapter VI-A Deductions - Summary

1. Deduction U/s 80C:


1 Persons eligible for Individual or HUF
deduction
2 Nature of deduction Deduction is allowed in respect of specified payments and investments.
3 Specified payment and Any sum paid or deposited in the PY by the assessee
investments
(i) as life insurance policy to effect or keep in force insurance on life (a) self,
spouse and any child in case of individual and (b) any member, in case of
HUF.
(ii) to effect or keep in force a deferred annuity contract on life of self, spouse and
any child in case of individual. [such contract should not contain a provision
for cash payment option in lieu of payment of annuity].
(iii) by way of deduction from salary payable by or on behalf of the government to
any individual for the purpose of securing him a deferred annuity or making
provision for his spouse or children. [The sum deducted should not exceed
1/5th of salary].
(iv) as contribution (not being repayment of loan) by an individual to SPF.
(v) as contribution to PPF in the name of self, spouse and any child in case of
individual and any member in case of HUF. (Maximum amount that could be
deposited = Rs. 150000).
(vi) as contribution by an employee to RPF.
(vii) as contribution by an employee to ASAF.
(viii) under Sukanya Samriddhi account, in the name of the individual or any girl
child of that individual or any girl child for whom such person is the legal
guardian.
(ix) subscription to NSC.
(x) as a contribution to ULIP of UTI or LIC mutual fund (Dhanraksha plan) in the
name of self, spouse and any child in case of individual and any member in
case of HUF.
(xi) to effect or to keep in force a contract for such annuity plan of LIC (i.e. Jeevan
Dhara, Jeevan Akshay and their upgradations) or any other insurer as
referred to in by the CG. [Tata AIG Easy retire annuity plan of Tata AIG Life
Insurance company Ltd].
(xii) as subscription to any units of mutual fund. [Equity linked savings scheme].
(xiii) as contribution by an individual to any pension fund set up by any mutual fund
or UTI. [UTI Retirement Benefit pension fund].
(xiv) as subscription to any such deposit scheme of National housing bank
[National Housing Bank (Tax savings) Term Deposit Scheme, 2008] or as a
contribution to any such pension fund set up by NHB as notified by the CG.
(xv) as subscription to notified deposit schemes of (a) public sector company
providing long-term finance for purchase or construction of residential houses
in India; (b) any authority constituted in India for the purposes of housing or
planning, development or improvement of cities, towns and villages. [Public
deposit scheme of HUDCO].
(xvi) as tuition fees (excluding any payment towards any development fees or
donation or payment of similar nature), to any university, college, school or
other educational institution situated within India for the purposes of full-time
education of any two children of individual.
(xvii) towards the cost of purchase or construction of a residential house property.
[The income from house property should be chargeable to tax U/H IFHP or
would have been chargeable to tax U/H IFHP had it not been used for
assessee’s own residence.]
(xviii) as subscription to equity shares or debentures forming part of any eligible
issue of capital of public company or PFI approved by the Board.
(xix) as term deposit for 5 years or more with Scheduled Bank in accordance with a
scheme framed and notified by the CG. [Maximum limit for investment = Rs.
150000].
(xx) as subscription to any notified bonds of NABARD.
(xxi) in an account under the Senior Citizen Savings Scheme Rules, 2004.

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Chapter-5A: Chapter VI-A Deductions - Summary

(xxii) as five-year term deposit in an account under the Post office time deposit
Rules, 1981.

2. Deduction in respect of contribution to certain pension funds (S. 80CCC):


1 Assessee eligible for Individual
deduction
2 Nature of deduction Under this section, the assessee is entitled to deduction in respect of amount paid
/deposited by him to effect a contract for annuity plan of LIC or any other insurer for
receiving pension from the fund set up by LIC or any other insurer.
3 Conditions for availing He should have deposited a sum under an annuity plan of LIC or any other insurer for
deduction receiving pension.
Amount of bonus or interest credited to his accounts by the insurer is not to be
regarded as amount deposited.
Amount paid should be out of the taxable income of the current or earlier years.
No deduction is allowed u/s 80C in respect of amount allowed as deduction under
this section
4 Quantum of deduction Amount deposited or Rs. 150000 whichever is less.
Note: Deduction U/s 80C, S. 80CCC and S. 80CCD (1) shall not exceed Rs. 150000.
[S. 80CCE].
5 Taxability of amount received Where the assessee or his nominee, upon surrender of the annuity plan, receives
upon surrender of annuity any amount (including interest or bonus) standing to the credit of the assessee in
respect of which deduction U/s 80CCC was allowed, such amount shall be included
in the total income of the assessee or his nominee in the year of receipt.
6 Taxability of pension Where the assessee or his nominee receives pension from the annuity plan, it is
taxable in the hands of recipient in the year of receipt.

3. Deduction U/s 80D:


Payments Deduction in case of Deduction in case of
individual HUF
Insured or person Insured or person
treated treated
Family Parents Any member of HUF
A Mediclaim insurance premium Eligible Eligible Eligible
B Contribution to CGHS or Government notified health schemes Eligible
C Preventive health check up payments Eligible Eligible
D Maximum deduction
General deduction (applicable in respect of A, B and C) Rs. 25000 Rs. 25000 Rs. 25000
Additional deduction (applicable only in case of A when insured is a Rs. 25000 Rs. 25000 Rs. 25000
senior citizen)
E Medical expenditure on the health of a person who is a super senior Eligible Eligible Eligible
citizen (if mediclaim insurance is not paid on the health of such person)
F Maximum deduction in respect of E Rs. 50000 Rs. 50000 Rs. 50000
G Maximum deduction in respect of A, B, C and E Rs. 50000 Rs. 50000 Rs. 50000

Points requiring attention:


1 Family = Individual + Spouse + Dependent children.
2 No restriction on number of children.
3 Father-in-law and mother-in-law are not part of family.
4 Grandparents, brothers and sisters are not part of family.
5 Parents may be dependent or independent.
6 Mediclaim insurance premium means premium paid to effect insurance on the health under a scheme framed by GIC
and approved by the CG or by any other insurer and approved by IRDA.
7 Deduction in respect of the aggregate payment on account of preventive health check up of self, spouse, dependent
children, father and mother cannot exceed Rs. 5000.
8 All payments (supra) other than preventive health checkup payments should be made through a mode other than cash.
9 However, payment on account of preventive health checkup can be made by any mode (including cash).
10 Senior-citizen = Resident individual who is atleast 60 years at any time during the PY.

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Chapter-5A: Chapter VI-A Deductions - Summary

Proportionate deduction of insurance premium paid in lump sum:


1 S. 80D (4A) is inserted to provide that where any amount is paid in lump sum to keep in force health insurance of
specified person for more than one year, then deduction equal to appropriate fraction is allowed each year of the
relevant PY subject to maximum amount permissible under the section. It should be noted that provision of this section
is applicable for both senior citizens as well as other individuals/HUFs.
2 "Appropriate fraction" means the fraction, the numerator of which is one and the denominator of which is the total
number of relevant PYs;
3 "Relevant PY" means the PY beginning with the PY in which such amount is paid and the subsequent PY (s) during
which the insurance shall have effect or be in force.
4. Deduction U/s 80DD:

1 Assessee eligible for Individual/HUF (being resident in India).


deduction
2 Nature of deduction Deduction in respect of maintenance including medical treatment of disabled dependent.
3 Disabled person Person suffering from at least 40% of
Disability

Blindness Leprosy - Locomotor


Mental illness
cured Disability

Low vision Hearing Mental Autism,


impairment retardation cerebral palsy

4 Severely disabled Person suffering from atleast 80% of the aforesaid disabilities.
person
5 Dependent Dependent

In case of In case of
Individual HUF

Any member
Spouse Children Parents Brothers/
Sisters
Note: These persons should be dependant wholly or mainly on the assessee (individual or
HUF) for his support and maintenance.
6 Conditions for The assessee should have incurred an expenditure for medical treatment, training &
deduction rehabilitation of a disabled dependent or
He should have deposited an amount under a scheme framed by LIC or other insurer or UTI
and approved by CBDT, for the maintenance of disabled dependent.
The aforesaid scheme should provide for payment of annuity or lump sum amount to the
disabled dependent in the event of death of assessee.
The disabled dependent should not claim deduction u/s. 80U.
The assessee should furnish a copy of certificate issued by the medical authority in Form no.
10-IA along with his ROI.
7 Quantum of If the person maintained is ordinarily disabled, the deduction will be Rs. 75000. Whereas, the
deduction person maintained is severely disabled, the deduction will be Rs. 125000. The quantum of
deduction is fixed. No regard should be had to actual expenditure.

8 Death of disabled If the disabled dependent predeceases the assessee, an amount equal to the amount paid or
dependent deposited under the scheme shall be deemed to be the income of the assessee of the PY in
which such amount is received by the assessee and shall accordingly be charged to tax as
the income of that PY. No exemption U/s 10 (10D).

5. Deduction U/s 80U:


1 Assessee eligible for Disabled resident individual.
deduction
2 Meaning of disabled Person suffering from atleast 40% of
person

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Chapter-5A: Chapter VI-A Deductions - Summary

Disability

Blindness Leprosy - Locomotor


Mental illness
cured Disability

Low vision Hearing Mental Autism,


impairment retadation cerebral palsy

3 Meaning of severely Person suffering from atleast 80% of the aforesaid disabilities.
disabled person
4 Quantum of deduction If the assessee is ordinarily disabled, the deduction will be Rs. 75000. However, if the
assessee is severely disabled, the deduction will be Rs. 125000.
5 Certificate by medical The assessee shall have to furnish a copy of the certificate (in form no. 10-IA) issued by
authority the medical authority along with the return of income. Where the condition of disability
requires reassessment, a fresh certificate from the medical authority shall have to be
obtained after the expiry of the period mentioned on the original certificate in order to
continue to claim the deduction.

6. Deduction U/s 80DDB:


1. Assessee eligible for deduction Individual/HUF (being resident in India)

2. Nature of deduction Deduction in respect of medical treatment.


3. Conditions for availing deduction
The assessee should have actually paid (not merely incurred) towards medical treatment of disease or ailment specified in
R. 11DD.
The medical treatment should be for curing the specified ailment or disease of the assessee (if the assessee is an
individual) or the assessee’s dependants.
If the assessee is an individual, his spouse, children, parents, brothers or sisters dependant wholly or mainly on him for his
support and maintenance are regarded as dependants.
If the assessee is a HUF, any member of the family dependant wholly or mainly on the family for his support and
maintenance is regarded as dependant.

Medical
treatment

In case of In case of HUF,


Individual, shall shall relate to
relate to

Spouse Children Parents Brothers/


Any member
Sisters

The assessee should obtain the prescription for such medical treatment from a neurologist, an oncologist, a urologist, a
hematologist, an immunologist or such other specialist, as may be prescribed.
The medical practitioner need not be employed in a Govt. hospital. He may be even a visiting medical practitioner.
4. Quantum of deduction
If the person treated is a senior citizen, the deduction = (Actual amount paid or Rs. 100000) – Insurance cover –
Reimbursement from the employer.
If the person treated is a non-senior citizen, the deduction = (Actual amount paid or Rs. 40000) – Insurance cover –
Reimbursement from the employer.

7. Deduction U/s 80E:


1 Assessee eligible for deduction Individual
2 Nature of deduction Deduction is provided in respect of interest on loan paid by the assessee
during the PY out of his income chargeable to tax.
3 Conditions for availing deduction The loan must have been taken for the purpose of pursuing his higher
education or for the purpose of higher education of his relative.
The loan must have been taken from a financial institution or approve d
charitable institution.
3 Meaning of ‘relative’ Spouse + children + student for whom the individual is the legal guardian.
4 Meaning of ‘higher education’ It means any course of study (including vocational studies) pursued after
passing the Senior Secondary Examination or its equivalent from any

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Chapter-5A: Chapter VI-A Deductions - Summary

school, board, or university recognised by the CG or SG or local authority


or by any other authority authorised by the CG or SG or local authority to do
so. Precisely, higher education means any course after Class XII.
5 Meaning of ‘financial institution’ (a) Banks; (b) any other financial institution notified by the CG in official
gazette.
6 Meaning of ‘approved charitable Institution established for charitable purposes and approved by the
institution’ prescribed authority (U/s 10 (23C)) or an institution referred to in S. 80G (2)
(a).
7 Period of deduction AY relevant to the PY in which assessee starts paying interest on loan
(called as ‘initial AY’) + 7 AYs immediately succeeding the initial AY or until
the interest is paid in full by the assessee, whichever is earlier.

8. Deduction U/s 80G:


(i) Eligible assessee Deduction under this section is available to all assessees, whether corporate or non-
corporate, whether having income U/H PGBP or not.
(ii) Nature of deduction Under this section, the assessee is eligible for deduction in respect of monetary
donations made by him.
(iii) Eligible donations Deduction is allowed only with respect to donations made to funds or institutions
specified in this section.
(iv) Quantum of deduction
Donations U/s. 80G

Donations - to Other Donations


be restricted to
10% of GTI

Donations Donations Donations Donations


Qualifying for qualifying for Qualifying for qualifying for
50% deduction 100% deduction 50% deduction 100% deduction

See List - 1 See List - 2 See List - 3 See List - 4


List – 1
1. Donations made to any charitable trust/institution fulfilling the conditions of S. 80G (5).
2. Donations made to the Government or any local authority – where donations are to be utilized by them for any
charitable purpose other than for the purpose of promoting family planning:
3. Donations made to an authority constituted in India for the purpose of dealing with the need for housing
accommodation, planning and development of cities, towns etc.,
4. Donations made to any corporation established by the CG/SG, for promoting the interests of the minority community.
5. Donations made to any temple, mosque, gurudwara, church or other place notified by the Central Government to be of
historic, archaeological or artistic importance or to be a place of public worship of renown throughout any State or
States – Where the donations to be made for renovation or repair purposes.

List–2
1. Donations made to Government or any such local authority, institution or association as may be approved by the CG. –
where donations are to be utilized for promoting family planning:
2. Donations made by companies to the Indian Olympic Association or to any other association or institution for the
development of infrastructure for sports and games; or the sponsorship of sports and games.

List – 3
1. Donations made to the Indira Gandhi Memorial Trust
2. Donations made to the Rajiv Gandhi Foundation
3. Donations made to the Jawaharlal Nehru Memorial Fund
4. Donations made to the Prime Minister’s Drought Relief Fund

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Chapter-5A: Chapter VI-A Deductions - Summary

List – 4
1. Donations made to the National Defence Fund set up by the CG.
2. Donations made to the Prime Minister’s National Relief Fund
3. Donations made to the Prime Minister’s Armenia Earthquake Relief Fund
4. Donations made to the Africa (Public Contributions – India) Fund
5. Donations made to the National Foundation for Communal Harmony
6. Donations made to a University or any educational institution of national eminence approved by the Prescribed
Authority
7. Donations made to the Maharashtra Chief Minister’s Relief Fund / the Chief Minister’s Earthquake Relief Fund
8. Donations made to any fund set up by the Government of Gujarat for providing relief to earthquake victims of Gujarat
9. Donations made to any Zila Saksharta Samiti constituted for improvement of primary education in villages and towns
10. Donations made to the National Blood Transfusion Council or any State Blood Transfusion Council
11. Donations made to any fund set up by SG to provide medical relief to the poor
12. Donations made to the Army Central Welfare Fund; the Indian Naval Benevolent Fund; the Air Force Central Welfare
Fund
13. Donations made to the Andhra Pradesh Chief Minister’s Cyclone Relief Fund
14. Donations made to the National Illness Assistance Fund
15. Donations made to the Chief Minister’s Relief Fund; the Lt. Governor’s Relief Fund
16. Donations made to the National Sports Fund set up by Central Government
17. Donations made to the National Cultural Fund set up by Central Government
18. Donations made to the Fund for Technology Development and Application
19. Donations made to the National Trust for Welfare of Persons with Autism etc.
20 Donations to Swachh Bharat Kosh, set up by the CG (other than the sum spent by the assessee in pursuance of CSR
U/s 135 (5) of the Companies Act 2013).
21 Donations to National children’s Fund.
22 Donations to Chief minister’s Relief Fund or Lieutenant Governor’s Relief Fund.
23 Donations to Clean Ganga Fund, set up by the CG, where such assessee is a resident (other than the sum spent by
the assessee in pursuance of CSR U/s 135 (5) of the Companies Act 2013).
24 Donations to National Fund for Control of Drug Abuse constituted U/s 7A of the Narcotic Drugs and Psychotroic
Substances Act, 1985.

Computation of GTI for S. 80G:


Gross Total Income before allowing Chapter VI A deductions XXX
Less: Deductions u/s. 80C to 80U XXX
Less: LTCG XXX
Less: Short-term capital gains arising out of transfer of certain equity shares/units which were subjected to XXX
STT (Sec.111A)
Gross Total Income for Sec. 80G(4) XXX

Mode of payment:
No deduction shall be allowed in respect of donation of any sum exceeding Rs. 2000 unless such sum is paid by any mode
other than cash.
9. Deduction U/s 80GG:
1 Assessee eligible for deduction Individual
2 Nature of deduction Rent paid by the assessee.
3 Conditions a) The assessee should be a self employed person. But if he is employed, he
should not get house rent allowance from his employer.
b) He or his spouse or his minor child or the HUF in which he is a member,
should not own residential accommodation at the place where he resides,
performs the duties of his office or carries on his business or profession.
c) In respect of a house property owned by him at any other place, he should
not avail self-occupied property benefit.
d) He should file a declaration in Form No. 10BA regarding the expenditure
incurred by him towards payment of rent.
4 Quantum of deduction Least of the following:
(a) Rent paid in excess of 10% of total Income
(b) Rs. 5000 per month
(c) 25% of Total Income (Refer Note)

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Chapter-5A: Chapter VI-A Deductions - Summary

Meaning of total income for the purpose of S. 80GG:


Find out gross total income XXX
Less: LTCGs XXX
Less: STCG taxable U/s 111A XXX
Less: Amount deductible U/s 80C to 80U (except S. 80GG) XXX
Total income for the purpose of S. 80GG XXX

10. Deduction U/s 80JJAA:


1 Eligible assessee Person whose GTI includes profits and gains derived from business and to whom S.
44AB applies.
2 Nature of deduction Deduction is allowed in respect of additional employee cost incurred in the course of
business in the relevant PY.
3 Quantum of deduction 30% of additional employee cost incurred in the course of business in the relevant
PY.
4 Period of deduction 3 AYs including the AY relevant to the PY in which the employment is provided by
the assessee.
5 Additional employee cost Total emoluments paid or payable to additional employees employed during the PY.
6 Emoluments Any sum paid or payable to an employee in lieu of his employment by whatever
name called.
Note the words ‘paid or payable’. Accordingly, non-monetary perquisites shall not be
included in emoluments.
Even allowances which are wholly or partly exempted in the hands of employees
shall be taken into account for computing emoluments.
7 Exclusions from emoluments (a) Any contribution paid or payable by the employer to any pension fund or
provident fund or any other fund for the benefit of employees under any law for the
time being in force
(b) any lump-sum paid or payable to an employee at the time of termination of his
service or superannuation or voluntary retirement, such as gratuity, severance pay,
leave encashment, voluntary retirement benefits, commutation of pension etc.
8 Additional employee Employee who has been employed during the PY and whose employment has the
effect of increasing the total number of employees employed by the employer as on
the last day of the preceding year.
9 Exclusions from additional Employee whose total emoluments are more than Rs. 25000 p.m.
employee Employee employed for a period of less than 240 days during the PY.
Employee who does not participate in recognised provident fund.
10 Additional employee cost for In the first year of new business, emoluments paid or payable to employees
the first year in case of new employed during that PY shall be deemed to be the additional employee cost.
business
11 Circumstances when In case of an existing business, the additional employee cost shall be nil, if
additional employee cost in (a) there is no increase in the number of employees from the total number of
case of an existing business is employees employed as on the last day of the preceding PY.
nil. (b) emoluments are paid otherwise than by an account payee cheque or account
payee bank draft or by use of electronic clearing system through a bank account.
12 Report of CA For claiming deduction U/s 80JJAA, the assessee shall furnish, along with ROI, a
report of CA in form 10DA containing prescribed particulars.

Points requiring attention:


1 The assessee may be an Individual or HUF or company or firm or any other person.
2 This section applies even to non-residents carrying on business in India.
3 If the GTI of the assessee includes profits and gains from profession and not business, S. 80JJAA shall not apply.
4 Business should not have been formed by splitting up or reconstruction of an existing business.
5 Business should not have been acquired by way of transfer from any other person or as a result of any business re-
organisation
6 In case of an employee engaged in the business of manufacturing of apparel (which is seasonal in nature) or in the
business of manufacturing footwear or leather products, any employee employed for a period of less than 240 days
but for 150 days or more in the PY shall, still, be considered as ‘additional employee’.
7 Where a new employee is employed during the PY for a period of less than 240 days or 150 days, as the case
may be, but is employed for a period of 240 days or 150 days, as the case may be, in the immediately
succeeding PY, he shall be deemed to have been employed in the succeeding PY and the provisions of S.

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Chapter-5A: Chapter VI-A Deductions - Summary

80JJAA shall apply accordingly.


8 Deduction U/s 80JJAA is in addition to the deduction U/s 37 (1) in respect of emoluments.
9 In the first year emoluments can be paid in cash. (i.e. other than through banking channels).

11. Deduction in respect of royalty income of the authors-S. 80QQB:


1. Assessee eligible for Resident individual being an author.
deduction
2. Nature of deduction Under this section, assessee is eligible for deduction in respect of any lump sum
consideration received for the assignment or grant of any of his interests in the copyright of
any book being a work of literary, artistic or scientific nature or royalty or copyright fees
received (in lump sum or otherwise).
3. Items not regarded as Books shall not include brochure, commentaries, diaries, guides, journals, magazines,
books newspapers, pamphlets, textbooks for schools and other publication of similar nature.
4. Quantum of deduction Whole of such income or Rs. 300000 (whichever is less)
5. Restriction on royalty or If royalty or copyright fee is not received in lump sum – amount in excess of 15% of value of
copyright fees not such books sold during the previous year shall be ignored.
received in lump sum
6. Conditions for availing deduction
a) Any income earned from any source outside India shall be remitted within six months from the end of the relevant
previous year or such extended time by RBI.
b) A certificate in the prescribed Form 10CCD given by the person making payment shall be furnished along with the
Return of Income.
c) Where income is earned outside India, a certificate from the prescribed authority in the prescribed form (Form No. 10H)
shall be furnished along with ROI.
7. Double deduction not available
Where a deduction U/s 80QQB for any previous year has been claimed and allowed, no deduction in respect of such
income shall be allowed under any other provisions of the Act in any AY.

12. Deduction in respect of interest on deposits in savings account – S. 80TTA:


1 Where the GTI of an assessee, being an individual (not being a senior citizen) or a HUF, includes any income by way
of interest on deposits (not being time deposits) in a savings account with-
(a) a banking company to which the Banking Regulation Act, 1949;
(b) a co-operative society engaged in carrying on the business of banking (including a co-operative land mortgage bank
or a co-operative land development bank); or
(c) a Post Office;
there shall be allowed, in computing the TI of the assessee a deduction as specified hereunder, namely:—
(i) in a case where the amount of such income does not exceed in the aggregate Rs. the whole of such
10000 amount;
(ii) in any other case Rs. 10000
2 For the purposes of this section, "time deposits" means the deposits repayable on expiry of fixed periods.

Note: Post office savings bank interest is exempt up to Rs. 3,500 (in an individual account) and Rs. 7,000 (in a joint
account) U/s 10 ( 15) (i).

13. Deduction in respect of interest on deposits (with bank/post-office) in case of senior citizens – S. 80TTB:
1 In case of an individual being senior citizen, if his/her GTI includes income by way of interest on deposits (time deposits
or otherwise) with specified entities ('the interest income'), he/she is entitled to a deduction, up to Rs. 50,000.
2 Specified entity = (a) Banking company to whom the Banking Regulation Act, 1949 applies; (b) Any bank or banking
institution referred in S. 51 of the Banking Regulation Act; (c) A Co-operative society engaged in Banking business; (d)
Co-operative land mortgage bank; (e) Co-operative land development bank; (f) Post office defined in section 2(k) of the
Indian Post Office Act, 1898;

14. Deduction in respect of certain income of producer companies – S. 80PA:


1 Where the GTI of an assessee, being a producer company having a total turnover of less than Rs. 100 Crores in any PY,
includes any profits and gains derived from eligible business, there shall, in accordance with and subject to the provisions
of this section, be allowed, in computing the TI of the assessee, a deduction of an amount equal to 100% of the profits and
gains attributable to such business for the PY relevant to an AY commencing on or after 01.04.2019, but before
01.04.2025.

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Chapter-5A: Chapter VI-A Deductions - Summary

2 In a case where the assessee is entitled also to deduction under any other provisions of Chapter VI-A, the deduction under
this section shall be allowed with reference to the income, if any, as referred to in this section included in the GTI as
reduced by the deductions under such other provisions of this Chapter.
3 Eligible business means (a) the marketing of agricultural produce grown by the members; (b) the purchase of agricultural
implements, seeds, livestock or other article intended for agriculture for the purpose of supplying them to the members; (c)
the processing of the agricultural produce of the members.

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Chapter-5B: Minimum alternate tax (MAT) - Summary

1. Applicability of MAT provisions:

1 Applicability of MAT provisions to SN Category of foreign company Applicability


foreign companies 1 Foreign company which is resident of a foreign S. 115JB
country or specified territory with which India has does not
DTAA and which does not have PE in India as per apply.
such DTAA.
2 Foreign company which is resident of a foreign S. 115JB
country or specified territory with which India does does not
not have DTAA and which does not have apply.
requirement to seek registration under the law
relating to companies in India.
3 Other foreign companies S.115JB is
applicable.
2 Applicability of MAT provision to S. 8 If such company is a mutual concern or is registered U/s 12AA, the MAT
companies [Non-profit companies]. provisions are not applicable.
3 Applicability of MAT provisions to SN Category of insurance company Applicability
insurance companies. [S.115JB (5A)]. 1 Insurance company in life insurance S. 115JB does not
business apply.
2 Insurance company in general insurance S. 115JB is applicable
business
4 MAT provisions not to apply in respect Profits of tonnage tax business shall not be subject to tax under the BP
of income from tonnage tax business. route.
[S. 115-VO]. Tonnage tax business means business of operating qualifying ships carried
on by a tonnage tax company.
Tonnage tax company means an Indian shipping company whose income
from the business of operating qualifying ships shall be computed on
presumptive basis based on the tonnage capacity of the ship under Chapter
XII-G (S. 115V to S. 115VZC).

2. Provisions of S. 115JB:
A. Determination of route under which company is liable to pay tax: [S. 115JB (1)]:
Step-1 Compute the TI of the company in accordance with the provisions of the Act other than Chapter-XII-B.
Step-2 Compute the tax on TI computed in step-1 by applying the tax rates given in the relevant Finance Act and
by applying special tax rates on specified income (like LTCG, STCG (S.111A) etc) included in the TI where
the Act requires so.
Step-3 Compute book profits (BP) in accordance with S. 115JB.
Step-4 Compute tax on book profits by applying 18.5%. [However, in case of companies located in IFSC which
derives its income solely in convertible foreign exchange instead of 18.5% apply 9%].
Step-5 If the tax computed in step-4 > tax computed in step-2, then the company is in book profit route.
If the tax computed in step-4 < tax computed in step-2, then the company is in normal total income route.

B. Determination of tax liability if the company is in book profit route:


1 Tax on book profits ****
2 Surcharge (if BP > Rs. 100L) ****
3 Tax + surcharge (1+2) ****
4 Marginal relief (if any) (***)
5 Tax + surcharge (after marginal relief) ****
6 HEC @ 4% ****

C. Determination of tax liability if the company is in normal total income route:


1 Tax on TI computed in accordance with the provisions of the Act other than Chapter-XII-B ****
2 Surcharge (if TI > Rs. 100L) ****
3 Tax + surcharge (1+2) ****
4 Marginal relief (if any) (***)
5 Tax + surcharge (after marginal relief) ****
6 HEC @ 4% ****

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Chapter-5B: Minimum alternate tax (MAT) - Summary

3. Manner of computation of book profits in case of companies to which Ind-AS is not applicable:
1 Net profit as per the statement of P&L *****
2 15 positive adjustments (i.e. additions) given in Clause (a) to (k) of Explanation-1 to S. 115JB. *****
3 12 negative adjustments (i.e. deductions) given in Clause (i) to (viii) of Explanation-1 to S. 115JB. (****)
4 Book profit (1+2-3) *****

4. Adjustments to be made in arriving at the book profit:

(i) Clause (a) of Explanation-1 to S. 115JB:


1 Clause (a) of Income tax paid or provision therefor shall be added to the net profit for arriving at the BP, if it
Explanation-1 to S. is debited to the statement of P&L.
115JB
2 Extended meaning of Income tax paid shall include:
‘income-tax paid’.
[Explanation-2 to S. (a) Surcharge
115JB]. (b) Education cess
(c) DDT
(d) Interest charged under this Act.

(ii) Clause (b) and Clause (i) of Explanation-1 to S. 115JB:


1 Clause (b) of Any amount carried to any reserve, by whatever name called, shall be added to the net profit
Explanation-1 to S. for arriving at the BP, if it is debited to the statement of P&L.
115JB
2 Clause (i) of Any amount withdrawn from reserves shall be reduced from the net profit for arriving at the
Explanation-1 to S. BP, if it is credited to the statement of P&L.
115JB But that reserve should have been created by debiting the statement of P&L.

(iii) Clause (c) & Clause (i) of Explanation-1 to S. 115JB:

1 Clause (c) of Any amount set aside to provisions made for meeting liabilities other than ascertained liabilities
Explanation-1 to S. shall be added to the net profit for arriving at the BP, if it is debited to the statement of P&L.
115JB
2 Clause (i) of Any amount set aside as provisions for diminution in value of asset [Examples: Provision for
Explanation-1 to S. NPA, PBDD, provision for permanent decline in the value of investments, provision for
115JB impairment losses etc] shall be added to the net profit for arriving at the BP, if it is debited to the
statement of P&L.

(iv) Clause (d) and Clause (e) of Explanation-1 to S. 115JB:


1 Clause (d) of Any amount by way of provision for losses of subsidiary companies, shall be added to the net
Explanation-1 to S. profit for arriving at the BP, if it is debited to the statement of P&L.
115JB
2 Clause (e) of Any amount of dividend paid or proposed shall be added to the net profit for arriving at the
Explanation-1 to S. BP, if it is debited to the statement of P&L.
115JB

(v) Clause (f) and Clause (ii) of Explanation-1 to S. 115JB:


1 Clause (ii) of Any of income to which provisions of S. 10, S. 11 or S. 12 apply shall be reduced from the
Explanation-1 to S. net profit for arriving at the BP, if it is credited to the statement of P&L.
115JB
2 Clause (f) of Explanation- Any expense relatable to income to which provisions of S. 10, S. 11 or S. 12 apply shall be
1 to S. 115JB added back to the net profit for arriving at the BP, if it is debited to the statement of P&L.

(vi) Clause (g), Clause (iia) and Clause (iib) of Explanation-1 to S. 115JB:
1 Clause (g) of Amount of depreciation debited to the statement of P&L shall be added back to the net profit
Explanation-1 to S. for computing BP.
115JB
2 Clause (iia) of Any increase in depreciation on account of revaluation of assets (if debited to the statement of
Explanation-1 to S. P&L) shall be reduced from the net profit for computing BP
115JB

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Chapter-5B: Minimum alternate tax (MAT) - Summary

3 Clause (iib) of Any amount withdrawn from the revaluation reserve and credited to statement of P&L shall be
Explanation-1 to S. reduced from the net profit for computing BP but such reduction shall be only to the extent of
115JB increase in depreciation on account of revaluation of assets.

(vii) Clause (j) of Explanation-1 to S. 115JB:


Clause (j) of Any amount standing in revaluation reserve relating to revalued asset, on retirement or disposal
Explanation-1 to S. of such asset, if not credited to the statement of P&L shall be added to the net profit for
115JB computing BP.

(viii) Clause (h) and Clause (viii) of Explanation-1 to S.115JB:


1 Clause (h) of Explanation-1 Any amount of deferred tax or provision therefor shall be added back to the net profit for
to S. 115JB computing the BP, if it was debited to the statement of P&L account.
2 Clause (viii) of Explanation- Amount of deferred tax shall be reduced from the net profit for computing the BP, if it was
1 to S. 115JB credited to the statement of P&L account.

(ix) Clause (vii) of Explanation-1 to S. 115JB:


Clause (vii) of Explanation- In case of sick companies, the profits pertaining to the period ending with the PY in which the
1 to S. 115JB company revives shall not be subjected to tax under the BP route.

(x) Clause (iie), Clause (iif), Clause (fc) and Clause (k) of Explanation-1 to S. 115JB:
1 Clause (fc) of Amount of notional loss on account of exchange of shares in SPV for units of business trust
Explanation-1 to S. referred to in S. 47 (xvii) shall be added to the net profit for arriving at the BP, if it was debited
115JB to the statement of P&L.
Amount of notional loss resulting from any change in carrying amount of units (supra) shall be
added to the net profit for arriving at the BP, if it was debited to the statement of P&L.
Amount of loss on account of transfer of units (supra) shall be added to the net profit for arriving
at the BP, if it was debited to the statement of P&L.
2 Clause (iie) of Amount of notional gain on account of exchange of shares in SPV for units of business trust
Explanation-1 to S. referred to in S. 47 (xvii) shall be reduced from the net profit for arriving at the BP, if it was
115JB credited to the statement of P&L.
Amount of notional gain resulting from any change in carrying amount of units (supra) shall be
reduced from the net profit for arriving at the BP, if it was credited to the statement of P&L.
Amount of gain on account of transfer of units (supra) shall be reduced from the net profit for
arriving at the BP, if it was credited to the statement of P&L.
3 Clause (k) of Amount of gain on account of transfer of units (supra) by taking into account the cost of shares
Explanation-1 to S. in SPV exchanged with units shall be added to the net profit for computing the BP.
115JB
4 Clause (iif) of Amount of loss on account of transfer of units (supra) by taking into account the cost of shares
Explanation-1 to S. in SPV exchanged with units shall be reduced from the net profit for computing the BP.
115JB

(xi) Clause (iid) and Clause (fb) of Explanation-1 to S. 115JB:


1 Clause (iid) of Following incomes credited to the statement of P&L shall be reduced from the net profit for
Explanation-1 to S. computing BP of a foreign company:
115JB (a) Capital gains arising from transaction in securities suffering tax at a rate < 18.5%
(b) Interest, royalty and FTS chargeable to tax at a rate specified in Chapter XII (S. 115A
to S. 115BBE) which is less than 18.5%
2 Clause (fb) of Expenditure incurred in relation to the income (supra) which is debited to the statement of P&L
Explanation-1 to S. shall be added back to the net profit for computing BP.
115JB

(xii) Clause (iic) and Clause (fa) of Explanation-1 to S. 115JB:


1 Clause (iic) of Share income from an AOP credited to the statement of P&L shall be reduced from the net
Explanation-1 to S. profit for computing the BP.
115JB. It is exempt U/s 86 under the normal TI route.
2 Clause (fa) of Expenditure incurred in relation to share income (supra) debited to the statement of P&L shall
Explanation-1 to S. be added back to the net profit for computing the BP.
115JB.

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Chapter-5B: Minimum alternate tax (MAT) - Summary

(xiii) Clause (iig) and Clause (fd) of Explanation-1 to S. 115JB:


1 Clause (iig) of Royalty earned in respect of patent developed and registered in India by a resident company
Explanation-1 to S. which has exercised option for coming U/s 115BBF and which is credited to the statement of
115JB. P&L shall be reduced from the net profit for computing BP.
However, this royalty shall suffer tax @ 10% on gross basis under the normal TI route.
2 Clause (fd) of Expenditure incurred in relation to share income (supra) debited to the statement of P&L shall
Explanation-1 to S. be added back to the net profit for computing the BP.
115JB.

(xiv) Clause (iii) of Explanation-1 to S. 115JB:


1 Clause (iii) of Explanation-1 to Amount of loss brought forward or unabsorbed depreciation whichever is less (as per
S. 115JB. the books of accounts) shall be deducted from the net profit for computing the BP.
2 Explanation to Clause (iii) of Loss shall not include depreciation.
Explantion-1 to S. 115JB. If the brought forward loss or unabsorbed depreciation is nil, the Clause (iii) shall not
apply.

Points requiring attention:


Comparison should be on cumulative basis and not year-wise. [CBDT Circular 495 dated 22.09.1987 + Adoon
Electronics Private Ltd 232 ITR 528 (MP); Brut welded Tools Private Ltd 39 ITD 432 (Mad); Shree synthetics Ltd
233 ITR 333 (MP)].
1 For the purpose of Clause (iii), nature of loss is irrelevant.
2 Under the BP route, we are not bothered about the age of loss.
3 Restrictions contained in S. 79 have no role to play in the BP route.
4 Adjustment under Clause (iii) is not affected by the belated filing of return.

Amendment brought out by the FA 2018:


1 The aggregate amount of unabsorbed depreciation and loss brought forward shall be allowed to be reduced from the
net profit for computing book profits, if a company’s application for corporate insolvency resolution process under the
Insolvency and Bankruptcy Code, 2016 has been admitted by the Adjudicating authority.
2 MAT provisions shall not be applicable to a foreign company, if its TI comprises solely of profits and gains from the
business referred to in S. 44B, S. 44BB, S. 44BBA and S. 44BBB and such income has been offered to tax at the rates
specified in the said sections.

5. Some important issues in computing book profit:


1 List of adjustments – List of positive adjustments and negative adjustments is exhaustive in nature. No other
exhaustive adjustment could be made.
2 Other provisions not to S. 115JB is a self-contained code for computation of BP. No other provisions of this Act
apply for computing BP shall apply for computing BP. Vide non-obstante clause in S. 115JB (1).
3 Prior-period items not to ‘Prior period item’ means income or expense which arises in the current period as a result
be adjusted in computing of errors or omission in the preparation of the financial statements of one or more prior
the BP. [Khaitan periods.
Chemicals and For MAT purpose, the statement of P&L is to be prepared in accordance with the provisions
Fertilizers Ltd (Del)]. of the companies Act.
S. 129 (1) requires the companies to comply with the accounting standards while preparing
the financial statements.
One such AS is AS-5. As per AS-5, the prior period items are included in the determination
of net profit or loss for the period, but are required to be shown separately, so that their
impact on profit could be perceived.
Therefore, for the computation of BP, there is no need for any adjustments regarding the
prior period items.
4 Can AO question the Held that the AO cannot question the authenticity of the audited financial statements.
audited financial
statements? [Apollo
He cannot embark upon fresh enquiry relating to entries passed in the books of accounts.
Tyres Ltd 255 ITR 273
His role is limited to the extent of making such positive and negative adjustments
(SC)].
contemplated in Explanation-1 to S. 115JB.

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Chapter-5B: Minimum alternate tax (MAT) - Summary

6. Chapter VI provisions (S. 70 to S. 80) and provisions of S. 32 (2) continue to apply inspite of company being in BP
route – S. 115JB (3):
Nothing contained in S. 115JB (1) shall affect the determination of the amounts in relation to the relevant PY to be C/F to the
subsequent year(s) under the provisions of S. 32 (2) or S. 72 or S. 73 or S. 74 or S. 74A.

7. Report of accountant – S. 115JB (4):


Every company to which S. 115JB applies shall furnish a report of a CA in Form-29B, certifying that the BP has been
computed in accordance with the provisions of S. 115JB.

8. Applicability of other provisions to companies coming under the BP route – S. 115JB (5):
Save as otherwise provided in the section, all other provisions of the Act shall apply to every assessee being a company
mentioned in S. 115JB.

Applicability of advance tax provisions even in BP route:


1 S. 115JB (5) provides that all other provisions of this Act shall apply to every assessee, being a company, mentioned in
this section.
2 According to S. 207, tax shall be payable in advance during any FY, in accordance with the provisions of S. 208 to 219
(both inclusive), in respect of the TI of the assessee which would be chargeable to tax for the AY immediately following
that FY.
3 U/s 115JB (1), where the tax payable on TI is less than 18.5% of BP of a company, the BP would be deemed to be the
TI and tax would be payable @ 18.5%.
4 Since in such cases, the BP is deemed to be the TI, as per the provisions of S. 207, tax shall be payable in advance in
respect of such BP (which is deemed to be TI) also.
5 Further, the annual Finance Act prescribes rate for payment of advance tax when tax is payable U/s 115JB.
6 Therefore, if the BP tax is not paid in advance fully or partly, or not paid in installments as required U/s 211 within the
time limit specified therein, the company becomes liable to interest U/s 234B and S. 234C. [Rolta Ltd 196 Taxman 594
(SC)].

9. MAT credit – S. 115JAA:


1 Tax credit for MAT [S. 115JAA If a person pays tax U/s 115JB for a PY, he shall be entitled to credit in respect of
(1A) & (2A)]. such tax.
Amount of credit = (BP tax paid – Tax on normal TI payable).
2 No interest on MAT credit. No interest shall be payable on tax credit allowed U/s 115JAA (1A). [Proviso-1 to
S. 115JAA (2A)].
3 Carry forward of credit. [S. The amount of tax credit determined U/s 115JAA (2A) shall be C/F & set off in
115JAA (3A)]. accordance with the provisions of S. 115JAA (4) & (5) but such C/F shall not be
allowed beyond 15th AY immediately succeeding the AY for which tax credit
becomes allowable U/s 115JAA (1).
4 Year and extent of set off. [S. If, for an AY, the tax on normal TI exceeds the BP tax, the tax credit shall be
115AA (4) S. 115JAA (5)]. allowed to be set off to the extent of the excess of tax on normal TI over the BP
tax and the balance of the tax credit, if any, shall be C/F.

5 Variation to MAT credit pursuant If the amount of tax on normal TI or the BP tax is reduced or increased as a result
to orders passed under this Act. of any order passed under this Act, the amount of tax credit allowed under this
section shall also be varied accordingly. [S. 115JAA (6)].
6 Restriction on the quantum of Where the amount of tax credit in respect of any income-tax paid in any country
MAT credit. [Proviso-2 to S. or specified territory outside India U/s 90 or S. 90A or S. 91, allowed against the
115JAA (2A)]. BP tax payable, exceeds the amount of the tax credit admissible against the tax
on normal TI payable by the assessee, then, while computing the amount of credit
U/s 115JAA (2), such excess amount shall be ignored.
In other words, the amount of tax credit in respect of tax on BP shall not be
allowed to be carried forward to subsequent year to the extent such credit relates
to the difference between the amount of foreign tax credit (FTC) allowed against
tax on BP and FTC allowable against the tax on normal TI payable by the
assessee.

11. Computation of Book Profit for Ind AS compliant companies – S. 115JB (2A), S. 115JB (2B) and S. 115JB (2C):

See the main notes.

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Chapter-5C: Miscellaneous amendments (FA 2017 & 2018) - Summary

Miscellaneous amendments:
1 S. 10 (23C) Income of Chief minister’s Relief fund and Lieutenant Governor’s Relief fund are exempt.
(iiiaaaa).
2 S. 10 (48) S. 10 (48) exempts any income accruing or arising to a foreign company on account of storage of
crude oil in a facility in India and sale of crude oil therefrom to any person resident in India, if, - (a)
such storage and sale by the foreign company is pursuant to an agreement or an arrangement
entered into by the CG or approved by the CG; and (b) having regard to the national interest, the
foreign company and the agreement or arrangement are notified by the CG in this behalf.

3 S. 10 (48B). It provides that any income accruing or arising to a foreign company on account of sale of left over
stock of crude oil, if any, from a facility in India after the expiry of an agreement or an arrangement
[referred to in S. 10 (48A)] shall also be exempt (subject to such conditions as may be notified by the
CG in this behalf).
4 Disallowance of Existing provisions of S. 58 specify the amounts which are not deductible in computing income U/H
TDS default IFOS which include certain disallowances made in computation of income U/H PGBP.
extended to These disallowances include disallowances such as disallowance U/s 40 (a) (i) / (iii) and U/s 40A.
income taxable Disallowance pertaining to TDS default when payment or credit is given to resident (which is covered
U/H IFOS. [S. 58 by S. 40 (a) (ia)) is not applicable while computing income U/H IFOS.
(1A)]. With a view to improving compliance of provision relating to TDS, S. 58 (1A) has been amended (w.e.f
AY 2018-19) so as to provide that provisions of S. 40 (a) (ia) shall, so far as they may be, apply in
computing income chargeable U/H IFOS as they apply in computing income chargeable U/H PGBP.
5 Restriction on Under the existing provisions of S. 80G, deduction is not allowed in respect of cash donation
cash donation exceeding Rs. 10000.
U/s 80G. FA 2017 has reduced this limit to Rs. 2000 with effect from AY 2018-19.
6 Amendments The existing provisions of S. 133 empower the ITA to call for information for the purpose of any inquiry
pertaining to or proceeding under the Act.
power to call 2nd proviso to S. 133 provides that the power in respect of an inquiry, in case where no proceeding is
information. [S. pending, shall not be exercised by any ITA below the rank of the PDIT or DIT or PCIT or CIT without
133]. the prior approval of such authorities.
Considering the requirements of the work profile of the authorities working in the Investigation
Directorate, the 1st proviso to S. 133 has been amended with effect from 01.04.2017 to provide that the
power in respect of inquiry or proceeding under the Act, may also be exercised by the JDIT or DDIT
and ADIT.
Further, the 2nd proviso is amended to provide that the JDIT, DDIT or ADIT may exercise the powers in
respect of such inquiry, without seeking prior approval of higher authorities.
7 Extension of the S. 133A empowers an ITA to enter any place, at which a business or profession is carried on, at which
power to survey any books of account or other documents or any part of cash or stock or other valuable article or thing
[S.133A]. relating to business or profession are kept, for the purposes of conducting a survey.
To widen the scope of the said section, S. 133A (1) has been amended with effect from 01.04.2017 to
include any place, at which an activity for charitable purpose is carried on.

Penalty for failure to furnish statement of financial transaction or reportable account [Section 271FA]
Section 285BA(1) (read with Rule 114E) obliges specified person to furnish the statement of financial transaction or
reportable account on or before 31st May, immediately following the financial year in which the transaction is registered or
recorded (except in respect of certain transaction of cash deposits during financial year 2016 where different date was
prescribed). Further, sub-section (5) of the said section also empowers the prescribed income-tax authorities to issue notice
requiring the person to furnish such statement, if he has not furnished the statement within due date.

Hitherto, section 271FA provided that if such specified person failed to furnish such statement within due date, he was liable
to pay penalty of Rs. 100 for every day of continuing default.

It further provided that in case where such person failed to furnish the statement within time specified in the notice issued
under section 285BA(5), he shall be liable to pay penalty of Rs. 500 for every day of continuing default. In order to ensure
compliance of the reporting obligations under section 285BA, Finance Act, 2018 has amended section 271FA with effect
from April 1, 2018 to enhance the quantum of penalty as under:
1 if such specified person fails to furnish such statement within due date, he shall be liable to pay penalty of Rs. 500 for
every day of continuing default; and
2 in case where such person fails to furnish the statement pursuant to and within time specified in the notice issued under
section 285BA(5), he shall be liable to pay penalty of Rs. 1,000 for every day of continuing default.

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Chapter-6: Provisions of S.269SS, S. 269T & S. 269ST - Summary:

1. Mode of taking or accepting certain loans, deposits and specified sum – S. 269SS:
In the following circumstances, loan, deposit or specified sum shall be taken or accepted only through APC/APBD/by use of
ECS through a bank account:
Circumstance-1 Loan, deposit or specified sum ≥ Rs. 20000.
Circumstance-2 Loan, deposit or specified sum taken or accepted < Rs. 20000.
However, from the same depositor loan, deposit or specified sum was taken on the earlier occasion.
It is remaining unpaid. Amount remaining unpaid is ≥ Rs. 20000.
Circumstance-3 Loan, deposit or specified sum taken or accepted < Rs. 20000.
Loan, deposit or specified sum taken or accepted from the same depositor on the earlier occasion is
remaining unpaid. But the unpaid amount is also < Rs. 20000.
However, loan, deposit or specified sum taken or accepted on the current occasion together with the
unpaid amount of loan, deposit or specified sum taken or accepted on the earlier occasion from the
same depositor ≥ Rs. 20000.

Points requiring attention:


1 Specified sum means a sum of money received by way of advance or otherwise in relation to transfer of an immovable
property, whether or not the transfer takes place. [Clause (iv) of Explanation to S. 269SS].
2 S. 269SS applies to sum received in relation to transfer of an immovable property, whether held as capital asset or
stock-in-trade.
3 S.269SS applies even if sum is received in relation to transfer of agricultural land. No exclusion in S. 269SS similar to
that in S. 194-IA, S. 194LA and S. 56 (2) (x).

2. Penalty U/s 271D:


1 Offence Taking or accepting loan, deposit or specified sum in contravention of provisions of S. 269SS.
2 Levying authority JCIT
3 Quantum of Equals to Loan, deposit or specified sum taken or accepted in contravention of provisions of S.
penalty 269SS.
4 Escape route No penalty shall be levied if the JCIT is satisfied that the borrower has reasonable cause for
violation of the provisions of S. 269SS. [S. 273B].

Proviso-1 to S. 269SS:
S. 269SS shall not apply to loan or deposit or specified sum taken by or from the following persons:

1 CG/SG
2 Banking company
3 Co-operative banks
4 Post office saving bank
5 Statutory corporation
6 Government company
7 Association or institution or body or class of association or institution or body notified by the CG.

Provios-2 to S. 269SS:
If the acceptor of loan or deposit or specified sum as well as payer have agricultural income and don’t have any income
chargeable to tax, then S. 269SS shall not apply.

Some judicial rulings on S. 269SS & S. 271D:


1 V. Sivakumar (2013) Transactions between firm and partners are outside the ambit of S. 269SS. Firm is not a
(Mad) + Muthoot separate juristic person. It is a collective name for partners. It is a compendious way of
Financiers (2015) (Del) describing partners. Fiction created in S. 2 (31) is only for the purpose of determination of
TI and tax thereon.
2 Noida Toll Bridge Co S. 269SS covers only cash loan and not loan through book entries.
Ltd (Del)
3 Whether the share View-1: Share application money is neither loan nor deposit. S. 269SS is not violated.
application money is Penalty U/s 271D cannot be levied. [I.P. India (P) Ltd (Del)].
covered by S. 269SS? View-2: Share application money is not loan. However, it comes within the purview of
deposit. If there is an obligation to return, the sum becomes deposit. If the shares are
allotted to the applicant, though the share application money is not refunded in species, it is
returned in the form of shares. If the shares are not allotted, the share application money
becomes refundable. Anyway share application is refunded in species or otherwise.

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Chapter-6: Provisions of S.269SS, S. 269T & S. 269ST - Summary:

Therefore, it comes with the ambit of deposit. If it is received in cash, it is a violation of S.


269SS. [Bhalotia Engineering Works (P) Ltd (Jharkhand)].
4 Kailash Chandra Advances given in the ordinary course of business are outside the ambit of S. 269SS.
Deepak Kumar (All)
5 Diwan Enterprises 246 Same amount cannot be treated as unexplained cash credit as well as loan. If the story of
ITR 571 (Del) + loan is not believed by the Department and accordingly, addition is made U/s 68, then the
Standard Brands Ltd – JCIT cannot levy penalty U/s 271D, treating it as loan taken in violation of S. 269SS.
285 ITR 295 (Del)

3. Mode of re-payment of certain loan or deposit – S. 269T:


In the following circumstances, (a) branch of a banking company; (b) branch of a co-operative bank; (c) any other company;
(d) firm; (e) co-operative society; (f) any other person shall repay loan or advance or specified advance only through APC or
APBD or by use of ECS through a bank account:
Circumstance- Loan or deposit or specified advance together with the interest, if any, payable thereon ≥ Rs. 20000.
1
Circumstance- Loan or deposit repaid and interest thereon < Rs. 20000.
2 However, the aggregate of loan or deposit to be repaid to the same depositor together with interest
thereon ≥ Rs. 20000.
Circumstance- Specified advance repaid together with interest thereon < Rs. 20000.
3 However, the aggregate specified advance received by such person either in his own name or jointly with
any other person on the date of such repayment together with the interest, if any, payable on such
specified advances ≥ Rs. 20000.

Specified advance – Clause (iv) of Explanation to S. 269T:


Specified advance means any sum of money in the nature of advance by whatever name called in relation to transfer of an
immovable property, whether or not the transfer takes place.

4. Penalty U/s 271E:


1 Offence Repayment of loan or deposit or specified advances in contravention of the provisions of S. 269T.
2 Levying JCIT
authority
3 Quantum of Equals to amount of Loan, deposit or specified advance repaid in contravention of provisions of S.
penalty 269T.
4 Escape route No penalty shall be levied if the JCIT is satisfied that the borrower has reasonable cause for violation
of the provisions of S. 269T. [S. 273B].

Note: For quantification of penalty U/s 271E, interest is not relevant. Interest is relevant only in deciding whether the
provisions of S. 269T is violated or not.

Proviso-2 to S. 269T:
Where loan or deposit or specified advance is repaid to following persons, S. 269T shall not apply:
1 CG/SG
2 Banking company
3 Co-operative bank
4 Statutory corporation
5 Government company
6 Post-office Savings Bank
7 Any other person notified by the CG in OG

Important judicial ruling:


Triumph International Even repayment of loan by passing mere adjusting book entries by the assessee can be
Finance (India) Ltd. (2012) taken to be in contravention of provisions of S. 269T to attract penalty U/s 271E.
345 ITR 270 (Bom) However, no penalty should be levied if there is reasonable cause for violation.

Important CBDT circulars:


CBDT Circular Penalty orders U/s 271D and S. 271E shall be passed within 6 months from the end of the month in
9/2016 which the SCN was issued by JCIT and not within 6 months from the end of the month in which order
of assessment was passed by the AO containing direction for initiation of penalty proceedings U/s
271D and S. 271E. [S. 275 (1) (c)].

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Chapter-6: Provisions of S.269SS, S. 269T & S. 269ST - Summary:

CBDT Circular The action inviting imposition of penalty U/s 271D and S. 271E is accepting or repaying loan
10/2016 otherwise than by way of APC or APBD or by use of ECS through bank account. It is not related to
the income that may be assessed or finally adjudicated. The penalty U/s 271D and S. 271E is
independent of assessment.
Thus, the time-limit for passing order U/s 271D and S. 271E is not affected by the pendency of
appeal against the assessment order.
Accordingly, the time-limit for passing order U/s 271D and S. 271E is not 6 months from the end of
the month in which the order of ITAT is received by the CIT. It is 6 months from the end of the month
in which the SCN was issued by the JCIT.

5. Restriction on cash transactions – S. 269ST:


No person shall receive an amount of Rs.2L or more:
(a) In aggregate from a person in a day; or
(b) In respect of a single transaction; or
(c) In respect of transactions relating to one event or occasion from a person,
Otherwise than by an APC or APBD or use of ECS through a bank account:

Proviso to S. 269ST:
The provisions of this section shall not apply to:
(i) Any receipt by (a) Government; (b) any banking company, Post office savings Bank or co-operative bank;
(ii) Transactions of the nature referred to in S. 269SS.
(iii) Such other persons or class of persons or receipts, which the CG may notify in the OG.

6. Penalty U/s 271DA:


1 Offence Receiving a sum in contravention of the provisions of S.269ST.
2 Levying JCIT
authority
3 Quantum of Equals to the amount received in contravention of S. 269ST.
penalty
4 Escape route No penalty shall be levied if the JCIT is satisfied that there are good and sufficient reasons for
contravention of provisions of S. 269ST. [S. 273B].

Notification No. 28/2017 dated 05.04.2017:


S. 269ST shall not apply to receipt by any person from any banking company, post office savings bank or co-operative bank.

Notification No 57/2017 dated 03.07.2017:


The CG hereby specifies that the provisions of S. 269ST shall not apply to the following, namely:
(a) Receipt by a business correspondent on behalf of a banking company or co-operative bank, in accordance with the
guidelines issued by the RBI;
(b) Receipt by a white label automated teller machine operator from retail outlet sources on behalf of a banking company
or co-operative bank, in accordance with the authorization issued by the RBI under the payment and settlement
systems Act, 2007;
(c) Receipt from an agent by an issuer of pre-paid payment instruments, in accordance with the authorization issued by
the RBI under the payment and settlement systems Act, 2007;
(d) Receipt by a company or institution issuing credit cards against bills raised in respect of one or more credit cards.
(e) Receipt which is not includible in the TI U/s 10 (17A).

Clarifications in respect of S. 269ST [Circular No. 22/2017, Dated 03.07.2017]:


The CBDT has clarified that in respect of receipt, in the nature of repayment of loan, by NBFCs or HFCs, the receipt of one
instalment of loan repayment in respect of a loan shall constitute a ‘single transaction’ as specified in S. 269ST (b) and all
the instalments paid for a loan shall not be aggregated for the purposes of determining applicability of the provisions of S.
269ST.

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Chapter-7: Business Trust

Tax implications of various transactions in relation to Business Trust:

A. Transfer of listed units of BT through RSE:


1 POH criterion for units of 36 months
BT
2 STT levy on purchase or If the units of BT are purchased / transferred through RSE, the transaction is subjected to
sale through RSE STT @ 0.1% in the hands of purchaser or seller, as the case may be.
3 No deduction in respect STT paid shall not be allowed as deduction while computing income U/H CG. [S. 48
of STT Proviso-7].
4 Tax treatment of LTCG If STT is paid at the time of transfer of units of BT, the resultant LTCG is covered by S.
arising on account of 112A. However, if the transfer takes place in a RSE located in IFSC and the consideration
transfer of units of BT. for such transfer is received in foreign currency, then the resultant LTCG is still covered by
S. 112A, though there is no STT obligation.
In computing such LTCG, effect shall not be given to 2nd Proviso to S. 48. In other words,
there will be no benefit of indexation. [S. 48 Proviso-3].
LTCG (Supra) in excess of Rs. 1L is only taxable. Such excess shall suffer tax @ flat rate
10%.
In case of a resident individual or HUF, if the BEL is not exhausted by other income, then
such unexhausted BEL could be adjusted against the LTCG (Supra).
No deduction shall be allowed under Chapter VI-A in respect of that portion of GTI which
represents this LTCG.
5 Tax treatment of STCG If STT is paid at the time of transfer of units of BT, the resultant STCG is covered by S.
arising on account of 111A. However, if the transfer takes place in a RSE located in IFSC and the consideration
transfer of units of BT. for such transfer is received in foreign currency, then the resultant STCG is still covered by
S. 111A, though there is no STT obligation.
No deduction shall be allowed under Chapter VI-A in respect of that portion of GTI which
represents this STCG. It shall suffer tax @ 15%.

B. Exchange of shares in SPV for units of BT:


Where the assessee exchanges his shares in SPV for the units of BT, this shall not be regarded as transfer. [S. 47 (xvii)].
Hence, the question of computing CG does not arise.

C. Transfer of units of BT which were acquired in consideration for exchange of shares in SPV:
1 POH of units (supra) Starts on the DOA of shares in SPV. [S. 2 (42A) Explanation-1 Clause (hc)].
2 COA of units (supra) COA of shares in SPV. [S. 49 (2AC)].
3 STT obligation STT shall be levied @ 0.1%.
However, the STT shall be levied @ 0.20% in the hands of seller upon sale of such units of
BT (which are acquired in lieu of shares of SPV), under an offer for sale to the public
included in the initial offer and where such units are subsequently listed on a RSE. Such
STT shall be collected and remitted to the credited of Government by the Lead Merchant
Banker appointed by the BT
4 Tax treatment of LTCG If STT is paid at the time of transfer of units of BT, the resultant LTCG is covered by S.
arising on account of 112A. However, if the transfer takes place in a RSE located in IFSC and the consideration
transfer of units (supra). for such transfer is received in foreign currency, then the resultant LTCG is still covered by
S. 112A, though there is no STT obligation.
In computing such LTCG, effect shall not be given to 2nd Proviso to S. 48. In other words,
there will be no benefit of indexation. [S. 48 Proviso-3].
LTCG (Supra) in excess of Rs. 1L is only taxable. Such excess shall suffer tax @ flat rate
10%.
In case of a resident individual or HUF, if the BEL is not exhausted by other income, then
such unexhausted BEL could be adjusted against the LTCG (Supra).
No deduction shall be allowed under Chapter VI-A in respect of that portion of GTI which
represents this LTCG.
5 Tax treatment of STCG If STT is paid at the time of transfer of units of BT, the resultant STCG is covered by S.
arising on account of 111A. However, if the transfer takes place in a RSE located in IFSC and the consideration
transfer of aforesaid for such transfer is received in foreign currency, then the resultant STCG is still covered by
units of BT. S. 111A, though there is no STT obligation.
No deduction shall be allowed under Chapter VI-A in respect of that portion of GTI which
represents this STCG. It shall suffer tax @ a flat rate of 15%.

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Chapter-7: Business Trust

D. Interest income from SPV:


1 Narration of transaction. BT has given loan to SPV. Interest on such loan arises to BT.
2 Tax treatment of interest It is exempt in the hands of BT U/s 10 (23FC). In respect of this income, the BT is
(supra) in the hands of BT. given a pass-through status.
3 No TDS obligation for SPV. In respect of this interest, SPV has no TDS obligation. [S. 194A (3) (xi)], since it is
exempt in the hands of BT.
4 Tax treatment of such portion If the UH = FC/NCNR, it shall suffer tax in the hands of investors at a flat rate of 5%.
of distribution made by the BT [S. 115A (1) (a) (iiac)].
to its investors (i.e. unit No deduction is available in respect of such portion of distribution. [S. 115A (3)].
holders) which represents Not even Chapter VI-A deduction is available against that portion of GTI which
interest (supra) represents the distribution (supra). [S. 115A (4)].
If the UH = Resident, no special provisions are prescribed. Normal rates of tax are
applicable.
PY (chargeability) = PY (Distribution).
5 TDS on such portion of If the UH = FC/NCNR, tax shall be deducted at source by the BT @ 5% U/s 194LBA
distribution made by the BT to at the time of payment or credit to the account of the UH whichever is earlier.
its investors (i.e. unit holders) If the UH = Resident, tax shall be deducted at source by the BT @ 10% U/s 194LBA
which represents interest at the time of payment or credit to the account of the UH whichever is earlier. (Subject
(supra) to S. 206AA).

E. Dividend from non-SPV sources:


1 Tax treatment of dividend income from non- Dividend from non-SPV sources are exempt U/s 10 (34).
SPV sources (being domestic companies) in
the hands of REIT.
2 Tax treatment of such dividend element It is exempt in the hands of UHs U/s 10 (23FD).
present in the distribution made by BT to its
UHs.

F. Dividend distributed by SPV to BT:


SN Situation SPV BT UH
1 BT holds less than 100% of equity share Dividend is Dividend from This dividend element in the
capital of SPV liable to DDT SPV is exempt distribution made by the BT to
U/s 115-O. U/s 10 (34). the UH is exempt U/s 10
[Subject to S. (23FD). On this, the BT has
115BBDA]. no obligation to deduct tax at
source U/s 194LBA.
2 BT holds Case- Dividend is declared Dividend is Dividend from This dividend element in the
100% of 1 or paid out of profit liable to DDT SPV is exempt distribution made by the BT to
equity earned before BT U/s 115-O. U/s 10 (34). the UH is exempt U/s 10
share acquired 100% [Subject to S. (23FD). On this, the BT has
capital of holding. 115BBDA]. no obligation to deduct tax at
SPV source U/s 194LBA.
Case- Dividend is declared Dividend paid Dividend from This dividend element in the
2 or paid out of profits to BT is not SPV is exempt in distribution made by the BT to
earned on or after liable to DDT the hands of BT the UH is exempt U/s 10
the date on which U/s 115-O. [S. U/s 10 (23FC) (b). (23FD). On this, the BT has
BT acquired 100% 115-O (7)]. no obligation to deduct tax at
holding. source U/s 194LBA.

Note: If dividend from non-SPV sources with dividend in Situation-1 or dividend in Case-1 of Situation-2 in aggregate
exceeds Rs. 10L, the excess over 10L becomes taxable in the hands of BT on gross basis @ 10% U/s 115BBDA.

G. Rental income arising to REIT from real-estate assets directly held by it:
1 Rental income earned by REIT from Exempt in the hands of REIT U/s 10 (23FCA).
real estate assets directly held by it.
2 No TDS on rent (supra). On the rent payable to REIT, the person responsible for making payment
has no obligation to deduct tax at source U/s 194-I. [3rd Proviso to S. 194-I].
3 Tax treatment of this rent element It shall be taxed in the hands of UH. In respect of this income, the BT is

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Chapter-7: Business Trust

present in the distribution made by the given a pass-through status.


REIT to UH.
4 TDS obligation on the rent element If the UH = Resident, the BT shall deduct tax at source U/s 194LBA (1) @
present in the distribution. 10%. [Subject to S. 206AA].
If the UH = FC, the BT shall deduct tax at source U/s 194LBA (3) at rates in
force (i.e. 40% + surcharge if applicable + Health & Education cess).
If the UH = NCNR, the BT shall deduct tax at source U/s 194LBA (3) at rates
in force (i.e. 30% + surcharge if applicable + Health & Education cess).
Tax shall be deducted at source at the time of payment or at the time of
credit (whichever is earlier).
H. CG on disposal of assets by BT:
1 Tax treatment of LTCG arising to It shall suffer tax at rates specified in S. 112/S. 112A.
REIT on account of transfer of
CA
2 Tax treatment of STCG arising If it is covered by S. 111A, it shall suffer tax in the hands of REIT @ 15%.
to REIT on account of transfer of If it is not covered by S. 111A, it shall suffer tax in the hands of REIT @ MMR. [S.
CAs 115UA (2)].
3 Tax treatment of CG element It is exempt in the hands of UHs U/s 10 (23FD).
present in the distribution made
by REIT to UHs

I. Income of BT other than (a) interest from SPV; (b) dividend from SPV; (c) dividend from non-SPV sources (being
domestic companies); (d) CG covered by S. 111A and S. 112; (e) rental income from direct investment in real estate
assets:
1 Tax treatment of such other income in the hands of BT. It is taxable in the hands of BT @ MMR.
[S.115UA (2)].
2 Tax treatment of such other income element present in the distribution It is exempt in the hands of UHs U/s 10
made by BT to its UHs. (23FD).

J. Interest payment to NR Lenders on ECB by the BT:


1 Narration of Transaction On or after 01.07.2012 but before 01.07.2020, BT has borrowed money in foreign currency
from a source outside under a loan agreement approved by the CG or by way of issue of LT
bonds as approved by the CG in this behalf or the BT has borrowed money from a source
outside India by way of issue of RDB before 01.07.2020.
Interest is payable to the FC or NCNR at a rate which does not exceed the rate approved by
the CG.
2 Tax treatment of the Interest is taxable in the hands of FC/NCNR @ a flat rate of 5%. [S. 115A (1) (a) (iiaa)].
interest (supra) in the Nothing is allowed as deduction U/s 28 to S. 44C or S. 57. [S. 115A (3)].
hands of FC/NCNR. No deduction is allowed under Chapter VI-A. [S. 115A (4)].
3 TDS obligation U/s BT has obligation to deduction tax at source on the interest (supra) @ 5% U/s 194LC at the
194LC time of payment or credit to the account of the payee whichever is earlier.

K. Special provisions relating to BT – S. 115UA:


S. 115UA (1) Any income distributed by a business trust to its unit holders shall be deemed to be of the same nature
and in the same proportion in the hands of the unit holder as it had been received by, or accrued to, the
business trust.
Necessity of S. The surplus distributed by the BT to the UHs comes from a basket of mixed receipts like (a) interest
115UA (1) received from SPV; (b) interest received from non-SPV sources; (c) dividend received from SPV; (d)
dividend received from non- SPV sources and (e) sales consideration of capital assets sold by the BT.
In the hands of UH, the tax treatment of different elements of income present in the amount distributed
is not same.
Hence, there is a necessity to segregate the different components of income present in the amount
distributed.

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Chapter-8: Provisions relating to Mutual Fund – Summary:

1. Additional income tax on income distributed by MF – S. 115R:


When income is distributed to the unit-holders, the fund house has to pay additional income tax U/s 115R (2) as provided
below:
Distributor Unit-holder Additional income-tax rate
Administrator - -
Equity oriented fund - 12.94% (w.e.f 01.04.2018)
Infrastructure debt fund (being a MF) FC/NCNR 6.13%
Debt funds Individual / HUF 38.82%
Any other person 49.92%

Points requiring attention:


1 Distribution tax shall be paid to the credit of CG within 14 days of the date of distribution. [S. 115-R (3)].
2 Interest shall be paid @1% p.m. or part thereof from 15th day to the date of payment on the outstanding distribution tax.
[S. 115-S].
3 If the distribution tax is not paid as required U/s 115-R (2), the MF and its principal officer are regarded as assessee in
default. Collection & recovery proceedings could be initiated. [S. 115-T].
4 Income distributed by way of dividend by the MF/Administrator/Specified company to the unit holders is exempt U/s 10
(35). This is because the fund house has suffered distribution tax U/R 115-R (2).
5 Distribution by the fund house upon redemption of units will not suffer distribution tax in the hands of fund house.
Capital gains will be computed in the hands of unit holders upon redemption of units. [CBDT Circular 6/2014].
6 Distribution by the fund house by way of allotment of bonus units will attract distribution tax in the hands of fund house.
When these bonus units are transferred by the unit holder, for computation of capital gains, the cost of acquisition of
bonus units shall be regarded as nil (subject to S. 94 (8)). [CBDT Circular 6/2014].
7 LTCG arising from transfer of EOU of MF is covered by S. 112A, if the investor has suffered STT @ 0.001% at the time
of transfer. However, if the transfer takes place in a RSE located in IFSC and the consideration for such transfer is
received in foreign currency, then the resultant LTCG is still covered by S. 112A, though there is no STT obligation.
In computing such LTCG, effect shall not be given to 2nd Proviso to S. 48. In other words, there will be no benefit of
indexation. [S. 48 Proviso-3].
LTCG (Supra) in excess of Rs. 1L is only taxable. Such excess shall suffer tax @ flat rate 10%.
In case of a resident individual or HUF, if the BEL is not exhausted by other income, then such unexhausted BEL could
be adjusted against the LTCG (Supra).
No deduction shall be allowed under Chapter VI-A in respect of that portion of GTI which represents this LTCG.
8 STCG arising from transfer of EOU of MF is covered by S. 111A, if the investor has suffered STT @ 0.001% at the
time of transfer. However, if the transfer takes place in a RSE located in IFSC and the consideration for such transfer is
received in foreign currency, then the resultant STCG is still covered by S. 111A, though there is no STT obligation.
No deduction shall be allowed under Chapter VI-A in respect of that portion of GTI which represents this STCG. It shall
suffer tax @ a flat rate of 15%.
9 Any income of MF is exempt U/s 10 (23D).
10 MF shall file return for every year, irrespective of income or loss being reported by it. [S. 139 (4C)].

Note: If the infrastructure debt fund is having the form of NBFC, the tax implications are as under:

1 Exemption U/s 10 (47) Income of infra-structure debt fund is exempt U/s 10 (47). It is having just pass-through
status.
2 Interest paid by It is income deemed to accrue or arise in India for the non-resident investor. [S. 9 (1) (v)
infrastructure debt fund to (b)]. It is taxable in India.
non-resident investors – It is taxed on gross basis in the hands of non-resident. No deduction is allowed in respect
Tax implications. of any expense or allowance against this interest income. [S. 115A (3)].
No Chapter-VIA deduction is allowed against that portion of GTI of non-resident investor
which represent this interest income. [S. 115A (4)].
It shall suffer tax at flat rate of 5% (+ Surcharge if applicable + HEC). [S. 115A (1) (iia)].
If the NR investor does not have any income other than this interest income and the
interest income was subjected to TDS U/s 194LB, there is no need for NR investor to file
ROI for the relevant PY. [S.115A (5)].
3 TDS U/s 194LB The infrastructure debt fund shall deduct tax at source @ 5% on the interest payable to
investors at the time of payment or credit to the account of the investor whichever is
earlier.

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Chapter-8: Provisions relating to Mutual Fund – Summary:

2. Consolidation of mutual fund schemes – Tax implications:


1 Where there is consolidation of mutual fund scheme, the unit holders of consolidating scheme are allotted units of
consolidated scheme for extinguishment of their rights in the units of consolidating scheme. This comes within the ambit
of the term ‘transfer’ as defined in S. 2 (47).
2 In order to make consolidation tax neutral, S. 47 (xviii) is inserted to exclude this from the ambit of transfer. Hence,
question of computing capital gains in the hands of the unit holders of consolidating scheme does not arise.
3 However, the exclusion u/s 47 (xviii) is only in respect of homogenous consolidation.
4 COA of units of consolidated scheme allotted to the unit holders of consolidating scheme = COA of units of
consolidating scheme. [S. 49 (2AD)].
5 POH of units of consolidated scheme allotted to the unit holders of consolidating scheme shall start on the DOA of units
of consolidating scheme. [S. 2 (42A) Explanation-1 Clause (hd)].

3. Consolidation of plans within a scheme of mutual fund – Tax implications:


(i) Where there is consolidation of plans of a mutual fund scheme, the unit holders of consolidating plan are allotted units
of consolidated plans for extinguishment of their rights in the units of consolidating plan. This comes within the ambit
of the term ‘transfer’ as defined in S. 2 (47).
(ii) In order to make consolidation tax neutral, S. 47 (xix) is inserted to exclude this from the ambit of transfer. Hence,
question of computing CG in the hands of the unit holders of consolidating plan does not arise.
(iii) COA of units of consolidated plan allotted to the unit holders of consolidating plan = COA of units of consolidating
plan. [S. 49 (2AF)].
(iv) POH of units of consolidated plan allotted to the unit holders of consolidating plan shall start on the DOA of units of
consolidating plan. [S. 2 (42A) Explanation-1 Clause (hg)].

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Chapter-9: Provisions relating to New Pension Scheme

1. Provisions relating to New Pension Scheme:


1 Tax implications in the hands of subscriber (being an employee) in respect of his contribution and the
contribution of employer:
(a) Employer’s contribution It is salary in the hands of employee (as per S. 17 (1)).
It is allowed as deduction U/s 80CCD (2) in the hands of employee to the extent of
10% of (Salary + DA (if the terms of employment so provides)).
(b) Employee’s contribution In respect of this, deduction is allowed U/s 80CCD (1B) to the employee to the extent
of Rs. 50000.
Also U/s 80CCD (1), deduction is allowed to the employee to the extent of lower of the
following: (a) Employer’s contribution in excess of Rs. 50000; (b) 10% of (Salary + DA
(if the terms of employment so provides)).
2 Tax implications in the hands of subscriber (being self-employed person) in respect of his contribution
Deduction in respect of own Contribution to pension account is allowed as deduction U/s 80CCD (1B) to the extent
contribution of Rs. 50000.
Also U/s 80CCD (1), deduction is allowed to the subscriber to the extent of lower of the
following: (a) Contribution in excess of Rs. 50000; (b) 20% of GTI.
3 Ceiling in S. 80CCE Ʃ Deductions U/s 80C + S. 80CCD (1) + S. 80CCC ≤ Rs. 150000.
4 Tax implications of payments out of pension wealth in the hands of the subscriber:
(a) Payment of pension wealth Exempt in the hands of the nominee. [Proviso to S. 80CCD (3)].
to the nominee upon death
of the subscriber (being an
employee or otherwise).
(b) Partial withdrawal from NPS Any payment from the NPST to a subscriber being an employee under the pension
account by subscriber being scheme referred to in S. 80CCD, on partial withdrawal made out of his account in
an employee. [S. 10 (12B)]. accordance with the terms & conditions, specified under the Pension Fund Regulatory
and Development Authority Act, 2013 and the regulations made thereunder, to the
extent it does not exceed 25% of the amount of contributions made by him, shall be
exempt from tax.
(c) Subscriber (being an 40% of the pension wealth is exempt U/s 10 (12A).
employee or otherwise) Balance, if used for purchasing annuity, is exempt u/s 80CCD (5). Otherwise, it is
closes his account under taxable U/s 80CCD (3) (a).
NPS or opts out of NPS
(d) Pension paid by annuity Taxable in the hands of the assessee. [S. 80CCD (3) (b)].
service provider
5 Tax implications in the hands of the employer:
Deduction in respect of his In respect of employer’s contribution to the pension account of the employee, the
contribution to the pension employer gets deduction U/s 36 (1) (iva) while computing income U/H PGBP.
account of the employee Deduction is restricted to 10% of (Salary + DA (if the terms of employment so
provides)).
6 Tax implications in the hands of NPST:
(a) Exemption U/s 10 (44) Any income received by NPST is exempt U/s 10 (44).
(b) Exemption from TDS Any payments made to NPST shall not be subjected to TDS. [S. 197A (1E)].
(c) Exemption from STT Finance Act 2004 Chapter VII exempts NPST from STT payable in respect of purchase
and sale of equity and derivatives.
7 Exemption from DDT - S. On dividend payable to NPST, the investee-company need not pay DDT.
115-O (1A)

2. ‘Atal Pension Yojana’ notified U/s 80CCD (1) [Notification 7/2016 dated 19-02-16]
S. 80CCD (1) empowers the CG to notify a pension scheme, contribution to which would qualify for deduction in the hands
of an individual assessee. Accordingly, in exercise of the powers conferred by S. 80CCD (1), the CG has notified the ‘Atal
Pension Yojana.

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Chapter-10: Provisions relating to Electoral Trust – Summary:

1. Exemption in respect of voluntary contribution received by ET – S. 13B:


Any voluntary contributions received by an ET shall not be included in its TI of the PY, if such ET distributes to any
registered political party during the said PY, 95% of the aggregate donations received by it during the said PY along with the
surplus, if any, B/F from any earlier PY; and such ET functions in accordance with the rules made by the CG.

2. Rules governing functioning of an ET for claim of exemption U/s 13B:

R. 17 CA (1): Persons from whom contributions may be received by an electoral trust: ET may receive voluntary
contributions from:
(a) an individual who is a citizen of India;
(b) a company which is registered in India; and
(c) a firm or HUF or an AOP or a BOI, resident in India.

R. 17CA (3): Persons from whom contribution shall not be received by an electoral trust: The ET shall not accept
contributions-
(a) from an individual who is not a citizen of India or from any foreign entity whether incorporated or not; and
(b) from any other ET;
(c) from a Government company and
(d) from a foreign source as defined in S. 2 (j) of the Foreign Contribution (Regulation) Act, 2010

R. 17CA (4): Mode of acceptance of contribution: The ET shall accept contributions only by way of an APC drawn on a
bank or APBD or by electronic transfer to its bank account and shall not accept any contribution in cash.

R. 17CA (5): PAN/Passport – Prerequisite: The ET shall not accept any contribution without the PAN of the contributor,
who is a resident and the passport number in the case of a citizen of India, who is not a resident.

R. 17CA (6): Distribution only to eligible political party: An ET shall distribute funds only to the registered political
parties.

R. 17CA (7) (i): Ceiling on Administration expenses: The ET may, for the purposes of managing its affairs, spend upto
5% of the total contributions received in a year subject to an aggregate limit of Rs. 5L in the 1st year of incorporation and Rs.
3L in subsequent years;

R. 17CA (7) (ii): Quantum of distributable contribution: Total contributions received in any FY along with the surplus from
any earlier FY, if any, as reduced by the amount spent on managing its affairs, shall be the distributable contributions for the
FY;

R. 17CA (7) (iii): Minimum amount to be distributed & time-limit for distribution: An ET shall be required to distribute
the distributable contributions received in a FY, to the eligible political parties before the 31st March of the said FY, subject
to the condition that at least 95% of the total contributions received during the FY along with the surplus B/F from earlier FY,
if any, are distributed.

4. Deduction in respect of donations to ET – S. 80GGB and S. 80GGC:


If any person makes a donation to an ET, such donations shall be allowed as deduction in computing the TI of such person.

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Chapter-11: Taxation of NRI – Summary:

1. Applicability of Chapter XII-A (S. 115-C – S.115-I): [S. 115C]:


1 Applicability of Chapter This chapter applies to a NRI in respect of investment income and LTCG.
XII-A No other income of NRI is covered by this chapter.
2 NRI A non-resident being an Indian citizen or person Indian origin.
3 Person of Indian origin A person shall be deemed to be of Indian origin if he, or either of his parents or any of his
grand-parents, was born in undivided India.
4 Investment income Any income derived (other than dividends referred to in S. 115-O) from a foreign exchange
asset.
5 LTCG LTCG arising from transfer of foreign exchange asset.
6 Foreign exchange asset Any specified asset which the assessee has acquired or purchased with, or subscribed to
in, convertible foreign exchange.
7 Specified asset (a) Shares in an Indian company; (b) debentures issued by an Indian company which is not
a private company; (c) deposits with an Indian company which is not a private company; (d)
Government securities; (e) any other asset as may be notified by the CG in the OG.
Shares may be equity shares or preference shares, listed shares or unlisted shares, quoted
shares or non-quoted shares, shares in public company or in private company.
8 Convertible foreign Foreign exchange notified as such by the RBI.
exchange

2. No deduction against investment income – S. 115D:


S.115D In computing the investment income, no deduction shall be allowed in respect of any expenditure or allowance. It
(1) is taxed on gross basis.
S.115D No deduction shall be allowed under Chapter VI-A in respect of that portion of GTI which represents investment
(2) income.
In computing LTCG arising on account of transfer of foreign exchange asset, effect should not be given to 2 nd
proviso to S. 48 (i.e. no indexation benefit).
However, the application of 1st proviso to S. 48 is not negated.

3. Special tax rates – S. 115E:


1 Tax rate applicable for investment income earned by NRI 20% flat.
2 Tax rate applicable for LTCG arising on account of transfer of foreign exchange asset by NRI 10% flat

4. Exemption in respect of LTCG arising on account of transfer of foreign exchange asset – S. 115F:
S. 115F LTCG that is eligible for Exemption is available in respect of LTCG arising from transfer of foreign
(1) exemption exchange asset.
Condition to be fulfilled for NRI shall invest the net consideration in acquisition of new asset (being
enjoying exemption specified assets or NSC issued by the CG).
Time limit for making 6 months from the date of transfer of foreign exchange asset.
investment
Quantum of exemption (LTCG * Amount invested in new asset) ÷ Net consideration.
Net consideration FVC – Expenses incurred in relation to transfer.
S. 115F Lock-in-period in respect of new The new asset shall not be transferred within 3 years from the date of its
(2) asset acquisition.
Also, it shall not be converted into money otherwise than by way of transfer
within 3 years from the date of its acquisition.
Consequences of violation of If the new asset is transferred within the lock-in-period, the following two
lock-in-period consequences will follow in the PY of transfer: (a) withdrawal of exemption
granted earlier U/s 115F (1); (b) computation of CG on account of transfer
of new asset.
If the new asset is converted into money otherwise than by way of transfer
within 3 years (supra), the exemption granted earlier U/s 115F (1) shall be
withdrawn in the PY of conversion.

5. Relaxation from filing of return – S. 115G:


1 Where the NRI has no income taxable in India other than the investment income (or) and the LTCG arising from transfer
of foreign exchange asset, he need not file ROI for the relevant PY.
2 However, this relaxation is available only if the investment income and LTCG (supra) are subjected to TDS.

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Chapter-11: Taxation of NRI – Summary:

6. Opting for Chapter XII-A even after becoming resident – S. 115H:


1 Where the assessee, who was a NRI in the earlier years, becomes resident for the relevant PY, still, he can, in respect
of his investment income, opt for chapter XII-A through a declaration in writing along with his ROI for the relevant PY.
2 If he does so, then the provisions of Chapter XIIA shall continue to apply to him in relation to such income for that PY
and for every subsequent PY until the transfer/conversion (otherwise than by transfer) into money of foreign exchange
assets.

7. Opting out of Chapter XII-A: S. 115-I


1 A NRI may elect not to be governed by the provisions of Chapter XII-A for any AY by furnishing his ROI for that AY U/s
139 declaring therein that the provisions of Chapter XIIA shall not apply to him for that AY.
2 If he does so, then the provisions of Chapter XIIA shall not apply to him for that AY and his TI for that AY shall be
computed and tax on such TI shall be charged in accordance with the other provisions of this Act.

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Chapter-12: Taxation of Non-resident sportsmen, athlete, entertainer etc.

Special provisions applicable to NR sportsmen, athlete, entertainer and sports association:

1 Special provision S. 115BBA


2 Who is covered by S. 115BBA? It applies to non-resident sportsmen, athlete, entertainer (who are foreign
nationals) and non-resident sports association.
3 Which income of non-resident Income by way of participation in India in any game (other than a game the
foreign national sportsmen winnings wherefrom are taxable U/s 115BB) or sport;
(including athlete) are covered by Income by way of advertisement;
S. 115BBA? Income by way of contribution of articles relating to any game or sport in India in
newspapers, magazines or journals;
4 Which income of non-resident Income from performance in India.
foreign national entertainer are
covered by S. 115BBA?
5 Which income of non-resident Any amount guaranteed to be paid or payable to such association or institution in
sports association are covered by relation to any game (other than a game the winnings wherefrom are taxable U/s
s. 115BBA? 115BB) or sport played in India;
6 Taxability of income (supra) Aforesaid income shall suffer tax @ flat rate of 20%.
No deduction in respect of any expenditure/allowance shall be allowed under any
provision of this Act in computing the income (supra).
7 TDS in respect of income (supra) The person responsible for paying aforesaid income shall deduct tax at source @
20% U/s 194E.
Tax shall be deducted at source at the time of payment or credit to the account of
the payee, whichever is earlier.
8 Relaxation to the persons (supra) If the persons (supra) have no income taxable in India other than the income
from filing of return. [S. 115BBA (supra) and the income (supra) has been subjected to TDS U/s 194E, then there
(2)]. is no obligation to file ROI in respect of the relevant PY.
9 Indcom (Cal). Umpires and match referees ≠ Sportsmen or athlete.
Payments to them does not come U/s 115BBA and it shall not be subjected to
TDS U/s 194E.
Tax shall be deducted U/s 195.

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Chapter-13: Taxation of FII

Special provisions applicable to Foreign Institutional Investors (FII):

1 Meaning of FII. FII means persons notified as such by the CG in OG. [Explanation to S. 115AD].
Foreign portfolio investors registered under the SEBI (Foreign Portfolio Investors)
Regulations, 2014 are notified as FII. [Notification 9/2014].
2 Securities held by FII Securities held by a FII which has invested in such securities in accordance with SEBI
characterized as regulation are to be regarded as capital asset. These securities do not stand excluded from
capital asset. the scope of the term CA even if these are held as SIT. [S. 2 (14)].
3 Interest on RDB If the FII has subscribed to RDBs of an Indian company and interest income is receivable on
receivable by FII - or after 01.06.2013 but before 01.07.2020, then it shall suffer tax @ a flat rate of 5% U/s
Tax implications. 115A (1) (a) (iiab).
Interest rate shall not exceed the rate notified by the CG.
4 Interest rate notified In case bonds were issued before 01.07.2010, then the rate of interest shall not exceed
by the CG (Base rate of SBI as on 01.07.2010 + 5%).
In case bonds were issued on or after 01.07.2010, then the rate of interest shall not exceed
(Base rate of SBI as on the date of issue of bonds + 5%).
5 Interest on If the FII has subscribed to Government securities and interest income is receivable on or
Government after 01.06.2013 but before 01.07.2020, then it shall suffer tax @ a flat rate of 5% U/s 115A
securities receivable (1) (a) (iiab).
by FII–Tax
implications.
6 No deduction in No deduction (including deduction under Chapter VI-A) shall be allowed in respect of
respect of interest aforesaid interest in the hands of FII. [S. 115A (3) & (4)].
(supra).
7 TDS obligation U/s The person responsible for paying interest (supra) shall deduct tax at source U/s 194LD @
194LD 5% on such interest at the time of payment or credit to the account of payee, whichever is
earlier.
8 Relaxation from filing If the interest (supra) is the only taxable income of FII for the relevant PY and it was
of return. subjected to TDS U/s 194LD, then the FII has no obligation to file ROI for the relevant PY.
[S. 115A (5)].
9 Income (dividend It is taxable in the hands of FII @ flat rate of 20%.
exempt U/s 10 (34)) No deduction (including deduction under Chapter VI-A) shall be allowed in respect of this
arising from income in the hands of FII. [S. 115AD (2)].
securities (units) to
FII – Tax
implications.
10 TDS obligation U/s The person responsible for paying the income referred to in (9) shall deduct tax at source U/s
196D 196D @ 20% at the time credit to the account of the payee or at the time of payment,
whichever is earlier.
11 LTCG arising from S. 48 Proviso-1 (exchange neutralization benefit) and S. 48 Proviso-2 (indexation benefit)
securities (not shall not apply for computing LTCG arising from securities in the hands of FII. [S. 115AD (2)].
covered by S. 112A) It shall suffer tax @ a flat rate of 10%. [S. 115AD (1)].
– Tax implications.
12 LTCG arising from S. 48 Proviso-1 (exchange neutralization benefit) and S. 48 Proviso-2 (indexation benefit)
securities (not shall not apply for computing LTCG arising from securities in the hands of FII. [S. 115AD (2)].
covered by S. 112A) Tax shall be calculated @ 10% on this LTCG exceeding Rs. 1L.
– Tax implications.
13 STCG referred to in S. 48 Proviso-1 (exchange neutralization benefit) and S. 48 Proviso-2 (indexation benefit)
S. 111A – Tax shall not apply for computing STCG (referred to in S. 111A) arising from securities in the
implications. hands of FII. [S. 115AD (2)].
It shall suffer tax @ a flat rate of 15%. [S. 115AD (1)].
14 Other STCG arising S. 48 Proviso-1 (exchange neutralization benefit) and S. 48 Proviso-2 (indexation benefit)
from transfer of shall not apply for computing STCG arising from securities in the hands of FII. [S. 115AD
securities – Tax (2)].
implications. It shall suffer tax @ a flat rate of 30%. [S. 115AD (1)].

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Chapter-14: Taxation of Overseas Financial Organisation - Summary

Special provisions relating to Offshore funds or Overseas Financial Organisation - S. 115AB:


1 Meaning of Overseas It means any fund, institution, association or body, whether incorporated or not,
Financial Organisation. established under the laws of a country outside India, which has entered into an
arrangement for investment in India with any public sector bank or public financial
institution or a mutual fund and such arrangement is approved by the SEBI.
2 LTCG arising on account Income by way of LTCG arising from the transfer of units of mutual funds purchased in
of transfer of units – Tax foreign currency shall suffer tax in the hands of overseas financial organisation @ a flat
implications. rate of 10%. [S. 115AB (1)].
While computing this LTCG, provisions of 2nd proviso to S. 48 (i.e. benefit of indexation),
shall not apply. [S. 115AB (2)].
3 TDS obligation U/s 196B. The person responsible for making payment of income by way of LTCG arising from
transfer of units purchased in foreign currency to overseas financial organisation shall
deduct tax at source @ 10% U/s 196B at the time of credit to the account of the payee or
at the time of payment, whichever is earlier.

Points requiring attention:


1 STCG arising from transfer of units are not covered by S. 115AB.
2 Proviso-1 to S. 48 (i.e. computation of capital gains in foreign currency) applies only when the capital asset transferred
is shares or debentures in Indian company. It has no application in respect of units.
3 Income from units is exempt U/s 10 (35).
4 Expenses in connection with earning income from units are not to be allowed as deduction. (S. 14A).

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Chapter-15: Assessment of co-operative society - Summary

Deduction in respect of specified income of co-operative societies – S. 80P:


1 Deduction U/s 80P S. 80P provides deduction to a co-operative society against its GTI. [S. 80P (1)].
Deduction is allowed in respect of income specified in S. 80P (2) included in the GTI of Co-
operative society to the extent permitted in S. 80P (2).
2 Income specified in 100% of the following income included in the GTI of the Co-operative society shall be allowed
S. 80P (2). as deduction while computing its taxable income:
S. 80P (2) (a) (i) Profits attributable to carrying on the business of banking or providing credit facilities to its
members;
S. 80P (2) (a) (ii) Profits attributable to a cottage industry;
S. 80P (2) (a) (iii) Profits attributable to marketing of agricultural produce grown by its members;
S. 80P (2) (a) (iv) Profits attributable to purchase of agricultural implements, seeds, livestock or other articles
intended for agriculture for the purpose of supplying them to its members;
S. 80P (2) (a) (v) Profits attributable to processing, without the aid of power, of the agricultural produce of its
members;
S. 80P (2) (a) (vi) Profits attributable to collective disposal of the labour of its members;
S. 80P (2) (a) (vii) Profits attributable to fishing or allied activities, that is, the catching, curing, processing,
preserving, storing or marketing of fish or the purchase of materials and equipment in
connection therewith for the purpose of supplying them to its members;
S. 80P (2) (b) Profits of a Co-operative society, being a primary society engaged in supplying milk, oilseeds,
fruits or vegetables raised or grown by its members to-
A a federal co-operative society engaged in the business of supplying milk, oilseeds, fruits
or vegetables.
B the Government or a local authority
C a Government company or a statutory corporation engaged in supplying milk, oilseeds,
fruits or vegetables, as the case may be, to the public.
S. 80P (2) (d) Income by way of interest or dividends derived by the co-operative society from its investments
with any other co-operative society.
S. 80P (2) (e) Income derived by the co-operative society from the letting of godowns or warehouses for
storage, processing or facilitating the marketing of commodities.
S. 80P (2) (f) Interest income from securities and house property income in the case of a co-operative society
(other than housing society or an urban consumers’ society or a society carrying on transport
business or a society engaged in manufacturing operations with the aid of power) whose GTI
does not exceed Rs. 20000.
3 Adhoc deduction U/s In case of a co-operative society engaged in activities other than those specified in (2), so
80P (2) (c) much of its profits and gains attributable to such activities as does not exceed the following
shall be allowed as a deduction in computing its total income:
Where the co-operative society is a consumer co-operative society Rs. 100000
In any other case Rs. 50000

Points requiring attention:

1 Deduction in respect of income Deduction in respect of income from carrying on the business of banking is
from banking available only to Primary agricultural credit society and Primary co-operative
agricultural and rural development bank. [S. 80P (4)].
2 Deduction in respect of Income Cold storage can be said to be a warehouse or godown where goods are
from cold storage. stored, and hence income from cold storage would be allowed as a deduction
U/s 80P. [District Co-operative Federation 271 ITR 22 (All)].

Important judicial rulings:


1 Karnataka State Co- Placement of reserve funds with SBI or RBI is in compliance with the statutory provisions
operative Apex Bank and is imperative for the purpose of carrying on banking business. Accordingly, the income
251 ITR 194. derived therefrom would be income from banking business and hence, eligible for
deduction U/s 80P (2) (a) (i).
2 Mehsana District Interest on Investment in Government securities out of statutory reserves by a co-operative
Central Co-operative society engaged in banking business is eligible for deduction U/s 80P (2) (a) (i). The
Bank Ltd 251 ITR 522 position will be the same even if the investments were made out of voluntary reserves
which are utilized in the course of its ordinary banking business.
Provision of safe deposit lockers is part of ordinary banking business. Locker rent derived
from the hiring out of safe deposit vaults is income from the business of banking and

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Chapter-15: Assessment of co-operative society - Summary

therefore, deductible U/s 80P (2) (a) (i).


3 Madras Auto Rickshaw Selling goods on credit to the members does amount to provision of credit facility.
Drivers' Co-operative Accordingly, the profits therefrom is not eligible for deduction U/s 80P (2) (a) (i).
Society 249 ITR 330
(SC)
4 Kotagiri Industrial Co- The deduction is allowed U/s 80P only after the GTI of the assessee is computed in
operative Tea Factory accordance with the provisions of the Act. Further, the eligible income will be computed as
Ltd 224 ITR 604 (SC) + per S. 80AB, which provides for computation of profits in accordance with the provisions of
Shirke Construction the Act i.e. after setting of current year losses as well as past year’s unabsorbed losses or
Equipment Ltd 291 ITR allowances.
380 (SC).

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Chapter-16: Taxation of dividend - Summary

1. Basics in taxation of dividend:


1 Basis of charge [S. 8] Though S. 145 (1) provides that the income chargeable U/H IFOS shall be computed in accordance with
the method of accounting regularly employed by the assessee, the chargeability of dividend is
independent of the method of accounting followed by the assessee. It is governed by the provisions of
S. 8.
Final dividend, if taxable, shall be taxed in the PY in which it is declared in the AGM.
Interim dividend, if taxable, shall be taxed in the PY in which it is unconditionally made available to the
shareholders.
Deemed dividend, if taxable, shall be taxed in the PY in which it is distributed or paid to the
shareholders.
2 Dividend fits only U/H Dividend, if taxable, shall be taxed only U/H IFOS irrespective of whether it is received by an investor or
IFOS. dealer. [S. 56 (2) (i)].
3 Deduction U/s 57 If dividend is taxable, the following may be allowed as deduction U/s 57:
(i) Realisation charges (commission or remuneration paid to banker or agent for realisation of dividend).
[S. 57 (i)].
(ii) Any other expenditure wholly and exclusively incurred for the purpose of making or earning dividend
income chargeable U/H IFOS. [S. 57 (iii)].
4 Significance of ‘for the Even if the dividend is not actually earned in the relevant PY, any expenditure wholly and exclusively
purpose of making or incurred for the purpose of making or earning dividend income shall be allowed as a deduction. What is
earning …’ in S. 57 (iii) relevant is incurring expenditure for the purpose of earning. Whether such purpose is achieved or not is
not relevant (i.e. whether income is earned or not is not relevant). [Rajendra Prasad Moody (SC)].
5 Disallowance U/s 14A. Expenditure incurred in earning exempted dividend shall not be eligible for deduction while computing
taxable income.

2. Taxability of dividend:
SN Nature of dividend Implications in the hands of shareholders Tax implications in the hands
of distributing company
1 Any dividend from Taxable U/H IFOS No obligation to pay DDT U/s
foreign company If the shareholder is an Indian company and has not less than 26% 115-O.
equity in the distributing foreign company and the dividend received
is not one covered by S. 2 (22) (e), then it shall suffer tax @ 15% on
a gross basis (i.e. No deductions U/s 57). [S. 115BBD].
In other cases, it shall suffer tax @ the FA rates and deductions
contemplated U/s 57 are available.
2 S. 2 (22) (e) dividend It is exempt in the hands of shareholders U/s 10 (34). S. 115BBDA There is DDT U/s 115-O @
from domestic company does not apply to this dividend. 34.944%.
3 Any other dividend from If the shareholder = PCT or PRT registered U/s 12AA, exemption is There is DDT obligation U/s
domestic company not available U/s 10 (34). However, exemption may be enjoyed U/s 115-O @ 20.555%.
11 (subject to fulfilment of conditions stipulated therein). [S. 11 (7)].
S. 115BBDA does not apply.
If the shareholder = Fund or institution or educational institution or There is DDT obligation U/s
university or medical institution or hospital referred to in S. 10 (23C) 115-O @ 20.555%.
(iv)/(v)/(vi)/(via), exemption is not available U/s 10 (34). However,
exemption may be enjoyed U/s 10 (23C) (subject to fulfilment of
conditions stipulated therein). [19th Proviso to S. 10 (23C)]. S.
115BBDA does not apply.
If the shareholder = domestic company, exemption is available U/s There is DDT obligation U/s
10 (34). S. 115BBDA does not apply. 115-O @ 20.555%.
If the shareholder = Business Trust and the distributing company is No DDT obligation for the
SPV in which business trust holds 100% equity and the dividend is SPV. [S. 115-O (7)].
declared out of profits of SPV reported after business trust acquired
100% equity holding, then the dividend is exempt in the hands of
business trust U/s 10 (23FC) (b). S. 115BBDA does not apply.
If the shareholder = NPST, the dividend declared is exempt U/s 10 No DDT obligation for the
(44). S. 115BBDA does not apply. distributing company. [S.
115-O (1A)].
If the distributing company is a unit of IFSC, deriving income solely in No DDT obligation of the unit
convertible foreign exchange and the dividend (interim or final) is of IFSC. [S.115-O].
declared by it out of its current income on or after 01.04.2017, it is

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Chapter-16: Taxation of dividend - Summary

exempt in the hands of shareholder U/s 115-O (8). S. 115BBDA does


not apply.
If the shareholder = Sikkimese, the dividend is exempt U/s 10 There is DDT obligation for
(26AAA). S.115BBDA does not apply. the distributing company U/s
115-O @ 20.555%.
If the shareholder = a member of scheduled tribe residing in the There is DDT obligation for
states of Manipur, Tripura, Arunachal Pradesh, Mizoram and the distributing company U/s
Nagaland ladakh region of the State of Jammu and Kashmir, the 115-O @ 20.555%.
dividend is exempt U/s 10 (26). S. 115BBDA does not apply.
If the shareholder = MF or any other person whose dividend income There is DDT obligation for
is exempt under any clause (other than clause (34)) of S. 10, S. the distributing company U/s
115BBDA shall not apply. 115-O @ 20.555%.
If the shareholder = non-resident, the dividend income is exempt U/s There is DDT obligation for
10 (34). S. 115BBDA does not apply. the company U/s 115-O @
20.555%.

3. Provisions of S. 115BBDA:
1 Where the TI of a specified assessee being a resident in India includes any income in aggregated exceeding Rs. 10L,
by way of dividend (not being one covered by S. 2 (22) (e)) from domestic companies, such dividend in excess of Rs.
10L shall be charged to tax in the hands of the specified assessee @ 10% (flat).
2 No deduction in respect of any expenditure or allowance or set off shall be allowed.
3 Specified assessee means any person other than (a) a domestic company; (b) entities referred to in S. 10 (23C)
(iv)/(v)/(vi)/(via); (c) a trust or institution registered U/s 12AA.

4. Deemed dividend – S. 2 (22):


1 S. 2 (22) (a) Dividend includes any distribution by a company of its accumulated profits, if such distribution entails
release by the company to its shareholders of all or any part of the assets of the company.
Issue of equity shares as bonus shares to the equity shareholders ≠ dividend u/s 2 (22) (a). [Reason:
Issue of bonus shares does not entail release of assets.]
2 S. 2 (22) (b) Dividend includes any distribution to its shareholders by a company of debentures, debenture-stock, or
deposit certificates in any form, whether with or without interest and any distribution to its preference
shareholders of shares, by way of bonus, to the extent to which the company possesses accumulated
profits.
3 S. 2 (22) (c) Dividend includes any distribution made to shareholders of a company on its liquidation, to the extent to
which the distribution is attributable to the accumulated profits of the company immediately before its
liquidation. [Discussed in detail in Capital gains chapter].
4 S. 2 (22) (d) Dividend includes any distribution to its shareholders by a company on the reduction of its capital to the
extent to which the company possessed accumulated profits. [Discussed in detail in Capital gains
chapter].
5 S. 2 (22) (e) Dividend includes payment by way of loan or advance made by a closely held company to its major
Limb-1 shareholder, to the extent to which the company possesses accumulated profits.
Major shareholder means shareholder being a person who beneficially owns equity shares carrying not
less than 10% voting power.
6 S. 2 (22) (e) Dividend includes payments made by a closely held company on behalf of major shareholder, to the
Limb-2 extent to which the company possessed accumulated profits.
7 S. 2 (22) (e) Dividend includes payments made by a closely held company (a company other than a company in
Limb-3 which public are substantially interested) for the individual benefit of major shareholder, to the extent to
which the company possessed accumulated profits.
8 S. 2 (22) (e) Dividend includes payments by way of loan or advance made by a closely held company to a concern in
Limb-4 which the major shareholder is a member or partner and has substantial interest, to the extent to which
the company possessed accumulated profits.
Substantial interest means (a) beneficial ownership in equity shares carrying not less than 20% voting
power (if the concern = company) [S. 2 (32)]; (b) beneficial entitlement to not less than 20% of the profits
at any time during the relevant PY (if the concern ≠ company) [Explantion-3 to S. 2 (22)].

Points requiring attention:


Points relating to dividend U/s 2 (22) (a)
1 Issue of preference shares as bonus shares to equity shareholder amounts to dividend U/s 2 (22) (a) in the PY of redemption
of preference bonus shares. DDT obligation U/s 115-O arises in the PY of redemption. [Shashi Bala Navinithlal (Guj)].

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Chapter-16: Taxation of dividend - Summary

2 On redemption of these preference bonus shares, capital gains shall not be computed in the hands of the shareholders.
[Decision of SC in G. Narasimhan case applied].
3 Redemption of these preference shares amounts to buy back.
Therefore, the company becomes liable to pay BBDT U/s 115QA (if the shares are unlisted) in the PY of redemption. This is
not desirable since the company suffers DDT in the PY of redemption. It can’t be burden also with BBDT. However, there is no
specific provision to exclude the applicability of S. 115QA.
4 For the purpose of S. 2 (22) (a), accumulated profits shall include even capitalised profits (i.e. which is shown as part of share
capital upon issued of bonus shares).
Points relating to S. 2 (22) (e)
1 The ‘shareholder’ has to be only a person who is the beneficial owner of shares. The moment there is a shareholder, who
need not necessarily be a member of the company on its register, who is the beneficial owner of shares carrying not less than
10% voting power, S. 2 (22) (e) gets attracted. [National Travel services (2018) (SC) + Gopal & Sons (HUF) (2017) 391 ITR
1 (SC)].
2 For quantification of dividend U/s 2 (22) (e), the loan amount shall not be compared with the share of the lendee shareholder
in the accumulated profits of the company but with the accumulated profits possessed by the company. [Mayur Madhukant
Mehta (Guj)].
3 Repayment of loan within the relevant PY does not give immunity from the provisions of S. 2 (22) (e). [Tarulatha Shyam
(SC)].
4 To invoke S. 2 (22) (e), the AO need not see whether the loan is genuine or sham, secured or unsecured, short-term or long-
term, interest-bearing or interest-free etc.
5 Provisions of S. 2 (22) (e) apply only in respect of gratuitous loan given to the shareholder and not to loan given by the
company to the shareholder as a consideration for some benefit or advantage enjoyed from him. [Pradeep Kumar Malhothra
(Cal)].
6 S. 2 (22) (e) does not apply to advances given in the ordinary course of business. [Ankitech (P) Ltd (Del) + Ambassador
Travels (P) Ltd (Del)].
7 Any legal fiction shall be led to a logical conclusion. The aggregate amount of dividend taxable in the hands of the
shareholders cannot exceed the accumulated profits of the company.
Therefore, every time when loan or advance is given by the company to its major shareholder, and if it is taxed U/s 2 (22) (e)
in the hands of major shareholder, the amount so taxed shall be notionally reduced from the accumulated profits.
For quantification of dividend U/s 2 (22) (e) on the subsequent occasions, the loan or advance shall be compared with such
reduced accumulated profits. [G. Narasimhan (SC)].
8 Repayment of loan doesn’t augment the accumulated profits.
9 S. 2 (22) (e) Limb-4 dividend (if taxable) is taxable in the hands of major shareholder and not in the hands of concern. [Hotel
Hill Top (Raj) + Universal Medicare (P) Ltd (Bom)]. Dividend U/s 2 (22) (e) from a domestic company is exempt in the
hands of shareholder U/s 10 (34). However, the company shall be liable to pay DDT @ 34.944%.
10 To invoke S. 2 (22) (e) Limb-4, the voting power of the shareholder in the lending company who has substantial interest in the
lendee concern shall be atleast 10% on the date of loan.
Such shareholder shall be member or partner in the concern on the date of loan.
The profit entitlement of the shareholder (supra) in the lendee concern need not be 20% or more on the date of loan. It is
enough if it so at any time during the relevant PY. Note the words ‘at any time during the relevant PY’ in Explanation-3 to S. 2
(22).
11 If the loan is granted in the ordinary course of business of the lending company and the lending of money is substantial part of
the company’s business, the loan or advance to the major shareholder or the concern in which he is substantially interested
shall not be regarded as dividend u/s 2 (22) (e). [S. 2 (22) (ii)].
12 The word ‘substantial part’ in S. 2 (22) (ii) means ‘not small, trivial, insignificant or inconsequential. [Parle Plastic Ltd (Bom)].
13 Yardstick for measuring whether a particular business activity is substantial part or not could be (a) Turnover; (b) profit
reported; (c) capital employed or asset employed; (d) man power employed etc. There is no single yardstick which is
applicable in all cases. [Parle Plastic Ltd (Bom)].
14 Where a loan has been treated as dividend and subsequently the company declares and distributes dividend to all its
shareholders including the borrowing shareholder, and the dividend so paid is set off by the company against the previous
borrowing, the adjusted amount shall not again treated as a dividend. [S. 2 (22) (iii)].
Though this exclusion does not result in benefit to the shareholder, it helps the company to save DDT.
15 For the purpose of S. 2 (22) (a) to (d), accumulated profits shall include even capitalised profit. However, it is not so for the
purpose of S. 2 (22) (e).
Thus, for quantification of dividend U/s 2 (22) (e), the loan or advance shall be compared with the accumulated profits which
shall not include bonus shares shown as part of share capital. [P. K. Badani (Bom)].
16 Mr. V, holding 75% equity shares in X (P) Ltd, leased out a building to X (P) Ltd (to be used as factory building) for a nominal
rent on the understanding that X (P) Ltd shall bear repairs and renovation expenses. The building was, earlier, used for the
business carried on by Mr. V which was discontinued subsequently.

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Chapter-16: Taxation of dividend - Summary

During the relevant PY, X (P) Ltd spent Rs. 1 Crore on repairs and renovation of the building. The AO invokes S. 2 (22) (e)
and treats Rs. 1 Crore as dividend in the hands of Mr. V.
Held, no money had been paid by way of advance or loan to Mr. V. Further, the amount spent was towards repairs and
renovations of premises owned by the assessee but occupied by the company as lessee. The expenses incurred by virtue of
repairs and renovation on the premises can’t be brought within ‘advance or loan’ given to Mr. V. It can’t be treated as a
payment by the company on behalf of the shareholder or for the individual benefit of such shareholder. Therefore, the question
of invoking S. 2 (22) (e) doesn’t arise. [Vir Vikram Vaid (2014) (Bom)].

5. Disallowance U/s 14A:


S. 14A (1) For the purpose of computing the total income under Chapter IV-D, no deduction shall be allowed in
respect of expenditure incurred by the assessee in relation to income which does not form part of total
income under this Act.
S. 14A (2) The AO shall determine the amount of expenditure incurred in relation to such income which does not part
of the total income under this Act in accordance with such method as may be prescribed, if the AO, having
regard to the account of the assessee, is not satisfied with the correctness of the claim of the assessee in
respect of such expenditure in relation to income which doesn’t form part of TI under this Act.
S. 14A (3) The provisions of S. 14A (2) shall also apply in relation to a case where an assessee claims that no
expenditure has been incurred by him in relation to income which does not form part of total income under
this Act.

R. 8D (New):
R. 8D (1) Where the AO, having regard to accounts of the assessee of a PY, is not satisfied with—
(a) the correctness of the claim of expenditure made by the assessee; or
(b) the claim made by the assessee that no expenditure has been incurred,
in relation to income which does not form part of the TI under the Act for such PY, he shall determine the
amount of expenditure in relation to such income in accordance with the provisions of R. 8D (2).
R, 8D (2) The expenditure in relation to income which does not form part of the TI shall be the aggregate of following
amounts, namely:—
(i) the amount of expenditure directly relating to income which does not form part of TI; and
(ii) an amount equal to one per cent of the annual average of the monthly average of the opening and
closing balances of the value of investment, income from which does not or shall not form part of TI:
Proviso to Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed
R. 8D (2) by the assessee

Issues in R. 8D:
1 The AO, for invoking R. 8D, has to record satisfaction as to why the disallowance offered by the assessee is not correct.
There should be a definite finding in this regard. Otherwise, R. 8D can’t be invoked. [Taikisha Engineering India Ltd (Del)].
2 When the assessee had not retained shares with the intention of earning dividend and dividend income was incidental to his
business of sale of shares, which remained unsold by the assessee, it could not be said that the expense incurred in
acquiring shares should be disallowed U/s 14A. [CCI Ltd (Kar) + Smt. Leena Ramachandran (Ker)].
3 S. 14A deals only with disallowance of expenditure incurred in relation to exempt income. Depreciation, being a statutory
allowance U/s 32, is outside the ambit of S. 14A. [Vishnu Anant Mahajan (Ahd (SB)).].
4 Expenses which are relatable to earning of exempt income shall be disallowed irrespective of the fact whether such income
has been earned during the FY or not. [CBDT Circular 5/2014].
5 S. 14A is not applicable for deductions, which are permissible and allowed under Chapter VI-A. It is applicable only if an
income is not included in the TI as per Chapter-III of the IT Act.
Deductions under Chapter VI-A are different from exemptions provided in Chapter-III.
The words ‘do not form part of TI under this Act’ used in S. 14A are significant and important.
Income which qualifies for deduction U/s 80C to S. 80U has to be first included in the total income of the assessee and then
allowed as deduction.
However, income referred to in Chapter III do not form part of TI and therefore, as per S. 14A, no deduction shall be allowed
in respect of expenses incurred by the assessee in relation to such income. [Banaskantha District Co-operative Milk
Producers Union Ltd (Guj) + Khribco (Del)].

6. Dividend Distribution Tax – S. 115-O:


1 What is DDT? [S. 115-O (1)] It means additional income tax payable by a company upon declaration or distribution
or payment of dividend to its shareholders.
Dividend may be final dividend or interim dividend or deemed dividend (not being one
covered by S. 2 (22) (e)).

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Chapter-16: Taxation of dividend - Summary

It may be out of current profits or accumulated profits.


2 Who is liable to pay DDT? Domestic company. [S. 115-O (1)].
However, if the distributing company is a unit of IFSC, deriving income solely in
convertible foreign exchange and the dividend (interim or final) is declared by it out of
its current income on or after 01.04.2017, then it has no DDT obligation. [S. 115-O
(8)].
Also, if the distributing company is a SPV in which the business trust has 100%
equity and the dividend is declared out of profits reported after business trust has
acquired 100% equity holding, then the SPV has no DDT obligation. [S. 115-O (7)].
3 Quantification of DDT in case of Dividend referred to in S. 2 (22) (e) * 34.944%
dividend referred to in S. 2 (22) (e).
4 Quantification of DDT in case of [Dividend distributed to the shareholders – Permissible adjustments U/s 115-O (1A)]
dividend (not being one referred to in S. * [100/(100-15)] * 15% * 112% * 104%.
2 (22) (e). [S. 115-O (1) + S. 115-O
(1B)]
5 Adjustments permissible U/s 115-O (1A) I. Dividend (interim or final dividend) received from the subsidiary during the FY.
II. Dividend payable to NPST
6 Points related to adjustment-I Subsidiary should be a domestic company and it should have paid DDT on the
dividend declared by it; (or)
Subsidiary should be a foreign company, the dividend received from which is taxable
U/s 115BBD.
Same amount of dividend shall not be taken into account for reduction more than
once. [Proviso to S. 115-O (1A)].
7 Meaning of subsidiary for the purpose of A company shall be subsidiary of another company, if such other company holds
S. 115-O (1A). more than half in nominal value of the equity share capital of the company.
[Explanation to S. 115-O (1A)].
In other words, sub-subsidiary is not subsidiary.
8 DDT – an independent obligation. [S. Notwithstanding that no income tax is payable by a domestic company on its TI
115-O (2)]. computed in accordance with the provisions of the Act, the tax on distributed profits
(i.e. DDT) shall be payable by the distributing company.
9 Time limit for paying DDT. [S. 115-O The Principal officer of the company and the company shall be liable to pay DDT to
(3)]. the credit of CG within 14 days from the date of declaration or distribution or payment
(whichever is earliest).
10 DDT payment is final. [S. 115-O (4)]. DDT paid by the company shall be treated as the final payment of additional income
tax and no credit is available to the distributing company in respect of the amount of
tax so paid.
11 No deduction. [S. 115-O (5)]. Neither the distributing company nor the shareholder is eligible for any deduction in
respect of the dividend or DDT thereon.
12 Interest on delayed payment. [S. 115- If there is a delay in remittance of DDT, interest is levied @ 1% p.m or part thereof on
P]. the outstanding DDT for the period beginning with the expiry of 14 days (supra) and
ending with the date of payment of DDT.
13 Declaration as assessee-in-default. If the DDT is not paid as required U/s 115-O, the Principal officer and the domestic
[S.115-Q]. company shall be regarded as assessee-in-default.
This will enable the Department to initiate collection and recovery proceedings U/s
222 and S. 226 for recovery of DDT.
14 Penalty for default. [S. 271C]. If there is a failure to pay DDT as required U/s 115-O, then JCIT can levy penalty of a
sum equal to DDT.
However, no penalty will be levied if there is reasonable cause for the violation. [S.
273B].
15 Prosecution U/s 276B The Principal officer could be punished with rigorous imprisonment (minimum: 3
months; Maximum: 7 years) and fine for not paying DDT as required U/s 115-O.

Latest from Judiciary:


Can DDT U/s 115-O be levied in respect DDT is a surrogate tax. Since dividend is non-agricultural income in the hands
of the dividend declared out of of the shareholder (even though it was declared out of agricultural income of
agricultural income? [Tata Tea and the company), it (in its entirety) shall suffer DDT.
Others [2017] 398 ITR 260 (SC)]

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Chapter-17: Assessment of Trust – Summary

Provisions relating to Public trust:


1. Charitable purpose:
1 Meaning of (i) Relief of poor; (ii) Education; (iii) Medical relief; (iv) Yoga; (v) preservation of environment
charitable purpose (including forest, wildlife and watersheds); (vi) Preservation of monuments, places or objects of
[S. 2 (15)]. artistic or historic interest; (vii) Advancement of any other object of general public utility.
2 Restriction on Advancement of any other object of general public utility ≠ charitable purpose, if it involves
commercial activities carrying on of any activity in the nature of trade or commerce or business for a consideration
irrespective of the nature of use or application or retention, of income from such activity.
[Proviso to S. 2 (15)].
3 Relaxation from However, advancement of any other object of general public utility which involves carrying on
restriction (supra) commercial activities shall be regarded as charitable purpose if:
(i) such activities are undertaken in the course of actual carrying out of such advancement of
any other object of general public utility. [i.e. the commercial activities should be linked or
related to the objects].
(ii) the Ʃ receipts from such activity during the PY do not exceed 20% of the total receipts of the
trust for the PY. [Proviso to S. 2 (15)].
4 Limitation on the If the trust is created for the objects covered in Limb-1 to Limb-6 of S. 2 (15) or for religious
scope of proviso to purpose, then there is no restriction in carrying on commercial activities (whether linked to its
S. 2 (15) objects or otherwise) which are incidental to its objects.
Proviso to S. 2 (15) has no role to play.
The only requirement is to maintain separate books of accounts in respect of its commercial
activities. [S. 11 (4A)].

2. Conditions for availing exemption – S. 12A:


S. 12A (1) Registration PCT/PRT shall make an application to the CIT seeking registration in Form-10A. It
(aa) shall be accompanied by (a) Trust deed; (b) Earlier year’s account (Maximum 3
preceding PYs).
S. 12A (1) (b) Audit requirement PCT/PRT shall get its books of accounts audited by a CA if its TI for the relevant PY
without giving effect to the provisions of S. 11 and S. 12 exceeds the BEL.
Audit report shall be in Form-10B. It shall be duly verified and signed by the CA. It
shall set fort prescribed particulars.
It shall be electronically filed within the due date for filing ROI. [Proviso to R. 12 (2)].
S. 12A (1) Filing of timely PCT/PRT shall furnish the ROI for the relevant PY U/s 139 (4A) within the due date
(ba) return specified in S. 139 (1).

Application seeking registration where there is adoption or modification of objects:


1 If a PCT/PRT which has been granted registration adopts new objects or modifies its existing objects which do not
conform to the conditions of registration, then it shall make application in the prescribed form and manner to the
PCIT/CIT seeking registration.
2 The application shall be made within a period of 30 days from the date of the adoption or modification (supra). [S. 12A
(1) (ab)].

3. Procedure for registration:


S. 12AA (1) Calling for documents The CIT, upon receipt of application seeking registration, shall verify the objects
(a) and conducting of the trust and genuineness of its activities.
inquiry For this purpose, the CIT may call for such documents or information from the
trust as he thinks necessary.
He may also conduct such inquiry as he deems fit.
S. 12AA (1) Passing of order If the CIT is satisfied about the objects of the trust and the genuineness of the
(b) (i) granting registration activities of the trust, he may pass an order in writing granting registration.
S. 12AA (1) Passing of order If he is not satisfied, he may pass an order denying registration through an order
(b) (ii) denying registration in writing
Proviso to S. OBH Before passing an order denying registration, the CIT shall grant opportunity of
12AA (1) (b) being heard to the trust.
(ii)
S. 12AA (2) Time limit for passing The order granting or denying registration shall be passed within 6 months from
order U/s 12AA (1) (b) the end of the month in which application was received.

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Chapter-17: Assessment of Trust – Summary

Points requiring attention:


1 Extension of the objects of the trust beyond the territory of India can’t be a ground for denial of registration. [M. K.
Nambyar Saarc Law Charitable Trust (Del)].
2 Where the CIT has neither passed an order granting registration nor passed an order denying registration within 6
months (supra), the registration is deemed to have been granted. [Society for promotion of education, Allahabad
(SC)].
3 If the trust is newly created and is yet to commence its activities, it is enough if the CIT verifies its objects. Registration
cannot be denied on the ground that the trust is yet to commence its activities. [Meenakshi Amma Endowment Trust
(Kar)].
4 Where the settler has given power to the trustees to alter the objects specified in the trust deed, there is no need for the
approval of Civil Court for amending the trust deed. [Kamala Town Trust (SC)].

4. From when the exemption U/s 11 and S. 12 is available?


S. 12A (2) From when exemption is Exemption U/s 11 and S. 12 is available to the trust from the PY in which the
available? application was made seeking registration.
Proviso-1 to Benefit of roll back If, on the date of grant of registration, the proceedings in relation to
S. 12A (2) assessment for any earlier PY (s) is pending, then the AO shall grant
exemption U/s 11 and S. 12 for such PY (s) provided the objects and
activities of the trust remains the same for such PY as that of those upon
verification of which registration was granted.
Proviso-2 to No reopening U/s 147 The AO shall not take any action U/s 147 for any earlier PY solely on the
S. 12A (2) ground of non-registration of such trust for such PY.
Proviso-3 to When the benefit of Nothing contained in Proviso-1 and Proviso-2 are applicable in case of any
S. 12A (2) Proviso-1 and Proviso-2 trust which was refused registration or the registration granted was cancelled
are not applicable? at any time before.

5. Cancellation of registration:
S. 12AA (3) Grounds for cancellation (i) Activities of the trust are not genuine or the activities are not carried out in
of registration accordance with its objects.
S. 12AA (4) (ii) Income or property of the trust is applied or used for the benefit of S. 13
(3) persons (like author, trustee, relatives etc). (Unless there is a reasonable
cause).
(iii) Funds of the trust are invested or deposited in a manner not permitted
U/s 11 (5). (unless there is a reasonable cause)
S. 12AA (3) & Procedure to be followed OBH should be given to the trust before passing an order cancelling the
(4) in cancellation registration.
Cancellation should be through an order in writing.

Points requiring attention:


1 If a trust becomes non-charitable No. Registration can be cancelled only under the circumstances
because of Proviso to S. 2 (15), is it contemplated U/s 12AA (3) and S. 12AA (4). [Karnataka Industrial Area
justified for the CIT to cancel the Development Board (Kar) + T. N. Cricket Association (Mad) + CBDT
registration? Circular 21/2016].
2 S. 12AA (3) or S. 12AA (4) order – Order passed U/s 12AA (3) or S. 12AA (4) cancelling registration is
appealable? appealable before ITAT. [S. 253 (1)].

6. Tax on accreted income – S. 115-TD:


1 What is tax on accreted It is an additional income-tax payable U/s 115-TD by a trust or institution registered U/s
income? 12AA.
2 When tax on accreted Circumstance-I: Trust or institution gets converted into a form which is not eligible for
income is payable? registration U/s 12AA.
Circumstance-II: Trust or institution gets merged with a non-compatible entity.
Circumstance-III: Trust or institution gets dissolved and its assets are not transferred
to specified entities within specified time.
3 Quantum of tax on accreted Accreted income of the trust or institution on the specified date * MMR (i.e. 35.88%).
income.
4 Payment of tax on accreted The tax on accreted income is in addition to the income-tax chargeable in respect of
income = Independent the total income of the trust or institution.
obligation. In the aforesaid circumstances, the trust or institution shall pay tax on accreted income,

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Chapter-17: Assessment of Trust – Summary

even if no income-tax is payable by it on its TI.


5 Circumstance-1: Conversion of trust or institution into a form which is not eligible for grant of registration U/s
12AA:
(a) When can be say that the Circumstance-1A: Registration granted to the trust or institution U/s 12AA got
trust or institution has got cancelled.
converted into a form which Circumstance-1B: Trust or institution has adopted or undertaken modification of its
is not eligible for grant of objects which do not confirm to the conditions of registration and trust or institution has
registration? not applied for fresh registration U/s 12AA in the relevant PY.
Circumstance-1C: Trust or institution has adopted or undertaken modification of its
objects which do not confirm to the conditions of registration and trust or institution has
applied for fresh registration U/s 12AA and the aforesaid application has been rejected.
(b) Manner of computation of 1 ƩFMV of total assets (not being fictitious assets) of the *****
accreted income on trust or institution on the specified date
specified date 2 Total liability (not being contingent liabilities) of the (*****)
trust on the specified date
3 Accreted income (1-2) *****
(c) Specified date Date of conversion
(d) Exclusions from assets for Exclusion-1: Assets acquired out of agricultural income referred in S. 10 (1).
computing accreted income Exclusion-2: Assets acquired during the period beginning from the date of creation of
trust or institution and ending on the date on which registration becomes effective.
[Provided the trust or institution has not been allowed any benefit U/s 11 and S. 12
during this period].
(e) Exclusion of related Liabilities related to the assets excluded shall be excluded from liabilities which are
liabilities considered for computing accreted income.
(f) Date of conversion in Date of order cancelling the registration.
circumstance-1A
(g) Date of conversion in Date of adoption or modification of objects.
circumstance-1B & 1C
(h) Time limit for payment of Situation Narration of the situation Time-limit for payment
tax on accreted income in 1 Time-limit for filing appeal U/s 253 Within 14 days from the
circumstance-1A against the order cancelling the date on which the period for
registration expired and no appeal has filing appeal U/s 253
been filed by the trust or institution. expires.
2 Appeal was made against the Within 14 days from the
cancellation order and the appellate date on which order in
authority confirms cancellation appeal is received by the
trust or institution.
(i) Time limit for payment of Within 14 days from the end of the relevant PY.
tax on accreted income in
circumstance-1B
(j) Time limit for payment of Situation Narration of the situation Time-limit for payment
tax on accreted income in 1 Time-limit for filing appeal U/s 253 Within 14 days from the
circumstance-1C against the order rejecting the date on which the period for
application has expired and no appeal filing appeal U/s 253
has been filed by the trust or institution. expires.
2 Appeal was made against the rejection Within 14 days from the
order and the appellate authority upholds date on which order in
rejection of application. appeal is received by the
trust or institution.
6 Circumstance-2: Merger of trust or institution with non-compatible entity
(a) What do we mean by It means merger of trust or institution with an entity (other than an entity which is a trust
merger of trust or institution or institution having similar objects and registered U/s 12AA).
with non-compatible entity?

(b) Manner of computation of 1 ƩFMV of total assets (not being fictitious assets) of the *****
accreted income on the trust or institution on the specified date
specified date. 2 Total liability (not being contingent or unascertained (*****)
liabilities) of the trust or institution on the specified
date

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Chapter-17: Assessment of Trust – Summary

3 Accreted income (1-2) *****


(c) Specified date Date of merger.
(d) Exclusions from assets for Same as in point 5 (d).
computing accreted
income.
(e) Exclusion of related Liabilities related to the assets excluded shall be excluded from liabilities which are
liabilities considered for computing accreted income.

(f) Time limit for payment of Within 14 days from the date of merger.
tax on accreted income.
7 Circumstance-3: Dissolution of trust or institution – not followed by transfer of assets to specified entities
within specified time.
(a) Specified entities Any trust or institution registered U/s 12AA.
Any fund or institution or trust or University or other educational institution or hospital or
medical institution referred to in S. 10 (23C).
(b) Specified time 12 months from the end of the month in which the dissolution takes place.
(c) Manner of computation of 1 ƩFMV of total assets (not being fictitious assets) of the *****
accreted income on the trust or institution on the specified date
specified date. 2 Total liability (not being contingent or unascertained (*****)
liabilities) of the trust or institution on the specified
date
3 Accreted income (1-2) *****
(d) Specified date Date of dissolution
(e) Exclusions from assets for Exclusion-1: Assets acquired out of agricultural income referred in S. 10 (1).
computing accreted income Exclusion-2: Assets acquired during the period beginning from the date of creation of
trust or institution and ending on the date on which registration becomes effective.
[Provided the trust or institution has not been allowed any benefit U/s 11 and S. 12
during this period].
Exclusion-3: Assets transferred to trust or institution registered U/s 12AA or entities
referred to in S. 10 (23C) within the aforesaid period of 12 months.
(f) Time limit for payment of Within 14 days from the date on which the period of aforesaid 12 months expires.
tax on accreted income.
8 Interest payable for non- If tax on accreted income is not paid within the time allowed U/s 115-TD (i.e. 14 days),
payment of tax on accreted simple interest shall be paid @ 1% p.m or part thereof on such tax for the period
income. [S. 115-TE]. beginning on the date immediately after the last date on which such tax was payable
and ending with the date on which the tax is actually paid.
9 Trust or institution = If tax on accreted income is not paid in accordance with the provisions of S. 115-TD,
deemed to be AID for not the Principal officer or trustee and trust or institution shall be regarded as assessee-in-
honouring S. 115-TD. [S. default.
115-TF (1)]. Collection and recovery proceedings could be initiated.
10 Provisions of S. 115-TF (2) If the trust or institution gets dissolved and assets are transferred to (a) trust or
institution registered U/s 12AA or entities referred to in S. 10 (23C) beyond the period
of 12 months (supra); or (b) entities other than trust or institution registered U/s 12AA or
entities referred to in S. 10 (23C), then the transferee shall be regarded as AID in
respect of tax on accreted income and interest thereon.
Collection and recovery proceedings could be initiated against the transferee.
However, the liability of the transferee shall be limited to the extent of assets received
by him.
11 Cost of acquisition of the FMV of the capital asset which has been taken into account for computation of
capital asset in the hands of accreted income as on the date of dissolution.
the transferee for
computation of capital
gains. [S. 49 (8)].

Determination of FMV of assets for computing accreted income – R. 17CB:


SN Asset Situation Manner of determination of FMV
1 Quoted shares and I. Traded on the FMV = (Lowest price quoted on RSE on the specified date + Highest
securities specified date price quoted on RSE on the specified date]/2
II. Not traded on the FMV = (Lowest price quoted on RSE on a date immediately preceding

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Chapter-17: Assessment of Trust – Summary

specified date the specified date when such shares and securities were traded on a
RSE + Highest price quoted on RSE on such immediately preceding
date)/2.
2 Non-quoted equity FMV = (A+B-L)*PV/PE
shares A = Book value of all assets (other than bullion, jewellery, precious
stone, artistic work, shares, securities and immovable properties).
B = FMV of bullion, jewellery, precious stone, artistic work, shares,
securities and immovable properties determined in accordance with R.
17CB.
L = Book value of liabilities not being contingent or unascertained
liabilities.
PE = Total amount of paid up equity share capital as shown in the B/s.
PV = Paid up value of such equity share.
3 Non quoted shares FMV = Price it would fetch if sold in the open market on the specified
and securities other date on the basis of valuation report from a merchant banker or FCA.
than equity shares
4 Immovable FMV = Higher of (a) price that the property shall ordinarily fetch if sold in
properties the open market on the specified date on the basis of the valuation
report from a registered valuer; (b) SDV on the specified date.
6 Business undertaking FMV = A+B-L
5 Any other asset FMV = price that the asset shall ordinarily fetch if sold in the open
market on the specified date on the basis of the valuation report from a
registered valuer;

7. Exemption U/s 11 and S. 12:

I. Exemption U/s 11 (1) (a) & S. 11 (1) (d):


1 Income of Income derived from PHUT
PCT/PRT Voluntary contributions
Profits from business which is incidental to its objects
2 Tax Applied for charitable or religious purpose in Exempt U/s 11 (1) (a)
treatment of India
income Applied for charitable or religious purpose Not exempt
derived from outside India
PHUT Applied for any purpose other than Not exempt
charitable/religious purpose
Accumulated for charitable or religious purpose Unconditionally exempt up to 15% of income derived from
in India PHUT. [S. 11 (1) (a)]
Excess accumulation is not exempt U/s 11 (1) (a). However
may be eligible for conditional exemption U/s 11 (2).
3 Tax Anonymous contributions (i.e. the contributions No exemption U/s 11. [S. 13 (7)].
treatment of in respect of which the identity of the donor can’t
voluntary be established from the records of the donee
contributions trust) received by a PCT (registered U/s 12AA)
Anonymous contributions received by a PRT Same treatment as that is given to the non-anonymous
(registered U/s 12AA) donations.
Non-anonymous donations Where it is given with a specific direction that it shall form
part of the corpus of the trust, it is called corpus
contribution. It is exempt unconditionally U/s 11 (1) (d).
Where no such direction is given by the donor, it is called
non-corpus contribution. It shall be regarded as income
derived from PHUT. [S. 12 (1)]. Exemption is available in
accordance with the provisions of S. 11 (1) (a).
4 Direction Money deposited into the donation box which bears the inscription that the money so deposited shall form part
need not be of the corpus of the trust shall be treated as corpus donation.
explicit Though the donor doesn’t give any explicit direction to treat it as part of corpus, it is implied. [Maha Devi Tirath
Shardama Seva Sangh (Chd)].
5 Profits from If the commercial activity is incidental to its objects and separate books of accounts are maintained in respect
incidental thereof, then the business profits or surplus from commercial activities shall be regarded as income derived

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Chapter-17: Assessment of Trust – Summary

business from PHUT.


Exemption may be claimed in accordance with the provisions of S. 11 (1) (a). [S. 11 (4A)].
Some important issues:
1 Application of income can be even on capital front. [S. R.MM.CTM. Tiruppani Trust (SC)].
2 Repayment of loan (originally taken for fulfillment of objects of the trust) out of income of relevant PY amounts to
application of that year’s income and accordingly, to that extent, it is exempt U/s 11 (1) (a). [Janmabhoomi Press
Trust (Mad)].
3 Where non-corpus donations are made out of income of relevant PY to trusts with similar objects, it shall be regarded
as application of income and to that extent, it is exempt U/s 11 (1) (a). The exemption to the donor trust does not
depend on as to whether the sum donated has been applied by the donee trust or not. [Sarala Devi Sarabhai Trust
(Guj)].
4 Corpus donations to trust registered U/s 12AA or to institutions referred to in S. 10 (23C) shall not be regarded as
application of income by the donor trust. [Expalanation-2 to S. 11 (1)]. Therefore, it is not eligible for exemption in the
hands of the donor trust.
5 Giving loan for carrying out the objects of the trust amounts to application of income. [Cutchi Menon Union (Kar)].
6 Amount set-apart or ear-marked for a specific purpose and is not available for the purposes of the trust anymore, it is
to be regarded as applied, though it is yet to be spent. [Nizam’s Charitable Trust (AP)].
7 Where amounts were withdrawn from the corpus in the earlier years for carrying out the objects of the trust and the
corpus is recouped out of the income of the relevant PY, such recoupment of corpus amounts to application of income.
Hence, it is eligible for exemption U/s 11 (1) (a). [Matriseva Trust (Mad)].
8 ‘Income’ in S. 11 (1) shall be understood in commercial sense. It shall be computed in accordance with the rules of
accountancy and not in accordance with the provisions of the Act. [Giridharilal Shewnarain Tantia Trust (Cal)].
9 Where a trust has been granted registration U/s 12AA (1) (b) and the said registration is in force for any PY, then,
nothing contained in S. 10 shall operate to exclude any income derived from PHUT from the total income for that PY.
[S. 11 (7)]. However, exemption U/s 10 (1) and S. 10 (23C) could be enjoyed still.
10 Entities referred to in S. 10 (23C) (iv)/(v)/(vi)/(via) can’t enjoy exemption U/s 10 except U/s 10 (1) and S. 10 (23C).
11 1 Expenses incurred for the purpose of earning income from It is deducted in arriving at income derived
PHUT from PHUT.
2 Expenses incurred for maintaining the administrative It is treated as application of income of the
machinery of the trust. trust.
12 Payment of tax dues by the trust amounts to application. [Janaki Ammal Ayya Nadar Trust (Mad)].
13 Income, for the purpose of application shall be determined without any deduction or allowance by way of depreciation
in respect of any asset, the acquisition of which has been claimed as an application of income in the same or any other
PY. [S. 11 (6) + Explanation to S. 10 (23C)].

II. Deemed application – Explanation-1 to S. 11 (1):


1 If there is a shortfall in application of income due to non-receipt of income accrued, the trust can exercise the option
under Explanation-1 to S. 11 to treat the shortfall as being applied. However, the trust has to apply the sum deemed to
have been applied in the PY of receipt or in the PY succeeding the PY of receipt. The shortfall which has not been made
good shall be brought to tax in the PY succeeding the PY of receipt. [S. 11 (1B)].
2 If there is a shortfall in application of income due to any reason other than non-receipt of income accrued, the trust can
exercise the option under Explanation-1 to S. 11 to treat the shortfall as being applied. However, the trust has to apply
the sum deemed to have been applied in the succeeding PY. The shortfall which has not been made good shall be
brought to tax in the succeeding PY. [S. 11 (1B)].
Explanation to S. 11 (2):
1 Where the PCT/PRT enjoyed the benefit of deemed application in view of Explanation-1 to S. 11 (1) in the earlier year
and in the subsequent PY the short fall of the earlier year was made good by donating to another trust registered U/s
12AA or to institutions referred to in S. 10 (23C) (iv)/(v)/(vi)/(via), that shall not amount to application of income for
charitable or religious purpose.
Accordingly, the sum donated to make good the short fall (supra) shall be taxed in the hands of the trust U/s 11 (1B).
[Explanation to S. 11 (2)].
2 However, the Explanation to S. 11 (2) has no role to play where donations are made to another trust registered U/s
12AA or to institutions referred to in S. 10 (23C) (iv)/(v)/(vi)/(via) out of free accumulations of earlier years.
Exemption U/s 11 (1) (a) in respect of free accumulation is unconditional. It can’t be withdrawn invoking Explanation to
S. 11 (2). [Bagri Foundation (Delhi)].
Note:
The rejection by the CIT, of the application made by a trust for approval U/s 80G, on the ground that it had not spent 85% of
its income for charitable purposes, is not valid. [Shree Govindbhai Jethalal Nathavani Charitable Trust (2015) 373 ITR
619].

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Chapter-17: Assessment of Trust – Summary

Amendments brought out by Finance Act 2018:


A new Explanation 3 has been inserted after S. 11 (1) w.e.f AY 2019-20 to provide that for the purposes of determining the
amount of application of income U/s 11 (1) (a), the provisions of S. 40 (a) (ia), and of S. 40A (3) / (3A), shall, mutatis
mutandis, apply as they apply in computing the income chargeable U/H PGBP.

III. Deemed application of capital gains – S. 11 (1A):


1 Deemed The capital gains arising to a PCT or PRT (Registered U/s 12AA) from transfer of a capital asset
application of held under trust for charitable or religious purpose shall be deemed to have been applied for
capital gains charitable or religious purpose and accordingly, are exempt U/s 11 (1) (a), if the net consideration
arising on account of transfer of the capital asset is utilised for acquisition of another capital asset
to be so held.
Where only a part of the net consideration is utilised for acquiring new asset, then the capital gains
to the extent of the difference between the amount utilised and the cost of transferred asset shall
be regarded as applied for charitable or religious purpose. Only to that extent it exempt U/s 11 (1)
(a)
2 Net consideration Full value of consideration – Expenses incurred in connection with transfer.
3 Cost of Ʃ Cost of acquisition + Cost of improvement.
transferred asset
4 Computation of It is not done in accordance with the provisions of S. 48. Head-wise computation does not apply to
capital gains PCT/PRT. Therefore, the question of doing indexation does not arise.

Note:
1 In English mortgage, there is absolute transfer of mortgaged property from mortgagor to the mortgagee on a condition
that the mortgagee shall re-transfer the property on repayment of loan. [Bafna Charitable trust Vs CIT 230 ITR 864
(Bom)].
2 If the trust invests the net consideration arising from a capital asset held as property held under trust in an English
mortgage, the requirements of S. 11 (1A) are satisfied.

IV. Conditional exemption in respect of accumulation in excess of 15% - S. 11 (2):

1 Tax treatment of accumulation of 15% free accumulation is unconditionally exempt U/s 11 (1) (a).
income by PCT/PRT Accumulation in excess of 15% of income derived from PHUT is eligible for
exemption U/s 11 (2) (subject to conditions stipulated therein).
2 Conditions to be fulfilled for 1. Trust shall file a statement (in Form-10) to the AO within the due date for filing
enjoying exemption U/s 11 (2). [S. of ROI.
11 (2) + S. 13 (9)] 2. Accumulation in excess of 15% shall be invested or deposited in a manner laid
down in S. 11 (5).
3. ROI for the relevant PY shall be filed within the due date referred to in S. 139
(1).
3 Contents for Form-10 Specific purpose for which accumulation is made in excess of 15%.
Period for excessive accumulation. [Period specified can’t exceed 5 years].
4 Mere listing of objects in Form-10 – Generality of objects can’t take the place of specificity of purpose.
not suffice. Merely listing the objects is not sufficient to enjoy the exemption U/s 11 (2).
The purpose mentioned shall be precise and specific to enable the AO to
appreciate the necessity for excessive accumulation. There is no bar on plurality
of purpose. [Trustees of Singhania Charitable Trust (Cal)].
However, a contrary liberal view is expressed by the Delhi HC in Hotel and
Restaurant Association.

V. Circumstances under which the exemption granted U/s 11 (2) could be withdrawn – S. 11 (3):
SN Circumstance Tax implications
1 Excessive accumulation for which exemption was enjoyed U/s 11 (2) It shall be deemed to be the income of the
is applied for purposes other than charitable or religious purposes PY in which it is so applied.
mentioned in Form-10.
2 Excessive accumulation for which exemption was enjoyed U/s 11 (2) It shall be deemed to be the income of the
ceases to be accumulated for the purposes mentioned in Form-10. PY in which it ceases to be so accumulated.
3 Excessive accumulation for which exemption was enjoyed U/s 11 (2) It shall be deemed to be the income of the
ceases to remain invested or deposited in any of the forms or modes PY in which it ceases to remain so invested

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Chapter-17: Assessment of Trust – Summary

specified in S. 11 (5). or deposited.


4 Excessive accumulation for which exemption was enjoyed U/s 11 (2) It shall be deemed to be the income of the
is not utilised for the purpose for which it is so accumulated or set PY immediately following the expiry of the
apart during the period specified in Form-10 or in the year period specified in Form-10.
immediately following the expiry thereof,
5 Excessive accumulation for which exemption was enjoyed U/s 11 (2) It shall be deemed to be the income of the
is donated to any trust or institution registered U/s 12AA or to PY in which it is donated.
institutions referred to in S. 10 (23C) (iv) or (v) or (vi) or (via).

VI. Change in purpose of accumulation – Procedure – S. 11 (3A):

1 Where due to circumstances beyond the control of trust, excessive accumulation in respect of exemption was enjoyed
U/s 11 (2) cannot be applied for the purpose for which it was accumulated or set apart, the AO may, on an application
made to him in this behalf, allow the trust to apply such income for such other charitable or religious purpose in India as
is specified in the application by the trust and as is in conformity with the objects of the trust.
2 Thereupon, the provisions of S. 11 (3) shall apply as if the purpose specified by the trust in the application U/s 11 (3A)
were a purpose specified in Form-10.
3 If the trust specifies donating to another trust registered U/s 12AA or to institutions referred to in S. 10 (23C) as an
alternate purpose, that shall not be accepted by the AO U/s 11 (3A) unless the trust is getting dissolved. [Proviso-1 and
Proviso-2 to S. 11 (3A)].

VII. Business undertaking held under trust – AO empowered to compute income therefrom – S. 11 (4):
1 Where the trust claims a business undertaking as PHUT and the income therefrom as exempt, the AO shall have power
to determine the income of such undertaking in accordance with the provisions of this Act relating to assessment.
2 Where any income so determined is in excess of the income as shown in the accounts of the undertaking, such excess
shall be deemed to be applied to purposes other than charitable or religious purposes. [S. 11 (4)].

VIII. Modes of investment of trust funds – S. 11 (5):


A PCT or PRT (Registered U/s 12AA) can invest or deposit money in any of the following forms and modes, namely:
1 Investment in government securities (like Indira Vikas Patra, Kishan Vikas Patra etc).
2 Deposit with the office savings bank.
3 Deposit with scheduled banks or co-operative banks (including co-operative land mortgage bank, co-operative land
development bank etc).
4 Investment in units of UTI.
5 Investment in CG or SG securities.
6 Investment in debentures issued by or on behalf of any company or corporation. [However, both the principal and
interest thereon must have been guaranteed by the CG or SG].
7 Investment or deposits in any PSC. [Where an investment is made in the shares of any PSC and such PSC ceases to
be a PSC, the investment so made shall be deemed to be an investment made for a period of 3 years from the date of
such cessation and in the case of any other investment or deposit, till the date of its maturity].
8 Investment in bonds of approved financial corporation providing long term finance for industrial development in India
and eligible for deduction U/s 36 (1) (viii).
9 Investment in bonds of approved public companies whose principal object is to provide long-term finance for
construction or purchase of houses in India for residential purposes and eligible for deduction U/s 36 (1) (viii).
10 Deposits with or investment in any bonds issued by a public company formed and registered in India with the main
object of carrying on the business of providing long-term finance for urban infrastructure in India.
‘Long term finance’ means any loan or advance where the terms under which moneys are loaned or advance provide
for repayment along with interest thereof during a period of not less than 5 years.
‘Urban infrastructure’ means a project for providing potable water supply, sanitation and sewerage, drainage, solid
waste management, road, bridges and flyovers or urban transport.
11 Investment in immovable property excluding plant and machinery, not being plant and machinery installed in a building
for the convenient occupation thereof.
12 Deposit with IDBI.
13 Any other mode of investment or deposit as may be prescribed.
R. 17C prescribes the following other modes:
(a) Investment in units issued under any scheme of MF referred to in S. 10 (23D).
(b) Any transfer of deposits to Public Account of India.
(c) Deposits made with an authority constituted in India or under any law enacted either for the purpose of dealing with
and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of

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Chapter-17: Assessment of Trust – Summary

cities, towns and villages or for both;


(d) Investment by way of acquiring equity shares of a depository.
(e)Investment by way of acquiring shares of NSDC.
(f) Investment in debt instruments issued by any infrastructure finance company registered with RBI.
(g) Investment in stock certificates as defined in Sovereign Gold Bonds Schemes, 2015.

Note:
In case where the properties bequeathed to a trust could not be transferred to it due to ongoing court litigation and pendency
of probate proceedings, the provisions of S. 11 (5) are not attracted and consequently, the provisions of S. 13 (1) (d) do not
get invoked. [Khetri Trust (2014) (Delhi)]:

IX. Circumstances in which exemption U/s 11 and S. 12 is not available – S. 13:


Provisions of S. 13 Income from the property held under a trust for private religious purposes which does not enure for
(1) (a) the benefit of the public is not eligible for exemption U/s 11 and S. 12.
Provisions of S. 13 Income of a charitable trust created for the benefit of any particular religious community or caste is
(1) (b) not eligible for exemption U/s 11 and S. 12.
Explanation-2 to S. A trust or institution created or established for the benefit of SC, BC, ST or women and children
13 shall not be deemed to be a trust or institution created or established for the benefit of a religious
community or caste within the meaning of S. 13 (1) (b).
Provisions of S. 13 If income or property of the PCT or PRT is used or applied, directly or indirectly, for the benefit of
(1) (c) persons referred to in S. 13 (3), the trust will lose exemption U/s 11 and S. 12.
S. 13 (3) persons (1) the author of the trust or the founder of the institution;
(2) any person who has made a substantial contribution to the trust or institution, that is to say, any
person whose total contribution up to the end of the relevant PY exceeds Rs. 50000;
(3) where such author, founder or person is a HUF, a member of the family;
(4) any trustee of the trust or manager (by whatever name called) of the institution;
(5) any relative of any such author, founder, person, member, trustee or manager as aforesaid;
(6) any concern in which person (supra) has a substantial interest.
Explanation-1 to S. (1) Spouse of the individual;
13 (Meaning of (2) Brother or sister of the individual;
relative) (3) Brother or sister of the spouse of the individual;
(4) Any lineal ascendant or descendant of the individual;
(5) Any lineal ascendant or descendant of the spouse;
(6) spouse of a person referred to in (2), (3), (4) or (5);
(7) Any lineal descendant of a brother or sister of either the individual or of the spouse.
Explanation-3 to S. A person referred to in S. 13 (3) shall be deemed to have substantial interest in a concern, being
13 (substantial company, if its equity shares carrying not less than 20% of the voting power are, at any time during
interest in concern) the PY owned beneficially by such person or partly by such person and partly by one or more of the
other persons referred to in S. 13 (3).
A person referred to in S. 13 (3) shall be deemed to have substantial interest in any other concern,
if such person is entitled, or such person and one or more of the other person referred to in S. 13
(3) are entitled in the aggregate, at any time during the PY, to not less than 20% of the profits of
such concern.
Circumstances in which income or property of PCT or PRT is deemed to have been used or applied for the benefit
of S. 13 (3) persons [S. 13 (2)].
1. Loan without adequate Any part of the income or property of the trust or institution is, or continues to be lent to any
interest or adequate person referred to in S. 13 (3) for any period during the PY without either adequate security
security. [S. 13 (2) (a)]. or adequate interest or both.
2. Allowing use of property Any land or building of the trust or institution is, or continues to be, made available for use
without adequate rent. [S. of any person referred to in S. 13 (3), for any period during the PY without charging
13 (2) (b)]. adequate rent or other compensation.
3. Excess payment for Any amount is paid by way of salary, allowance or otherwise during the PY to any person
services. [S. 13 (2) (c)]. referred to in S. 13 (3) out of the resources of the trust or institution for services rendered
by that person to such trust or institution and the amount so paid is in excess of what may
be reasonably paid for such services.
4. Inadequate remuneration Services of the trust or institution are made available to any person referred to in S. 13 (3)
for services rendered. [S. during the previous year without adequate remuneration or other compensation.
13 (2) (d)].
5. Excess payment for Any share/security/other property is purchased by trust or institution from any person

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Chapter-17: Assessment of Trust – Summary

purchase of property. [S. referred to in S. 13 (3) during the PY for consideration which is more than adequate.
13 (2) (e)].
6. Inadequate Any share or security or other property is sold by the trust or institution to any person
consideration for property referred to in S. 13 (3) during the PY for consideration which is less than adequate.
sold. [S. 13 (2) (f)].
7. Diversion of income or Any income or property of the trust or institution is diverted during the PY in favour of any
property exceeding Rs. person referred to in S. 13 (3).
1000. [S. 13 (2) (g)].
8. Investment in a concern Any funds of the trust or institution are, or continue to remain invested for any period during
in which S. 13 (3) person is the PY in any concern in which any of the person referred to in S. 13 (3) has a substantial
substantially interested. [S. interest.
13 (2) (h)].
Exemption not to be denied The value of any services, being medical or educational services, made available by any
to charitable trusts charitable or religious trust running a hospital or medical institution or an educational
providing educational or institution, to any person referred to in S. 13 (3), shall be deemed to be income of such trust
medical facilities to or institution derived from property held under trust wholly for charitable or religious
specified persons. [S. 13 purposes during the PY in which such services are so provided and shall be chargeable to
(6)]. income-tax notwithstanding the provisions of S. 11 (1).
Notwithstanding anything contained in S. 13 (1) (c) and S. 13 (2), but without prejudice to
the provisions contained in S. 12 (2), in the case of a charitable or religious trust running an
educational institution or a medical institution or a hospital, the exemption U/s 11 or 12 shall
not be denied in relation to any income, other than the income referred to in S. 12 (2), by
reason only that such trust has provided educational or medical facilities to persons
referred to in S. 13 (3).
Provisions of S. 13 (1) (d) if for any period during the PY, any funds of the trust or institution are invested or deposited
otherwise than in any one or more of the modes specified in S. 11 (5), the trust or institution
will lose exemption U/s 11 and S. 12.
Proviso to S. 13 (1) (d) Any funds representing the profits and gains of business incidental to its objects (in respect
of which separate books of accounts are maintained) may be invested or deposited even in
a manner other than a manner specified in S. 11 (5).
Acquisition of asset, though not covered by S. 11 (5), will not result in forfeiture of
exemption U/s 11 and S. 12 for a period of 1 year from the end of the PY in which such
asset is acquired.

Note:
1 For claiming exemption U/s 11 (1) (d) in respect of corpus donations and exemption U/s 11 (1) (a) in respect of 15% free
accumulation, the trust is not required to invest in the forms and modes specified U/s 11 (5). However, for claiming
exemption U/s 11 (2) in respect of accumulation in excess of 15% free accumulation, the trust is first required to invest
the sum in S. 11 (5) modes.
2 While S. 11 (2) mandates investments in S. 11 (5) for claiming exemption, S. 13 (1) (d) nowhere mandates investments
of funds; it only states that if any funds are invested, the same should be in the forms and modes specified U/s 11 (5),
otherwise whole of the exemption is lost. The words ‘any funds’ in S. 13 (1) (d) would cover corpus donations and 15%
free accumulation. Thus, if corpus donation or 15% free accumulation is invested otherwise than in S. 11 (5) modes,
then, the trust will lose whole of exemption and all incomes of the trust including the corpus donations will become
taxable accordingly.

X. Charge of tax on PCT/PRT – S. 164 (2):


1 Unexempted Income of PCT or PRT which is not exempted U/s 11 and S. 12 shall be taxed @ slab rates. [S.
income to suffer 164 (2)].
tax @ Slab rates
2 Exemption lost View-1: Entire income of the trust loses exemption U/s 11 and S. 12. Entire income shall suffer tax
due to provisions @ MMR.
of S. 13 (1) (c) View-2: Entire income of the trust loses exemption U/s 11 and S. 12. Only such part of income
and S. 13 (1) (d) which has forfeited exemption U/s 13 (1) (c) and s. 13 (1) (d) shall suffer tax @ MMR. Other part of
income shall suffer tax at slab rates. [Sheth Mafatlal Gagalbhai Foundation Trust [2001] 249 ITR
533 (Bom)].
View-3: Entire income of the trust does not lose exemption U/s 11 and S. 12. Only such part of
income which has forfeited exemption U/s 13 (1) (c) and S. 13 (1) (d) shall suffer tax and tax shall
be @ MMR. [Fr. Mullers Charitable institutions [2014] 363 ITR 230 (Kar) + Agrim Charan
Foundation [2002] 253 ITR 593].

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Chapter-17: Assessment of Trust – Summary

XI. Anonymous donation – Tax treatment: S. 115BBC:


1 Meaning of anonymous donation It means any voluntary contribution where a person receiving such contribution
does not maintain a record to establish the identity of the donor (indicating the
name, address and such other particulars as may be prescribed.
2 Classification of anonymous Anonymous donation is classified into (a) anonymous donation covered by S.
donation 115BBC; (b) anonymous donation not covered by S. 115BBC.
3 Anonymous donation not covered by It is eligible for exemption U/s 11 and S. 12. If it is a corpus donation, it is
S.115BBC unconditionally exempt U/s 11 (1) (d). If it is a non-corpus donation, it is eligible
for exemption U/s 11 (1) (a), if 85% is applied for the objects of the trust.
4 Anonymous donation covered by S. It is not eligible for exemption U/s 11 and S. 12. [S. 13 (7)].
115BBC. Anonymous donation to the extent of higher of (a) 5% of total donation; or (b)
Rs. 1L, shall suffer tax @ slab rates.
Excessive anonymous donation shall suffer tax @ 30% (flat).
5 Anonymous donation received by It is covered by S. 115BBC.
PCT registered U/s 12AA
6 Anonymous donation received by It is covered by S. 115BBC.
entities referred to in S. 10 (23C)
(iiiad)/(vi)/(iiiae)/(via)/(iv).
7 Anonymous donation received by It is not covered by S. 115BBC.
PRT registered U/s 12AA
8 Anonymous donation received by It is not covered by S. 115BBC.
religious institution approved by CIT
U/s 10 (23C) (v)
9 Anonymous donation received by If the anonymous donation is received with a specific direction that it should be
trust existing wholly for charitable used only for educational institution or hospitals run by the trust, then it is
and religious purpose approved by covered by S. 115BBC.
CIT U/s 10 (23C) (v) If there is no such specific direction, then the anonymous donation is not
covered by S. 115BBC.

2. Entities eligible exemption U/s 10 (23C):


1 Entities entitled to Any university or other educational institution existing solely for educational purposes and not
unconditional exemption for purposes of profit, and which is wholly or substantially financed by the Government; [S. 10
(23C) (iiiab)].
Any university or other educational institution existing solely for educational purposes and not
for purposes of profit if the aggregate annual receipts of such university or educational
institution do not exceed the amount of annual receipts as may be prescribed (Rs. 100L). [S. 10
(23C) (iiiad)].
Any hospital or medical institution existing solely for philanthropic purposes and not for
purposes of profit, and which is wholly or substantially financed by the Government. [S. 10
(23C) (iiiac)].
Any hospital or medical institution existing solely for philanthropic purposes and not for
purposes of profit, if the aggregate annual receipts of such hospital or institution do not exceed
the amount of annual receipts as may be prescribed (Rs. 100L). [S. 10 (23C) (iiiae)].
2 When can we say that the If the Government grant to a university or other educational institution or hospital or medical
institution is substantially institution during the relevant PY exceeds 50% of the total receipts (including voluntary
financed by the contribution) of such university or other educational institution or hospital or medical institution
Government? [Explanation as the case may be, then such university or other educational institution or hospital or medical
to S. 10 (23C) (iiiab) and S. institution shall be considered as being substantially financed by the Government for the PY.
10 (23C) (iiiac)].
3 Entities entitled to Any fund or institution established for charitable purposes which may be approved by the CIT,
conditional exemption having regard to its the objects and its importance throughout India or throughout any state (s).
[S. 10 (23C) (iv)].
Any trust or institution wholly for public religious purposes or wholly for public religious and
charitable purposes, which may be approved by the CIT, having regard to the manner in which
the affairs of the trust or institution are administered and supervised for ensuring that the
income accruing thereto is properly applied for the objects thereof. [S. 10 (23C) (v)].
Any university or other educational institution existing solely for educational purposes & not for
purposes of profit, other than those mentioned in S. 10 (23C) (iiiab) or S. 10 (23C) (iiiad) &
which may be approved by the CIT. [S. 10 (23C) (vi].

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Chapter-17: Assessment of Trust – Summary

Any hospital or medical institution existing solely for philanthropic purposes and not for
purposes of profit, other than those mentioned in S. 10 (23C) (iiiac) or S. 10 (23C) (iiiae) and
which may be approved by the CIT.

Conditions to be fulfilled for enjoying exemption U/s 10 (23C) (iv)/(v)/(vi)/(via):


1 Application to be made Application shall be made in the prescribed form and manner to the CIT for the purpose
of grant of the exemption.
2 Time limit for making application for Applications shall be filed on or before 30th September of the succeeding FY. For
grant of exemption example, if an educational institution seeks exemption U/s 10 (23C) (vi) for PY 2018-19,
it has to make an application for grant of exemption by 30.09.2019.
3 Furnishing of documents CIT may call for such documents (including audited accounts) or information which he
consider necessary for satisfying himself about the genuineness of the activities of the
entities (supra). He may also make such inquiries as he deems necessary for this
purpose.
4 Time limit for disposal of application Order granting approval or order rejecting the application shall be passed within the
period of 12 months from the end of the month in which such application was received.
5 Order of rejection – appealable. Order rejecting the application is appealable before ITAT U/s 253 (1).
6 Application of income It shall apply its income, or accumulates it for application, wholly and exclusively to the
objects for which it is established and in a case where more than 15% of its income is
accumulated, the period of the accumulation of such amount shall not exceed 5 years.
7 Mode of investments It should not invest or deposit its funds otherwise than in S. 11 (5) modes. Exception:
Voluntary contributions received and maintained in the form of jewellery, furniture or
notified article.
Note: If voluntary contributions, other than cash or those referred above, are received in
modes other than S. 11 (5) modes, then, exemption will be available if those
contributions are transferred into S. 11 (5) modes within 1 year from the end of the PY
when such asset was acquired.
8 Condition as to exemption of business The exemption does not apply to profits and gains of business, unless the business is
income. incidental to the attainment of its objectives and separate books of account are
maintained by it in respect of such business.
9 Audit of accounts Where its TI for any PY (without giving effect to the provisions of this section) exceeds
the BEL, it shall get its accounts audited in respect of that year by a CA. The report of
such audit shall be in the prescribed form duly signed and verified by such accountant
and set forth such particulars as may be prescribed.
10 Payment to similar institution out of Where it does not apply its income during the year of receipt and accumulates it, any
accumulation – not regarded as payment or credit out of such accumulation to any trust or institution registered U/s 12AA
application of income. or to any fund or trust or institution or any university or other educational institution or
any hospital or other medical institution referred to in S. 10 (23C) (iv)/(v)/(vi)/(via) shall
not be treated as application of income to its objects.
11 Withdrawal of approval Where the fund or institution etc has not applied its income or invested or deposited its
funds in accordance with the aforesaid provisions; or its activities are not genuine or are
not being carried out in accordance with all or any of the conditions subject to which it
was notified or approved, then the CIT may, at any time after giving a reasonable
opportunity of being heard, withdraw its approval and forward a copy of the order
withdrawing the approval to AO concerned.
12 Anonymous donations to be included Any anonymous donation referred to in S. 115BBC on which tax is payable in
in total income accordance with the provisions of the said section shall be included in the total income.
13 Amount donated by way of corpus Any amount donated out of its income to any trust or institution registered U/s 12AA by
donation to trust registered U/s 12AA way of corpus donation shall not be treated as application of income to the objects for
not considered as application. which the entity is established.
14 Entities referred to in S. 10 (23C) (iv) If the purpose of trust referred to in S. 10 (23C) (iv)/(v) does not remain charitable in a
or S. 10 (23C) (v) not entitled to PY on account of the commercial receipts > 20% of total receipts of the trust, then, such
exemption if its commercial receipts trust would not be entitled to get benefit of exemption in respect of its income for that PY
exceed 20% of total receipts. in which the commercial receipts exceed the specified threshold.
The denial of exemption would be compulsory by operation of law and would not be
dependent on any approval being withdrawn or registration being cancelled.
15 No benefit of exemption U/s 10 to These entities can’t enjoy exemption U/s 10 except U/s 10 (1) and S. 10 (23C).
entities eligible for exemption U/s 10
(23C)

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Chapter-17: Assessment of Trust – Summary

16 Depreciation not allowable if cost of Income for the purposes of application U/s 10 (23C) shall be determined without allowing
the asset claimed as application. any deduction or allowance for depreciation, where the cost of acquisition of the asset
has been claimed as application of income U/s 10 (23C) in the same PY or any other
PY.
17 13th Proviso below S. 10 (23C) For the purpose of determining the amount of application U/s 10 (23C), provisions of S.
40 (a) (ia) and S. 40A (3)/(3A) shall, mutatis mutandis apply as they apply in computing
the income chargeable U/H PGBP.
18 Obligation to file return These entities have obligation to file ROI for the relevant PY if their TI (without giving
effect to S. 10 (23C)) exceeds BEL. [S. 139 (4C)].
Even entities covered by S. 10 (23C) (iiiab) and S. 10 (23C) (iiiac) have obligation to file
ROI U/s 139 (4C).

Note:
1 Where an institution engaged in imparting education incidentally makes profit, it would not lead to an inference that it
ceases to exist solely for educational purposes. [Queen’s educational society (SC)].
2 Imparting education or training in specialized filed like communication, advertising etc and awarding diplomas or
certificates would constitute ‘educational purpose’ for grant of exemption U/s 10 (23C) (vi). [Peter’s Educational
society (2016) (SC)].

3. Private Specific Trust:


1 Options to the Department. Option-1: Income of the trust could be assessed to tax directly in the hands of
[S. 166] beneficiaries.
Income of the trust is treated as income as the personal income of beneficiaries and
taxed accordingly. Trustee does not come into picture.
Option-2: Income of the trust could be assessed to tax in the hands of the trustee as
representative assessee.
Tax shall be levied upon and recovered from the trustee (representative assessee) in
a like manner and to the same extent to which it would have been levied upon and
recovered from the persons so represented. [S. 161 (1)].
2 Business carried on by the If the trust carries on business, then the entire income of the trust shall suffer tax @
trust – Implications. [S. 161 MMR (notwithstanding anything contained in S. 161 (1)).
(1A)].
3 S. 161 (1A) – not to apply. If the trust was declared through a will and was created for the benefit of dependent
[Proviso to S. 161 (1A)]. relatives and this is the only trust so created, then S. 161 (1A) shall not apply.

4. Private Discretionary Trust:


1 Taxed at MMR Entire income of the trust shall suffer tax @ MMR in the hands of the trustee in representative
capacity. [S. 164 (1)]. This is subject of S. 111A, S; 112 etc.
Nothing is taxed in the hands of the beneficiaries.
2 Relaxation In the following circumstances, the trust shall suffer tax at slab rates and not at MMR:
Circumstance-1 None of the beneficiaries is a beneficiary in any other trust.
The personal income of the beneficiary does not exceed BEL.
The trust does not carry on business.
Circumstance-2 The trust was declared through a will for the benefit of dependent relative and it was the only
trust so created.
Circumstance-3 The trust was created through non-testamentary instrument for the benefit of dependent
relative before 01.03.1970 and the trust does not carry on business.

5. Oral Trust:
1 Meaning It means a trust not evidence by duly executed instrument in writing.
2 Tax treatment Its entire income shall suffer tax @ MMR. No exemptions are available under the Act. [S.
164A].
3 Conversion of oral trust An oral trust will be regarded as a trust declared by a duly executed instrument in writing if a
into non-oral trust statement in writing signed by the trustees, setting out the purposes of the trust, particulars
as to the trustees, the beneficiaries and the trust property, is forwarded to the AO within 3
months from the date of declaration of trust.
Then, exemptions may be allowed (if entitled).

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Chapter-18: Taxation of political parties - Summary

1. Special provisions relating to political parties:


1 Exemption U/s 13A A political party registered U/s 29A of the Representation of the People Act, 1951 is eligible
for exemption U/s 13A.
2 Income eligible for (a) IFHP; (b) Capital gains; (c) IFOS; (d) voluntary contribution.
exemption
3 Conditions to be (i) It shall maintain such books of account and other documents to enable the AO to properly
satisfied for enjoying deduce its income therefrom.
exemption (ii) It shall maintain a record of each such voluntary contribution (other than electoral bonds)
in excess of Rs. 20000 and the name and address of the contributor.
(iii) Accounts of the political party shall be audited by a CA.
(iv) Donation exceeding Rs. 2000 shall not be received otherwise than by an APC/APBD/by
use of ECS through a bank account/by way of electoral bond.
(v) A report of donations received referred to in S. 29C of the Representation of the People
Act, 1951 shall be submitted for each financial year.
(vi) Return of income shall be furnished U/s 139 (4B) within the time limit specified in S. 139
(1).

2. Deduction U/s 80GGB:


1 Assessee eligible for Indian company.
deduction
2 Nature of deduction Assessee is eligible for deduction in respect of contributions made to registered political
parties or electoral trust during the PY (otherwise than by way of cash).
3 Extended meaning of Political contribution includes even the expenditure incurred on advertisement in any
political contribution publication (being a publication in the nature of a souvenir, brochure, tract, pamphlet or the
like) by or on behalf of a political party or for its advantage.
4 Ceiling on deduction Nothing is specified in the section.

Note:
1 Any expenditure on advertisement in a political magazine incurred by an Indian company is disallowed U/s 37 (2B) while
computing income U/H PGBP.
2 However, it is allowed as deduction U/s 80GGB against the GTI.

3. Deduction U/s 80GGB:


1 Assessee eligible for Any person other than (a) Indian company; (b) local authority; (c) AJP wholly or partly funded
deduction by the Government.
2 Nature of deduction Assessee is eligible for deduction in respect of contributions made to registered political
parties or electoral trust during the PY (otherwise than by way of cash).
3 Ceiling on deduction Nothing is specified in the section.

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Chapter-19: Clubbing provisions - Summary

1. Transfer of income without transfer of asset – S. 60:


(i) If any person transfers the income from any asset without transferring the asset itself, such income is to be included in
the total income of the transferor.
(ii) It is immaterial whether the transfer is revocable or irrevocable.

2. Income arising from revocable transfer – S.61:


(i) Transfer of assets can be of two types: (a) Revocable; (b) Irrevocable.
(ii) S. 63 defines the term ‘revocable transfer’.
(iii) A transfer is deemed to be revocable if the instrument through which transfer is effected (a) contains any provisions
for retransfer, directly or indirectly, of the whole or any part of the income or assets to the transferor, or (b) gives, in
any way to the transferor, a right to reassume power, directly or indirectly, over the whole or any part of the income or
the assets.
(iv) S. 61 Provides for clubbing the income arising from assets transferred under revocable transfer in the hands of the
transferor.
(v) This clubbing provision will operate even if only part of income of the transferred asset had been applied for the
benefit of transferor. Once the transfer is revocable, the entire income from the transferred asset is includible in the TI
of the transferor.

3. Exceptions where clubbing provisions are not attracted even in case of revocable transfer – S. 62:
(i) If there is a transfer of asset which is not revocable during the life time of the transferee, the income from the
transferred asset is not includible in the total income of the transferor provided the transferor derives no direct or
indirect benefit from such income.
(ii) If the transferor receives direct or indirect benefit from such income, such income is to be clubbed in his total income
even though the transfer may not be revocable during the life time of the transferee.
(iii) As and when the power to revoke the transfer arises, the income arising by virtue of such transfer will be included in
the total income of the transferor.

4. Clubbing of income arising to spouse:

A. Income by way of remuneration from a concern in which the individual has substantial interest – S. 64 (1) (ii):
(i) In computing the total income of any individual, all such income which arises directly or indirectly, to the spouse of
such individual by way of salary, commission, fees or any other form of remuneration, whether in cash or in kind, from
a concern in which such individual has a substantial interest shall be included.
(ii) However, this provision does not apply where the spouse of the said individual possesses technical or professional
qualifications and the income to the spouse is solely attributable to the application of his or her technical or
professional knowledge or experience. In such an event, the income arising to the spouse is to be assessed in his or
her hands.

Points requiring attention:


(i) An individual is said to have substantial interest in a concern, being company, if he singly or along with his relatives
beneficially owns equity shares carrying not less than 20% voting power at any time during the PY.
(ii) An individual is said to have substantial interest in a concern, not being company, if he singly or along with his
relatives is beneficially entitled to not less than 20% of the profits of the concern at any time during the PY.
(iii) Relative = Spouse + Brother + Sister + Lineal ascendant +Lineal descendant.

Clubbing when both husband and wife are having substantial interest and both are employed in the concern:
Situations Does husband possess Does wife possess technical or Manner of clubbing
technical or professional professional knowledge and
knowledge and experience? experience?
1 Yes No Club the salary of the wife from the concern
with the income of the husband.
2 No Yes Club the salary of the husband from the
concern with the income of the wife.
3 Yes Yes No need for clubbing. Assess the respective
salary income in the hands of the respective
spouse.
4 No No Include the salary of the other spouse in the
total income of the spouse whose total income
excluding such remuneration is greater.

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Chapter-19: Clubbing provisions - Summary

(B) Income from assets transferred to spouse - S. 64 (1) (iv):


Applicability of S. 64 (1) (iv):
If the following conditions are satisfied, S. 64 (1) (iv) shall apply:
1 The tax payer is an individual.
2 He/she transfers an asset other than a house property.
3 The asset is transferred to his/her spouse.
4 The transfer may be direct or indirect.
5 The asset is transferred otherwise than (a) for adequate consideration, or (b) in connection with an agreement to live
apart.

Impact of S. 64 (1) (iv):


The income arising from the transferred asset shall be included in the income sheet of transferor individual and not in the
hands of transferee spouse.

Note: Where the subject matter of transfer is house property, then the provisions of S. 27 (i) shall apply and the transferor
individual is deemed to be the owner and the annual value shall be assessed to tax in his hands. Provisions of S. 64 (1) (iv)
has no relevance.

Points requiring attention:


1 Spouse means legally wedded wife or husband. The term will not cover concubine. Executors of the will of T.V.
Krishna Iyer 38 ITR 144 (Ker).
2 Husband and wife relationship should subsist both on the date of transfer of the asset and on the date of accrual of
income. Then only the provisions of S. 64 (1) (iv) can be invoked. Philip John Plasket Thomas 49 ITR 97 (SC).
3 Note the words “indirectly”. The effect of this is, even cross transfers are hit by S. 64 (1) (iv). C.M. Kothari 49 ITR 107
(SC).
4 To avoid clubbing of the income of the transferee-spouse with that of the transferor-spouse, what S. 64 (1) (iv) requires
is “adequate consideration” and not “good consideration”.
Only such consideration which is capable of being measured in monetary terms can fall within the ambit of the
expression “adequate consideration”. Therefore, natural love and affection of the transferee-spouse, though a good
consideration, is not an adequate consideration. Tulsidas Kilachand 42 ITR 1 (SC).
5 Similarly, consent by the transferee-spouse to allow the transferor-spouse to adopt a child cannot be regarded as
adequate consideration. Potti Veerayya Sresty 85 ITR 194 (AP).
6 Even if the form of the asset transferred by the transferor-spouse is changed by the transferee-spouse, still, the income
arising from such changed asset shall be clubbed in the hands of the transferor-spouse. Mohini Thapar 83 ITR 208
(SC).
7 Bonafide loan by the husband to wife or vice versa will not invite the application of S. 64 (1) (iv). Hasina Begum 158
ITR 215 (Cal).
8 The Mumbai High Court in Patwardhan 76 ITR 279 held that the purpose of S. 64 (1) (iv) is to include the income of
the transferred assets in computation of the total income of the transferor-spouse only to the extent the consideration
was found inadequate. However, a contrary view has been expressed by the Kerala High Court in Junus Haji
Ummer Sait 173 ITR 3 (Ker).
9 Even the capital gains derived by the transferee-spouse upon sale of assets transferred to her/him by the transferor-
spouse had to be included in the total income of the transferor-spouse-U/s 64 (1) (iv). Seventilal Maneklal Sheth 68
ITR 503 (SC).
10 Even the capital gains arising on account of transfer of an asset the form of which is changed by the transferee-spouse
shall be clubbed in the hands of the transferor-spouse. Smt Pelleti Sridevamma 216 ITR 826 (SC).
11 Subsequent to the receipt of shares as gift from the transferor-spouse, if bonus shares are allotted to the transferee-
spouse and on which the transferee-spouse receives any dividend, that is not bit by S. 64 (1) (iv). M.P. Birla 142 ITR
377 (Bom). Income arising from accretions to the transferred asset shall not be clubbed invoking S. 64 (1) (iv).
12 Second generation income cannot be clubbed invoking the provisions of S. 64 (1) (iv). For example, subsequent to the
receipt of a house property as gift from the transferor-spouse, if the transferee-spouse earns any income from fixed
deposits placed with a bank, made out of the rental income, such second generation income is not hit by S. 64 (1) (iv).
M.S.S. Rajan 252 ITR 126 (Mad).
13 In Karamchand Premchand Ltd 40 ITR 106 (SC), the apex court held that income includes loss. Therefore, U/s 64
(1) (iv) even loss could be clubbed.

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Chapter-19: Clubbing provisions - Summary

Amount to be clubbed when transferred asset is invested in business:


Clubbing procedure [Explanation-3 to S. 64 (1)]:
Step 1 Find out the total investment of transferee-spouse in the business on the 1st day of the PY.
Step 2 Find out the amount invested by the transferee spouse out of the assets transferred to her without adequate
consideration by her husband on the 1st day of the PY in the said business.
Step 3 Find out the taxable income of the transferee spouse from the business.
If the transferees spouse becomes the partner of a firm by investing the aforesaid asset, then only interest
income from the firm is considered under step-3.
Share of profit from the firm is not considered under step-3 as it is exempt U/s 10 (2A).
Remuneration received from the firm cannot be considered for clubbing since it is paid for the services rendered
by the partner.
Step 4 The amount which shall be included in the hands of the transferor is determined as follows: Step 3 * (Step 2/
Step 1)

5. Income from assets transferred to son’s wife S. 64 (1) (vi):


Applicability of S. 64 (1) (vii):
If the following conditions are satisfied, S. 64 (1) (vii) shall apply:
1 The tax payer is an individual.
2 He or She has transferred an asset.
3 The asset is transferred to his/her son’s wife.
4 The transfer may be direct or indirect.
5 The asset is transferred otherwise than for adequate consideration.

Impact of S. 64 (1) (vii):


The income arising from the transferred asset shall be included in the income sheet of transferor individual and not in the
hands of transferee daughter-in-law.

Points requiring attention:


(i) The relationship of father-in-law or Mother-in-Law and Daughter-in-Law should subsist both at the time of transfer and
at the time of accrual of income.
(ii) Even S. 64 (1) (vi) covers cross transfers - Om Dutt 277 ITR 63 (P&H).
(iii) The asset may be held by the transferee in the same form or in a different form.
(iv) Explanation-3 to S. 64 (1) is applicable here also.

6. Income from assets transferred to a person for the benefit of spouse (S. 64 (1) (vii)):
Applicability of S. 64 (1) (vii):
S. 64 (1) (vii) is applicable if the following conditions are satisfied:
1 The taxpayer is an individual.
2 He/she has transferred an asset.
3 The transfer may be direct or indirect.
4 The asset is transferred to a person or association of person.
5 It is transferred for the immediate or deferred benefit of his/her spouse.
6 The transfer is for an inadequate consideration.

Impact of S. 64 (1) (vii):


Income from such asset to the extent of such benefit is taxable in the hands of the taxpayer who has transferred the asset.

7. Income from assets transferred to a person for the benefit of son’s wife (S. 64 (1) (viii):

Applicability of S. 64 (1) (viii):


S. 64 (1) (viii) is applicable if the following conditions are satisfied:
1 The tax payer is an individual.
2 He/she has transferred an asset.
3 The asset is transferred to any person or an association of person.
4 Transfer may be direct or indirect.
5 The asset is transferred for the immediate or deferred benefit of his or her son’s wife.
6 The asset is transferred otherwise than for adequate consideration.

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Chapter-19: Clubbing provisions - Summary

Impact of S. 64 (1) (vii):


Income from such asset to the extent of such benefit is taxable in the hands of the taxpayer who has transferred the asset.

8. Clubbing of income of minor (S. 64 (1A)):


Income accruing or arising to a minor child shall be clubbed in the hands of the parent of the child. Provisions relating to
clubbing of income of the minor child in the hands of parents are given in S. 64 (1A). However, in respect of the income
clubbed U/s 64 (1A), the parent is eligible for exemption U/s 10 (32).

Which income of the minor could be clubbed?


?
Child Income not clubbed
No
= with the parent
Minor

Yes

Minor Child

Suffering from disability


Other Minor Child
Specified u/s 80 U

Income of such Minor Income


child (from all sources) -
Not subject to Clubbing
provisions
On account of any On account of any
activity involving Other income
manual work
application of his
skill, talent or
specialized
knowledge and
experience
Parent in whose hands the income of the minor is to be clubbed: subject to
Not subject to Clubbing Provision
Clubbing Provision

Marriage of Marriage of Parents


Parents subsists doesn’t subsist

Situation 1 Situation 2

Total income of Father (excluding Total income of Mother (excluding


the income includible u/s 64(1A) the income includible u/s 64(1A)
> >
Total income of Mother(excluding Total income of Father (excluding
the income includible u/s 64(1A) the income includible u/s 64(1A)

Clubbed with the Clubbed with the Income of Minor is clubbed


income of Father income of Mother with the income of that
Exemption U/s 10 (32): parent who maintains the
Minor child in the relevant
Previous Year
Parent with whose income the income of minor is clubbed is entitled to an exemption to the extent of Rs. 1500 per child or
the income clubbed (whichever is less).

Points requiring attention:


1 Meaning of “Child” (S. 2 Child in relation to a child includes a step child and an adopted child of that individual.
(15B)) But it does not include an illegitimate child.
2 Minor married daughter Unlike S. 27, S. 64 (1A) does not exclude minor married daughter.
Hence, U/s 64 (1A) even the income arising to a minor married daughter would be
clubbed with that of the parent.
3 Attaining majority during the Where the minor child becomes major during the PY, then the income up to the date he
previous year remained minor in that PY shall be clubbed in the hands of the parent.

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Chapter-19: Clubbing provisions - Summary

4 Income from investments To be clubbed with that of the parent U/s 64 (1A).
made out of income earned
from manual work or
activities involving
application of skill, talent or
specialized knowledge and
experience

9. Conversion of self-acquired property into family property & subsequent partition (S. 64 (2)):

Situations covered by S. 64 (2):


Situation An Individual converts his self-acquired property into property belonging to the family. It is done by impressing
1 such property with the character of joint family property or throwing such property into common stock of the
family.
Situation An individual transfers his self-acquired property, directly or indirectly, to the family otherwise than for adequate
2 consideration.

Clubbing of income before partition:


In the aforesaid situations, the income from such property is clubbed with the income of the transferor.

Clubbing of income after partition:


If the property converted or transferred by an individual is subsequently transferred amongst the members of the family, the
income derived from such converted property, as is received by the spouse of the transferor will be included in the
income of the transferor.

10. Liability of person in respect of income included in the income sheet of another person: S. 65:
1 S. 61 to S. 64 provided for clubbing of income of one person in the hands of the other in circumstances specified
therein. However, service of notice of demand (in respect of tax on such income) may be made upon the person to
whom such asset is transferred (i.e. the transferee). In such a case, the transferee is liable to pay that portion of tax
levied on the transferor which is attributable to the income so clubbed.
2 Similar provision will be applicable in case of deemed ownership of house property U/s 27 (i.e. transfer of house
property otherwise than for adequate consideration to spouse, not being in connection with agreement to live apart or to
minor child not being a minor married daughter).

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Chapter-20: Assessment Procedure Summary

A. Filing of returns – S. 139:


1. Voluntary return – S. 139 (1):
1 Filing of ROI by firms and For each PY, every firm and company shall furnish ROI. It shall be furnished within
companies –Mandatory. [S. 139 the due date specified in Explanation-2 to S. 139 (1).
(1) (a)]
2 Mandatory filing of loss return by Every firm and company shall furnish on or before the due date (supra) the return in
firms and companies. [Proviso-3 respect of loss in every PY.
to S. 139 (1)].
3 Filing of ROI by other persons. Every other person has obligation to file ROI only if the TI of the PY > BEL. It shall
[S. 139 (1) (b)]. be furnished within the due date specified in Explanation-2 to S. 139 (1).

4 TI for the purpose of S. 139 (1) TI before giving effect to the provisions of Chapter VI-A.
(b). [Proviso-6 to S. 139 (1)].
5 Due date for filing return. Assessees who have entered into international 30th November of
[Explanation-2 to S. 139 (1)]. transactions or specified domestic transactions. the AY
Other assessees being (a) companies; (b) auditees; (c) 30th September of
working partner of an auditee-firm the AY
Other assessees 31st July of the AY
6 Filing of return in respect of If the TI of the PY of any other person in respect of which a person is assessable
income of any other person by under this Act > BEL, he shall furnish return of income of such other person in
person who is assessable in this prescribed form, verified in prescribed manner and setting forth prescribed
regard. [S. 139 (1) (b)]. particulars within the due date specified in Expalantion-2 to S. 139 (1).

Points requiring attention:


1 Relaxations to non- NRI, who does not have any income other than (a) investment income; and (b) LTCG
residents from filing of arising from transfer of foreign exchange assets and on these incomes has suffered TDS,
returns. need not file ROI for the relevant PY. [S. 115G].
Persons referred to in S. 115BBA (1) (i.e. Non-resident foreign national sportsmen etc) who
do not have any income other than the income referred to therein and have suffered TDS
U/s 194E, need not file ROI for the relevant PY. [S. 115BBA (2)].
FC/NCNR, who does not have any income other than interest referred to in S. 115A (1) (a)
(ii)/(iia)/(iiaa)/(iiab) and has suffered TDS U/s 195 or S. 194LB, S. 194LC or S. 194LD, as
the case may be, need not file ROI for the relevant PY. [S. 115A (5)].
FC/NCNR, who does not have any income other than interest on GDR or FCCB and has
suffered TDS U/s 196C, need not file ROI for the relevant PY. [S. 115AC (4)].
2 Power of CG to exempt The CG has power to notify persons who need not file ROI subject to fulfillment of
filing of return. [S. 139 conditions specified therein.
(1C)].

Consequences of not filing return within the due date:

1. Interest U/s 234A (1)


1 Circumstances in which interest is Situation-1: Return was filed belatedly and the return was processed U/s 143 (1)
levied U/s 234A (1). but no assessment was made.
Situation-2: Return was filed belatedly and assessment was made thereafter.
Situation-3: Return was not filed and best judgment assessment was made U/s
144.
2 Computation of interest in Base for Tax on total income determined U/s 143 (1) – TDS – TCS
situation-1. computation of – Advance tax – Self assessment tax paid before the due
interest date for filing return – double tax avoidance relief – MAT
credit or AMT credit. [Part of Rs. 100 ignored].
Interest rate 1% per month or part thereof.
Period for which Date immediately following the due date to the date of
interest is furnishing of return.
computed
3 Computation of interest in Base for Tax on total income assessed – TDS – TCS – Advance
situation-2 computation of tax – Self assessment tax paid before the due date for
interest filing return – double tax avoidance relief – MAT credit or

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Chapter-20: Assessment Procedure Summary

AMT credit. [Part of Rs. 100 ignored].


Interest rate 1% per month or part thereof.
Period for which Date immediately following the due date to the date of
interest is furnishing of return.
computed
4 Computation of interest in Base for Tax on total income assessed U/s 144 – TDS – TCS –
situation-3 computation of Advance tax – Self assessment tax paid before the due
interest date for filing return – double tax avoidance relief – MAT
credit or AMT credit. [Part of Rs. 100 ignored].
Interest rate 1% per month or part thereof.
Period for which Date immediately following the due date to the date of
interest is completion of assessment U/s 144.
computed
2. Loss of tax holidays – S. 80AC
Provisions of S. 80AC For the AY 2018-19 onwards, no deduction is available under Chapter VI-A
Part-C (S. 80-IA to S. 80RRB), if the return is not filed within the due date
specified in Explanation-2 to S. 139 (1).
3. Fees U/s 234F
1 When it is levied? Where a person required to furnish ROI U/s 139, fails to do so within the due date
specified in Explanation-2 to S. 139 (1), he shall pay fees U/s 234F.
2 Quantum of fees payable. Situation-1 Return is filed beyond the due date but within 31st Rs.
December of the AY. 5000
Situation-2 Return is filed beyond 31st December of the AY. Rs.
10000
If the TI of the assessee does not exceed Rs. 5L, the fee payable U/s 234F shall
not exceed Rs. 1000.
4. Prosecution U/s 276CC
1 When the provisions of S. 276CC Case-1: Assessee having obligation to file return U/s 139 hasn’t filed return within
shall apply? the due date wilfully.
Case-2: Assessee, upon receipt of notice U/s 142 (1) (i) requiring filing of return,
defaults wilfully.
2 Consequence of willful default. Assessee may be punished with rigorous imprisonment and fine.
3 Term of imprisonment Situation-1 Tax that would have been evaded if Minimum term = 6
the failure had not been discovered months.
> Rs. 25L Maximum term = 7
years.
Situation-2 Tax that would have been evaded if Minimum term = 3
the failure had not been discovered months.
does not Rs. 25L Maximum term = 2
years.
4 Rebuttable presumption [S. Mensrea (i.e. culpable state of mind) is presumed. It needs to be rebutted.
278E].
5 Escape route for a person other ROI was filed before the end of the relevant AY.
than company in case-1 [Sai (Tax on assessed income – TDS – Advance tax) ≤ Rs. 3000.
Enterprises (SC)] (i.e. No
prosecution U/s 276CC)
5. Shrinking of period of interest payable on account delay in granting of refund out of TDS/TCS/Advance tax – S.
244A
1 Return was filed within the due Period of interest = 1st day of the AY to the date of grant of refund.
date
2 Return was filed beyond the due Period of interest = Date of furnishing of return to the date of grant of refund.
date
6. Best judgment assessment U/s 144
Provisions of S. 144 If the assessee does not file the return within the due date, he becomes a non-
cooperating assessee and in his case, assessment could be made U/s 144 on
best judgement basis.

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Chapter-20: Assessment Procedure Summary

2. Filing of returns by beneficial owners of, or beneficiaries in, foreign assets: Proviso-4 and Proviso-5 to S. 139 (1):
1 Persons who have obligation to file R&OR who has no obligation to file return U/s 139 (1) and who:
return by virtue of Proviso-4 to S. (i) holds as a beneficial owner or otherwise, any asset (including any financial
139 (1) interest in any entity) located outside India; or
(ii) has a signing authority in any account located outside India; or
(iii) is a beneficiary of any asset (including any financial interest in any entity)
located outside India.
shall file return in prescribed form, verified in prescribed manner and setting forth
prescribed particulars within the due date specified in Expalantion-2 to S. 139 (1)
(irrespective of whether he has reported income or loss in the relevant PY).
2 Relaxation from filing of return in An individual being a beneficiary of an asset o/s India need not file return by
respect of beneficiary. [Proviso-5 virtue of Proviso-4 to S. 139 (1), if the income arising from such asset is includible
to S. 139 (1)]. in the income of the owner of the asset.
3 Beneficial owner. [Expalantion-4 to Beneficial owner means an individual who has provided, directly or indirectly,
S. 139 (1)]. consideration for the assets for the immediate or future benefit, direct or indirect,
of himself or any other person.
4 Beneficiary. [Explanation-5 to s. Beneficiary (in respect of an asset) means an individual who derives benefit from
139 (1)]. the asset during the PY and the consideration for such asset has been provided
by any person other than such beneficiary.

3. Filing of return by specified entities – S. 139 (4A)/(4B)/(4C)/(4D)/(4E)/(4F):


1. Filing of return by PCT/PRT (Registered U/s 12AA) – S. 139 (4A)
(i) When there is obligation for If the TI of the PY of the PCT/PRT (Registered U/s 12AA) without giving effect to the
PCT/PRT (Registered U/s provisions of S. 11 and S. 12 > the BEL, then there is obligation to file ROI for the
12AA) to file return U/s 139 relevant PY within the due date specified in S. 139 (1).
(4A)?
(ii) Due date for filing ROI 30th September of the AY. [Since trust has obligation to get its books of accounts
audited U/s 12A (1) (b)].
(iii) Consequences of not filing Loss of exemption U/s 11 and S. 12. [S. 12A (1) (ba)].
return within S. 139 (1) time No exemption could be claimed U/s 11 (2) in respect of accumulation in excess of 15%
limit. of income derived from PHUT. [S. 13 (9)].
Penalty U/s 272A.
S. 234F fees.
(iv) Penalty U/s 272A Default inviting action Non-filing of return U/s 139 (4A) within the time-limit
U/s 272A specified in S. 139 (1).
Levying authority JCIT/JDIT
Quantum of penalty Rs. 100 for each day of continuing default.
Escape route No penalty U/s 272A, if there is reasonable cause for
the default.
2. Filing of return by political parties – S. 139 (4B)
(i) When there is obligation for If the TI of the PY of the political party (Registered U/s 29A of the ROPA) without
a registered political party to giving effect to the provisions of S. 13A > the BEL, then there is obligation to file ROI
file return U/s 139 (4B)? for the relevant PY within the due date specified in S. 139 (1).
(ii) Due date for filing ROI 30th September of the AY. [Since the political party has obligation to get its books of
accounts audited U/s 13A].
(iii) Consequences of not filing Loss of exemption U/s 13A.
return within S. 139 (1) time S. 234F fees.
limit.
3. Filing of return by entities entitled to exemption under specified clauses of S. 10 – S. 139 (4C)
1 Which entities are required Entity required to file return U/s 139 (4C). Clause of S. 10
to filed return U/s 139 (4C)? under which
exemption is
available
Research association approved by CG S. 10 (21)
News agency established in India – existing solely for the S. 10 (22B)
purpose of collection and distribution of news (approved by
the CG)
Association or institution established in India for controlling or S. 10 (23A)
regulating or supervising or encouraging profession of law,

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Chapter-20: Assessment Procedure Summary

medicine, engineering, architecture, accountancy etc.


(approved by the CG)
Public trust or society registered under the Society S. 10 (23B)
Registration Act (to develop khadi and village industries)
Registered trade union S. 10 (24) (a)
Association of registered trade union S. 10 (24) (b)
University or educational institution referred to in S. 10 (23C) S. 10 (23C)
(iiiab) or S. 10 (23C) (iiiad) or S. 10 (23C) (vi).
Hospital or medical institution referred to in S. 10 (23C) (iiiac) S. 10 (23C)
or S. 10 (23C) (iiiae) or S. 10 (23C) (via).
Fund or institution existing wholly for charitable purpose S. 10 (23C) (iv)
(approved by the CCIT having regard to its object & its
importance throughout the state or country)
Public trust existing wholly for religious purpose or wholly for S. 10 (23C) (v)
charitable or religious purpose (approved by the CCIT)
Infrastructure debt fund S. 10 (47)
Authority or board or commission or corporation or fund or S. 10 (46)
trust constituted or established under the Central or State Act
or constituted by the CG or SG to regulate and administer any
activity for the benefit of general public and which is not
engaged in any commercial activity.
Mutual fund S. 10 (23D)
Securitisation trust S. 10 (23DA)
VCC/VCF S. 10 (23FB)
Investors protection fund S. 10 (23EC) / S.
10 (23ED)
Core settlement fund S. 10 (23EE)
Coffee Board S. 10 (29A)
Rubber Board S. 10 (29A)
Tea Board S. 10 (29A)
Tobacco Board S. 10 (29A)
Marine Products Export Development Authority S. 10 (29A)
Agricultural and Processed Food Products Development S. 10 (29A)
Authority
Spices Board S. 10 (29A)
Coir Board S. 10 (29A)
Fund for the welfare of employees or their dependents S. 10 (23AAA)
2 When there is obligation for If the TI of the PY of these entities without giving effect to the provisions of these
these entities to file return clauses of S. 10 > the BEL, then there is obligation to file ROI for the relevant PY
U/s 139 (4C)? within the due date specified in S. 139 (1).
3 Due date for filing ROI It depends on whether the books of accounts are to be audited or not.

4 Consequences of not filing Penalty U/s 272A (subject to S. 273B).


return within S. 139 (1) time S. 234F fees.
limit.
4. File of return U/s 139 (4D)/(4E)/(4F)
1 Who is required to file return Irrespective of income or loss, for every year, the universities/colleges/institutions
U/s 139 (4D)? referred to in S. 35 (1) (ii) and S. 35 (1) (iii) have obligation to file return within the due
date specified in S. 139 (1).
2 Who is required to file return Irrespective of income or loss, for every year, the business trust has obligation to file
U/s 139 (4E)? return within the due date specified in S. 139 (1).
3 Who is required to file return Irrespective of income or loss, for every year, the investment fund has obligation to file
U/s 139 (4F)? return within the due date specified in S. 139 (1).

4. Loss returns – S. 139 (3):


1 Filing of Where assessee has sustained loss U/H PGBP or U/H CG and wants such loss to be C/F to the next
return U/s AY U/s 72, S. 73, S. 73A, S. 74 or S. 74A, he shall file a return of loss U/s 139 (3) within the due date
139 (3) specified in Explanation-2 to S. 139 (1).

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2 Consequence of non- Where a loss return referred to in S. 139 (3) is not filed within the due date (supra),
compliance with S. 139 (3). [S. then the assessee shall not be entitled to carry forward losses U/s 72, S. 73, S.
80]. 73A, S. 74 or S. 74A.
S. 80 supersedes provisions of Chapter-VI (i.e. S. 70 – S. 80).
3 Carry forward and set off If a loss return is filed belatedly, carry forward and set off is only prohibited U/s 80
prohibited U/s 80 and not set and not set off.
off.
4 Certain carry forwards not Belated filing of loss return shall not affect the following:
prohibited U/s 80 1 Carry forward of unabsorbed loss U/H IFHP U/s 71B.
2 Carry forward of unabsorbed depreciation U/s 32 (2). [Govind Nagar Sagar
Ltd (Del) + East Asiatic Company India (P) Ltd (Mad)].
3 Carry forward of unabsorbed capital expenditure on scientific research U/s
35 (4) and S. 32 (2).
4 Carry forward of unabsorbed expenditure on promotion of family planning
amongst employees U/s 36 (1) (ix) Proviso-2 and S. 32 (2).
5 Filing loss return beyond the S. 119 (2) (a) empowers the CBDT to relax a list of provisions which inter-alia
due date but within the time includes S. 139.
extended by CBDT – will it In order to avoid stringency of law, the CBDT, in exercise of this power, extends the
affect carry forward of loss? due date for filing ROI.
If the loss return is furnished beyond the due date referred to in Explanation-2 to S.
139 (1), however, furnished within the time extended by the CBDT, it shall be
regarded as one filed within S. 139 (1) time limit.
The benefit of carry forward is unaffected.
6 Will S. 80 prohibit carry forward S. 80 prohibits only carry forward of losses pertaining to the PY for which loss return
of earlier year’s loss? was filed belatedly.
However, the carry forward of unabsorbed losses pertaining to earlier PYs shall not
be affected.
7 Condonation of delay in filing of loss return to enable carry forward of losses: [CBDT Circular 9/2015].
(a) Provisions of S. 119 (2) (b) It empowers CBDT to authorise subordinate IT authorities to admit and dispose off,
on merits, any application or claim made by the assessee seeking (a) deduction; (b)
exemption; (c) refund; or (d) any other relief (like, carry forward of losses), beyond
the time-limit specified under this Act for making such claim or application.
This power is exercised through general or special order to avoid genuine hardship.
(b) Circular issued to condone the Condoning If the return having a claim of carry forward is filed late,
delay in filing loss return to authority then the delay, in case of genuine hardship, could be
enable carry forward of losses. condoned by the CIT if the returned loss is up to Rs.
10L.
If the returned loss exceeds Rs. 10L but is up to Rs.
50L, the delay could be condoned by the CCIT.
If the returned loss exceeds Rs. 50L, the delay could be
condoned by the CBDT.
Time limit for Condonation application for claim of loss can be made
making application only within 6 years from the end of the AY for which
application is made.
Time limit for Application received for condonation of delay shall be
disposing of disposed off within 6 months from the end of the month
condonation in which application is received by the condoning
application authority.

5. Belated return – S. 139 (4):


Any person who has not furnished a return within the time allowed to him U/s 139 (1) may furnish the return for any PY at
any time before the end of the relevant AY or before the completion of assessment, whichever is earlier.

6. Revised return – S. 139 (5):


If a person having furnished a return U/s 139 (1) or S. 139 (4) discovers any omission or wrong statement therein, then he
may furnish a revised return at any time before the end of the relevant AY or before the completion of assessment,
whichever is earlier.

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Issues in revised return:


1 Letters can’t substitute revised Any deduction or exemption not claimed in the original return could be claimed
return. only through a revised return and not through letters. [Geotze India Ltd (SC)].
2 Revised return steps into the shoes Revised return steps into the shoes of original return.
of original return. It substitutes the original return since inception.
If the original return was filed within S. 139 (1) time limit, then the revised return
is also deemed to have been filed within S. 139 (1) time limit.
Thus, if the assessee offers loss through the revised return, such revised return
becomes a return U/s 139 (3) and such loss could be carried forward.
[Dhampur sugar mills Ltd (All)].
3 Whether a loss return filed U/s 139 If a loss return is filed U/s 139 (3), all the provisions of the Act shall apply to
(3) could be revised? [Periyar such return as if it were a return required to be furnished U/s 139 (1).
district co-operative milk Therefore, if the original return was a loss return filed U/s 139 (3), even such
producer union Ltd (Mad)]. return could be revised U/s 139 (5).
4 Whether a loss return filed beyond Loss return filed beyond S. 139 (1) time limit would be still treated as a return
S. 139 (1) time limit but filed within filed U/s 139 (3), if it was filed within the time extended by the CBDT.
the time extended by the CBDT Therefore, such return could also be revised U/s 139 (5). [Hargovind Damji
could be revised U/s 139 (5)? (Guj)].
5 Does filing of a valid revised return Assessee filed a loss return pursuant to notice issued by the AO U/s 142 (1) (i).
automatically enable the assessee Since, such return was filed before the end of the relevant AY, the assessee
to carry forward losses? revised the return U/s 139 (5) and offered additional loss.
In the instant case, though the validity of the revised return could not be
questioned, still the assessee will not be allowed to carry forward both the
losses offered through original return and revised return, since both are not
returns U/s 139 (3).
Filing of a valid revised return does not automatically enable the assessee to
carry forward losses.
6 Whether a revised return could be Yes. [Dr. N. Srivatava (MP)].
revised U/s 139 (5)?
7 Is there any restriction on the No. Revision U/s 139 (5) is possible any number of times subject to the time
number of time a return could be limit specified therein. There is no need for nod of the AO for revising the
revise? return. [Waman Padmanabh Dande 22 ITR 339 (Nag)].
8 Whether a return processed U/s 143 A return could be revised even after processing U/s 143 (1), provided the
(1) could be revised U/s 139 (5)? relevant AY has not expired.
Processing of return U/s 143 (1) does not amount to assessment. [Rajesh
Jhaveri Stock Brokers (P) Ltd (SC)].
9 Significance of ‘discovers any If the assessee has furnished return U/s 139 (1) or U/s 139 (4) and he was not
omission or wrong statement’ in S. aware of omission or falsity of the statements made in the original return at the
139 (5). time of filing of original return and the omission or wrong statement was due to
inadvertence or bonafide mistake, the assessee can file a revised return, within
the time limit specified in S. 139 (5).
However, S. 139 (5) can’t provide remedy to the cases involving deliberate
concealment or furnishing of inaccurate particulars.
Filing a revised return U/s 139 (5) can’t save the assessee from the rigours of
penalty for under-reporting unless the assessee explains to the satisfaction of
the AO that the omission or falsity in the original return was attributable to
bonafide mistake or inadvertence. [Sunanda Ram Dekha (Gau)].

B. PAN – S. 139A:
1 Persons who should apply (a) Every person whose TI during any PY exceeded BEL.
for PAN (b) Every person carrying on any business or profession whose total sales, TO or GR
exceeds or is likely to exceed Rs. 5L in any PY.
(c) Every person who is required to furnish a ROI U/s 139 (4A).
(d) Every person being a resident, other than an individual, which enters into a
financial transaction of an amount aggregating Rs. 250000 or more in a FY
(e) Every person who is the MD, director, partner, trustee, author, founder, karta,
CEO, principal officer or office bearer of the person referred to in (d) or any
person competent to act on behalf of the person referred to in (d),
(f) Persons notified by the CG.

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2 Others can also apply Any person, other than the persons (supra), may apply to the AO for the allotment of a
PAN and the AO shall allot a PAN to such person immediately.
3 Quoting of PAN in PAN shall be mandatorily quoted in all returns, challans and documents pertaining to
documents pertaining to prescribed transactions.
prescribed transactions.

Transactions notified by the CBDT requiring mandatory quoting of PAN:


SN Nature of transaction Value of transaction
1. Sale or purchase of a motor vehicle or vehicle which requires registration by All such transactions.
a registering authority, other than two wheeled vehicles.
2. Opening an account [other than a time-deposit referred to at SN 12 and a All such transactions.
Basic Savings Bank Deposit Account] with a banking company or a co-
operative bank
3. Making an application to any banking company or a co-operative bank or to All such transactions.
any other company or institution, for issue of a credit or debit card.
4. Opening of a demat account with a depository, participant, custodian of All such transactions.
securities
5. Payment to a hotel or restaurant against a bill or bills at any one time. Payment in cash of an amount > Rs. 50,000.
6. Payment in connection with travel to any foreign country or payment for Payment in cash of an amount exceeding Rs.
purchase of any foreign currency at any one time. 50,000.
7. Payment to a Mutual Fund for purchase of its units Amount exceeding
Rs. 50,000.
8. Payment to a company or an institution for acquiring debentures or bonds Amount exceeding
issued by it. Rs.50,000.
9. Payment to the Reserve Bank of India for acquiring bonds issued by it. Amount exceeding
Rs. 50,000.
10. Deposit with a banking company or a co-operative bank or post office Cash deposits - (i) exceeding Rs. 50,000
during any one day;
11. Purchase of bank drafts or pay orders or banker’s cheques from a banking Payment in cash of an amount exceeding
company or a co-operative bank Rs. 50,000 during any one day.
12. A time deposit with (i) a banking company or a co-operative bank; (ii) a Post Amount exceeding Rs. 50,000 or aggregating
Office; (iii) a Nidhi or (iv) a NBFC. to more than Rs. 5L during a FY.
13. Payment for one or more pre-paid payment instruments, as defined in the Payment in cash or by way of a bank draft or
policy guidelines for issuance and operation of prepaid payment instruments pay order or banker’s cheque of an amount
issued by RBI India under the Payment and Settlement Systems Act, 2007, aggregating to more than Rs. 50,000 in a FY.
to a banking company or a co-operative bank or to any other company or
institution.
14. Payment as life insurance premium to an insurer as defined in the Amount aggregating to more than Rs. 50K in
Insurance Act, 1938. a FY.
15. A contract for sale or purchase of securities (other than shares) Amount exceeding Rs. 1L per transaction.
16. Sale or purchase, by any person, of shares of a company not listed in a Amount exceeding Rs. 1L per transaction.
RSE.
17. Sale or purchase of any immovable property. Amount exceeding Rs. 10L or SDV
exceeding Rs. 10L.
18. Sale or purchase, by any person, of goods or services of any nature other Amount exceeding Rs. 2L per transaction:
than those specified at SN 1 to 17, if any.

C. Quoting of Aadhar number [S. 139AA]:


1 Mandatory quoting of Aadhar Number. Every person who is eligible to obtain Aadhar Number is required to
[S. 139AA (1)]. mandatorily quote Aadhar Number, on or after 1st July, 2017: (a) in the
application form for allotment of PAN; (b) in the ROI.
2 Mandatory quoting of Enrolment Id, If a person does not have Aadhar Number, he is required to quote Enrolment
where person does not have Aadhar ID of Aadhar application form issued to him at the time of enrolment in the
Number. [Proviso to S. 139AA (1)]. application form for allotment of PAN or in the ROI furnished by him.
Enrolment ID means a 28 digit Enrolment Identification Number issued to a
resident at the time of enrolment.
3 Intimation of Aadhar Number to Every person who has been allotted PAN as on 1st July, 2017, and who is
prescribed Authority. [S. 139AA (2)]. eligible to obtain Aadhar Number, shall intimate his Aadhar Number to
prescribed authority on or before a date as may be notified by the CG.

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4 Consequences of failure to intimate If a person fails to intimate the Aadhar Number, the PAN allotted to such
Aadhar Number. [Proviso to S. 139AA person shall be deemed to be invalid and the other provisions of the Act shall
(2)]. apply, as if the person had not applied for allotment of PAN.
5 Provision not to apply to certain The provisions of S. 139AA relating to quoting of Aadhar Number would,
person or class of persons. [S. 139AA however, not apply to such person or class or classes of persons or any State
(3)]. or part of any State as may be notified by the CG.

Notification dated 11.05.2017:


The provisions of S. 139AA shall not apply to an individual who does not possess the Aadhar number or the Enrollment ID
and is:
(i) Residing in the states of Assam, J&K and Meghalaya;
(ii) A non-resident as the IT Act;
(iii) Of the age of 80 years or more at any time during the PY;
(iv) Not a citizen of India.

Supreme Court Judgement on Aadhar-PAN linkage: [Press release dated 10.06.2017]


(i) Those persons who have already enrolled themselves under Aadhaar scheme would comply with the requirements of
S. 139AA (2).
(ii) However, those assessees who are not Aadhaar card holders and do not comply with the provisions of S. 139AA (2),
their PAN cards cannot be treated as invalid.

CC. Verification of return – S. 140 (Amendments):


1 S. 140 provides for verification of ROI by specified persons in case of different assessees.
2 To facilitate implementation of the Insolvency and Bankruptcy Code, 2016 (IBC), it is provided that the insolvency
professional appointed by the adjudicating authority would be the authorised signatory for verification of ROI of the
specified company, with effect from AY 2018-19.

3 Specified company means company in whose case an application for corporate insolvency resolution process is
admitted by Adjudicating Authority; and such application may be admitted U/s 7 or S. 9 or S. 10 of IBC.
4 "insolvency professional" means a person enrolled U/s 206 with an insolvency professional agency as its member and
registered with the Board as an insolvency professional U/s 207;"
5 National Company Law Tribunal is Adjudicating Authority under IBC.
6 In case of such companies, in terms of the provisions of IBC, the Board and the directors are not functional and the
responsibilities are conferred on insolvency professional. Accordingly, the provision is amended to facilitate verification
and signature of such Company's ROI by insolvency professional.

D. Self-assessment – S. 140A:
1 Payment of self-assessment Where any tax is payable on the basis of any return required to be furnished under, inter
tax etc. [S. 140A (1)]. alia, S. 139, after taking into account –
(i) the amount of tax, already paid
(ii) any tax deducted or collected at source;
(iii) DTAR
(iv) MAT credit
(v) AMT Credit
the assessee shall be liable to pay such tax together with interest and fee payable under
any provision of this Act for any delay in furnishing the return or any default or delay in
payment of advance tax before furnishing the return.
2 Order of adjustment of amount Where the amount paid by the assessee U/s 140A (1) falls short of the aggregate of the
paid by the assessee. tax, interest and fee as aforesaid, the amount so paid shall first be adjusted towards the
[Explanation to S. 140A (1)]. fee payable and thereafter towards interest and the balance, if any, shall be adjusted
towards the tax payable.
3 Assessee-in-default for non- If any assessee fails to pay the whole or any part of such of tax or interest or fees, he
payment of sum referred to in shall be deemed to be an assessee in default in respect of such tax or interest or fees
S. 140A (1). [S. 140A (3)]. remaining unpaid and all the provisions of this Act shall apply accordingly.
Penalty could be levied to the extent of tax outstanding, if the assessee is assessee-in-
default in respect of tax. [S. 221].
Collection and recovery proceedings could be initiated and the sum due could be
recovered in accordance with modes of recovery specified in S. 222 and S. 226.

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E. Inquiry and audit before assessment - S. 142:

1. Notice U/s 142 (1):

S.142 (1) (i) Notice requiring filing of Where return has not been furnished within the time-limit specified in S.
return. 139 (1), the AO may issue a notice U/s 142 (1) (i) requiring filing of return
within the time specified in such notice.
S. 142 (1) (ii) Notice requiring production For the purpose of making assessment under this Act, the AO may
of accounts and issue a notice U/s 142 (1) (ii) seeking production of accounts and
documents. documents which he considers necessary.
Clause (b) of Restriction on powers given The AO shall not require the production of any accounts relating to a
Proviso to S. U/s 142 (1) (ii). period more than 3 years prior to the PY.
142 (1)
S. 142 (1) (iii) Notice requiring specified For the purpose of making assessment under this Act, the AO may
information. issue a notice U/s 142 (1) (iii) seeking information on specified points in
writing (duly verified).
Clause (a) of Sanction of JCIT required However, the previous approval of the JCIT shall be obtained before
Proviso to S. for seeking certain requiring the assessee to furnish a statement of all assets and liabilities
142 (1) information. not included in the accounts.

Points requiring attention:

1 Significance of ‘For the purpose of Powers U/s 142 (1) (ii) and (iii) could be exercised only for the purpose of
making assessment under this Act’ in S. making assessment. That means, assessment proceedings U/s 143 (3) or
142 (1) S. 144 should have been initiated before issue of notice U/s 142 (1) (ii) and
(iii).
2 Could powers U/s 142 (1) (ii) and (iii) be S. 2 (8) defines assessment to include reassessment. Therefore, even for
exercised for the purpose of re- the purpose of dong reassessment U/s 147, the powers U/s 142 (1) (ii) and
assessment? (iii) could be exercised.
3 Consequences of violation of S. 142 (1) Best judgement assessment U/s 144
(i)/(ii)/(iii) Penalty U/s 272A (1) (d) [AO is empowered to levy a penalty of Rs. 10000].
4 Additional consequences in case of Rigorous imprisonment up to 1 year. [S. 276D].
violation of S. 142 (1) (ii). Initiation of search operations U/s 132.

2. Inquiry U/s 142 (2):

For the purpose of obtaining full information in respect of the income or loss of any person, the AO may make such inquiry
as he considers necessary.

3. Audit – S. 142 (2A) to S. 142 (2D):

1 Power to give audit direction. [S. 142 During the pendency of assessment proceedings, the AO can give
(2A)]. direction to the assessee to get his books of accounts audited by a CA and
to furnish audit report in Form-6B duly signed and verified by such CA and
setting forth such particulars as may be prescribed and such other
particulars as the AO may require.
2 Factors that may influence the AO to Nature and complexity of accounts
give audit direction. [S. 142 (2A)]. Volume of accounts
Doubts regarding the correctness of accounts
Multiplicity of transactions in accounts
Specialized nature of business activities of the assessee
Interest of revenue.
3 OBH to the assessee. [Proviso to S. The AO shall give opportunity of being heard to the assessee before he
142 (2A)]. gives audit direction U/s 142 (2A).

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4 Prior sanction of CIT/CCIT. [S. 142 (2A)]. The AO shall obtain prior sanction of the CIT/CCIT before he gives audit
direction U/s 142 (2A).
Even the CA who is going to do audit shall be nominated by the CIT/CCIT.
5 Direction binding even if accounts were The audit direction shall have effect notwithstanding that the accounts of
already audited. the assessee have been audited under any other law. [S. 142 (2B)].
The audit direction shall have effect notwithstanding that the accounts of
the assessee have been audited U/s 44AB of IT Act. The scope of every
audit is different. [Super Cassettes Industries Ltd (Del)].
6 Can audit direction be given in the course Yes. Assessment includes reassessment. [S. 2 (8)].
of reassessment proceedings U/s 147?
7 Time-limit for submission of audit report. Audit report shall be furnished within the time specifies by the AO.
[S. 142 (2C)]
8 Extension of time-limit. [Proviso to S. 142 AO can extend the time limit for submission of audit report for good and
(2C)]. sufficient reasons.
However, the Ʃ period originally fixed for submission of audit report and the
period extended shall not, in any case, exceed 180 days from the date on
which the direction U/s 142 (2A) is received by the assessee.
10 Audit expenses – who shall bear? The expenses of, and incidental to, any audit U/s 142 (2A) shall be paid by
[Proviso to S. 142 (2D)]. the CG.
11 Consequences of non-compliance with Best judgement assessment U/s 144.
audit direction. Penalty U/s 272A (1) (d) [AO is empowered to levy a penalty of Rs. 10000].
Rigorous imprisonment up to 1 year. [S. 276D].
12 Delay in submission of audit report due to If the audit report is not submitted in time inspite of assessee extending co-
default of CA – Can AO do assessment operation, and the default is attributable to the auditor, then best judgement
U/s 144? assessment can’t be made.
Assessee can’t be punished for the mistake of the auditor who was
nominated by the CIT/CCIT. [Swadeshi Polytex Ltd 144 ITR 1 (SC)].
13 Audit direction – not appealable. If the assessee is aggrieved by the audit direction, he can’t prefer an
appeal against it, since it is not appealable.
However, a writ petition could be made before the HC challenging the audit
direction.
14 OBH to the assessee before using the The assessee shall, except where the assessment is made U/s 144, be
material gathered. [S. 142 (3)]. given an opportunity of being heard in respect of any material gathered on
the basis of any inquiry U/s 142 (2) or any audit U/s 142 (2A) and proposed
to be utilised for the purposes of the assessment.

F. Reference to DVO – S. 142A:

1 Reference to DVO The AO may, for the purposes of assessment or reassessment, make a
reference to a VO to estimate the value, including FMV, of any asset, property
or investment and submit a copy of report to him.
2 Satisfaction about incompleteness or The AO may make a reference to the VO U/s 142A (1) whether or not he is
incorrectness of books – not a pre- satisfied about the correctness or completeness of the accounts of the
requisite for making reference U/s 142A. assessee.
[S. 142A (2)].
3 Powers of DVO. [S. 142A (3)]. The DVO, on a reference made U/s 142A (1), shall, for the purpose of
estimating the value of the asset, property or investment, have all the powers
that he has U/s 38A of the Wealth-tax Act, 1957.
4 Estimation based on evidences produced The VO shall, estimate the value of the asset, property or investment after
after giving OBH. [S. 142A (4)]. taking into account such evidence as the assessee may produce and any other
evidence in his possession gathered, after giving an opportunity of being heard
to the assessee.
5 Best judgement estimation in case of non- The VO may estimate the value of the asset, property or investment to the best
cooperation. [S. 142A (5)]. of his judgment, if the assessee does not co-operate or comply with his
directions.
6 Time-limit for furnishing of valuation report. The VO shall send a copy of the report of the estimate made U/s 142A (4) or S.
[S. 142A (6)]. 142A (5), as the case may be, to the AO and the assessee, within a period of 6
months from the end of the month in which a reference is made U/s 142A (1).

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7 Using valuation report for framing The AO may, on receipt of the report from the VO, and after giving the
assessment. [S. 142A (7)]. assessee an opportunity of being heard, take into account such report in
making the assessment or reassessment.
8 Significance of ‘for the purposes of Vide ‘for the purposes of assessment or reassessment’ in S. 142A (1). This
assessment or reassessment’ in S. 142A indicates that reference U/s 142A (1) can be made only during the pendency of
(1). assessment or reassessment proceedings. [Umiya co-opearative housing
society Ltd (Guj)].

G. Processing of returns – S. 143 (1):

1 Processing of returns U/s 143 (1) Return furnished U/s 139 or in pursuance to notice issued U/s 142 (1) (i) shall
be processed U/s 143 (1).
2 Manner of processing U/s 143 (1). The following adjustments are to be made to returned income or loss namely
(list exhaustive):
Adjustment-1 [S. 143 (1) (a)]. Rectification of arithmetical errors in the return.
Adjustment-2 [S. 143 (1) (a)]. Denial of incorrect claim, if it is apparent from the information contained in the
return.
Adjustment-3 [S. 143 (1) (a)]. Disallowance of loss claimed, if the return of the PY in which loss was
incurred was furnished beyond the due date specified in S. 139 (1).
Adjustment-4 [S. 143 (1) (a)]. Disallowance of expenditure indicated in the audit report but not taken into
account in computing the TI in the return.
Adjustment-5 [S. 143 (1) (a)]. Disallowance of deduction claimed U/s 80-IA, S. 80-IB, S. 80-IC, S. 80-ID, S.
80-IE or S. 10AA, if the return is furnished beyond the due date specified in
S. 139 (1).
3 Intimation to the assessee about the Before making any adjustments (supra), an intimation has to be given to the
adjustments. [Proviso-1 to S. 143 (1) assessee requiring him to respond to such adjustments. Such intimation may
(a)]. be in writing or through electronic mode.
4 Considering the responses before The response received, if any, has to be duly considered before effecting any
making adjustments. [Proviso-2 to S. adjustment.
143 (1) (a)]. However, if no response is received within 30 days of issue of such
intimation, the processing shall be carried out incorporating the adjustments.
5 Computation of tax and interest The tax and interest and fee U/s 234F, if any, shall be computed on the basis
based on adjusted TI. [S. 143 (1) (b)] of the total income computed U/s 143 (1) (a).
6 Determination of demand or refund. The sum payable by, or the amount of refund due to, the assessee shall be
[S. 143 (1) (c)]. determined after adjustment of the tax, interest and fee U/s 234F, if any,
computed U/s 143 (1) (b) by any TDS, TCS, any advance tax paid, DTAR,
any tax paid on self-assessment and any amount paid otherwise by way of
tax or interest.
7 Sending intimation to the assessee An intimation shall be prepared or generated and sent to the assessee
communicating demand or refund. specifying the sum determined to be payable by, or the amount of refund due
[S. 143 (1) (d)]. to, the assessee U/s 143 (1) (c).
8 Granting of refund. [S. 143 (1) (e)]. The amount of refund due to the assessee in pursuance of the determination
U/s 143 (1) (c), if any, shall be granted to the assessee.
9 Processing results in variation to the Intimation shall also be sent to the assessee in a case where the loss
returned loss – Intimation required. declared in the return by the assessee is adjusted but no tax or interest and
[Proviso-1 to S. 143 (1)]. fee U/s 234F is payable by, or no refund is due to, him.
10 Acknowledgement - deemed to be Where processing has not resulted in demand or refund not it has resulted in
intimation in other cases. variation to the returned losses, then acknowledgement is deemed to be an
[Explanation (b) to S. 143 (1)]. intimation issued U/s 143 (1).
11 Time limit for sending intimation. Intimation U/s 143 (1) shall be sent within 1 year from the end of the FY in
[Proviso-2 to S. 143 (1)]. which return is made.

Points requiring attention:

1 Time-limit of 1 year is for issue and not for service. Vide the word ‘sent’ in Proviso-2 to S. 143 (1).
2 S. 143 (1) intimation could be challenged in appeal before the CIT (A) U/s 246A.
An application seeking rectification can be made to the AO U/s 154.

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Revision petition can be made to the CIT U/s 264. [Sanchit Software and Solutions (P) Ltd (Bom) + Vijay Gupta
(2016) (Del)].
3 Where any sum is determined to be payable by the assessee U/s 143 (1), the intimation U/s 143 (1) shall be deemed to
be a notice of demand for the purpose of S. 156.
Accordingly, if the sum specified in S. 143 (1) intimation is not paid within 30 days of its service, then the assessee shall
be regarded as assessee-in-default. [S. 220 (4)].
AO can levy penalty U/s 221. AO can initiate collection and recovery proceedings U/s 226.
Interest is levied U/s 220 (2) @ 1% p.m or part thereof on the sum specified in the intimation from 31 st day to the date of
payment.
Precisely, the consequences that will flow if the notice of demand is not honoured will flow for not honoring the
intimation issued U/s 143 (1).

Processing of return in case of scrutiny: [S. 143 (1D)]:

1 If a return is filed having a claim of refund and case is selected for scrutiny U/s 143 (2), then the refund shall be granted
to the assessee U/s 143 (1). The IT Department cannot stop the refund till the completion of assessment U/s 143 (3).
2 However, to protect the interest of revenue, S. 241A has been introduced by the FA 2017.
3 For the returns furnished for AY 2017-18 or thereafter, where refund of any amount becomes due to the assessee U/s
143 (1) and the AO is of the opinion that grant of refund may adversely affect the recovery of revenue, he may, for the
reasons recorded in writing and with the previous approval of the PCIT or CIT, withhold the refund upto the date on
which the assessment is made. [S. 241A].

H. Scrutiny notice – S. 143 (2):

1 Scrutiny notice. [S. 143 If the AO or the prescribed ITA considers it necessary or expedient to ensure that the
(2)] assessee has not understated his income or has not computed excessive loss or has
not underpaid his tax in any manner he can issue a notice for making the assessment.
2 Prescribed income-tax An ITA not below the rank of an ITO who has been authorised by the CBDT to act as
authority ITA for the purpose of S. 143 (2).
3 What the assessee is On the date to be specified therein, the assessee is required either to attend office of
required to do through this AO or to produce any evidence on which the assessee may rely in support of the
notice? return.
4 Form of notice. The scrutiny notice may be in paper/electronic form. [S. 282A (1)]
5 Time limit for serving Notice U/s 143 (2) cannot be served after the expiry of 6 months from the end of the FY
scrutiny notice. in which the ROI is furnished. [Proviso to S. 143 (2)].
6 Significance of scrutiny Issue scrutiny notice is the 1st step in initiation of proceedings U/s 143 (3). Proceedings
notice. are not initiated unless the notice (supra) is issued.
7 Provisions of S. 292BB
(a) Where an assessee has appeared in any proceeding or co-operated in any inquiry relating to an assessment or
reassessment, it shall be deemed that any notice under any provision of this Act, which is required to be served upon
him, has been duly served upon him in time in accordance with the provisions of this Act and such assessee shall be
precluded from taking any objection in any proceeding or inquiry under this Act that the notice
(a) was not served upon him; or

(b) was not served upon him in time; or

(c) was served upon him in an improper manner:

(b) However, S. 292BB shall not apply where the assessee has raised such objection before the completion of such
assessment or reassessment.
8 Consequences of non- Best judgement assessment U/s 144.
compliance with scrutiny Penalty U/s 272A (1) (d) [AO is empowered to levy a penalty of Rs. 10000].
notice.

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I. Scrutiny assessment – S. 143 (3):

1 Order of assessment U/s After hearing such evidence as the assessee may produce and such other evidence as
143 (3) the AO may require on specified points, and after taking into account all relevant
material which he has gathered, the AO shall, by an order in writing, make an
assessment of the TI or loss of the assessee, and determine the sum payable by him or
refund of any amount due to him on the basis of such assessment.
2 Hearing [S. 2 (23C)] ‘Hearing’ shall include communication of data and document through electronic mode.
3 Assessment an integrated Assessment is an integrated process. It involves two steps: (a) determination of total
process. income or loss of the assessee; (b) determination of demand or refund.
Within the time limit specified in S. 153 (1) for completion of assessment U/s 143 (3), it
is not enough if the total income or loss alone is determined.
It is imperative to get the demand or refund determined based on the total income or
loss assessed.
4 Procedure for denial of In case of
exemption U/s 10 in case of (a) research association referred to in S. 10 (21);
certain entities which is
required to file return U/s (b) news agency referred to in S. 10 (22B);
139 (4C). [Proviso-1 to S.
143 (3)]. (c) association or institution referred to in S. 10 (23A);

(d) institution referred to in S. 10 (23B);

(e) fund or institution referred to in S. 10 (23C) (iv) or trust or institution referred to


S. 10 (23C) (v) or any university or other educational institution referred to in S.
10 (23C) (vi) or any hospital or other medical institution referred to in S. 10
(23C) (via),

which is required to furnish the ROI U/s 139 (4C), no order making an assessment of
the TI or loss of such research association etc shall be made by the AO, without giving
effect to the provisions of S. 10, unless—
(i) the AO has intimated the CG or the prescribed authority the contravention of
the provisions of S. 10 (21) or (22B) or (23A) or (23B) or S. 10 (23C) (iv) or (v)
or (vi) or (via), as the case may be, by such research association etc, where in
his view such contravention has taken place; and

(ii) the approval granted to such research association etc has been withdrawn or
notification issued in respect of such news agency or fund or trust or institution
has been rescinded:

4 When the procedure laid If the object of the charity approved by the CIT U/s 10 (23C) (iv) is ‘advancement of any
down in proviso-1 to S. 143 other object of general public utility’ and its receipts from commercial activities during
(3) shall not apply? the relevant PY > 20% of its total receipts, it becomes non-charitable for that PY. In
[Proviso-3 to S. 143 (3)]. such case, the AO can complete the assessment by denying exemption U/s 10 (23C)
without following the procedure laid down in Proviso-1 to S. 143 (3).
5 Procedure to be followed in where the AO is satisfied that the activities of the university, college or other institution
withdrawal of recognition of referred to in S. 35 (1) (ii) and (iii) are not being carried out in accordance with all or any
entities referred to in S. 35 of the conditions subject to which such university, college or other institution was
(1) (ii)/(iii). [Proviso-2 to s. approved, he may, after giving a reasonable opportunity of showing cause against the
143 (3)] proposed withdrawal to the concerned university, college or other institution,
recommend to the CG to withdraw the approval and that Government may by order,
withdraw the approval and forward a copy of the order to the concerned university,
college or other institution and the AO.

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Points requiring attention:

1 AO frames assessment U/s 143 (3) based on return filed beyond the end of the relevant AY. What is the fate of
such assessment?
As per S. 139 (4), a valid return shall be filed within the end of the relevant AY. Return filed beyond the end of the relevant
AY is an invalid return.
Assessment based on invalid return is invalid. [Maya Devi Bansal (Cal)].
S. 292B will not give immunity to assessment based on invalid return, since it could be invoked only in case of defective
return.
S. 292BB will not come to the rescue of the revenue, since the validity of the assessment is not questioned on the ground of
notice being served beyond the time specified.
In the instant case, the AO should have proceeded U/s 147 and not U/s 143 (3).
If the order of assessment is challenged in appeal, appellate authorities will annul it.
2 Scope of fresh assessment [K.P. Mohideen Kutty (Ker) + Manasa Ram Sons (Raj)].
(a) Where the assessment is set aside and fresh assessment is ordered to re-examine specified issues, then the AO should
restrict himself to only such issues. He cannot consider any fresh issue which he can do so only by initiating proceedings
U/s 147 after the completion of fresh assessment proceedings.
(b) However, where the assessment is set aside in toto and there is a complete remand of case to the table of AO, then the AO
can do whatever he could have done in the course of original assessment. He can even consider the incomes which have
escaped his eyes in the first round.
(c) In nut shell, the scope of fresh assessment is based on the terms of order setting aside the original assessment and
directing fresh assessment.
3 Protective assessment
(a) Meaning of protective assessment: Income is generally charged to tax in the hands of person who earned it. However, S.
60 to S. 64 deals with circumstances in which it is clubbed in the hands of other person.
Even in such a case, the same income is not included in the hands of two persons.
However, in certain cases (i.e. where there exists doubt regarding the person who has title over the income), the
Department includes the same income in the hands of more than one person.
In the hands of one person on substantive basis and in the hands of other on protective basis.
Protective assessment is purely based on convention and not on the basis of any specific provisions of the Act. However,
the validity of this convention is upheld by the SC in Lalji Haridas and in Hirjee case.
(b) Income included only once finally: If, in appeal, the substantive addition is deleted, the protective inclusion becomes
final. However, if the substantive addition is sustained, the protective addition gets cancelled.
(c) No protective recovery and no under-reporting penalty: Protective assessment is possible. Protective recovery is not
possible. Protective inclusion kept as paper inclusion and is not acted upon. Further, on the strength of protective
assessment, under-reporting penalty can’t be levied. [Cochin Co (P) Ltd (ker) + Behari Lal Payarelal (Pun)].
(d) Necessity behind protective assessment: Had the income not been included on protective basis and if in appeal, the
substantive addition is deleted and at that point of time if the time to reopen the assessment has expired, then the
department will be at a loss. This is limitation is made good by the convention of protective inclusion.
4 Principle of Res Judicata – Does it apply to IT Act proceedings:
(a) The issue decided and adjudicated by the Court can’t be raised by the same parties to dispute before the same Court
again.
(b) The principle of res judicata does not apply to IT proceedings.
(c) Every AY is a separate compartment. Findings reached in respect of one AY can’t be automatically imported for another
AY. It is not binding for another AY.
5 Liability to pay tax arises from the charging section and not from the order of assessment. Assessment is, in fact only a
process through which the charge is quantified.
For want of assessment, the charged does not get obliterated. Hence, the assessee cannot claim refund on the ground that
no assessment was made in his case. [Saurashtra Cement and Chemicals industries Ltd 194 ITR 659 (Guj)].
6 Where the assessee has paid the tax due on RI and the demand which arose on account of additions made in the course of
assessment and the assessment was set aside and fresh assessment was ordered and the Department had failed to do the
fresh assessment in time and it had become barred by limitation, then the assessee is entitled to get the sum paid pursuant
to NOD as refund. However, the tax due on the returned income, being an admitted liability cannot be refunded back to the
assessee. [Shelly products (SC)].
E-assessment – S. 143 (3A) to (3C):

To authorise formulation and implementation of scheme for e-assessment, sub-sections (3A) to (3C) are inserted
in S. 143, w.e.f 01.04.2018. Broadly stated, the authorisation is as follows:

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1 The CG is empowered to make a scheme by notification in the Official Gazette.


2 The scheme must be for making e-assessment of total income or loss under section 143(3) of the Act, to impart
greater efficiency, transparency and accountability.
3 It should be achieved by: (a) eliminating interface between Assessing Officer and assessee, in course of
proceedings, to the extent technological feasible; (b) optimizing utilization of resources through economies of
scale and functional specialization; and (c) introducing team-based assessment with dynamic jurisdiction. [S.
143 (3A)].
4 For giving effect to the scheme, Central Government may direct that certain provisions of the Act (relating to
assessment) would not apply or would apply with exceptions or modifications or adaptations, as may be
specified in Notification to be issued for the purpose. Such a direction cannot be issued after March 31, 2020.
[S. 143 (3B)].
5 Every Notification to be issued, as aforesaid, should, as soon as may be after its issue, be laid before each
House of Parliament. [S. 143 (3C)].

J. Best judgment assessment – S. 144:

1 Circumstances in which the Assessee fails to make the return required U/s 139 (1), or
AO can do best judgement Assessee fails to comply with all the terms of a notice issued U/s 142 (1) or fails to
assessment U/s 144 comply with a direction issued U/s 142 (2A), or
Assessee, having made a return, fails to comply with all the terms of a notice issued
U/s 143 (2).
2 Manner of doing assessment The AO, after taking into account all relevant material which he has gathered, shall,
U/s 144. after giving the assessee an opportunity of being heard, make the assessment of the
total income or loss to the best of his judgment and determine the sum payable by the
assessee on the basis of such assessment.
3 OBH through SCN. [Proviso-1 Such opportunity shall be given by the AO by serving a notice calling upon the
to S. 144] assessee to show cause, on a date and time to be specified in the notice, why the
assessment should not be completed to the best of his judgment.
4 When SCN is not required? It shall not be necessary to give such opportunity in a case where a notice U/s 142 (1)
has been issued prior to the making of an assessment U/s 144.

Points requiring attention:

1 Partial compliance with notice issued U/s 142 (1) cannot give immunity from best judgement assessment.
[Shankaralinga Nadar and Bros (Mad)].
2 These three circumstances are alternative and not cumulative for the purpose of making an ex parte assessment.
3 BJA should be on a logical, rational and scientific basis. It shall not be on a random or arbitrary basis.
4 It shall not be based on suspicion, rumours, gossips, surmise or prejudice.
5 It shall be based on objective consideration of all materials gathered by him such as past years’ returns, current year’s
return, industry knowledge, enquiry with connected persons, books, documents etc.
6 The order of assessment shall be a speaking order clearly bringing out the basis of assessment and the assumptions
involved.
7 Though some guess work is inevitable, it should be a fair and reasonable.
8 BJA should not result in refund. If it is likely to result in refund, it shall be dropped.
9 Where the AO is not satisfied about the correctness or completeness of the accounts of the assessee, or where the
method of accounting provided in S. 145 (1) has not been regularly followed by the assessee, or income has not been
computed in accordance with the standards notified U/s 145A (2), the AO may make an assessment in the manner
provided in S. 144.
K. Directions by JCIT – S. 144A:

1 Direction to AO to enable him to JCIT may issue such directions as he thinks fit for the guidance of the AO to enable
frame assessment. [S. 144A]. him to complete the assessment and such directions shall be binding on the AO.
He may issue these directions on his own motion or on a reference being made to
him by the AO or on the application of an assessee.
Before he gives directions, he may call for and examine the records relating to the
pending assessment proceedings.
He may choose to interfere considering the nature of the case or the amount involved

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or any other reason, as he considers necessary.


2 OBH to be given to the assessee No directions which are prejudicial to the assessee shall be issued before an
if directions are prejudicial. opportunity is given to the assessee to be heard.
[Proviso to S. 144A].
3 Direction regarding the manner No direction as to the lines on which an investigation connected with the assessment
of investigation – not should be made, shall be deemed to be a direction prejudicial to the assessee.
prejudicial. [Explanation to
S.144A].

L. Income escaping assessment – S. 147 – S. 152:

Discussion segment-1:

1 If the AO has reason to believe that any income chargeable to tax has escaped assessment for any AY, he may,
subject to S. 148 to S. 153, assess or reassess such income.
2 Circumstances in which income is deemed to have escaped assessment. [Explanation-2 to S. 147].
(a) No ROI has been furnished by the assessee although his TI during the PY exceeded the BEL;
(b) ROI has been furnished by the assessee but no assessment has been made and it is noticed by the AO that the
assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return;
(c) (i) Assessment has been made, but income chargeable to tax has been under-assessed or
(ii) Assessment has been made, but such income has been assessed at too low a rate
(iii) Assessment has been made, but such income has been made the subject of excessive relief under this Act
(iv) Assessment has been made, but excessive loss or depreciation allowance or any other allowance under this Act
has been computed.
(ba) Assessee has failed to furnish a report in respect of any international transaction which he was so required U/s 92E.
(ca) ROI has not been furnished by the assessee and on the basis of information or document received from the
prescribed ITA U/s 133C (2), it is noticed by the AO that the income of the assessee exceeds the BEL.
ROI has been furnished by the assessee and on the basis of information or document received from the prescribed
ITA U/s 133C (2), it is noticed by the AO that the assessee has understated the income or has claimed excessive
loss, deduction, allowance or relief in the return.
(d) A person is found to have any asset (including financial interest in an entity) located outside India.

Points requiring attention:

1 Significance of ‘reason to Action U/s 147 can’t be based on suspicion, rumours, gossips, surmise or prejudice.
believe’ in S. 147 AO should have concrete material or information in his hands which should result in
formation of belief about escapement.
There should be a live link between the material gathered and the belief formed.
2 Illustrative list of material SC Judgment
which may trigger action HC judgment
U/s 147. CBDT circular
Invalid return submitted by the assessee.
Survey wing information
Findings arrived at in the course of scrutiny assessment for subsequent years.
Retrospective amendments.
Government notifications issued U/s 90 (3).
3 Scope of S. 147 Vs scope of S. 143 (3).
For selecting the case for scrutiny, there is no need for reasons to believe (based on concrete material or information)
that the income is under-stated in the return or the loss is over-stated or tax is under-paid in any manner.
However, for initiating action U/s 147, there should be reason to believe that the income chargeable to tax for the
relevant AY has escaped assessment.
There is no need for recording reasons for selecting the return for scrutiny U/s 143 (3). No need for sanction of higher
authorities to select the case for scrutiny.
However, for initiating proceedings U/s 147, the AO shall record reasons for re-opening and get the sanction for the
same from higher authorities.

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U/s 143 (3), there is no restriction on the scope of inquiry. AO can conduct such inquiry as he deems fit for obtaining full
information about income or loss.
However, in the course of proceedings U/s 147, the AO can’t make roving or fishing general inquiry. He can inquire only
in respect of income which has escaped assessment.
Law views S. 147 more seriously and there are enough safeguards against it being misused to harass the assessee.

Important judicial pronouncements:

1 The AO can’t traverse the path of S. 147 for not selecting the case for scrutiny. Assessment U/s 147 can never be a
substitute for assessment U/s 143 (3). What ought to have been done U/s 143 (3) can’t be done U/s 147. Scope of S. 147 is
different from that of S. 143 (3). [KLM Royal Dutch Airlines (Delhi)]. However, if the AO has fresh material on record
which makes him believe that there is escapement (i.e. the income in the return is understated) he may proceed to initiate
action U/s 147.
2 Where assessment could be made U/s 143 (3), there is no justification for the AO traverse the path of S. 147. [Qatalys
software technologies Ltd (Mad)].
3 There is no restriction on the number of times the case could be could be re-opened U/s 147 (Subject to S. 148 to S. 153).
[SSRG Arthanarain swamy 136 ITR 147 (Mad)].
4 During the pendency of validly initiated proceedings U/s 147, another proceeding U/s 147 can’t be initiated in respect of the
same AY. [Trustees of H.E.H. The Nizam’s Supplemental Family Trust 242 ITR 381 (SC)]. However, if these notices
pertain to different AYs, then the proceedings initiated are valid.
5 If the AO has reason to believe that any income chargeable to tax has escaped assessment for any AY, he may, subject to
S. 148 to S. 153, assess or reassess such income and also any other income chargeable to tax which has escaped
assessment and which subsequently comes to his notice in the course of proceedings under this section’.
6 Explanation-3 to S. 147 provides that for the purpose of assessment or reassessment U/s 147, the AO may assess or
reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice
subsequently in the course of the proceedings U/s 147, notwithstanding that the reasons for such issue have not been
included in the reasons recorded U/s 148 (2).
7 The phrase ‘and also any other income chargeable to tax which has escaped assessment and which subsequently
comes to his notice in the course of proceedings under this section…’ in S. 147 and Explanation-3 to S. 147 shall not
encourage the department to do roving or fishing inquiry in respect of matters unconnected with reopening U/s 147. General
inquiry is possible only when the proceedings are initiated U/s 143 (3).
8 Can the AO reassess issues other than the issues in respect of which proceedings were initiated U/s 147 when the
original “reason to believe” on the basis of which the notice was issued ceased to exist?
No possible. [Ranbaxy Laboratories Ltd [2012] (Del) + Jet Airways (India) Ltd (Bom)].
Possible. [Mehak Finvest P Ltd (2014) 367 ITR 769 (P&H) and N. Govindaraju (2015) (Kar)].
9 If there are mistakes apparent from record in the order of AO, he can rectify them U/s 154. However, he has no power to
review his own order through proceedings U/s 147. S. 147 proceedings can’t be used according to his whims and fancies.
[Kelvinator of India Ltd 320 ITR 561 (SC) [2010] + ICICI Securities Primary Dealership Ltd. (2012) 348 ITR 299 (SC) +
Aventis pharma Ltd (2010) (Bom)]. In short, mere change of opinion can’t trigger action U/s 147.
10 Revenue audit objection per se can’t trigger action U/s 147.
However, it is an eye-opener to the AO in most of the cases. It throws light on facts which would have escaped the eyes of
the AO. It enlightens the AO on the legal position based on decided case laws. The AO has to apply his mind on the
objections raised by the audit party, conduct inquiry and if he is satisfied about escapement, thereafter, he can step in U/s
147. [Mettur Chemical and Industrial corporation (Mad)].
11 Valuation report per se can’t be the basis for taking action U/s 147 unless there is some other corroborative evidence to
support it. [Dhariya constructions (SC)].
Discussion segment-2:

1 Where, for the relevant AY, assessment was already over U/s 143 or S. 147 and 4 years have elapsed from the end of the
relevant AY and thereafter, the AO wants to take action U/s 147, it is possible only when the escapement is attributable to the
failure of the assessee in truly and fully disclosing all facts material for framing assessment.
2 Initiation of reassessment beyond a period of 4 years on the basis of subsequent Tribunal and HC ruling is not valid, if there
is no failure on the part of the assessee to disclose fully and truly all materials facts. [Allanasons Ltd (2014) 369 ITR 648
(Bom)].
3 Can under-assessment due to subsequent change of law No. It can’t unless there was a failure on the part of the
be taken as income escaping assessment for triggering assessee to disclose fully and truly all material facts necessary
reassessment beyond 4 years from the end of the AY? for assessment. [Allanasons Ltd (2014) 369 ITR 648 (Bom)].

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4 If all material facts were disclosed by the assessee, Nedungadi Bank Ltd - 264 ITR 545 (Ker) + Indra Co Ltd 80
reopening of assessment U/s 147 beyond 4 years is not ITR 559 (Cal). + J. P. Baipai (HUF) 140 Taxman 34 (All) –
possible, if escapement is due to AO’s ignorance of law, Century Enka Ltd 143 ITR 629 (Cal) + Dr. H. Habicht Vs
CBDT Circular or decisions of court or due to omission by Makhija 154 ITR 552 (Bom) + Lokendra singh 128 ITR 450
AO of facts by oversight. (MP)].

Principles emerging from the decision of SC in Sun engineering case:

Principles emerging from the decision of SC in Sun engineering case are summarized as under:

1 Matters lost in the original assessment proceedings which have reached finality (because of non-filing of appeal or revision or
rectification application) cannot be raised in the reassessment proceedings. Hence, expenses disallowed or incomes taxed in the
original assessment against which no appeal/revision/rectification application was filed cannot be claimed as allowable or non-taxable
in the re-assessment proceedings U/s 147.
However, concluded matters, if it pertains to income which has escaped assessment, can be raised in the reassessment proceedings.
2 Expenses not claimed in the original assessment cannot be claimed in the reassessment proceedings U/s 147. However, the expenses
pertaining to the income which has escaped assessment can be claimed.
3 U/s 147, the income cannot be reduced below the income originally assessed. Similarly, U/s 147, losses cannot be assessed above the
losses originally assessed.
4 S. 147 is for the benefit of revenue and not for the benefit of the assessee. Therefore, if no return was filed earlier and no assessment
was made earlier, then U/s 147, the AO cannot compute the loss of the assessee.

Circumstances under which proceedings U/s 147 shall be dropped by the AO (at the instance of the assessee): [S.
152 (2)].

1 For the relevant AY, assessment got already over.


2 The order of assessment was not challenged by the assessee in appeal or revision. It has become final.
3 Subsequently, the AO initiates proceedings U/s 147 for the same AY.
4 In such case, the assessee can approach AO and require him to drop the proceedings U/s 147 if he could show that he
had already been assessed on an amount not lower than what he would be rightly liable for even if the income alleged
to have escaped assessment had been taken into account, or the assessment had been properly made.

Appellate proceedings are pending – whether action U/s 147 is possible? [Proviso-3 to S. 147]:

The AO may assess or reassess such income, other than the income involving matters which are the subject matters of any
appeal or revision, which is chargeable to tax and has escaped assessment.

Discussion segment-3:

Issue of notice U/s 148:

S. 148 (1) Before making the assessment/reassessment U/s 147, the AO shall serve on the assessee a notice requiring him
to furnish a return of his income for the PY corresponding to the relevant AY.
Such return shall be furnished within such time as may be specified in the notice.
It shall be in the prescribed form and verified in the prescribed manner and setting forth such other particulars as
may be prescribed
All the provisions of this Act shall apply to such return as if it return were a return required to be furnished U/s 139.
S. 148 (2) The AO shall, before issuing any notice U/s 148 (1), record his reasons for doing so.
Points requiring attention:

1 S. 147 = Machinery Provisions of S. 147 are machinery in nature.


provision. [R. Dalmia (Del)]. When the proceedings are initiated U/s 147, assessment is to be made either U/s
143 (3) or S. 144.
No independent procedure is prescribed in respect of proceedings initiated U/s 147.
For co-operating assessees, assessment is done U/s 147 read with S. 143 (3).
For non-cooperating assessees, assessment is done U/s 147 read with S. 143 (3).

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2 Assessment or The AO issues notice U/s 148 requiring the assessee to file a return for the relevant
reassessment U/s 147 read AY.
with S. 143 (3) The assessee shall furnish a return as required in the notice.
If he had already filed a return for the relevant AY either U/s 139 or in pursuance of a
notice issued U/s 142 (1) (i) and he has nothing to offer additionally, he can write a
letter to the AO to regard the return already filed U/s 139 or in pursuance of notice
issued U/s 142 (1) (i) as a return filed in pursuance of notice issued U/s 148.
Then, the AO shall serve on the assessee a notice U/s 143 (2) within 6 months from
the end of the FY in which return was furnished in pursuance of notice issued U/s
148.
The AO can issue notice U/s 142 (1) (ii) seeking accounts and documents relating to
the relevant AY for the purpose of making assessment or reassessment.
He can issue notice U/s 142 (1) (iii) seeking information on specified points in writing
(duly verified) for the purpose of making assessment or reassessment.
He can give audit direction U/s 142 (2A).
He can conduct inquiry U/s 142 (2) in respect of matters for which he has initiated
proceedings U/s 147.
Where assessment or reassessment U/s 147 involves estimation of value of any
asset or property or investment, he may make reference to the DVO U/s 142A.
He shall also consider the directions given by the JCIT for the purpose of framing
assessment or reassessment U/s 147.
He shall, then, pass an order of assessment or reassessment U/s 147 read with S.
143 (3), after giving OBH to the assessee.

3 Assessment or If the assessee does not file ROI in pursuance of notice issued U/s 148 or the
reassessment U/s 147 read assessee does not comply with the terms of notice issued U/s 143 (2) or does not
with S. 144 comply with the terms of notice issued U/s 142 (1) (ii)/(iii) or does not comply with the
audit directions issued U/s 142 (2A), the AO may do assessment/reassessment U/s
147 read with S. 144.
4 Significance of notice U/s If the AO, after initiating proceedings U/s 147, fails to serve on the assessee a notice
143 (2). [C. Palaniappan U/s 143 (2) within 6 months from the end of FY in which ROI was furnished in
(Mad)] pursuance of notice issued U/s 148, then the AO can’t proceed U/s 147 and such
proceedings are to be dropped. (Subject to S. 292BB).
5 No immunity from S. 292BB The failure of the AO, in reassessment proceedings, to issue notice U/s 143 (2), prior
for non-issuance of S. 143 to finalizing the re-assessment order, cannot be condoned by referring to S. 292BB.
(2) notice. S. 292BB applies insofar as failure of ‘service of notice’ is concerned and not with
regard to failure to ‘issue’ notice.
The non-issuance of said notice is fatal to the order of reassessment U/s 147. [Shri.
Jai shiv Shanker Traders (P) Ltd (2015) (Del) + Salarpur cold storage (P) Ltd
(2014) (All) + Silverline (2016) (Del)].
6 Reasons need not be S. 148 (2) only requires recording of reasons for initiating proceedings U/s 147 and
communicated through S. does not require its communication to the assessee through notice U/s 148.
148 notice. The validity of proceedings initiated U/s 147 can’t be questioned for non-
communication of reasons through notice issued U/s 148. [S. Narayanappa (SC) +
Ajantha Industries Vs CBDT 102 ITR 281 (SC)].
7 Reasons for re-opening to be The AO is duty bound to supply to the assessee the reasons recorded by him for
supplied. issue of notice U/s 148, after the assessee has filed the ROI. [Jawaharlal Gupta
(Del)].
8 Challenging S. 147 If the reasons recorded by the AO for issue of notice U/s 148 are invalid, then the
proceedings through a writ. assessee can file a writ petition before the HC challenging the proceedings initiated
U/s 147. [Trivandrum club (Ker)].
9 Objections for reopening, Upon perusal of reasons for re-opening, if the assessee raises objections to such re-
raised by the assessee are to opening, the AO shall deal with them through a speaking order before he continues
be dealt with through an the proceedings initiated U/s 147. [Keshav stock and shares Ltd (Del) + IOT
order. Infrastructure and energy services Ltd (Bom)].
10 Summary of events in S. 147 proceedings – [G. K. N. Drive shafts India Ltd (SC)]
(1) The AO possesses material which warrants the belief that income has escaped assessment.

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(2) He satisfies himself regarding the reasons for such belief.

(3) He checks time limits and monetary limits in S. 149 and S. 147 Proviso-1.

(4) He records reasons as required by S. 148 (2).

(5) He gets sanction from the higher authorities U/s 151.

(6) Issues notice U/s 148 requiring the assessee to file ROI.

(7) Assessee files ROI as required by the notice. Where the assessee has nothing to offer additionally, he can
write a letter to the AO to consider the return filed U/s 139 or in pursuance of notice issued U/s 142 (1) (i) as
return filed pursuant to notice issued U/s 148.

(8) Assessee demands reasons for issue of notice U/s 148.

(9) The AO furnishes the reasons.

(10) The raises objections if he has any.

(11) The AO counters the objections raised by the assessee, if he is not convinced by explanations given by the
assessee.

(12) The assessee seeks the intervention of JCIT U/s 144A.

(13) If JCIT does not provide remedy, the assessee files a writ.

(14) The HC decides the fate of the proceedings.

(15) If the assessee is aggrieved with the order of the HC, he files an appeal to SC.

(16) The SC decides the fate of the proceedings.

(17) If the proceedings are sustained, the AO completes the assessment U/s 147.

11 No need for fresh notice U/s 148 for If the ITAT sets aside the order of reassessment passed U/s 147 and
fresh reassessment. directs fresh re-assessment U/s 147, for that AO need not issue notice U/s
148. [T.SPL.P. Chidambaram Chettiar (SC)].

Time limit for issue of notice U/s 148 – S. 149:

S. 149 (1) (a) No notice U/s 148 shall be issued for the relevant AY, if 4 years have elapsed from the end of the
relevant AY, unless the case comes U/s 149 (1) (b)/(c)
S. 149 (1) (b) No notice U/s 148 shall be issued for the relevant AY, if 4 years, but not more than 6 years, have
elapsed from the end of the relevant AY unless the income chargeable to tax which has escaped
assessment amounts to or is likely to amount to Rs. 1L or more for that year.

Points requiring attention:

1 Time limit for issue and S. 149 (1) prescribes time-limit for issue of notice U/s 148 and not for service. [R. K.
not for service. Upadhyaya (SC)]. [See illustration-1].
2 When notice is said to be Notice is regarded as issued only on the date of delivery to the post office or courier
issued? company for service to the assessee. It is not issued merely upon signing it. [Kanubhai.
M. Patel (HUF) (Guj)]. [See illustration-2].
3 Provisions cumulative. The requirements of 1st proviso to S. 147 and S. 149 are cumulative. [Vikram Kothari
(HUF) (Guj)].

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4 Noticee deceased Where the noticee is deceased, the notice is not valid.
Assessment or reassessment on deceased is invalid.
The proper course of action is to issue notice the legal representative.
But even such notice shall be within the time limit specified in s. 149 (1) and 1 st Proviso to
S. 147. [Vipin Walia (2016) (Del) + Kesar Devi (Raj)]. [See illustration-6].

Escapement of income from foreign assets:

1 Where a person is found to possess any asset (including financial interest in any entity) located outside India, income is
deemed to have escaped assessment. [Explanation-2 (d) to S. 147].
2 Where any income relating to an asset (including financial interest in any entity) located outside India has escaped
assessment, then notice U/s 148 can be issued at any time within 16 years from the end of the relevant AY. [S. 149 (1)
(c)].
3 Where any income relating to an asset located outside India has escaped assessment for any AY, then the provisions of
1st Proviso to S. 147 shall not apply. [2nd Proviso to S. 147].
4 That means, even though the escapement is not attributable to the failure of the assessee in truly and fully disclosing all
facts material for framing assessment, proceedings U/s 147 could be initiated.

Summary of time-limits specified in S. 149 (1) and 1st proviso to S. 147:

Situation Narration of situation Whether notice U/s 148 could be


issued?
1 Escapement relating to income from foreign assets
A 16 years from the end of the relevant AY have not expired [and Yes
escapement is attributable to the failure of the assessee in
making true and full disclosure of all material facts].
B 16 years from the end of the relevant AY have not expired [and Yes
escapement is not attributable to the failure of the assessee in
making true and full disclosure of all material facts].
C 16 years from the end of the relevant AY have expired. No
2 Other escapement.
A 6 years have elapsed from the end of the relevant AY. No
B 6 years have not elapsed but 4 years have elapsed + No
escapement < Rs. 1L.
C 6 years have not elapsed but 4 years have elapsed + Yes
escapement ≥ Rs. 1L + escapement is attributable to failure of
assessee in making true & full disclosure of all material facts.
D 6 years have not elapsed but 4 years have elapsed + No
escapement ≥ Rs. 1L + escapement is not attributable to the
failure of the assessee in making true and full disclosure of all
material facts + For the relevant AY, already assessment was
over U/s 143 (3) or S. 147.
E 6 years have not elapsed but 4 years have elapsed + Yes
escapement ≥ Rs. 1L + escapement is not attributable to the
failure of the assessee in making true and full disclosure of all
material facts + For the relevant AY, already assessment was
not over U/s 143 (3) or S. 147.
F Not even 4 years have elapsed from the end of the relevant Yes.
AY.

Time-limit for issue of notice U/s 148 to the agent of non-resident – S. 149 (3):

1 Options to the Department in case of Option-1: Department can assess or re-assess the income of the non-resident
non-residents [S. 166] directly in his hands.
Option-2: Some person connected to NR can be treated as agent of NR through an
order passed U/s 163 upon which such person becomes a representative assessee

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(as per S. 160 (1) (i)) and the income of the NR could be assessed to tax in the
hands of such person treated as agent of NR in representative capacity.
In such case, tax shall be levied and recovered from the agent of the non-resident in
the like manner and to the same extent to which it would have been levied upon and
recovered from the NR. [S. 161].
2 What do we mean by treating a It means adjudicating liability in representative capacity. The person so treated as
person as agent of non-resident? agent of non-resident shall have same responsibilities, duties and liabilities as that of
the non-resident (like, filing of ROI, production of books and documents, co-operation
in inquiry, payment of tax etc).
3 Who could be treated as agent of Person (in India) employed by or on behalf of the NR; or
non-resident? [S. 163 (1)]. Person (in India) who has any business connection with the NR; or
Person (in India) from or through whom the NR is in receipt of any income, whether
directly or indirectly;
Person (in India) who is the trustee of the NR;
Any other person who, whether a resident or NR, has acquired by means of a
transfer, a capital asset in India.
4 Certain persons can’t be treated as A broker in India who, in respect of any transactions, does not deal directly with or on
agent of non-resident. [Proviso to S. behalf of a NR principal but deals with or through a NR broker shall not be deemed to
163]. be an agent U/s 163 in respect of such transactions (being transfer of CA in India), if
the following conditions are fulfilled, namely:—
(i) the transactions are carried on in the ordinary course of business through
the first-mentioned broker; and

(ii) the NR broker is carrying on such transactions in the ordinary course of his
business and not as a principal.

5 OBH to be provided [S. 163 (2)] No person shall be treated as the agent of a non-resident unless he has had an
opportunity of being heard by the AO as to his liability to be treated as such.
6 S. 163 order appealable. [S. 246A]. Order passed U/s 163 treating a person as agent of non-resident is appealable
before the CIT.
7 Can more than one person be treated Yes. In such case, a consolidated assessment of income of NR will be made based
as agent of non-resident? on the returns furnished by these persons treated as agent of NR applying the
provisions applicable to NR and the tax will be recovered from them accordingly.
8 Separate order U/s 163 for each year. In respect of every AY, a separate order is to be passed U/s 163.
Order passed U/s 163 in respect of one AY does not hold good for the other AYs.
9 Time limit for issue of notice U/s 148 Given in S. 149 (1) and 1st Proviso to S. 147.
where proceedings U/s 147 are
initiated directly against non-resident.
10 Time limit for issue of notice U/s 148 6 years from the end of the relevant AY. [S. 149 (3)]. [Subject to 1 st proviso to S. 147]
where proceedings U/s 147 are
initiated against the person treated as
agent of non-resident.

Sanction of higher authorities for issuing notice U/s 148: [S. 151]:

Notice U/s 148 shall be issued only with the sanction of the higher authority. [S. 149 (2)]. The higher authorities who shall
sanction in different situations are summarized as under:

Provision Situation Higher authority whose sanction is to be obtained by the AO


based on the reasons recorded U/s 148 (2).
S. 151 (1) Proceedings U/s 147 are initiated beyond 4 PCCIT/CCIT/PCIT/CIT
years from the end of the relevant AY
S. 151 (2) Proceedings U/s 147 are initiated within 4 JCIT
years from the end of the relevant AY + AO
< Rank of JCIT

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Note:

1 Sanctioning authority, being satisfied on the reasons recorded by the AO about the fitness of a case for issue of notice
U/s 148, need not issue such notice himself. [S. 151 (3)].
2 If the Act requires sanction of JCIT but the proceedings were initiated even with the sanction of different authority, even
though higher in rank (in the instant case, CIT), the proceedings are not validly initiated. [Ghan Shyam. K. Khabrani
(Bom) + SPL’s Siddharta Ltd (Del)].

Circumstance in which notice U/s 148 can be issued any time – S. 150 (1):

1 Time limit specified In order to give effect to a finding or direction contained in the order passed by the appellate
in S. 149 shall not authority or revisionary authority, proceedings are to be initiated U/s 147. For that purpose,
apply notice is to be issued U/s 148.
Such notice can be issued at any time. The time limit specified in S. 149 and the restriction
contemplated in 1st Proviso to S. 147 shall not apply. Vide ‘Notwithstanding anything contained
in S. 149’. Vide ‘subject to S. 148 to S. 153’ in S. 147.
2 No need for sanction For issuance of notice U/s 148 in the circumstances (supra), there is no need for sanction from
from higher authority. higher authority U/s 151.

Restriction on operation of S. 150 (1): S. 150 (2):

The provisions of S. 150 (1) shall not apply in any case where any such assessment/reassessment as is referred to in S.
150 (1) relates to an AY in respect of which an assessment/reassessment could not have been made at the time the order
which was the subject-matter of the appeal or revision, as the case may be, was made by reason of any other provision
limiting the time within which any action for assessment/reassessment may be taken.

M. Time-limit for completion of assessment or reassessment – S. 153:

I. Time-limit for completion of assessment U/s 143 (3) or S. 144:

1 Time-limit for completion of assessment U/s 143 (3) 21 months from the end of the relevant AY.
or S. 144 for the AY 2017-18 or earlier years.
2 Time-limit for completion of assessment U/s 143 (3) 18 months from the end of the relevant AY.
or S. 144 for the AY 2018-19.
3 Time-limit for completion of assessment U/s 143 (3) 12 months from the end of the relevant AY.
or S. 144 for the AY 2019-20 or subsequent AYs.

II. Time limit for passing order U/s 147: [S. 153 (2)].

1 Time limit for completion of proceedings U/s 147, where 9 months from the end of the FY in which notice U/s 148 was served on
the notice U/s 148 was served before 01.04.2019. the assessee.
2 Time limit for completion of proceedings U/s 147, where 12 months from the end of the FY in which notice U/s 148 was served
the notice U/s 148 was served on or after 01.04.2019. on the assessee.

III. Time-limit for completion of fresh assessment: [S. 153 (3)].

1 Time limit for completion of fresh 9 months from the end of the FY in which the order of the ITAT is received
assessment directed by the ITAT through by the CIT or PCIT. [If the order of the ITAT is received by the CIT or
its order U/s 254. PCIT before 01.04.2019].
12 months from the end of the FY in which the order of the ITAT is
received by the CIT or PCIT. [If the order of the ITAT is received by the
CIT or PCIT on or after 01.04.2019].
2 Time limit for completion of fresh 9 months from the end of the FY in which the order U/s 263 or S. 264 was
assessment directed by the CIT U/s passed. [If the order U/s 263 or S.264 was passed before 01.04.2019].
263/264. 12 months from the end of the FY in which the order U/s 263 or S. 264

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Chapter-20: Assessment Procedure Summary

was passed. [If the order U/s 263 or S.264 was passed on or after
01.04.2019].

IV. Time-limit for giving effect to appeal or revision – S. 153 (5):

1 Time limit for giving effect to the orders of appellate 9 months from the end of the FY in which these orders are received by the
authorities passed U/s 250 or S. 254 or S. 260A or S. CIT or PCIT. [If these orders are received by the CIT or PCIT before
262. (Where these orders requires verification of any 01.04.2019].
issue by way of submission of any document by the 12 months from the end of the FY in which these orders are received by the
assessee or any other person or where OBH is to be CIT or PCIT. [If these orders are received by the CIT or PCIT on or after
provided to the assessee). [2nd proviso to S. 153 (5)]. 01.04.2019].
2 Time limit for giving effect to the orders of appellate 3 months from the end of the month in which these orders are received by
authorities passed U/s 250 or S. 254 or S. 260A or S. the CIT.
262 (in other cases). 9 months from the end of the month in which these orders are received by
the CIT (where it is not possible for the AO to give effect to these
orders within 3 months (supra), for reasons beyond control and the
CIT on receipt of request in writing from the AO allows an additional
period of 6 months). [1st proviso to S.153 (5)].
3 Time limit for giving effect to the orders of revisionary 9 months from the end of the FY in which the order U/s 263 or S. 264 was
authority passed U/s 263 or S. 264 (Where these passed. [If the order U/s 263 or S.264 was passed before 01.04.2019].
orders requires verification of any issue by way of 12 months from the end of the FY in which the order U/s 263 or S. 264 was
submission of any document by the assessee or any passed. [If the order U/s 263 or S.264 was passed on or after
other person or where OBH is to be provided to the 01.04.2019].
assessee). [2nd proviso to S. 153 (5)].
4 Time limit for giving effect to the orders of revisionary 3 months from the end of the month in which the these orders are passed
authority passed U/s 263 or S. 264 (in other cases) by the revisionary authority CIT.
9 months from the end of the month in which the these orders are passed
by the revisionary authority CIT (where it is not possible for the AO to
give effect to these orders within 3 months (supra), for reasons
beyond control and the CIT on receipt of request in writing from the
AO allows an additional period of 6 months). [1st proviso to S. 153 (5)].

V. Time limit for completion of assessment or reassessment in certain cases pursuant to directions of appellate
authorities and Courts: [S. 153 (6) (ii)].

1 Where assessment or reassessment is made on the assessee in consequence of or to give effect to any finding or
direction contained in an order passed U/s 250 or S. 254 or S. 260A or S. 262 or in an order of any court in a
proceeding otherwise than by way of appeal, it shall be made within 12 months from the end of the month in which the
order is received by the CIT/PCIT.
2 Where assessment or reassessment is made on the assessee in consequence of or to give effect to any finding or
direction contained in an order passed U/s 263 or S. 264, it shall be made within 12 months from the end of the month in
which the order U/s 263 or S. 264 is passed by the CIT/PCIT.

VI. Time-limit for completion of consequential reassessment in the hands of partners – S. 153 (6) (ii):

Where in case of a firm, an assessment is made on the partner of the firm in consequence of an assessment or
reassessment made on the firm U/s 147, then such assessment or reassessment shall be made before the expiry of 12
months from the end of the month in which assessment order is passed in case of the firm.

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Extension of time-limit in certain cases: Explanation-1 to S. 153:

In computing the period of limitation for the purposes of S. 153 the following time periods shall be excluded:

Case Exclusion of Period

Commencing from Ending with

(i) Contravention of the The date on which the AO intimates the CG The date on which the copy of the order
provisions of S. 10 (21) / or the prescribed authority, the said withdrawing the approval or rescinding the
(22B) / (23A) / (23B) / (23C) contravention as required under 1st proviso notification, as the case may be, is received
(iv) / (v) / (vi) / (via). to S. 143 (3) by the AO.

(ii) Direction to get accounts The date on which the AO directs the The last date on which the assessee is
audited U/s 142 (2A). assessee to get his accounts audited U/s required to furnish a report of such audit (or)
142 (2A). the date on which the order setting aside
such direction is received by the PCIT/CIT, if
such direction is challenged before a Court.

(iii) Reference to the VO U/s The date on which the AO makes a The date on which the report of the VO is
142A (1). reference to the VO. received by the AO.

(iv) Where reference(s) for The date on which a reference or first of the The date on which the information requested
exchange of information is references for exchange of information is is last received by the PCIT/CIT (or) a period
made by a competent made by an authority competent under an of one year, whichever is less.
authority. [See illustration-5]. agreement referred to in S. 90 or S. 90A.

(v) the time taken in reopening the whole or any part of the proceeding or in giving an opportunity to the assessee to be re-heard
under the proviso to S. 129; or [See illustration-6].

(vi) the period during which the assessment proceeding is stayed by an order or injunction of any court. [See illustration -7 & 8].

Note:

In all the above cases, where immediately after the exclusion of the aforesaid period, the period of limitation available to the
AO for making an order of assessment, reassessment is less than 60 days, then such remaining period shall be extended to
60 days and the aforesaid period of limitation shall be deemed to be extended accordingly. [Proviso to Explanation-1 to
S.153].

N. Rectification of mistakes apparent from record: [S. 154]:

1 Power to rectify mistakes S. 154 (1) empowers the IT authorities to amend any order passed by them with a view
apparent from record. [S. 154 to rectify mistakes apparent from record.
(1)]
2 Significance of ‘IT authority’ in This power is not only available to AO but also to other IT authorities (like JCIT, CIT,
S. 154 (1)’. CIT (A), TPO, DVO, DRP etc).
However, ITAT can’t invoke this section to rectify mistakes apparent from record in its
order passed U/s 254 (1), since it is not an IT authority. But it has similar powers U/s
254 (2).
3 Significance of ‘any order’ in S. Assessment order, reassessment order, fresh assessment order, penalty order,
154 (1). amendment order, revisionary order, appellate order passed U/s 250, TPO’s order
passed U/s 92CA (3), DRP’s order passed U/s 144C (5), order passed by the AO U/s
195 (2), order passed U/s 197, etc could be amended U/s 154.
4 Whether intimations issued U/s Yes. It is explicitly provided so.
143 (1), S.200A or S. 206CB

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could be amended U/s 154?


5 Amendment by respective Respective orders could be amended by only respective authorities. For example, the
authorities. order of AO can’t be amended by the CIT/CIT (A).
6 What do we mean by mistakes It should be patent, obvious and apparent.
apparent from record? It should not be one which is established through a process of long drawn argument.
Its establishment should not be through a complicated process of investigation.
Its establishment shall not involve construction on a point of law. [T. S. Balaram ITO
Vs Volkart Bros 82 ITR 40 + Orient Paper Industries Ltd 208 ITR 158 (Cal) + Harita
Seating Systems Ltd [2011] 202 Taxman 402 (Mad)].
7 Examples of mistakes Clerical or arithmetical mistakes.
apparent from record. Mistakes in indexation.
Non-consideration of mandatory provisions.
Non-consideration of decisions of SC/JHC.
Non-consideration of CBDT circulars.
8 Can mere change of opinion No. A mere change of opinion, however, cannot be the basis on which the same or the
trigger action U/s 154? successor AO can treat a case as one of rectification of mistake. [M. Corp Ltd (SC)].
9 Amendment sumoto & at the The authority concerned
instance of the assessee. [S. (a) may make an amendment U/s 154 (1) of its own motion, and
154 (2)].
(b) shall make such amendment for rectifying any such mistake which has been
brought to its notice by the assessee or the deductor or collector, and where
the authority concerned is CIT (A), by the AO also.

10 OBH to the assessee before An amendment, which has the effect of enhancing an assessment or reducing the
making amendment. [S. 154 refund or otherwise increasing the liability of the assessee or deductor or collector,
(3)]. shall not be made U/s 154 unless the authority concerned has given notice to the
assessee or deductor or collector of its intention so to do and has allowed the
assessee or deductor or collector a reasonable OBH.
11 Amendment to be through a Where an amendment is made U/s 154, an order shall be passed in writing by the ITA
written order. concerned. [S. 154 (4)].
12 Refund upon effecting Where amendment made under this section has the effect of reducing the assessment
amendments reducing or otherwise reducing the liability of the assessee or deductor or collector, the AO shall
assessment. [S. 154 (5)]. make any refund which may be due to such assessee or the deductor or collector.
13 Raising demand upon effecting Where any amendment made under this section has the effect of enhancing the
amendments enhancing assessment or reducing a refund already made, the AO shall serve on the assessee a
assessment or reducing NOD in the prescribed form specifying the sum payable, and such NOD shall be
refund. [S. 154 (6)]. deemed to be issued U/s 156 and the provisions of this Act shall apply accordingly.
14 Time limit for making No amendment under this section shall be made after the expiry of 4 years from the
amendment. [S. 154 (7)]. end of the FY in which the order sought to be amended was passed.
15 Time limit for making Without prejudice to the provisions of S. 154 (7), where an application for amendment
amendments at the instance of under this section is made by the assessee to an IT authority, such authority shall pass
the assessee. [S. 154 (8)]. an order, within a period of 6 months from the end of the month in which the application
is received by it,—
(a) making the amendment; or

(b) refusing to allow the claim.

Issues in S. 154:

1 Non-consideration of the decision of courts can trigger action U/s 154. [Bihar State Road transport corporation (Pat)].
2 Where divergent were expressed by the HCs, and there is no unanimity, siding one view, action can’t be taken U/s 154,
until the controversy is set at rest by the SC. This is not a case involving mistake apparent from record. The AO can’t
proceed U/s 154. [Indian Steel & Wire Products Ltd 192 ITR 252 (Cal)].
3 However, though contrary views were expressed by other courts, the AO, relying on the decision of JHC, amend his
order U/s 154. [Ramlal Babulal 148 CTR 643 (P&H)].
4 Action U/s 154 is possible even based on later decisions. The Courts, by rendering judgments, do not enact law but only
interpret it (as existing at the material point of time when the order was passed). In other words, these decisions clarify

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the legal position which was prevalent when the order was passed. Therefore, even based on later decisions of HC/SC,
action can be taken U/s 154. [Saurashtra Kutch Stock Exchange Ltd [2008] (SC)].
5 Retrospective amendments are clarificatory in nature. Without understanding the legislative intent, the provisions were
mis-interpreted and such views were upheld by the Courts. Thus, to clarify the legislative intent, retrospective
amendments are made. These amendments are deemed to have been included in the statue book at the material point
of time when the AO passed the order of assessment.
If the order of assessment is not in conformity with these amendments, then there is mistake apparent from record. The
AO shall amend his order U/s 154. [E. Sefton & Co (P) Ltd (Cal)].
6 Non-consideration of mandatory provisions of the Act amounts to mistake apparent from record. Therefore, the AO can
step in U/s 154. [Plasser India (P) Ltd 84 TTJ 1024 (Del) + Steel strips Ltd [2011] 200 Taxman 368 (P&H) + Thomy
P. Chakola [2011] 200 Taxman 74 (Ker)].
7 Where curing is possible through S. 154, the AO cannot resort to S. 147. [Hindustan Unilever Ltd 325 ITR 102 (Bom)].
8 S. 143 (1) intimation cannot be amended U/s 154 after the issue of notice U/s 143 (2). [Tamil Nadu Magnesite Ltd
[2011] 196 Taxman 271 (Mad)].
9 In order to avoid stringency of law, S. 119 (2) (a) empowers the CBDT to relax a list of provisions which interalia
includes S. 154. In exercise of such powers, the CBDT issued circular 73 which provides that if the rectification
application is made by the assessee within 4 years from the end of the FY in which the order sought to be amended was
passed, then the rectification order can be passed even beyond 4 years.

Doctrine of merger:

1 If the order passed by an authority is modified in appeal or in revision, then the original order gets merged with the
modified order.
2 Thereafter, the operative order is only the modified order. The original order gets effaced. This is called doctrine of
complete merger.
3 In doctrine of partial merger, the original order does not get merged with the modified order completely. It mergers only
in respect of matters considered and decided in appeal or revision. In respect of other matters, original order continues
to exist.
4 In other words, in respect of matters considered and decides in appeal or revision, the operative order is the modified
order, whereas in respect of other matters, the operative order is the original order.
5 In S. 154, through S. 154 (1A), the doctrine of partial merger is incorporated.
6 S. 154 (1A) provides that where any matter has been considered and decided in any proceeding by way of appeal or
revision relating to an order, the authority passing such order may, notwithstanding anything contained in any law for the
time being in force, amend the order U/s 154 (1) in relation to any matter other than the matter which has been so
considered and decided.

Order already rectified U/s 154 – What is the time limit for subsequent rectification?

1 S. 154 provides that rectification can be made before the expiry of 4 years from the end of the FY in which the order
sought to be amended was passed.
2 The order sought to be amended will not necessarily mean the original order but also the rectified order.
3 Therefore, the 4 years’ time limit in respect of second application shall start from the end of the FY in which 1 st
rectification order was passed.
5 Accordingly, the 2nd rectification application was filed in time and was not time-barred.
6 Therefore, the AO is not justified in rejecting the 2nd rectification application. [Hind Wire Industries Ltd (SC].

O. Post search assessment – S. 153A to S. 153B:

1. Provisions relating to search and seizure – S. 132:

1 When search operations Any person to whom a summons U/s 131 was issued to produce books of accounts or
could be authorised? [S. other documents has failed to produce such books of account or other documents as
132 (1)]. required by such summons; or
Any person to whom a notice U/s 142 (1) was issued to produce books of accounts or
other documents has failed to produce such books of account or other documents as
required by such notice; or

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Department has, on the basis of information in its possession, reason to believe


that any person is in possession of any money, bullion, jewellery or other valuable article
or thing and such money, bullion, jewellery or other valuable article or thing represents
income which has not been disclosed for the purposes of this Act.
2 Who can authorise search DGIT – DIT – CCIT – CIT. (Hereinafter referred to as authorizing officers-I)
operations? [S. 132 (1)]. ACIT – ADIT – JCIT – JDIT (if empowered by the CBDT). [S. 132 (1) Proviso-4].
(Hereinafter referred to as authorizing officers-II)
3 Who can be authorised to ACIT – ADIT – JCIT – JDIT – DCIT – DDIT – Assistant CIT – Assistant DIT – ITO (could
carry out search be authorised by the authorizing officers-I).
operations? [S. 132 (1)]. DCIT – DDIT – Assistant CIT – Assistant DIT – ITO (could be authorised by the
authorizing officers-II).
4 What operations are (i) Authorised officer can enter and search any building, place, vessel, vehicle or aircraft
carried in the course of where he has reason to suspect that such books of account, other documents, money,
search? [S. 132 (1)]. bullion, jewellery or other valuable article or thing are kept;
(ii) He can break open the lock of any door, box, locker, safe, almirah or other receptacle
for exercising the powers conferred by (i) where the keys thereof are not available;
(iia) He can search any person who has got out of, or is about to get into, or is in, the
building, place, vessel, vehicle or aircraft, if he has reason to suspect that such person
has secreted about his person any such books of account, other documents, money,
bullion, jewellery or other valuable article or thing;
(iib) He can require any person who is found to be in possession or control of any books
of account or other documents maintained in the form of electronic record, to afford him
the necessary facility to inspect such books of account or other documents;
(iii) He can seize any such books of account, other documents, money, bullion, jewellery
or other valuable article or thing found as a result of such search:
However, the bullion, jewellery or other valuable article or thing, being SIT of the
business, found as a result of such search shall not be seized but the authorised officer
shall make a note or inventory of such stock-in-trade of the business. [Proviso to (iii)].
(iv) He can place marks of identification on any books of account or other documents or
make or cause to be made extracts or copies therefrom;
(v) He can make a note or an inventory of any such money, bullion, jewellery or other
valuable article or thing.
5 Requisitioning services of The authorised officer may requisition the services of any police officer or of any officer of
police. [S. 132 (2)] the CG, or of both, to assist him in search operations and it shall be the duty of every
such officer to comply with such requisition.
6 Examination on oath. [S. The authorised officer may, during the course of the search or seizure, examine on oath
132 (4)]. any person who is found to be in possession or control of any books of account,
documents, money, bullion, jewellery or other valuable article or thing and any statement
made by such person during such examination may thereafter be used in evidence in any
proceeding under this Act.
The aforesaid examination may not be merely in respect of any BOA, other documents or
assets found as a result of the search, but also in respect of all matters relevant for the
purposes of any investigation connected with any proceeding under this Act.
7 Presumptions as to the Where any books of account, other documents, money, bullion, jewellery or other
assets, books etc found in valuable article or thing are found in the possession or control of any person in the
the course of search. [S. course of a search, it may be presumed:
132 (4A) + S. 292C]. (i) that such books of account, other documents, money, bullion, jewellery or other
valuable article or thing belong to such person;
(ii) that the contents of such books of account and other documents are true ; and
(iii) that the signature and every other part of such books of account and other
documents which purport to be in the handwriting of any particular person or
which may reasonably be assumed to have been signed by, or to be in the
handwriting of, any particular person, are in that person's handwriting, and in the
case of a document stamped, executed or attested, that it was duly stamped
and executed or attested by the person by whom it purports to have been so
executed or attested.

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8 Period of retention of BOA or other documents seized shall not be retained by the authorised officer for a period
BOA and other exceeding 30 days from the date of the order of assessment or reassessment U/s 153A
documents. [S. 132 unless the reasons for retaining the same are recorded by him in writing and the approval of
(8)]. the CCIT/CIT/DGIT/DIT for such retention is obtained.
However, CCIT or CIT or DGIT or DIT shall not authorise the retention of the BOA and other
documents for a period > 30 days after all the proceedings under this Act in respect of the
years for which the BOA or other documents are relevant are completed.
9 Allowing making of The person from whose custody any books or other documents are seized may make copies
copies or taking of thereof, or take extracts therefrom, in the presence of the authorised officer at such place
extracts. [S. 132 (9)]. and time as he may appoint in this behalf.
10 Handing over of books Where the authorised officer has no jurisdiction over the person searched by him, the BOA
assets etc to the or other documents, or assets seized shall be handed over by the authorised officer to the
jurisdictional AO. [S. AO having jurisdiction over such person within a period of 60 days from the date on which
132 (9A)]. the last of authorisations for search was executed.
Thereupon, the powers exercisable by the authorised officer U/s 132 (8) or S. 132 (9) shall
be exercisable by such AO.
11 Power to make Where, during the course of the search or within a period of 60 days from the date on which
provisional the last of the authorisations for search was executed, the authorised officer, for the reasons
attachment. [S. 132 to be recorded in writing, is satisfied that for the purpose of protecting the interest of revenue,
(9B)]. it is necessary so to do, he may with the previous approval of the PDGIT or DGIT or the
PDIT or PDIT, by order in writing, attach provisionally any property belonging to the
assessee.
This power is given to protect the interest of the revenue by safeguarding recovery in search
cases.
12 Life of provisional Every provisional attachment aforesaid shall cease to have effect after the expiry of a period
attachment. [S. 132 of 6 months from the date of the order passed to that effect.
(9C)].
13 Power to make The authorised officer may, during the course of the search or within a period of 60 days
reference to valuation from the date on which the last of the authorisations for search was executed, make a
officer. [S. 132 (9D)]. reference to DVO, who shall estimate the FMV of the property in the manner provided U/s
142A and submit a report of the estimate to the said officer within a period of 60 days from
the date of receipt of such reference.
This power is given to enable correct estimation and quantification of undisclosed income
held by the assessee in the form of investment or property.

Points requiring attention:

1 Significance of ‘in consequence Search can’t be triggered by suspicion, gossips, rumours, anonymous letters,
of information in his possession, prejudice, surmise or past track record.
has reason to believe, in S. 132 There should be concrete material or information to warrant search operation.
(1). There should be a live link between the material gathered and the belief formed.
2 Communication from CBI ≠ DGIT received a communication from the CBI that the assessee has unexplained
Information. assets. DGIT issues authorisation for initiation of search operations. The legality
of search operations was questioned before the SC.
Held, that the communication from CBI, though a Government agency, per se
does not constitute information. DGIT should have conducted inquiry and have
gathered material in this regard to satisfy himself. The search operation is illegal,
since it was initiated purely based on the communication of CBI, without
application of mind. [Ajit Jain (SC)].
3 Recording of reasons. The authorizing officer shall record the reasons for initiation of search operations.
[Southern Herbals Ltd (Kar)].
4 Reasons need not be in search Search warrant need not bear the reasons for initiation of search operations.
warrant. [Southern Herbals Ltd (kar) + Space wood furnishers (P) Ltd (2015) (SC)].
5 Blank search warrant – not Search based on blank search warrant is illegal. Search warrant should specify
acceptable. the person to be searched and the location to be searched.
6 Fresh authorisation for extension Based on the information gathered in the course of a validly initiated search, if the
of search operations into new authorised officer wants to extend the search operations into new locations of the
locations. person searched, fresh authorisation is to be obtained.

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7 Authorisation from officers who Where any building, place, vessel, vehicle or aircraft in which the books of
don’t have jurisdiction over accounts or assets are suspected to be kept is within the area of jurisdiction of a
person searched. [Proviso-1 to CCIT or CIT who has no jurisdiction over the person searched, and such CCIT or
S. 132 (1)]. CIT has reasons to believe that delay in getting the authorisation from the CCIT
or CIT having jurisdiction over such person may be prejudicial to the interest of
the revenue, then he is competent to authorise the authorised officer to conduct
the search.
8 Books, documents and assets Where any CCIT or CIT has reason to suspect that any books of account, other
authorised to be searched kept documents, money, bullion, jewellery or other valuable article or thing in respect
in a place not mentioned in the of which an officer has been authorised by other CCIT or CIT to carry out search
authorisation – authorisation to operations are kept in any building, place, vessel, vehicle or aircraft not
search such place can come mentioned in the authorisation, such CCIT or CIT may, authorise the said officer
from non-jurisdictional officer. [S. to search such other building, place, vessel, vehicle or aircraft.
132 (1A)].
9 Prosecution U/s 275B for not The person who is found to be in possession or control of any books of account
affording facility to inspect books or other documents maintained in the form of electronic record and is required by
of account or documents the authorised office to afford him the necessary facility to inspect such books of
maintained in electronic form. account or other documents, fails to afford such facility to the authorised officer,
then he shall be punishable with rigorous imprisonment for a term which may
extend to 2 years and shall also be liable to fine.
10 Deemed or constructive search. Where it is not possible or practicable to take physical possession of any valuable
[2nd proviso to S. 132 (1)]. article or thing and remove it to a safe place due to its volume, weight or other
physical characteristics or due to its being of a dangerous nature, the authorised
officer may serve an order on the owner or the person who is in immediate
possession or control thereof that he shall not remove, part with or otherwise deal
with it, except with the previous permission of such authorised officer and such
action of the authorised officer shall be deemed to be seizure of such valuable
article or thing.
However, this power can’t be exercise in respect of valuable article or thing, being
stock-in-trade. [Proviso-3 to S. 132 (1)].
11 Order of restraint. [S. 132 (3)]. The authorised officer may, where it is not practicable to seize any such books of
account, other documents, money, bullion, jewellery or other valuable article or
thing, for reasons other than those mentioned in the 2nd proviso to S. 132 (1),
serve an order on the owner or the person who is in immediate possession or
control thereof that he shall not remove, part with or otherwise deal with it except
with the previous permission of such officer.
Serving a restraint order shall not be regarded as seizure of such books of
accounts, other documents or assets. [Explanation to S. 132 (3)].

12 Life of restraint order. [S. 132 Restraint order shall not be in force for a period exceeding 60 days from the date
(8A)]. of the order.
13 Reason to believe – not to be The reason to believe or suspect, as recorded by the income-tax authority U/s
disclosed. [Explanation to S. 132 132 (1) or S. 132 (1A), shall not be disclosed to any person or any authority or the
(1) & Explanation to S. 132 (1A)]. Appellate Tribunal.
Accordingly, When appeal is made by the assessee challenging the order of
assessment or reassessment U/s 153A, now it is not possible for the CIT (A) or
ITAT to demand the reasons which resulted in formation of belief that the person
raided is possessing assets representing undisclosed income. They can’t not see
as to whether the search operations were initiated based on concrete material or
information.
In other words, it is no more possible for the assessees to challenge the orders
passed U/s 153A before CIT(A) or ITAT on the ground that search is invalid since
is not backed sufficient material.

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2. Requisition of books of accounts, other documents and assets – S. 132A:

1 Circumstances in which books of accounts, Any person to whom a summons U/s 131 or a notice U/s 142 (1) (ii) was
other documents and assets could be issued to produce any books of account or other documents has failed to
requisitioned. [S. 132A (1)]. produce such books of account or other documents and the said books
of account or other documents have been taken into custody by any
officer under any other law.
Any assets represent income which has not been disclosed for the
purposes of the this Act by any person from whose possession or control
such assets have been taken into custody by any officer or authority
under any other law for the time being in force.
2 What do we mean by requisitioning books It means seeking them from the officer under any other law in force,
of account, other documents and assets? when these are no longer required for the purpose of such law.
[S. 132A (1)].
3 Who can authorise such requisition? [S. DGIT – DIT – CCIT – CIT. (Referred to as authorizing officers).
132A (1)].
4 Who could be authorised to make ACIT – ADIT – JCIT – JDIT – DCIT – DDIT – Assistant CIT – Assistant
requisition? [S. 132A (1)]. DIT – ITO. (Referred to as requisitioning officers).
5 Delivery of books etc pursuant to On a requisition being made as aforesaid, the officer under other law
requisition. [S. 132A (2)]. shall deliver the books of account, other documents or assets to the
requisitioning officer either forthwith or when such officer is of the opinion
that it is no longer necessary to retain the same in his custody.
6 Application of provisions of S. 132 to Where any books of account, other documents or assets have been
books, documents and assets requisitioned delivered to the requisitioning officer, the provisions of S. 132 shall apply
as if these are seized U/s 132 (1). [S. 132A as if such books of account, other documents or assets had been seized
(3)]. U/s 132 (1) by the requisitioning officer from the custody of the person
referred above.

3. Post search assessment provisions – S. 153A to S. 153D:

(i) Assessment in case of search or requisition – S. 153A:

1 Issuance of notice U/s 153A. [S. 153A The AO shall issue a notice to the person in respect of whom search was initiated
(1) (a)]. U/s 132 or to the person whose books of accounts, other documents and assets
were requisitioned U/s 132A seeking returns in respect of 6 AYs immediately
preceding the AY relevant to the PY in which search was initiated or requisitioned
was made and of relevant AY (s).
The returns shall be furnished within the time-limit specified in the notice.
The returns shall be in the prescribed form, verified in the prescribed manner and
shall set forth prescribed particulars.
All the provisions of the Act shall apply to such returns as if these were returns
required to be furnished U/s 139.
2 Relevant AY (s). [Explanation-1 to S. The expression "relevant AY" shall mean an AY preceding the AY relevant to the PY
153A (1)]. in which search is conducted or requisition is made which falls beyond 6 AYs but not
later than 10 AYs from the end of the AY relevant to the PY in which search is
conducted or requisition is made.
3 Conditions to be fulfilled for issuing (a) The AO has in his possession books of account or other documents or evidence
notice U/s 153A in respect of specified which reveal that the income, represented in the form of asset, which has escaped
AY (s). [Proviso-4 to S. 153A (1)] assessment amounts to or is likely to amount to Rs. 50L or more in the relevant AY
or in aggregate in the relevant AYs.
(b) The income referred to in (a) or part thereof has escaped assessment for such
year or years; and
(c) The search U/s 132 is initiated or requisition U/s 132A is made on or after
01.04.2017.
4 Meaning of ‘asset’ in Proviso-4 to S. Asset shall include (a) immovable property being land or building or both, (b) shares
153A (1). [Exp-2 to S. 153A (1)]. and securities, (c) loans and advances, (d) deposits in bank account.
5 Time-limit for issuing notice U/s 153A. No time-limit is prescribed for issuing or serving notice U/s 153A.
6 Single notice or separate notice? For each of the AYs for which proceedings are initiated U/s 153A, a separate notice

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is to be issued.
7 Assessment or reassessment U/s The AO shall assess or reassess the TI of 6 AYs immediately preceding the AY
153A. [S. 153A (1) (b)]. relevant to the PY in which such search is conducted or requisition is made and for
the relevant AY (s).
8 No block assessment – Assessment or The AO shall assess or reassess the TI in respect of each AY falling within such 6
reassessment for each AY separately. AYs and for the relevant AY (s).
[Proviso-1 to S. 153A (1)]
9 Relevant tax rates. [Explanation to S. In an assessment or reassessment made in respect of an AY U/s 153A, the tax shall
153A]. be chargeable at the rate (s) as applicable to such AY.
10 Time-limit for doing assessment or Situation Narration of the situation Time-limit
reassessment U/s 153A for 6 AYs and 1 Date on which last of 21 months from the end of the FY
for relevant AY (s). [S. 153B]. authorisation for search or in which last of the authorisation
requisition got executed < for search or requisition got
01.04.2018. executed.
2 Date on which last of 18 months from the end of the FY
authorisation for search or in which last of the authorisation
requisition got executed falls for search or requisition got
during the FY 18-19 executed.
3 Date on which last of 12 months from the end of the FY
authorisation for search or in which last of the authorisation
requisition got executed ≥ for search or requisition got
01.04.2019 executed.
11 Under which section assessment is S. 143 (3) or S. 144. But not U/s 153A.
done for the AY relevant to the PY in
which search was initiated or
requisitioned was made?
12 What is the time limit for completion of Situation Narration of the situation Time-limit
assessment for the AY relevant to the 1 Date on which last of 21 months from the end of the FY
PY in which search was initiated or authorisation for search or in which last of the authorisation
requisitioned was made? requisition got executed < for search or requisition got
0104.2018. executed.
2 Date on which last of 18 months from the end of the FY
authorisation for search or in which last of the authorisation
requisition got executed falls for search or requisition got
during the FY 18-19 executed.
3 Date on which last of 12 months from the end of the FY
authorisation for search or in which last of the authorisation
requisition got executed ≥ for search or requisition got
01.04.2019 executed.
13 S. 153A is a machinery provision. Provisions of S. 153A are machinery in nature.
When the proceedings are initiated U/s 153A, assessment is to be made either U/s
143 (3) or S. 144.
No independent procedure is prescribed in respect of proceedings initiated U/s 153A.
For co-operating assessees, assessment is done U/s 153A read with S. 143 (3).
For non-cooperating assessees, assessment is done U/s 153A read with S. 143 (3).
14 Assessment or reassessment U/s 153A The AO issues notice U/s 153A requiring the assessee to file a return for the 6 AYs
read with S. 143 (3) and the relevant AY (s).
The assessee shall furnish a return as required in the notice.
If he had already filed a return for the aforesaid AYs either U/s 139 or in pursuance of
a notice issued U/s 142 (1) (i) and he has nothing to offer additionally, he can write a
letter to the AO to regard the returns already filed U/s 139 or in pursuance of notice
issued U/s 142 (1) (i) as a return filed in pursuance of notice issued U/s 153A.
Then, the AO shall serve on the assessee a notice U/s 143 (2) within 6 months from
the end of the FY in which return was furnished in pursuance of notice issued U/s
153A.
He can issue notice U/s 142 (1) (iii) seeking information on specified points in writing
(duly verified) for the purpose of making assessment or reassessment.
He can give audit direction U/s 142 (2A).
He can conduct inquiry U/s 142 (2) for the purpose of framing assessment or

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reassessment U/s 153A.


He shall, then, pass an order of assessment or reassessment U/s 153A read with S.
143 (3), after giving OBH to the assessee.
15 Assessment or reassessment U/s 153A If the assessee does not file return in pursuance of notice issued U/s 153A or the
read with S. 144 assessee does not comply with the terms of notice issued U/s 143 (2) or does not
comply with the terms of notice issued U/s 142 (1) (iii) or does not comply with the
audit directions issued U/s 142 (2A), the AO may do assessment/reassessment U/s
153A read with S. 144.
16 Sanction of JCIT required. [S. 153D]. If the AO < JCIT, the AO shall pass the order of assessment or reassessment U/s
153A only with the sanction of JCIT.
Similarly, for the AY relevant to the PY in which search was initiated or requisition
was made, the order of assessment shall be passed only with the sanction of JCIT.
17 Joint authorisation should not lead to a It shall not be necessary to issue an authorisation U/s 132 or make a requisition U/s
conclusion that the persons searched 132A separately in the name of each person. [S. 292CC (1) (i)].
should be assessed as an AOP or BOI Where an authorisation U/s 132 has been issued or requisition U/s 132A has been
jointly. [S. 292CC] made mentioning therein the name of more than one person, the mention of such
names of more than one person on such authorisation or requisition shall not be
deemed to construe that it was issued in the name of an AOP or BOI consisting of
such persons. [S. 292CC (1) (ii)].
Notwithstanding that an authorisation U/s 132 has been issued or requisition U/s
132A has been made mentioning therein the name of more than one person, the
assessment or reassessment shall be made separately in the name of each of the
persons mentioned in such authorisation or requisition. [S. 292CC (2)].
The action of AO is justified in view of provisions of S. 292CC.
18 What is the fate of proceedings U/s Anonymous letters does not constitute information about the undisclosed income of
153A initiated pursuant to search the person complained of. Search based on such letters are illegal.
triggered by anonymous letters? The person raided can file a writ petition in the HC challenging the validity of the
[Suresh Chand Agarwal (All)]. proceedings initiated U/s 153A on the ground that the search is illegal.
Such proceedings will be quashed by the HC.
It can’t be a defence to the Department to contend that thought search was not in
consequence of information or material about the undisclosed income of the person
raided, in the course of such search, he was found to possess assets representing
undisclosed income.
Search operations have serious ramifications. It results in intrusion into the privacy of
the person raided.
Validity of search operations can’t be judged by its outcome.
Search operations could be initiated only in consequence of information in the
possession of the Department about undisclosed income.
Though, in the course of search assets representing undisclosed income and
incriminating evidences indicating concealment were seized, that can’t validate an
illegal search.
If search is illegal, the resultant proceedings U/s 153A also becomes illegal and
invalid.
19 Whether the material gathered in the Illegality of search will not vitiate the legality of the evidence.
course of illegal search can be used The evidentiary value of documents or records seized in the course of illegal search
against the assessee for initiating is not lost.
proceedings U/s 147? [Dr. Pratap There is not in the Indian Evidence Act to suggest this.
Singh (SC) + Pooran Mal (SC)]. Therefore, the Department is free to initiate proceedings U/s 147, if it is otherwise
possible.

(iii) Abatement of pending proceedings – 2nd proviso to S. 153A (1):

1 Pending proceedings shall get abated. The assessment or reassessment, if any, relating to any AY falling within the
[2nd proviso to S. 153A (1)]. period of 6 AYs and for the relevant AY (s) pending on the date of initiation of
the search or making of requisition, as the case may be, shall abate.
However, the Department is not at a loss. The assessment or reassessment
could be done U/s 153A in respect of those AYs for which the pending
proceedings got abated.

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Chapter-20: Assessment Procedure Summary

2 Concluded proceedings –intact. Nothing will happen to the concluded proceedings pertaining to these AYs.
These are intact. However, the AO shall do reassessment for these years.
3 Pending appellate proceedings / What gets abated under 2nd proviso to S. 153A (1) is only the proceedings
revisionary proceedings / rectification relating to assessment or reassessment which are pending on the date of
proceedings –intact. [CBDT circular initiation of search.
7/2003] Appellate proceedings, revisionary proceedings and rectification proceedings
which are pending on the date of initiation of search will not get abated.

(iv) No need to issue notice U/s 153A in certain cases – 3rd Proviso to S. 153A (1) + R. 112F:

1 Power of CG to notify The CG may by rules made by it and published in the OG (except in cases where any
cases where notice U/s assessment or reassessment has abated under 2nd proviso to S. 153A (1)), specify the
153A need not be issued. classes of cases in which the AO shall not be required to issue notice for assessing or
[3rd Proviso to S. 153A reassessing the TI for 6 AYs immediately preceding the AY relevant to the PY in which
(1)]. search is conducted or requisition is made and for the relevant AY (s).
2 R. 112F notified in Where as a result of a search U/s 132, a person is found to be in possession of any assets,
exercise of this power. whether or not he is the actual owner of such assets; and
Where such search is conducted in the territorial area of an assembly or parliamentary
constituency in respect of which a notification has been issued by the Election
Commissioner appointing the date and time of poll, before the completion of poll hours or
where the assets so seized or requisitioned are connected in any manner to the ongoing
election in an assembly or Parliamentary constituency:
Assessment or reassessment need not be made in respect of 6 AYs and in respect of
relevant AYs.
It would be sufficient if the assessment is made for the AY relevant to the PY in which
search was initiated or requisition was made and for those AYs for which the proceedings
for assessment or reassessment were abated by virtue of 2nd proviso to S. 153A (1).

(v) Revival of abated proceedings – S. 153A (2) + S. 153 (8):

1 Abated proceedings If any proceeding initiated or any order of assessment or reassessment made U/s 153A (1)
to get revived. [S. has been annulled in appeal or any other legal proceeding, then the assessment or
153A (2)]. reassessment relating to any AY which has abated 2 nd Proviso to S. 153A (1), shall stand
revived with effect from the date of receipt of the order of such annulment by the CIT.
2 Time-limit for (a) 1 year from the end of the month of such revival; or
completion of revived
proceedings. [S.153 (b) within the period specified in S. 153; or Whichever is later.
(8)].
(c) S. 153B (1).

(vi) Abatement of revived proceedings:

1 Revived proceedings to get abated. Such revival of abated proceedings shall cease to have effect, if the order of
[Proviso to S. 153A (2)]. annulling the proceedings U/s 153A is set aside.
The proceedings U/s 153A which got abated because of the order of annulment shall
stand revived.
2 Extended time-limit for completion of Normal time-limit U/s 153B + Time lost.
revived S. 153A proceedings. [Clause
(viii) of Explanation to S. 153B].
3 Time lost The period commencing from the date of annulment of proceeding U/s 153A (2) to
the date of receipt of the order setting aside the order of such annulment, by the CIT.
4 Minimum 60 days should be available The AO should have atleast 60 days for completion of assessment from the time he
to the AO after extension. [Proviso-1 could resume his work.
to Explanation to S. 153B].

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Chapter-20: Assessment Procedure Summary

a(vii) Assessment or reassessment in case of other person: S. 153C:

1 Issuing notice U/s 153A in case of The AO, having jurisdiction over the person searched or the person whose books of
a person other than the person accounts, other documents and assets were requisitioned (hereinafter referred to as S. 153A
searched. [S. 153C (1)]. person), is satisfied that (a) any assets seized or requisitioned belong to any person other
than S. 153A person; or (b) any books of accounts or documents seized or requisitioned,
pertain to, or any information contained therein relates to, any person other than S. 153A
person.
Then, he shall hand over such books of accounts, documents and assets to the AO having
jurisdiction over the person other than S. 153A person.
The AO, having jurisdiction over the person other than S. 153A person, is satisfied that the
books, documents or assets seized or requisitioned have a bearing on the determination of
the total income of the person other than S. 153A person.
Then, he shall issue notice U/s 153A to the person other than S. 153A person for 6 AYs
immediately preceding the AY relevant to the PY in which search was initiated or requisition
was made and for the relevant AY (s).
2 Assessment or reassessment for The AO, having jurisdiction over the person other than S. 153A person, shall assess or
the aforesaid AYs U/s 153A. [S. reassess the total income of the 6 AYs and relevant AY (s) U/s 153A.
153A (1)].
3 Time limit for completion of Situation Narration of the situation Time-limit
assessment or reassessment U/s 1 Date on which last of 21 months from the end of the FY in which last
153C read with S.153A for 6 AYs authorisation for search or of the authorisation for search or requisition
and relevant AY (s) [S. 153B]. requisition got executed < got executed; or
01.04.2018. 9 months from the end of the FY in which
books, documents and assets were handed
over U/s 153C (1) to the AO having jurisdiction
over the person other than S. 153A person.
(Whichever is later).
2 Date on which last of 18 months from the end of the FY in which last
authorisation for search or of the authorisation for search or requisition
requisition got executed got executed.
falls during the FY 18-19 12 months from the end of the FY in which
books, documents and assets were handed
over U/s 153C (1) to the AO having jurisdiction
over the person other than S. 153A person.
(Whichever is later).
3 Date on which last of 12 months from the end of the FY in which last
authorisation for search or of the authorisation for search or requisition
requisition got executed ≥ got executed.
01.04.2019 12 months from the end of the FY in which
books, documents and assets were handed
over U/s 153C (1) to the AO having jurisdiction
over the person other than S. 153A person.
(Whichever is later).
4 Pending proceedings shall get The assessment or reassessment, if any, relating to any AY falling within the period of 6 AYs
abated. [1st proviso to S. 153A (1)]. and for the relevant AY (s) pending on the date of handing over of books, documents and
assets U/s 153C to the AO concerned, shall abate.
However, the Department is not at a loss. The assessment or reassessment could be done
U/s 153C read with S. 153A in respect of those AYs for which the pending proceedings got
abated.
5 Power of CG to notify cases where 3rd Proviso to S. 153A (1) + S. 112F apply.
notice U/s 153A need not be
issued. [2nd proviso to S. 153C (1)].
6 Assessment for the AY relevant to Assessment for the AY relevant to the PY in which search was initiated or requisition was
the PY in which search was made shall be made U/s 143 (3) or S. 144.
initiated or requisition was made. However, if the books, documents or assets were handed over to the AO having jurisdiction
[S. 153C (2)]. over the person other than S. 153A person beyond the due date for filing return for the AY
relevant to the PY in which search was initiated or requisition was made, then for such AY
notice shall be issued U/s 153A and assessment shall be made U/s 153A.

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Chapter-20: Assessment Procedure Summary

7 Time-limit for completion of Same as that is given in 3.


assessment referred to in 6.

Points requiring attention:

1 Recording of satisfaction in the Where books, documents or assets are found from a person who is being searched, then the
satisfaction note by the AO normal presumption is that the said books, documents or assets belong to that person. [Vide S.
having jurisdiction over S. 153A 292CC].
person. [Pepsi Foods (P) Ltd It is for the AO to rebut that presumption and come to the conclusion or satisfaction that the
(2014) (Del) + Meghmani books, documents or assets, in fact, belongs to somebody else.
Organics Ltd (2013) (Guj) + There must be some cogent material available with the AO before he arrives at satisfaction that
CBDT Circular 24/2015]. the seized books, documents or assets do not belong to person searched but to somebody else.
Such satisfaction should be recorded in the file of the assessee (i.e. S. 153A person) which is
sine qua non to trigger jurisdiction for the AO (having jurisdiction over the other person) to
proceed against the other person.
The satisfaction note should clearly indicate that he has applied his mind and it was not done in
a mechanical manner.
In other words, the satisfaction note should display the reasons or basis for the conclusion that
the AO of the searched person is satisfied that the seized documents or assets belong to a
person other than the searched person.
2 Forwarding of satisfaction note A copy of the aforesaid satisfaction note shall be forwarded to the AO having jurisdiction over
to the AO having jurisdiction the other person and it shall be kept in the file of the other person.
over the other person.

4. Application of seized or requisitioned assets – S. 132B:

S. 132B (1): Manner of dealing with the assets seized: The assets seized U/s 132 or requisitioned U/s 132A may be dealt
with in the following manner, namely:—

(i) Liabilities that could be The amount of any existing liability under this Act, the Wealth-tax Act, 1957 and the amount of
recovered of the assets the liability determined on completion of the assessment U/s 153A and the assessment of the
seized year relevant to the PY in which search is initiated or requisition is made (including any penalty
levied or interest payable in connection with such assessment) and in respect of which such
person is in default or is deemed to be in default, may be recovered out of such assets:

Proviso- Application for release Where the person concerned makes an application to the AO within 30 days from the end of
1 to (i) of assets + Conditions the month in which the asset was seized, for release of asset and the nature and source of
to be fulfilled for acquisition of any such asset is explained to the satisfaction of the AO, the amount of any
release of assets. existing liability referred above may be recovered out of such asset and the remaining portion
of the asset may be released, with the prior approval of the CCIT or CIT, to the person from
whose custody the assets were seized:

Proviso- Time limit within which Such asset or any portion thereof as is referred to in proviso-1 shall be released within a period
2 to (i) the seized assets are of 120 days from the date on which the last of the authorisations for search U/s 132 or for
to be released requisition U/s 132A was executed;

(ii) Appropriation of money If the assets consist solely of money, or partly of money and partly of other assets, the AO may
seized apply such money in the discharge of the liabilities referred to above and the assessee shall be
discharged of such liability to the extent of the money so applied;

(iii) Sale of assets for The assets other than money may also be applied for the discharge of any such liability
discharge of liability referred to above as remains undischarged and the AO may recover the amount of such
liabilities by the sale of such assets and such sale shall be effected in the manner laid down in
the 3rd schedule.

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Chapter-20: Assessment Procedure Summary

S. 132B (2): Other recovery mode are applicable: Nothing contained in S. 132B (1) shall preclude the recovery of the
amount of liabilities aforesaid by any other mode laid down in this Act.

S. 132B (3): Returning back the surplus assets: Any assets or proceeds thereof which remain after the liabilities referred
to above are discharged shall be forthwith made over or paid to the persons from whose custody the assets were seized.

S. 132B (4) (a): Payment of interest by the CG: The CG shall pay simple interest @ 0.5% p.m or part thereof on the
amount by which the aggregate amount of money seized U/s 132 or requisitioned U/s 132A, as reduced by the amount of
money, if any, released under the first proviso to S. 132B (1) (i), and of the proceeds, if any, of the assets sold towards the
discharge of the liability referred to above, exceeds the aggregate of the amount required to meet the liabilities referred to
above.

S. 132B (4) (b): Period for which interest is to be paid: Such interest shall run from the date immediately following the
expiry of the period of 120 days from the date on which the last of the authorisations for search U/s 132 or requisition U/s
132A was executed to the date of completion of the assessment U/s 153A.

Explanation to S. 132B:

1 The Explanation provides that “existing liability” does not include advance tax payable in accordance with the provisions
of Part C of Chapter XVII of the Income-tax Act.
2 The impact of the above amendment as inserted by the said Explanation shall be harsh on the assessees who have
been searched U/s 132, since they have to pay advance tax from their own funds and not from seized funds.

5. Penalty in search cases – S. 271AAB:

1 When penalty can be Where the assessee has undisclosed income pertaining to specified PYs which is
levied U/s 271AAB? unearthed in the course of search operations U/s 132, penalty is levied U/s 271AAB.
2 Meaning of specified PY. PY which has ended before the date of search, but the date of furnishing the ROI U/s 139
(1) for such year has not expired before the date of search and the assessee has not
furnished the ROI for the PY before the date of search;
PY in which search was conducted.
3 Levying authority. AO.
4 Quantum of penalty. 30% of the undisclosed income (if the following conditions are satisfied).
60% of the undisclosed income. (if the following conditions are not satisfied).
5 Conditions to be fulfilled In a statement U/s 132 (4), the assessee admits the undisclosed income pertaining to
for suffering penalty @ specified PYs and specifies the manner in which income has been derived.
30%. The assessee substantiates the manner in which the undisclosed income was derived.
On or before the specified date, the assessee pays tax, together with interest, if any, in
respect of undisclosed income.
On or before the specified date, the assessee furnishes the ROI for the specified PYs
declaring such undisclosed income therein.
6 Meaning of specified It means the due date of furnishing of ROI U/s 139 (1) or the date on which the period
date. specified in the notice issued U/s 153A for furnishing of ROI expires, as the case may be.
7 No penalty U/s 270A. No penalty under the provisions of S. 270A shall be imposed upon the assessee in respect
of the aforesaid undisclosed income.

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Chapter-21: Advance tax & interest U/s 234A - S. 234B – S. 234C Summary

A. Advance tax provisions:


1 Requirement to pay tax in advance. Though income of the PY is assessed to tax in the AY, the recovery of tax on such
[S. 207 (1)]. income is not postponed to the AY. It is recovered in the same PY in which the
income is earned. One of the mechanisms through which the tax is recovered in the
same PY is the advance tax mechanism.
2 Steps in computation of advance tax Estimation of total income of the assessee for the relevant PY.
liability. Estimation of the tax liability using the tax rates specified in Part-III of Schedule I of
the Finance Act and special rates applicable for specified income.
Advance tax liability = Tax liability estimated (inclusive of surcharge (if applicable) &
education cess) – TDS – TCS – DTAR – AMT credit – MAT credit
3 No advance tax obligation in certain Case-1: If the advance tax liability < Rs. 10000, there is no advance tax obligation.
cases. [S. 208].
Case-2: If the assessee = senior citizen (i.e. resident + Age ≥ 60 years) and he does
not have income U/H PGBP, then there is no advance tax obligation. [S. 207 (2)].
4 Advance tax installments and due Due date of Instalment amount payable
date. [S. 211]. instalment
On or before 15th Not less than 15% of advance tax liability.
June
On or before 15th Not less than 45% of advance tax liability, as reduced by
September the amount, if any, paid in earlier instalment.
On or before 15th Not less than 75% of advance tax liability, as reduced by
December the amount, if any, paid in earlier instalments.
On or before 15th The whole of advance tax liability, as reduced by the
March amount, if any, paid in earlier instalments.
5 Advance tax payment and due date The assessees who have opted for presumptive taxation U/s 44AD or S. 44ADA
applicable for assessees who have shall pay the whole of the advance tax liability on or before 15th March.
opted for presumptive taxation U/s
44AD or S. 44ADA.
6 Payment made before the end of the Any amount paid by way of advance tax on or before 31st March shall also be
PY to be treated as advance tax. treated as advance tax paid during the FY for all purposes of the Act.
7 Income on which tax is deductible Employee receives salary without TDS U/s 192. Then, the employee shall pay the
but not deducted – Tax on such tax on his salary in advance. Otherwise, the employee exposes himself to interest
income shall be paid by way of U/s 234B. This so even if the employer is punished by way of levying interest U/s
advance tax. 201 (1A) for non-deduction of tax at source.

B. Computation of interest U/s 234A:


1. Interest U/s 234A (1)
1 Circumstances in which Situation-1: For the relevant AY, the return was filed belatedly and the return was processed
interest is levied U/s U/s 143 (1) but no assessment was made.
234A (1). Situation-2: For the relevant AY, the return was filed belatedly and assessment was made
thereafter.
Situation-3: For the relevant AY, the return was not filed and best judgment assessment was
made U/s 144.
Situation-4: For the relevant AY, the return was not filed and assessment was made U/s 147.
Situation-5: For the relevant AY, the return was not filed and assessment was made U/s 153A.
2 Computation of interest Base for computation of Tax on total income determined U/s 143 (1) – TDS – TCS –
in situation-1. interest Advance tax – Self assessment tax paid before the due date for
filing return – double tax avoidance relief – MAT credit or AMT
credit. [Part of Rs. 100 ignored].
Interest rate 1% per month or part thereof.
Period for which Date immediately following the due date to the date of furnishing
interest is computed. of return.
Interest to be included Interest computed as aforesaid – Interest U/s 234A (1) paid U/s
in the intimation issued 140A.
U/s 143 (1).
3 Computation of interest Base for computation of Tax on total income assessed – TDS – TCS – Advance tax –
in situation-2 interest Self assessment tax paid before the due date for filing return –
double tax avoidance relief – MAT credit or AMT credit. [Part of
Rs. 100 ignored].

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Chapter-21: Advance tax & interest U/s 234A - S. 234B – S. 234C Summary

Interest rate 1% per month or part thereof.


Period for which interest Date immediately following the due date to the date of
is computed furnishing of return.
Interest to be included in Interest computed as aforesaid – interest U/s 234A (1) paid
the notice of demand pursuant to intimation issued U/s 143 (1) –interest U/s 234A (1)
issued U/s 156. paid U/s 140A.
4 Computation of interest Base for Tax on total income assessed U/s 144 – TDS – TCS – Advance tax –
in situation-3 computation of Self assessment tax paid before the due date for filing return – double
interest tax avoidance relief – MAT credit or AMT credit. [Part of Rs. 100
ignored].
Interest rate 1% per month or part thereof.
Period for which Date immediately following the due date to the date of completion of
interest is assessment U/s 144.
computed
5 Computation of interest Base for Tax on total income assessed U/s 147 – TDS – TCS – Advance tax –
in situation-4 computation of Self assessment tax paid before the due date for filing return – double
interest tax avoidance relief – MAT credit or AMT credit. [Part of Rs. 100
ignored].
Interest rate 1% per month or part thereof.
Period for which Date immediately following the due date to the date of assessment
interest is U/s 147.
computed
6 Computation of interest Base for Tax on TI assessed U/s 153A – TDS – TCS – Advance tax – SAT
in situation-5 computation of paid before the DD for filing return – double tax avoidance relief –
interest MAT credit or AMT credit. [Part of Rs. 100 ignored].
Interest rate 1% per month or part thereof.
Period for which Date immediately following the due date to the date of assessment
interest is computed U/s 153A.

2. Interest U/s 234A (3)


1 Circumstances in which interest is Situation-1: For the relevant AY, the return was processed U/s 143 (1).
levied U/s 234A (3) Subsequently assessment is made U/s 147/ S. 153A. Pursuant to notice U/s
148 or S. 153A, return was not furnished within the time specified therein but
filed belatedly.
Situation-2: For the relevant AY, the return was processed U/s 143 (1).
Subsequently assessment is made U/s 147/ S. 153A (read with S. 144).
Pursuant to notice U/s 148 or S. 153A, no return was not furnished.
Situation-3: For the relevant AY, assessment was made U/s 143 (3), S. 144 or
S. 147. Subsequently, reassessment is made U/s 147 or U/s 153A. Pursuant to
notice U/s 148 or S. 153A, return was not furnished within the time specified
therein but filed belatedly.
Situation-4: For the relevant AY, assessment was made U/s 143 (3), S. 144 or
S. 147. Subsequently, reassessment is made U/s 147 or U/s 153A (read with
S. 144). Pursuant to notice U/s 148 or S. 153A, no return was not furnished.
2 Computation of interest in situation- Base for Tax on TI assessed U/s 147 or S. 153A - Tax on
1. computation of total income determined U/s 143 (1). [Part of Rs.
interest 100 ignored].
Interest rate 1% per month or part thereof.
Period for which Date immediately following the due date specified in
interest is computed the notice issued U/s 148 or S. 153A to the date of
furnishing of return.
3 Computation of interest in situation-2 Base for Tax on TI assessed U/s 147 or S. 153A (read with S.
computation of 144) - Tax on total income determined U/s 143 (1).
interest [Part of Rs. 100 ignored].
Interest rate 1% per month or part thereof.
Period for which Date immediately following the due date specified in
interest is the notice issued U/s 148 or S. 153A to the date of
computed completion of assessment U/s 147 or S. 153A (read
with S. 144).

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Chapter-21: Advance tax & interest U/s 234A - S. 234B – S. 234C Summary

4 Computation of interest in situation-3 Base for Tax on TI reassessed U/s 147 or S. 153A - Tax on TI
computation of assessed U/s 143 (3) or S. 144 or S. 147. [Part of Rs.
interest 100 ignored].
Interest rate 1% per month or part thereof.

Period for which Date immediately following the due date specified in
interest is the notice issued U/s 148 or S. 153A to the date of
computed furnishing of return pursuant to notice issued U/s 148
or S. 153A.
5 Computation of interest in situation-4 Base for Tax on TI reassessed U/s 147 or S. 153A (read with
computation of S. 144) - Tax on TI assessed U/s 143 (3) or S. 144 or
interest S. 147. [Part of Rs. 100 ignored].
Interest rate 1% per month or part thereof.
Period for which Date immediately following the due date specified in
interest is the notice issued U/s 148 or S. 153A to the date of
computed completion of reassessment U/s 147 or S. 153A (read
with S. 144).

C. Computation of interest U/s 234B:


1. Interest U/s 234B (1)
1 When interest is levied U/s 234B (1)? Assessee has obligation to pay tax in advance. But has not paid any
advance tax.
Advance paid by the assessee < 90% of the assessed tax.
2 Different situations in which interest is Situation-1: For the relevant AY, the return was processed U/s 143 (1)
computed U/s 234B (1). but no assessment was made.
Situation-2: For the relevant AY, the return was processed U/s 143 (1).
Subsequently, assessment was made U/s 143 (3) or S. 144.
Situation-3: For the relevant AY, return was not filed. Best judgment
assessment is made U/s 144.
Situation-4: For the relevant AY, no return was filed. Assessment was
made U/s 147.
Situation-5: For the relevant AY, no return was filed. Assessment was
made U/s 153A.
3 Computation of interest in situation-1
Stage-1: Computation of interest at the Assessed tax Tax on returned income – TDS – TCS –
time of filing of return. DTAR – AMT credit – MAT credit.
Advance tax paid < 90% of the assessed tax.
Base for computation of Assessed tax – Advance tax paid. [Part of
interest Rs. 100 ignored].
Interest rate 1% per month or part thereof.
Period for which interest 1st of the AY to date of payment of self-
is computed assessment tax U/s 140A.
Stage-2: Computation of interest at the Assessed tax Tax on TI as adjusted U/s 143 (1) –
time of preparing intimation U/s 143 (1) TDS – TCS – DTAR – AMT credit –
after the processing of return. MAT credit.
Advance tax paid < 90% of the assessed tax.
Quantum of interest U/s [(Assessed tax – Advance tax) * 1% *
234B (1) (1st day of the AY to date of payment of
SAT U/s 140A)] +
[(Assessed tax – Advance tax – self-
assessment tax paid U/s 140A) * 1% *
(1st day of month succeeding the
month of payment of self-assessment
tax to date of processing of return U/s