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IT Mirror 2 2016 inside page - Income Tax Bar MIRROR 2016-17-VOL-2.pdfINCOME TAX BAR ASSOCIATION 5 IT Mirror 2016-17 Vol: 2 President's Communication Dhruven V. Shah President Respected

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Page 1: IT Mirror 2 2016 inside page - Income Tax Bar MIRROR 2016-17-VOL-2.pdfINCOME TAX BAR ASSOCIATION 5 IT Mirror 2016-17 Vol: 2 President's Communication Dhruven V. Shah President Respected
Page 2: IT Mirror 2 2016 inside page - Income Tax Bar MIRROR 2016-17-VOL-2.pdfINCOME TAX BAR ASSOCIATION 5 IT Mirror 2016-17 Vol: 2 President's Communication Dhruven V. Shah President Respected

I T MIRRORCONTENTSMouth piece of Income

Tax Bar Association

CA Kaushik D. ShahChairman

Jayprakash J. SoniCo-Chairman

Rajesh P. ShahCo- Chairman

Members

CA Darshan B. ParikhCA Hersh S. JaniKaushal P. VyasVikram B. Gandhi

Office Bearers

Dhruven V. ShahPresident

Chaitanya A. NayakVice President

Kartikey B. ShahHon. Secretary

CA Vishves A. ShahHon. Jt. Secretary

Ashutosh R. ThakkarHon. Treasurer

Managing Committee

Bharatkumar H. PatelKanaiyalal H. VidhvaniCA Nikit D. ShahCA Rajendra R. KabraRajesh J. ShahCA Ritesh G. GandhiRupang R. ShahTejash R. Shah

Invitee Member

Shailesh C. DesaiLatesh K. ParikhBakul R. Parikh

03CHAIRMAN'S COMMUNICATION

PRESIDENT'S COMMUNICATION05

SECTION - A

ANALYSIS OF DEDUCTION OF INTEREST

– SECTION 36(1)(III)

CA Kaushik D. Shah - Chartered Accountant

07

WHETHER PROSECUTION U/S 276B OF

THE INCOME TAX ACT, 1961 CAN BE

INITIATED IF THE TDS IS PAID LATE?

CA Kaushik D. Shah - Chartered Accountant

15

JUDICIAL PRECDENTS ON

DEMONETIZATION OF CURRENCY

PRAMOD N. POPAT - ADVOCATE

19

BENAMI TRANSACTIONS (PROHIBITION)

AMENDMENT ACT,2016

Kartikey B. Shah - Advocate

22

FAQS ON PRADHAN MANTRI GARIB

KALYAN YOJANA29

SECTION - B

CIRCULAR ON SECTION 45--CAPITAL

GAINS SHARE TRANSACTIONS36

CIRCULAR ON ADMISSIBILITY OF CLAIM

OF DEDUCTION OF BAD DEBT UNDER

SECTION 36(1)(VII) R/W SECTION 36(2)

38

CIRCULAR ON REVISION OF MONETARY

LIMITS FOR FILING OF APPEALS BY

THE DEPARTMENT

40

CIRCULAR ON AMENDMENT IN SECTION

206C OF THE INCOME-TAX ACT VIDE

FINANCE ACT 2016

44

NOTIFICATION ON AMENDMENT

IN RULE 8D46

AMENDMENT OF INSTRUCTION TO PROVIDE

FOR GUIDELINES FOR STAY OF DEMAND48

Page 3: IT Mirror 2 2016 inside page - Income Tax Bar MIRROR 2016-17-VOL-2.pdfINCOME TAX BAR ASSOCIATION 5 IT Mirror 2016-17 Vol: 2 President's Communication Dhruven V. Shah President Respected

INCOME� TAX� BAR� ASSOCIATION 3 IT�Mirror� 2016-17����� Vol:� 2

I have great pleasure in putting in your hands the second issue of I.T. MIRROR which is Mouth

piece of Income Tax Bar Association. It is our endeavour to see that the Mirror is very useful to the

members in there day to day practice. In the first issue we have printed important and useful

articles of tremendous importance.

In this issue we would like to highlight the important circulars issued by CBDT with comments

which we are sure will be very helpful to the members. We have selected only important articles

and adopted principal of exceptions in selecting them. We have also printed important articles

which we are sure. The members would like to read and analyze.

I would like to specially mention the article on Benami Act which is written by the Hon. Secretary

Shri Kartik B. Shah. I must say that he has put in lot of efforts and pain in writing this article which is

a new topic for everyone.

We have consciously avoided the topic of Demonetisation as the same is covered in number of

magazines as well as seminars. However, let me give my views in brief on Demonetisation, while

the intent of the Prime Minister in this initiative cannot be doubted, there are certain concerns

which need to be addressed. The first is in regard to the notices that various persons have been

receiving on their depositing cash in their bank accounts and the surveys that are being carried

out. While the Income Tax Department certainly has the power to enquire into the source of

money, such actions should not lead to inspector raj which could, in turn, lead to abuse of power.

Even prior to demonetisation, there were complaints of tax terrorism. There must be a balance

between seeking information and inconvenience to the public. The use of authority must be

judicious.

It is now provided that in respect of income referred in Sections 68, 69, 69A, 69B, 69C or 69D

which is offered for the tax by the assessee in the Return of Income filed u/s. 139 the rate of tax on

such income will be 60% plus applicable surcharge and education cess. This will mean that any

income in the nature of cash credit, unexplained investments, unexplained expenditure etc. which

is offered for taxation u/s. 68, 69, 69A to 69D will now be taxable in the case of individual, HUF,

AOP, Firm, Company etc. at the rate of 60% (instead of 30% earlier) plus surcharge on the tax at

EDITORIALCHAIRMAN'S COMMUNICATION

CA Kaushik D.SHAHChairman of IT Mirror Committee 2016-17

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INCOME� TAX� BAR� ASSOCIATION 4 IT�Mirror� 2016-17����� Vol:� 2

25% of tax (i.e. 15%) even if the total income is less than Rs. 1 Crore. Besides the above,

education cess at 3% of tax will also be payable.

It is unfortunate that this Amendment Act however provides that if the old notes deposited in the

Bank during the above period are of the value below Rs. 2.5 Lacs, no tax will be payable. This

means that the announcements by the Prime Minister, Finance Minister and others representing

the government that no enquiry will be made in respect of deposits up to Rs. 2.50 Lacs have not

been honoured by the Government while enacting this Amendment Act.

In the end, I would like to draw the attention of the members to the CBDT notification for delegating thauthority for issuing notice u/s. 143(2) regarding Assessment. This notification is issued on 16

November 2016 which reads as under:

“Extract of Section 143(2) of Income Tax Act, 1961 related to Assessment for reference-

(2) where a return has been furnished under section 139, or in response to a notice under sub-

section(1) of section 142, the Assessing Officer or the prescribed income-tax authority, as the

case may be, if, considers it necessary or expedient to ensure that the assessee has not

understated the income or has not computed excessive loss or has not under-paid the tax in any

manner, shall serve on the assessee a notice requiring him, on a date to be specified therein,

either to attend the office of the Assessing Officer or to produce, or cause to be produced before

the Assessing Officer any evidence on which the assessee may rely in support of the return”.

In my opinion this is the most retrogate step taken by the Hon. CBDT. I hope no harassment will

take place on account of the powers granted to the I.T.O. for issuing notice in respect of scrutiny

assessments.

Wish you all a Very Happy, Prosperous and Meaningful 2017.

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INCOME� TAX� BAR� ASSOCIATION 5 IT�Mirror� 2016-17����� Vol:� 2

President's Communication

Dhruven V. ShahPresident

Respected seniors and professional colleagues!

Warm Greetings!

Since 8th November, the Honourable Prime Minister announced the decision of Demonetisation.

Thus each passing day is witnessing myriad changes in financial and economic structure of the

country. Benefits of this decision extends to tackle the menace of counterfeit notes,

consequentially to turn off the terror funding tap and to bring holders of unaccounted money to

book. This indeed is an added honour for the honest taxpayers of our country.

Being professionals of the IT industry, onus is on our shoulders to effectively get conversant with

new laws like Benami Property Act, Income Tax Amendment (2016) Act, Insolvency and

Bankruptcy Code, Real Estate (Regulation and Development) Act and above all Goods and

Services Act. It is essential that we effectively convey these news laws to our clients and help them

with advanced and appropriate tax planning. Pradhan Mantri Garib Kalyan Yojna, 2016 opened

up from 17/12/2016 and will continue up to 31/03/2017. It is our responsibility to make our clients

aware of it so that they may avail the benefits of such schemes and save themselves from hefty

penalties and stricter punishments. As many persons have missed IDS, 2016, Government has

given another chance to them to come out clean and contribute in the progress of the Nation.

Through I T Mirror we always try to provide insight into current updates of the new regulations. In

this second volume of I T Mirror, we have included some of the resourceful articles regarding

current scenario in Section A. In Section B we have collected some of the recent circulars and

notifications from CBDT along with necessary comments which explains the purpose and its

effect on different regulations. I specially thank CA Kaushik D Shah our Honourable chairman of I

T Mirror committee for taking the pain to narrate comments on circulars.

Last but not the least, Year 2016 has witnessed some dynamic reforms taken by the Central

Government in the area of legislations. I wish each and every member of this association more

enterprising, knowledgeable and prosperous New Year 2017. Let us all welcome the coming year

with the conviction that we would maintain always the integrity and dignity of this profession at the

highest level.

Wishing you Best of 2017!!!

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Section A

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INCOME� TAX� BAR� ASSOCIATION 7 IT�Mirror� 2016-17����� Vol:� 2

Deduction of expenses incurred for earning business income is spelt out in the Sections 30 to 36

of Income Tax Act, 1961. Under Section 36 of Income Tax Act, 1961, there are number of

deductions available subject to the conditions laid down. In this discussion, I would take up

Section 36(1)(iii) of the Income Tax Act, 1961 and analyze the provision therein from all facets,

which will make us understand the deduction in a comprehensive way. In the vortex of legal

pronouncements, I will analyze few case laws as well, which throw light on the grey areas that are

not captured or construed in the tax legislation.

Meaning and ConceptThe bare reading of Section 36(1)(iii) is as follows:

“36 (1) the deductions provided for in the following clauses shall be allowed in respect of the

matters dealt with therein, in computing the income referred to in Section 28

(i) and (ii) ******

(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business

or profession:-

Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an

asset for extension of existing business or profession (whether capitalized in the books of account

or not) for any period beginning from the date on which the capital was borrowed for acquisition of

the asset till the date on which such Asset was first put to use, shall not be allowed as deduction.

The sub section has three important words or phrases that are core for understanding of this

Section i.e. (i) Interest, (ii) Borrowed and, (iii) For the purpose of business or profession. In the

following paragraphs, I would elucidate the meaning of these words or phrases with reference to

this particular section for better understanding.

(i) Meaning of “Interest”:

The definition of interest given under Section 2(28A) says about “interest payable in any

manner in respect of any moneys borrowed or debt incurred”. But for Section 36(1)(iii),

“interest is restricted to that on money borrowed and not on debt incurred.

ANALYSIS OF DEDUCTION OF INTEREST– SECTION 36(1)(III)

CA Kaushik D. ShahChartered Accountant

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(ii) Concept of “borrowed”:

Provisions of Section 36(1)(iii) talks about capital borrowed and not about any other

debts or liability. A loan of money undoubtedly results in a debt, but every debt does

not involve a loan. Liability to pay a debt may arise from diverse sources and a loan is one of

such sources. The legislature has, under this clause, permitted as an allowance interest paid

on capital borrowed for the purposes of the business; and the capital, in this context, means

money and not any other asset purchased on credit [Bombay Steam Navigation Co. Pr. Ltd.

v. CIT, 56 ITR 52 (SC)]

• Importance of the word “loan”:

To qualify a transaction as loan, there must be a settlement / agreement between the

parties that particular amount would be given by one party to other party. The terms would

be that it would be refunded or returned either on demand or on the directions of the

creditors and particular interest / no interest would be paid on the said amount. Thus, for

the purpose of loan there must be interaction between the parties and there must be a

concluded contract. Thus for Section 36(1)(iii) the necessary precondition is the existence

of a loan transaction or a loan agreement between two parties with an established role of

creditor and debtor. There is a Gujarat High Court judgment in the case of Arun Family

Trust vs. CIT 298 ITR 437 (Guj.) which brings out this fact clearly.

• Element of refund is must:

An element of refund or repayment is a must in the concept of borrowing. If there is no

obligation to refund the capital provided, interest on such capital is not deductible under

Section 36(1)(iii) – Pepsu Road Transport Corp. V. CIT 130 ITR 18 (P&H).

(iii) Explanation of the term “for the purpose of business”:

This phrase, as held by many legal pronouncements, is the most important yardstick for

the allowability of deduction Under Section 36(1)(iii) of Income Tax Act, 1961. While

explaining the meaning of this phrase the Hon'ble Supreme Court in the case of S. A.

Builders Ltd. vs. CIT (A), Chandigarh reported in 288 ITR 1 has used the word

“commercial expediency”. By using this phrase Hon'ble Supreme Court has given a

new dimension and clarified the concept further. In the judgment the Supreme Court has

defined commercial expediency as “an expression of wide imports and includes such

expenditure as a prudent businessman incurs for the purpose of Business. The

expenditure may not have been incurred under any legal obligation, but yet it is allowable

as business expenditure, if it was incurred on grounds of commercial expediency”.

Further, following this judgment, the High Court of Delhi in the case of Punjab Stainless

Steel Inds. Vs. CIT 324 ITR 396, has further elaborated “The commercial expediency

would include such purpose as is expected by the assessee to advance its business

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interest and may include measures taken for preservation, protection or

advancement of its business interests, which has to be distinguished from the

personal interest of its directors or partners, as the case may be. In other words,

there has to be a nexus between the advancing of funds and business interest of the

assessee firm. The appropriate test in such a case would be as to whether a reasonable

person stepping into the shoes of the directors/partners of the assessee-firm and working

solely in the interest of the assessee-firm/ company, would have extended such interest

free advances. Some business objective should be sought to have been achieved by

extending such interest free advances when the assessee-firm/company itself is

borrowing funds for running its business.

Thus, for allowance of a claim for deduction of interest under this provision, following

three conditions needs to be fulfilled:

(i) The money, that is capital, must have been borrowed by the assessee

(ii) It must have been borrowed for the purpose of business

(iii) The assessee must have paid interest on the borrowed amount which is shown

as expenditure

Proviso to Section 36(1)(iii)

Section 36(1)(iii) provides for deduction of amount of the interest paid in respect of capital

borrowed for the purpose of the business or profession. Proviso to section 36(1)(iii) was amended

by Finance Act, 2003 w.e.f. 1 April, 2004 relating to A.Y 2004-2005 and subsequent years. st

This

was inserted to disallow interest on moneys borrowed for acquiring a capital asset till the date on

which the asset was brought to use even if it is for extension of existing business.

The logic behind provision is only to ensure that wherever interest is capitalized in the books of

account, it remains capitalized for the purpose of income tax. This interest cannot be claimed as a

deduction under Section 36(1)(iii) of the Act. One is not clear on the import of the expression

"extension of existing business or profession."

Extension is alien to income tax parlance and cannot be defined in objective and exact terms. In

today's business context, even acquisition of machinery worth a few lacs may tantamount to

extension. The objective is to address issues of substantial expansion of business. If that was the

intention, the concept of "extension of industrial undertaking", as mentioned and applicable for

Section 35D of the Act dealing with amortization and preliminary expenses, could have been

transplanted in Section 36(1)(iii) of the Act. This would clearly establish that the proviso would

apply to extension of industrial undertaking and not extension of business per se.

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Also, the use of the expression "whether capitalized in the books of account or not" could

raise host of controversies. Interest is capitalized in the books of accounts in the present

regime in accordance with the principles laid down in Accounting Standard 16 on

borrowing costs. The operative portion of the standard is as follows:

"Borrowing costs that are directly attributable to the acquisition, construction or production of a

qualifying asset should be capitalized as part of the cost of that asset. The amount of borrowing

costs eligible for capitalization should be determined in accordance with this statement. Other

borrowing costs should be recognized as an expense in the period in which they are incurred."

Borrowing costs are capitalized as part of the cost of a qualifying asset when it is probable that

they will result in future economic benefits to the enterprise and the costs can be measured

reliably. Other borrowing costs are recognized as an expense in the period in which they are

incurred. This mandatory standard has to be applied in respect of accounting periods

commencing on or after April 1, 2000. Also the AS 16, in paragraph 21 of Cessation of

capitalization, it is said that Capitalization of borrowing costs should cease when substantially all

the activities necessary to prepare the qualifying asset for its intended use or sale are complete.

While in Income Tax Act, Capitalization of borrowing costs should cease when business will start.

It means capitalization concept as per accounts and as per IT Act is not matching so no one can

say that this is the concealment of Income or inaccurate particular. Proviso itself hints that

company may capitalize it or not.

Hence, once interest is capitalized for accounting purposes, the proviso could have simply stated

that the treatment given for accounting purposes would apply for the purpose of tax computation

also. It is also not clear as to use of the expression "extension of profession" in the proviso. While

extension of business is normal and part of business activity, one cannot visualize or understand

how interest in such cases would be capitalized. In sum, the amendment has been introduced to

nullify judicial controversies on the subject and bring the much needed alignment between books

and income tax in the matter of interest accounting.

• Extent of disallowance when there is time lag between disbursement of loan and asset

being put to use

In my opinion, if the time lag is substantially long, then only the question of disallowance

of interest arises. As per the mandate of Accounting Standard 16 (AS-16) on Accounting for

Borrowing Cost, it is specifically provided that interest can be capitalized only in respect of

“qualifying asset” and it states that a qualifying asset is an asset that necessarily takes a

substantial period of time to get ready for its intended use. Assets which are ready for the

intended use when acquired are not qualifying asset and hence the assessee cannot capitalize

interest to the cost of qualifying asset and the same has to be written off to the profit and loss

account and the deduction u/s 36(1)(iii) cannot be denied. If it is not done, there would be

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violation of AS -16 which will make the financial statements untrue and unfair. The

time lag in our case between the loan disbursed and the asset used is very short and

hence it is not possible to capitalize the cost of interest. It is further submitted that in

my opinion assessee is otherwise entitled to deduction of such interest u/s 37(1) as such

situation is not covered by section 36(1)(iii). As per section 37(1), any expenditure incurred

wholly and exclusively for the purpose of business is required to be allowed as deduction u/s

37(1).

• Amendment in the Finance Act, 2015

Para 5 of ICDS-IX “Borrowing Costs” provides that to the extent the funds are borrowed

specifically for the purposes of acquisition, construction or production of a qualifying asset, the

amount of borrowing costs to be capitalized on that asset shall be the actual borrowing costs

incurred during the period.

It can be seen that there is a conflict between the proviso to section 36(1)(iii) and Para 5 of

ICDS-IX. Proviso to section 36(1)(iii) envisages capitalization of interest on capital borrowed

for acquisition of an asset only if such acquisition of asset is for extension of existing business

or profession while ICDS-IX envisages capitalization even if there is no extension of existing

business or profession, in order to align the provisions of the proviso to section 36(1)(iii) with

Para 5 of ICDS-IX, the Finance Act, 2015 has omitted the words “for extension of existing

business or profession” from the proviso to section 36(1)(iii). The amendment will be

effective from assessment 2016-17.

• Asset acquired out of borrowed capital need not have been used during relevant year and

interest can be allowed unless this asset is not for extension of existing business.

Asset acquired need not to have been used during the relevant previous year where

machinery was purchased out of borrowed funds for the purpose of business and it was

treated as business assets, merely because such machinery had not been actually used in

business at the time when assessment was made, interest paid on amount borrowed could

not be disallowed CIT vs. Associated Fibre & Rubber Industries (P.) Ltd. [1999] 102 Taxman

700 (SC)/CIT v. Insotex (P.) Ltd. [1984] 150 ITR 195 (Kar.)/Calico Dyeing & Printing Works v.

CIT [1958] 34 ITR 265 (Bom.)/C.T. Desai v. CIT [1979] 120 ITR 240 (Kar.). See also Dy. CIT v.

Core Health Care Ltd. [2008] 167 Taxman 206 (SC)/Jt. CIT vs. United Phosphorus Ltd. [2008]

167 Taxman 261 (SC).

In view of Supreme Court's judgment in case of Dy. CIT v. Core Health Care Ltd. [2008]

167 Taxman 206, it was to be held that interest paid in respect of borrowing to purchase capital

assets, which are not put to use in concerned financial year, can be permitted as an allowable

deduction Jt. CIT v. United Phosphorous Ltd. [2008] 167 Taxman 261 (SC). Where machinery

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was purchased out of borrowed amount for purpose of business and it was treated as

business assets merely because such machinery had not been actually used in

business at time when assessment was made, interest paid on amount borrowed

could not be disallowed CIT v. Associated Fibre & Rubber Industries (P.) Ltd. [1999] 102

Taxman 700 (SC)/CIT v. Insotex (P.) Ltd. [1984] 150 ITR 195 (Kar.)/Calico Dyeing & Printing

Works v. CIT [1958] 34 ITR 265 (Bom.)/C.T. Desai v. CIT [1979] 120 ITR 240 (Kar.).

However, this is before the insertion of proviso but it is clear that when it is proved that the

capital is not borrowed after business was set up then this proviso will not be applicable and

decision of above mentioned cases can be applicable because in the cases above, the capital

was not borrowed after the existing business was started and at the time of capital borrowed

no business existed and all the capital was borrowed altogether and not with separate

sanctioning of the loan.

Key issues - Section 36(1)(iii)

1) Interest on borrowed capital used for interest free loan

The law on this issue is settled after the Hon'ble Supreme Court judgment in the case of S. A.

Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC), in which the concept of “commercial

expediency” was used. Thus, where the funds of the business are diverted for interest free loans,

the main criteria for permissibility of interest on those funds are based on whether it was for

commercial expediency or not. The phrase “commercial expediency” has following important

traits as established by case laws cited supra:

• Such purpose as is expected by the assessee to advance its business interest.

• May include measures taken for preservation, protection or advancement of its business

interests.

• To be distinguished from the personal interest of its directors or partners, as the case may

be.

• There has to be a nexus between the advancing of funds and business interest of the

assessee. Some business objective should be sought to have been achieved by

extending such interest free advances when the assessee firm/company itself is

borrowing funds for running its business.

The Hon'ble Supreme Court has also relied upon the case where there would be mixed fund at the

disposal of the assessee. It further clarifies that under Section 36(1)(iii) the ultimate use of the fund

is important. It may not be relevant as to whether the advances have been extended out of the

borrowed funds or out of mixed funds which include borrowed funds. The test to be applied in such

cases is not the source of the funds but the purpose for which the advances are extended.

Let me further give you reference of jurisdictional High Court in CIT vs. Raghuvir Synthetics Ltd.

(354 ITR 222) has held that when interest free funds available with the assessee were far greater

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than loan advanced to the sister concerns and borrowed money was not utilized for the

purpose of advance to the sister concerns then interest was not disallowable merely on

account of the utilization of funds for non-business purposes and when no evidence is

brought on record by the Department that borrowed money was utilized for the purpose of

advance to sister concerns.

2) Interest on borrowing utilized for earning exempt income

The issue is whether to allow the interest on borrowing utilized for exempt income or non

assessable income. The primary condition for allowing deduction of interest in the computation of

business income is that the interest was paid on capital borrowed for the purpose of business or

profession. If the borrowed capital is utilized not in the business whose income is assessable, but

in earning some non assessable or exempt income, the interest paid thereon, is not an allowable

deduction under these provisions. This analogy flows from Section 14A inserted in Chapter IV of

the Act, by the Finance Act, 2011 with retrospective effect from 01.04.1962, which is intended to

safeguard the interest of the Revenue on account of wrong claim of expenditure relating to exempt

income against taxable income. The Section 14A postulates that only expenditure which is

relatable to taxable income should be deducted in computing the total income. Hence,

expenditure which is incurred to earn exempt income should not be considered in the computation

of total income as this would result in double advantage to the assessee.

Direct judgment which covers this issue is H.T. Conville vs. CIT 4 ITR 137. Where a borrowing is

specifically meant for use in a new industrial undertaking covered by Section 10B, such interest

would go to reduce the eligible relief. It was, therefore, decided in Procon Systems P. Ltd. V. ITO

296 ITR 636 (Mad) that such interest cannot be reduced from eligible profits, because it has

already been allowed as a business deduction.

Further, as per the jurisdictional High Court in CIT vs. Gujarat State Fertilizers and Chemicals

Ltd. (358 ITR 323), CIT vs. UTI Bank Ltd. (215 Taxman 8) & CIT vs. Hitachi Home and Life

Solutions (I) Ltd. (221 Taxman, 109) has held that where assessee's interest free funds far

exceeds investment made for earning exempted dividend income, and Assessing Officer had

failed to establish nexus between borrowed funds and investments made, than no disallowance

u/s 14A could be made since the presumption is that the interest free funds are first utilized for

making investment and not interest bearing funds following ratio of Hon'ble Bombay High Court

judgment of CIT vs. Reliance Utilities & Power Ltd. (313 ITR 340).

3) Distinction between Section 36(1)(iii) and Section 37(1)

Section 37(1), which is a residuary general provision, may have application to any expenditure

(including interest) which is not of the nature described in Sections 30 to 36. To an extent, Section

36(1)(iii) and Section 37(1), so far as the allowance of interest is concerned, run parallel to each

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other. But later, they do differ and it can then be discerned whether a given case falls

within the phraseology of Section 36(1)(iii) or Section 37(1). Comparing the two, I may

see –

4) The extent of disallowance under Section 36(1)(iii)

The Assessing Officer is often confronted with a question as to the extent of disallowance when it

is proved that the borrowings were utilized for non business purposes. In such situations, there

could be two possible scenarios:

i) Where there is only borrowed fund and no composite or mixed fund

In such cases, the disallowance is to be made at the full rate of interest payable on

such borrowed money. The amount of interest, if any, realized from such utilization is

not to be taken into account for ascertaining the extent of the disallowance [CIT vs.

India Silk House, 152 ITR 79 (Mad)].

ii) Where there is composite or mixed funds

In such a case, the Assessing Officer is required to co-relate between the natures of

feeding fund with utilization of such fund. After this co-relation the Assessing Officer

may devise methods based on factual analysis of the source of fund with the utilization

of fund to arrive at the figure of part disallowance of interest expenditure. In this case,

there cannot be full disallowance of interest payable by the assessee. Where the funds

are mixed up, so that it is not possible to identify the extent of borrowings utilized for

such loans, proportionate amount could be disallowed as held in K. Somasundaram

and Brothers Vs. CIT 238 ITR 939 (MAD).

In this article, I have dealt with important provisions of Section 36(1)(iii) and number of

issues arising out of the detailed analysis of the section as well as proviso, however

still the issues are likely to crop up and I hope this article would help in resolving those

issues.

Section 36(1)(iii) Section 37(1)

1. It must be interest on capital (moneys) borrowed

1. It may be interest even on any debt incurred

2. The borrowing must be for the “purpose of business”

2. The debt incurred must be and exclusively for the purpose of the business

3. The borrowed amount may be utilized for even procuring a capital asset related to the business

3. The debt incurred must not be utilized for procuring a capital asset so as to fall within the gamut of “capital expenditure”

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ISSUE:XYZ Ltd. Is a sick company incurring losses since last five years. However in spite of adverse

financial conditions the company paid all the tax deducted at source, but same was paid late. The

CIT (TDS) has initiated provisions of Section 276B, of the Income Tax Act, 1961 for prosecution.

It is worthwhile examining the wording of relevant provisions closely. The text is as

follows:276B- Failure to pay tax to the credit of Central Government under chapter XIID or

XVIIB.“If a person fails to pay to the credit of the central Government,

• the Tax deducted at source by him as required by or under provisions of Chapter

XVIIB or • the tax payable by him , as required by him or under,

• Sub Section(2) of Section 115-O; or• the second proviso to Section 194B,

he shall be punishable with rigorous imprisonment for a term which shall not be less than

3 months but which may extend to 7 years and with fine.”

Firstly, the very heading suggest that there should be a failure to pay the tax. Secondly the

placement of clause (a) in the section, makes it clear that it pertains to the tax deducted as per the

provisions of chapter XVIIB and not payment as per provision of chapter XVIIB. Thus, failure to

pay is on different footing. Put differently, payment need not be within the time specified in that

chapter.

In short, the section contemplates total failure and not mere delay. As against this, even if the tax is

already paid with interest, the notices for prosecution are being issued. The notices also mention

the fact of prior payment. This, then, is clearly against the wording and spirit of the provision.

It is necessary to compare the text of section 276B with provisions of section 40(a)(ia).Section

40(a) (ia) contemplates a time limit for the payment of tax as well ; and not merely the deduction as

per Chapter XVII B. For mere delay, there are already adequate provisions viz. section 40(a)(ia)

disallowance; 201(1A)- interest, 271C and 221 – penalty. Thus, section 276B clearly applies to

total failure and not a mere delay.

WHETHER PROSECUTION U/S 276B OF THE INCOME TAX ACT,1961 CAN BE INITIATED IF THE TDS IS PAID LATE?

CA Kaushik D. ShahChartered Accountant

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In case of BEE GEE MOTORS AND TRACTORS AND ANOTHER vs. INCOME TAX

OFFICER Punjab and Haryana High court reported 218 ITR 155 “held that the

complaint was that the petitioners did not deduct the income tax at source for the years 1982-83 &

1983-84, thus, making themselves liable for punishment under section 276B of the Act. However,

the petitioners later did deduct the required tax on February 20, 1985 and deposited the same on

the same date. By the time tax was deducted and deposited, no prosecution had been launched.

Since an insignificant amount of Rs. 9428 in one case and an even lesser amount in another case

was involved and the prosecution was launched after a number of years after the default was

committed or the tax was deposited and the matter was pending since 1993, the complaint

deserved to be quashed.”

The provision of the chapter XVIIB cast duties on assessee to deduct tax at source on various

payments made to the deductee. Thus, the deductor is an agent of the government to collect tax.

The tax so collected, has to be deposited or paid to the credit of the Central Government and any

failure in the payment of tax in time will attract all the consequences of payment of interest and

penalty and even prosecution.

The High Court of Bombay , Nagpur Bench in the case of ITO V/S Sultan Enterprises reported in

127 Taxman 514 was held as under :

“The facts of the case are not much in dispute. The offence in question relates to non deposit of tax

deducted at source amount within the prescribed time and therefore action was taken against

them and dues were recovered by imposing penalty and interest. This also amounts to offence

punishable provided under sections 276B and 278B.The learned CJM erred in applying the

principle of double jeopardy as provided under section 300 of the code of criminal procedures for

the simple reason that the recovery of the amount due and payable by respondent firm to the

income tax department has nothing to do with criminal prosecution because it is a distinct

provision inviting penal action for the default committed by the firm. They are liable both for the

recovery of the amount with interest and penalty so also for prosecution for having committed

offence punishable under section 276B of the act for their failure to pay the amount within the

prescribed period and as the respondent firm is a partnership concern all the partners of the firm

as contemplated under section 278B would be liable to be prosecuted.”

The Central Board of Direct Taxes (CBDT) has recently modified the guidelines for initiation of

prosecution under section 276B of the Income Tax Act, 1961 (“Act”). The press release dated

August 6, 2013 has clarified that any delay in remittance of Tax Deducted at Source (“TDS”),

would be liable for prosecution regardless of the period of delay.

Under Section 276B of the Act, any tax deductor could be prosecuted for delay or default in

remittance of TDS and be sentenced with rigorous imprisonment up to a period of 7 years. Prior to

this press release, the Revenue Authorities (“RA”) were adhering to an internal guideline of

initiating prosecution proceedings where the delay was more than 12 months. In other words, a

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tolerance period of 12 months of delay for initiation of prosecution was followed.

To curb the practice of tax deductors deliberately deducting the remittance of TDS and

deploying the funds for business, the CBDT has withdrawn the tolerance period, which was only

an internal guideline, not prescribed in law. With this change in policy, the RA could initiate

prosecution proceedings even for a day's delay in remittance of taxes. It has also been clarified

that tax deductors would have the option of applying for compounding of such offences before the

Jurisdictional Chief Commissioner and the offence would be compounded in suitable cases.

CONCLUSION:It is pertinent to note that CBDT had issued instruction number 1335 of CBDT dated 28-5-1980 to

the effect that prosecution should not normally be proposed when the amount involved are not

substantial and the amount in default has also been deposited to the credit of the government.

It is necessary to compare the text of section 276B with provisions of section 40(a)(ia). Section

40(a)(ia) contemplates a time limit for the payment of tax as well; not merely the deduction s per

Chapter XVIIB. For merely delay, there are already adequate provisions viz. Section 40(a)(ia)

disallowance; 201(1A)-interest, 271C and 221- penalty. Thus, section 276B clearly applies to

total failure and not a mere delay.

The Provisions of Section 278AA lays down that no person shall be punishable for any failure

referred to in section 276B if he proves that there was reasonable cause for such failure.

It is essentially a question of fact to be decided in each case on consideration of material placed

before the concerned authority. However the burden of proof that there was a reasonable cause

for default is on assessee.

In SEQUOIA CONSTRUCTION CO. LTD. & ORS. Vs. P.P. SURI, INCOME TAX OFFICER

reported in(1985) 47 CTR(DEL) 277: (1986) 158 ITR 496 (DEL) : (1985) 21 TAXMAN 13 there

was delay in deposit of TDS. In view of reasonable cause shown by assessee, penalty

proceedings came to be dropped by both appellate authorities. In this respect the court held that

“Dropping of penalty proceedings must weigh with trial Court while judging the reasonable cause

prevailing with assessee. Milder proof of reasonable cause must be taken to have been

established. Continuance of prosecution proceedings would be a sheer exercise in futility and

harassment of assessee – Prosecution was quashed”.

In UNION OF INDIA vs PYARELAL TARACHAND & ANR. (2003) 180 CTR (MP) 551 : (2003)

264 ITR 525 (MP) : (2004) 135 TAXMAN 97 the hon high court declined to interfere in the

judgment where trial court acquitted the assessee because it was not proved that the assessee

has deliberately or intentionally committed the default.

Prosecution can not be initiated against the company. It has to be initiated in the name of Director

or Principal Officer responsible for TDS compliances. For initiating prosecution proceedings

against the director of the company, the assessee officer has to give notice u/s 2(35) expressing

his intention to treat such directors of a company as “principal officers”. However, it would be

sufficient compliance if in the show cause notice issued to the company it is mentioned that the

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directors are to be considered as principal officers of the company.

In absence of both, permission is not granted to appeal against the judgment passed by

Addl. Chief Metropolitan Magistrate whereby respondent director of the company has

been acquitted of the offence under s. 276B. (COMMISSIONER OF INCOME TAX vs. DELHI

IRON WORKS (P) LTD. & ORS(2011) 331 ITR 5 (DEL) : (2010) 195 TAXMAN 372 (DEL).

The Supreme Court in Madhumilan Syntex Limited vs Union of India (2007) 290 ITR 199 (SC)

(2007) 160 Taxman 71 (SC) held that a delayed payment of tax deducted at source constitutes

offence u/s 276B. In that case, the assessee had deposited the TDS amount late. The assessee

had contended that since it has paid the amount, though late, it has not committed any default and

hence no offence can be registered against it. The Supreme Court dismissed this contention and

observed that – “ The contention of the appellant that though tax deducted at source has been

deposited late but since TDS has already been deposited to the account of the Central

Government, there was no default and no prosecution can be ordered, could not be accepted.

Once a statute requires to pay tax and stipulates period within which such payment is to be made,

the payment must be made within that period. If the payment is not made within that period, there

is default and appropriate action can be taken under the Act. Interpretation canvassed by the

appellant would make the provision relating to prosecution nugatory."

Keeping in mind the stringent provisions of law, first thing which is required is its strict compliance.

Assessee is required to pay interest and penalty for various defaults. There is an urgent need for

clear cut guidelines about the amount of Tax default and period of default which may attract

prosecution. This will not only save time of the assessee and the department but will also save

assessee from undue harassment.

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[1] A day after demonetization scheme, we all the Professionals are flooded with

various questions and day to day queries from our valued clients. Hopefully you

are observing and going through same atmosphere as I am. You may have

seen various reports which range from the scary to the alarmist on the topic of

demonetization. In fact here social media and News agency warriors must also

take the blame for spreading grossly exaggerated news.

[2] The Government has decided to discontinue with the legal tender character of

High Denomination Bank Notes (HDNs) of Rs. 500 and Rs. 1000 with effect

from November 9, 2016. In other words, such notes will not be legal tenders

from midnight of November 8, 2016. Old HDNs can be exchanges or deposited

in banks till December 30, 2016. After announcing such demonetization,

people have started worrying about the tax implications even in case of genuine

savings deposited into bank account.

[3] In the beginning some people have posted the unverified computation chart of

tax and penalty on cash deposit. Some reports say that you will have to pay

almost 95 % tax on the old cash you deposit in Banks. Some in Social Media

even interpreted that the 200 % penalty is on the income.

[4] Finance Minister introduced Taxation amendment Bill 2016 to tax HDNs

deposited in bank accounts and amended provisions of Section 115BBE to tax

the HDNs deposited in Bank Tax@ 60% + Surcharge@ 25% of tax, and

penalty@ 10% of tax, if assessed by A.O. However if opted for Pradhan Mantri

Garib Kalyan Yogna 2016 – 30% Tax + 33% of tax as Surcharge and penalty @

10% of income declared. 25% declared income to be deposited in interest free

deposit for Four Years. In search & seizure case higher tax and penalty

proposed.

[5] Demonetization as well as Taxation amendment Bill 2016 introduced to tax

JUDICIAL PRECDENTS ON DEMONETIZATIONOF CURRENCY

PRAMOD N. POPATADVOCATE

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HDNs deposited in bank accounts will raise many legal issues and lot of

litigations will arise. I, think appellate authorities will be flooded with lot

of appeals.

[6] In all these situations we have to guide our clients and pacify them in case of

genuine cash savings deposited in bank accounts. We have to advise them not

to be panic.

[7] In order to provide, some guideline on this issue I, have analyzed judicial

precedents wherein such issues have been discussed in the past, for the

benefit of professional brothers.

Particulars Case lawsBurden of proof A. In case o f rece ip t o f money by way o f

encashment of HDNs, the burden to

prove the source of money and its nature

rests solely on assessee – Anil Kumar

Singh v. CIT [1972] 84 ITR 307(Cal).

Forming part of cash A. The assessee exchanged HDNs in RBI

Balance in books and c la imed tha t they cons is ted o f h i s

cash balance in books. He stated that he had kept large sum of money for

the purpose of conducting his business and making

payments to labour. The ITO rejected explanation of

assessee, inter-alia, on the ground that assessee

failed to show why he kept large sums at hand at one

place when at each of the places where work was

carried out there were banks.The Apex Court held that such HDNs assessable as

income of assessee as there was material to show

that such HCDNs did not form part of cash balance

of assessee and the source of money was not

explained satisfactorily – Sreelekha Banarjee v.

CIT [1963] 49 ITR 112 (SC) B. The accounts of assessee had been accepted by

the Tribunal as genuine. Thus, it was impossible to

say that HDNs could not be included in the cash

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balance shown in books – Mehta Parikh &

Co. v. CIT [1956] 30 ITR 181 (SC).C. Value of HDNs was not assessable as

income from undisclosed sources if cash balance

shown in accounts of assessee was sufficient to

cover HDNs and value of HDNs formed part of cash

balance of the assessee – Lakshmi Rice Mills v.

CIT [1974] 97 ITR 258 (Pat.)D. Only source of receipt of money has to be disclosed

and not the source of receipt of HDNs which were

legal tenders at the relevant time – Lakshmi Rice

Mills v. CIT [1974] 97 ITR 258 (Pat.)E. HDNs could not be treated as income from

undisclosed sources just because it was not

mentioned in books that cash balance consisted of

HDNs – Chunilal Tikamchand Coal Co. Ltd. v. CIT

[1955] 27 ITR 602 (Pat.)F. It is for the department to show that assessee did not

possess the HDNs at the relevant time – Gur

Prasad Hari Das v. CIT [1963] 47 ITR 634 (All).G. Where assessee had deposited Rs.81,000 in high

denomination notes and Tribunal held that

assessee usually had cash of Rs. 81,000, said

amount could not be treated as income of assessee

from undisclosed sources – CIT v. Associated

Transport (P.) Ltd. [1995] 212 ITR 417 (Cal.)

Encashment of HDNs A. Tribunal could not make addition of undisclosed

representing income where HDNs encashed by assessee were

personal savings savings from his personal allowance – Sri SriNilkantha Narayan Singh v. CIT [1951] 20

ITR 8 (Pat.)

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INTRODUCTIONThe amendments of Benami Transactions (Prohibition) Act should further enhance

India's attractiveness as an investment destination by encouraging greater transparency

in ownership of property. Along with other regulatory changes such as implementation of

Goods and Services Act (GST), Real Estate (Regulation & Development) Act (RERA) and

Land Digitization, this amendment is a step in the right direction. In the short term, it will

lead to a reduction in transaction volumes. However, in the long term, it will help aligning

transactions with ethical standards and will increase international institutional investors

and financial institutions participation in this sector. Benami transactions (prohibition) Act,

1988 (hereinafter referred to as “the Act” or “the 1988 Act”) was a small act with 9 sections

when originally enacted. Benami Transactions (prohibition) amendment act, 2016

(hereinafter referred to as “the 2016 amendment act”) has amended the act to enlarge it

from 9 sections to 72 sections, 2016 amendment act has renamed the 1988 act as

“prohibition of Benami property Transactions Act,1988.” 2016 act shall come into force

with effect from 01/11/2016. (NOTIFICATION NO. SO 3289[E], DATED 25-10-2016)

DEFINITIONBenami transaction is a transaction or arrangement whereby the identity of real owner

(beneficial owner) of property is concealed by showing someone else (benamidar) as

owner on record. The beneficial owner provides or pays consideration for purchase of

property. Benami transaction is a consensual act and not something imposed upon a

person such as unauthorised access to his account or fraud.Benamidar and beneficial owner can be any person (viz. individual, HUF, firm, company,

trust, etc.)

OBJECTS OF BENAMI ACTTo prohibit a Benami Transaction so that the beneficial owner (true owner/real

owner/person who provided consideration) would be compelled to keep the

BENAMI TRANSACTIONS (PROHIBITION)AMENDMENT ACT,2016

Kartikey B. ShahAdvocate

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property in his own name only and the legal complexities owing to the

apparent ownership not being the real ownership, could be avoided. CATEGORIES OF BENAMI TRANSACTIONS

CATEGORY I : TRANSACTION OR ARRANGEMENT WHERE

CONSIDERATION PROVIDED BY PERSON OTHER THAN THE

TRANSFEREE OR THE PERSON IN WHOSE NAME PROPERTY IS HELD

• EXCEPTIONS-TRANSACTIONS WHEN IT IS NOT BENAMI» HUF Property held in the name of Karta/Members of HUF, property is

held for the benefit of Karta or a member of a HUF and consideration is

paid out of known sources of HUF.» Property held in Fiduciary capacity means informal relations which

exist whenever one party trusts and relies upon another held by a

person like trustee, executor, partner, agent, director of a company etc.

for the benefit of another person like trust, firm, principal, company etc.» Property is held by individual in name of spouse or child and not

specifically for the benefit of them and consideration is paid out of known

sources of individual.» Property is held by individual in joint names of himself or his

brother/sister/lineal ascendant or descendent and consideration is paid

out of known sources of individual and not specifically meant out of

income of known sources. The terms Brother and sister will not include

cousins.

CATEGORY II : WHERE TRANSACTIONS IS CARRIED OR MADE IN A

FICTITIOUS NAMEAs per Section 2(9)(D) provides that a transaction or an arrangement

in respect of a property is a Benami transaction if the person

providing the consideration is not traceable or is fictitious.

CATEGORY III : BENAMIDAR NOT AWARE OF OR DENIES KNOWLEDGE OF

TRANSACTION

CATEGORY IV : BENEFICIAL OWNER WHO PAID CONSIDERATION IS

FICTITIOUS OR IS UNTRACEABLE

POINTS TO PONDERIn this article I have narrated certain points mentioned below having importance in

understanding this act in a better way. Each point has its own importance and no one is

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interconnected to one another.

1. Benami property means any property which is the subject matter of

a Benami transaction and also includes proceeds from such property -

section 2(8).2. Benamidar means a person or a Fictitious person, as the case may be, in

whose name the Benami property is transferred or held and includes a

person who lends his name.3. Beneficial owner means a person, whether his identity is known or not, for

whose benefit the Benami property is held by a Benamidar. 4. Person being a Benamidar shall not retransfer the Benami property held by

him to the beneficial owner or any other person acting on his behalf.5. Section 58 of the act provides that Central Government may by notification

exempt any property relating to charitable or religious trusts from operation

of the act.6. Benami act covers all kinds of Immovable assets and movable assets

including cash, bank balance, shares etc.7. Though Benami transactions could be used to disguise the real ownership

of a property to prevent detection of the illegal activity that produced it, but it

can be entered into for other purposes like defrauding creditors, avoiding

payment of taxes or social reasons. 8. The true test to determine whether the transaction is Benami or not is to look

into the Intention of the parties, viz, whether it was intended to operate as

such or whether it was meant to be colourable. In every Benami transaction

the intention of the parties is the essence.9. In ITO v. M.R. Dhanalakshmi Ammal (1978) 112 ITR 413 (Mad.) court

suggested criteria for discharging burden of proof for the parties who sets

up the case of Benami nature of transaction. They are as under.a) The source of purchase consideration relating to the transaction,b) Possession of property,c) Position of the parties and their relationship to one another,d) Circumstances, pecuniary or otherwise, of the alleged transfer,e) The motive for the transaction,f) The custody and production of the title deeds, and g) The previous and subsequent conduct of the parties.

10. Where there was no proof to establish necessary ingredients of Benami like

contribution of capital, enjoyment of profits and control of business,

assessing officer could not be said be justified in including income of sister

concern PFI in hands of assesse company on ground that PFI was

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benamidar of assesse. – Parakh Foods Ltd. Dy. CIT (1998) 64

ITD 396 (Pune-Trib.)11. Prohibition contained in Benami Transaction Act against plea by

any person claiming to be real owner does not extend to declaring a

transaction as Benami transaction in tax proceedings.- P.K. Narayanan v. ITO (1994) 49 ITD 229 (Coch-Trib.)

12. In Benami transaction there is an operative transfer resulting in the vesting

of title in the transferee and in sham or Bogus or Fictitious transaction no

transaction has actually taken place and the transaction is merely shown to

have taken place on paper.- Meenakshi Mills Ltd. V. CIT (1957) 31 ITR 28 (SC)- Krishna Kumar v. Harman Dass (1991) 56 Taxman 233 (Delhi)

13. Power of attorney transactions are not regarded as Benami transactions

provided consideration has been paid to the original owner, person who

grants possession holds ownership, stamp duty on transaction has been

paid and the contract has been registered. Power of attorney transactions

cannot be treated as completed transfers or conveyances. Bonafide

genuine transactions such as power of attorney to family members or

development agreements between land owners and developer cannot be

brought in the radar of suspicion. 14. Where assessee's wife had been assessed for several years in respect of

share income from a firm which had been granted registration, merely

because during search of assessee's residence his wife stated that she did

not know name of firm and the share of profit therein though she admitted

she was a partner, she could not be treated as assessee's Benami so as to

include share income in assessee's hands.- Gaurishankar Omkarmal v. ITO (990) 37 TTJ (Ahd-Trib.) 353.

15. Depositing monies belonging to another would attract the Benami act and

returning the money in new notes would violate section 6 which forbids

benamidar from re-transfering property to real owner or any one acting on

his behalf. 16. If transaction involves foreign property, it would be covered under black

money act and not under Benami act.17. Section 2(9) (A) suggests that it must be established that the property is

held or possessed by the Benamidar and that consideration was paid by

another person. If the Benamidar is only a name lender than it is a “sham

Transaction”.18. Benami transaction is a punishable offence. Whoever enters shall be

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punishable with rigorous imprisonment for a term not less than one

year but which may extend to 7 years and shall also be liable with

fine which may extend to 25% of the fair market value of the

property or with both. Any property held Benami liable to be confiscated by

Central Government. No person being a Benamidar shall re-transfer the

Benami property held by him to the beneficial owner or any other person

acting on his behalf. With or without motive Benami transactions once

entered will attract all punishments. No suit, claim, action or defence based

on any right in respect of any property held Benami, shall be allowed by or

on behalf of a person claiming to be the real owner of such property.19. Section 54 of the act provides that any person who is required to furnish

information under this act knowingly gives any false information to any

authority or furnishes any false document in any proceedings under this act

shall be punishable with rigorous imprisonment for a term not less than 6

months but which may extend to 5 years and shall also be liable to fine

which may extend to 10% of the fair market value of the property. Offences

under the act are Non-cognizable but not bailable.20. Under Section 4(1) the real owner cannot bring any suit, claim or action to

enforce his right as the real owner on the plea that the ostensible owner is

Benamidar.21. Every proceedings under the act shall be deemed to be a judicial

proceeding. Any books of accounts or other documents produced before

the authority and impounded by him may retain for a period not exceeding 3

months from the date of order of attachment made by adjudicating authority.22. Where the initiating officer is of the opinion that the person in possession of

the property held Benami may alienate the property during the period

specified in the notice, he may, with the previous approval of the Approving

Authority, by order in writing, attach provisionally the property in the manner

as may be prescribed, for a period not exceeding 90 days from the date of

issue of notice.23. Notice may be served on the person named therein either by post or as if it

were a summons issued by a court under the code of civil procedure,1908.24. The Administrator shall by notice in writing order within 7 days of the date of

the service of notice to any person, who may be in possession of the

Benami property, to surrender or deliver possession thereof to the

administrator or any other person duly authorised in writing by him, in this

behalf and in the event of noncompliance of the order and immediate

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possession is warranted for the purpose of forcibly taking over

possession requisition the service of any police officer to assist him

and it shall be the duty of the officer to comply with the requisition.25. Any person including the initiating officer, aggrieved by an order of the

Adjudicating Authority may refer an appeal within 45 days in such form and

along with such fees, as may be prescribed, to the Appellate Tribunal

against the order passed by the Adjudicating Authority. Every appeal shall

be accompanied by a fee of Ten Thousand rupees.

26. POWERS OF APPELLATE TRIBUNAL» To determine a case finally, where the evidence on record is

sufficient» To take additional evidence or to require any evidence or to require

any evidence to be taken by the Adjudicating Authority, where the

Adjudicating Authority has refused to admit evidence, which ought to

have been admitted,» to require any document to be produced or any witness to be

examined for the purposes of proceeding before it,» to frame issues which appear to the Appellate Tribunal essential for

adjudication of the case and refer them to the Adjudicating Authority for

determination,» To pass final order and affirm, vary or reverse an order of

adjudication passed by the Adjudicating Authority and pass such other

order or orders as may be necessary to meet the ends of justice.27. Any party aggrieved by any decision or order of the Appellate Tribunal may

file an appeal to the High court within a period of 60 days from the date of

communication of the decision or order. 28. No prosecution, suit or other proceeding shall lie against the Government or

any officer of the Government or the Appellate Tribunal or the Adjudicating

Authority established under this act, for anything done or intended to be

done in good faith under this act.29. Where a person dies during the course of any proceeding under this act,

any proceeding taken against the deceased before his death shall be

deemed to have been taken against the legal representative and may be

continued against the legal representative from the stage at which it stood

on the date of the death of the deceased.30. Declaration under Pradhan Mantri Garib Kalyan Yojna, 2016 will not enjoy

immunity from Benami Act.31. Money deposited in Jan Dhan account if investigations reveal that money

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deposited belong to someone else then the provisions of Benami

act would be invoked to confiscate the money. 32. Section 281 A of the Income Tax Act, 1961 has been repealed

because of the amended Benami act except Jammu & Kashmir where this

act does not apply.

CONCLUSION

The amendment in the act is a means to reduce generation and utilization of

unaccounted (black) money. This was a pivotal election promise made by the current

government. Through this amendment the government seeks to clearly define ‚

Benami 'transactions, establish adjudicating authorities and an Appellate Tribunal to

deal with Benami transactions, and specifies the penalty for entering into Benami

transactions. Moreover, this will also increase the tax revenue for the Government by

curbing unaccounted money into the system. Along with other regulatory changes

such as implementation of Goods and Services Act (GST), Real Estate (Regulation &

Development) Act (RERA) and Land Digitization, this amendment is a step in the right

direction in improving transparency in real estate transactions. In the short term it will

lead to a reduction in transaction volumes. However, in the long term it will make India

a more attractive investment destination, aligning transactions with ethical standards

and will increase international institutional investors and financial institutions

participation in this sector.

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The Government has announced demonetization of existing currency of Rs. 500/1000 with effect from the 9th November, 2016. However, concerns have been raised that some of the existing provisions of the Income-tax Act, 1961 ('Act') could possibly be used for concealing black money. So, the Government has introduced Taxation Laws (Second Amendment) Bill, 2016 in the Lok Sabha to amend the provisions of Income-Tax Act.

The Government has announced Pradhan Mantri Garib Kalyan Yojana 2016 (PMGKY) in the Taxation Laws (Second Amendment) Bill, 2016. As per this PMGKY black money deposited in banks or held in cash can be offered for taxation at 49.9% (i.e., 30% tax, 9.9% surcharge and 10% penalty).

Q1. Who can make a declaration under PMGKY?

➢ "Any person" can make declaration as PMGKY available to every person (whether

resident or non-resident)

➢ Non-resident Indians, Foreign Citizens & Foreign Companies can make declaration

under PMGKY.

➢ Trustee can make a declaration on behalf of the beneficiary of a trust.

➢ Beneficiary can make separate declaration of his other income.

➢ Amalgamating company or a company which has converted itself into LLP cannot

make declaration as entity no more exists.

➢ Declaration can be filed on behalf of a deceased individual/a partitioned HUF/a

Company-in-liquidation/a dissolved firm/a dissolved private trust.

➢ Declaration can be made by a person who has not filed ITR in the past.

➢ If firm has undisclosed income, declaration shall be made by the firm.

➢ Partner cannot declare firm's income in his name.

➢ Partner may declare his undisclosed income in his name.

➢ Company can declare its undisclosed income.

➢ Govt. servant can declare undisclosed income inherited by him from his deceased

parents provided he can prove that it was really inherited by him.

➢ Person who has received notice under section 142/143(2)/148/153A/153C can

make declaration.

➢ Person searched (raided) or surveyed can also make declaration.

Q2. Who cannot make a declaration under PMGKY?

➢ Any person in respect of whom order of detention made under COFEPOSA, 1974.

FAQS ON PRADHAN MANTRI GARIB KALYAN YOJANA

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➢ Any person notified as accused in respect of securities scam of 1991-1992.

➢ Any person liable to be prosecuted under Chapter IX or Chapter XVII of IPC,

1860.

➢ Any person liable to be prosecuted under NDPS Act, 1974.

➢ Any person liable to be prosecuted under Unlawful Activities (Prevention) Act, 1967.

➢ Any person liable to be prosecuted under Prevention of Corruption Act, 1988.

➢ Any person liable to be prosecuted under Prohibition of Benami Property

Transactions Act, 1988.

➢ Any person liable to be prosecuted under Prevention of Money-Laundering Act,

2002.

➢ Person against whom FIR filed under any of the above Acts can declare if charge

sheet was not filed nor summons issued.

Q3. Which income can be declared under PMGKY?

➢ Undisclosed income which is taxable under the Income-tax Act, 1961 and in the form

of cash or deposit in an account with a specified entity can be declared.

➢ Undisclosed income in the form of jewellery, bullion, diamonds, other valuables can

be declared after selling them and converting them into cash or getting their sales proceeds credited to bank account.

➢ Cash or deposits with specified entities.

➢ 'Black' received in cash in property sales can be declared.

➢ Deposits in PPF account can be declared

➢ NSC cannot be declared

➢ RD balance in bank/post offices can be declared

➢ Deposits with NBFCs can be declared if they are notified as 'specified entities'

➢ Deposits with co-operative societies can be declared if they are notified as 'specified

entities'

➢ Deposits with Post Office can be declared

➢ It appears credit of TDS in Form 26AS will be available for payment under the

Scheme to the extent not claimed in ITR filed.

Q 4. Which income cannot be declared under PMGKY?

➢ Undisclosed income in the nature of "Red money" i.e. proceeds of crime, drugs,

terrorism, benami property, money-laundering cannot be declared.

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➢ Undisclosed foreign income/asset chargeable to tax under the Black Money

(Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 cannot be declared.

➢ Undisclosed income in the form of jewellery, bullion, diamonds, other valuables,

NSCs, investments in capital of firms etc. cannot be declared.

Q5. For which assessment years can declaration be made?

➢ Income chargeable to tax under Income-tax Act for any assessment year

commencing on or before 1-4-2017 can be declared.

Q6. What is the rate of tax, surcharge, penalty, interest and deposit under the PMGKY?

➢ Tax @ 30% of declared undisclosed income

➢ Pradhan Mantri Garib Kalyan Cess @ 33% of tax i.e. 9.9% of declared undisclosed

income.

➢ Penalty @10% of declared undisclosed income.

➢ Total payment to be made (tax plus PMGKY cess plus penalty) @ 49.9% of declared

undisclosed income.

➢ Deposit @ 25% of declared undisclosed income in PMGKY non-transferable non-

interest-bearing bonds for 4 years.

➢ Payment of 49.9% as well as deposit of 25% to be made before filing declaration.

➢ Proof of payment and deposit to be attached to declaration.

➢ Last date of declaration to be notified by Govt.

➢ No Education cess

➢ No Surcharge

➢ No Penalty under Section 270A

➢ No interest under section 234A or 234B or 234C

➢ Tax, cess and penalty paid are non-refundable

➢ No rounding off of undisclosed income declared

➢ No rounding off of tax payable under PMGKY

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INCOME� TAX� BAR� ASSOCIATION 32 IT�Mirror� 2016-17����� Vol:� 2

FREQUENTLY ASKED QUESTIONSPradhan Mantri Garib Kalyan Deposit Scheme (PMGKDS), 2016

1. What is Pradhan Mantri Garib Kalyan Deposit Scheme (PMGKDS), 2016

Pradhan Mantri Garib Kalyan Deposit Scheme (PMGKDS), 2016 is a scheme notified by

the Government of India on December 16, 2016 which is applicable to every declarant

under the Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana,

2016.

2. Who is eligible to deposit in PMGKS?

The deposit under this Scheme shall be made by any person who declared undisclosed

income under sub-section (1) of section 199C of the Taxation and Investment Regime for

Pradhan Mantri Garib Kalyan Yojana, 2016.

3. In what form will the deposits under this scheme be held?

The Deposits shall be held at the credit of the declarant in Bond Ledger Accounts (BLA)

maintained with Reserve Bank of India.

4. Who are the authorized agencies where the application and amount of deposit

will be accepted?

Application and amount for the deposit (in the form of Bond Ledger Account) shall be

received by any banking company to which the Banking Regulation Act, 1949 (10 of 1949)

applies (Authorized Banks).

5. Where can declarants get the application form?

Application for the deposit will be available at branches of authorized banks. It is also

available in the Reserve Bank of India website.

6. When can a declarant make the deposit into the scheme?

The deposits under this Scheme shall be made in a single payment in any of the

authorized banks from the 17th day of December, 2016 till 31st day of March, 2017

7. What are the Know-Your-Customer (KYC) norms?

Permanent Account Number (PAN) is the KYC document for individuals depositing in the

scheme. If a declarant does not hold PAN, he shall apply for PAN and provide the details of

such PAN application along with acknowledgement number to the bank while making the

application. On receipt of PAN, the details may be updated with the bank from which

application was made.

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8. What is the minimum and maximum limit for depositing in the scheme?

The deposit by a declarant shall not be less than twenty-five per cent of the

undisclosed income declared under sub-section (1) of section 199C of the

Taxation and Investment Regime for Pradhan Mantri Garib Kalyan Yojana, 2016. Deposit

shall be made in multiples of ₹ 100.

9. Will any interest be paid on the deposit under the scheme?

No interest shall be paid for deposits made in this scheme.

10. After making the deposit, will any documentary evidence be issued?

On deposit, an acknowledgement receipt mentioning name of declarant and amount

deposited will be duly authorized and provided by the bank from which application was

made. Subsequently a certificate of holding for the BLA will be issued which may be

collected from the authorized bank.

11. When will the deposit be repaid ?

Repayment of the deposit will be made after a period of 4 years from the effective date of

deposit (ie., date of tender of cash or the date of realization of draft or cheque or transfer

through electronic transfer)

12. What will the declarant get on redemption?

On redemption, the entire amount deposited into the scheme will be repaid.

13. How will the declarant get the redemption amount?

The redemption amount will be credited to the bank account furnished by the person in the

application form.

14. What are the procedures involved during redemption?

· On the date of maturity, the proceeds will be credited to the bank account as per the

details on record.

· In case there are changes in any details, such as, account number, IFSC code,

email ids etc then the investor must intimate Reserve Bank Of India , through the

authorized banks promptly.

15. Can the deposit made into this scheme be prematurely redeemed ?

No, option for premature redemption of the BLA is not available.

16. Can the BLA be gifted/transferred to a relative or friend on some occasion?

No, the BLAs cannot be gifted/transferred to any relative or friend. Transferability of the

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Bond Ledger Account shall be limited to nominee or to the legal heir of an

individual holder, only in the event of death of the declarant.

17. Who will provide other services to the declarants after deposit in the scheme?

The banks through which the deposit into this scheme was made will provide other

customer services such as change of bank account details, cancellation of nominee etc.

18. What are the payment options for depositing in PMGKS?

The deposit shall be made in the form of cash or draft or cheque drawn in favour of the

authorised bank accepting such deposit or by electronic transfer.

19. Whether nomination facility is available for these investments?

Yes, nomination facility is available as per the provisions of the Government Securities Act

2006 and Government Securities Regulations, 2007. A nomination form is available along

with Application form. In case of cancellation/change in nomination, a separate form is to

be filled and submitted to the authorized bank.

20. Are the BLAs tradable?

No, the Bonds ledger Account are not tradable.

21. To whom the queries regarding PMGKDS be sent?

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INCOME� TAX� BAR� ASSOCIATION 35 IT�Mirror� 2016-17����� Vol:� 2

Section B

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INCOME� TAX� BAR� ASSOCIATION 36 IT�Mirror� 2016-17����� Vol:� 2

CIRCULAR NO. 6/2016, DTD. 29-2-2016[F.NO. 225/12/2016-ITA-II]

Sub-section (14) of section 2 of the Income-tax Act, 1961 (Act) defines the term capital

asset to include property of any kind held by an assessee, whether or not connected with

his business or profession, but does not include any stock-in-trade or personal assets

subject to certain exceptions. As regards shares and other securities, the same can be

held either as capital assets or stock-in-trade/trading assets or both. Determination of the

character of a particular investment in shares or other securities, whether the same is in

the nature of a capital asset or stock-in-trade, is essentially a fact-specific determination

and has led to a lot of uncertainty and litigation in the past.

2. Over the years, the courts have laid down different parameters to distinguish the shares

held as investments from the shares held as stock-in-trade. The Central Board of Direct

Taxes (CBDT) has also, through Instruction No. 1827, dated August 31, 1989 and Circular

No. 4 of 2007 dated June 15, 2007, summarized the said principles for guidance of the

field formations.

3. Disputes, however, continue to exist on the application of these principles to the facts of

an individual case since the taxpayers find it difficult to prove the intention in acquiring

such shares/securities. In this background, while recognizing that no universal principal in

absolute terms can be laid down to decide the character of income from sale of shares

and securities (i.e. whether the same is in the nature of capital gain or business income),

CBDT realizing that major part of shares/securities transactions takes place in respect of

the listed ones and with a view to reduce litigation and uncertainty in the matter, in partial

modification to the aforesaid Circulars, further instructs that the Assessing Officers in

holding whether the surplus generated from sale of listed shares or other securities would

be treated as Capital Gain or Business Income, shall take into account the following--

(a) Where the assessee itself, irrespective of the period of holding the listed shares and

securities, opts to treat them as stock-in-trade, the income arising from transfer of such

shares/securities would be treated as its business income,

(b) In respect of listed shares and securities held for a period of more than 12 months

Section 45--Capital Gains--Share Transactions--Issue of Taxability of Surplus on Sale of Share and Securities--Capital Gain or Business

Income--Instruction in Order to Reduce Litigation

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immediately preceding the date of its transfer, if the assessee desires to treat

the income arising from the transfer thereof as Capital Gain, the same shall not

be put to dispute by the Assessing Officer. However, this stand, once taken by the

assessee in a particular Assessment Year, shall remain applicable in subsequent

Assessment Years also and the taxpayers shall not be allowed to adopt a

different/contrary stand in this regard in subsequent years;

(c) In all other cases, the nature of transaction (i.e. whether the same is in the nature of

capital gain or business income) shall continue to be decided keeping in view the

aforesaid Circulars issued by the CBDT.

4. It is, however, clarified that the above shall not apply in respect of such transactions in

shares/securities where the genuineness of the transaction itself is questionable, such as

bogus claims of Long Term Capital Gain/Short Term Capital Loss or any other sham

transactions.

5. It is reiterated that the above principles have been formulated with the sole objective of

reducing litigation and maintaining consistency in approach on the issue of treatment of

income derived from transfer of shares and securities. All the relevant provisions of the

Act shall continue to apply on the transactions involving transfer of shares and securities.

COMMENTS TO UNDERSTAND THE GENESIS

This is a very important circular clarifying as to when the surplus on sale of shares is taxable business income and when it is taxable as Capital Gains. Legal battles have been going on sometimes the outcome is in the favour of the assessee and sometimes against the assessee. This circular is helpful in deciding this most critical issue. Let me refer to para 3(a)…. “Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income.”

In my opinion this clause clearly suggests that if assessee wants to treat the surplus on sale of shares as stock-in-trade then the income arising from the transfer of shares will be treated as business income. However, if the assessee in spite of volume as well as frequency of share transactions treats the surplus as Capital Gain then the same has to be taxed as Capital Gain. Though clause (a) is silent on this aspect the intention is loud and clear.

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INCOME� TAX� BAR� ASSOCIATION 38 IT�Mirror� 2016-17����� Vol:� 2

CIRCULAR NO. 12/2016, DT. 30-5-2016[F.NO.279/MISC./140/2015-ITJ]

1. Proposals have been received by the Central Board of Direct Taxes regarding filing

of appeals/pursuing litigation on the issue of allowability of bad debt that are written off

as irrecoverable in the accounts of the assessee. The dispute relates to cases

involving failure on the part of assessee to establish that the debt is irrecoverable.

2. Direct Tax Laws (Amendment) Act, 1987 amended the provisions of sections

36(1)(vii) and 36(2) of the Income Tax Act 1961, (hereafter referred to as the Act) to

rationalize the provisions regarding allowability of bad debt with effect from the 1st

April, 1989.

3. The legislative intention behind the amendment was to eliminate litigation on the

issue of the allowability of the bad debt by doing away with the requirement for the

assessee to establish that the debt, has in fact, become irrecoverable. However,

despite the amendment, disputes on the issue of allowability continue, mostly for the

reason that the debt has not been established to be irrecoverable. The Honble

Supreme Court in the case of TRF Ltd. In CA Nos. 5292 to 5294 of 2003 vide judgment

dated 9-2-2010 [(2010) 36 (I) ITCL 2 (SC) : 2010 TaxPub(DT) 1481 (SC)], has stated

that the position of law is well settled. After 1.4.1989, for allowing deduction for the

amount of any bad debt or part thereof under section 36(1) (vii) of the Act, it is not

necessary for assessee to establish that the debt, in fact has become irrecoverable; it

is enough if bad debt is written off as irrecoverable in the books of accounts of

assessee.

4. In view of the above, claim for any debt or part thereof in any previous year, shall be

admissible under section 36(l)(vii) of the Act, if it is written off as irrecoverable in the

books of accounts of the assessee for that previous year and it fulfills the conditions

stipulated in sub section (2) of sub-section 36(2) of the Act.

Admissibility of Claim of Deduction of Bad Debt Under Section 36(1)(vii) r/w Section 36(2)

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5. Accordingly, no appeals may henceforth be filed on this ground and appeals

already filed, if any, on this issue before various Courts/Tribunals may be

withdrawn/not pressed upon.

6. This may be brought to the notice of all concerned.

COMMENTS TO UNDERSTAND THE GENESIS

In this circular it is clarified that the claim of bad debt has to be allowed as

deduction even when debt is not established to be irrecoverable. The

circular ratifies the decision of their lordships for Supreme Court in the

case of TRF Ltd.

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INCOME� TAX� BAR� ASSOCIATION 40 IT�Mirror� 2016-17����� Vol:� 2

CIRCULAR NO. 21/2015, DTD. 10-12-2015F.NO. 279/MISC. 142/2007-ITJ (PT)

Reference is invited to Boards Instruction No. 5/2014 dt. 10-7-2014 wherein monetary limits

and other conditions for filing departmental appeals (in Income-tax matters] before Appellate

Tribunal and High Courts and SLP before the Supreme Court were specified.

2. In supersession of the above instruction, it has been decided by the Board that

departmental appeals may be filed on merits before Appellate Tribunal and High Courts and SLP

before the Supreme Court keeping in view the monetary limits and conditions specified below.

3. Henceforth, appeals/ SLPs shall not be filed in cases where the tax effect does not exceed

the monetary limits given hereunder:

It is clarified that an appeal should not be filed merely because the tax effect in a case exceeds

the monetary limits prescribed above. Filing of appeal in such cases is to be decided on merits of

the case.

4. For this purpose, tax effect means the difference between the tax on the total income

assessed and the tax that would have been chargeable had such total income been reduced by

the amount of income in respect of the issues against which appeal is intended to be filed

(hereinafter referred to as disputed issues). However the tax will not include any interest thereon,

except where chargeability of interest itself is in dispute. In case the chargeability of interest is the

Revision of Monetary Limits for Filing of Appeals by the Department Before Income Tax Appellate Tribunal and High Courts and SLP

before Supreme Court--Measures for reducing litigation

S. No.

Appeals in

Income-tax matters

Monetary

Limit (in Rs)

.

Before Appellate Tribunal 10,00,000

.

Before High Court 20,00,00

0

.

Before Supreme Court 25,00,00

0

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issue under dispute, the amount of interest shall be the tax effect. In cases where

returned loss is reduced or assessed as income, the tax effect would include notional tax

on disputed additions. In case of penalty orders, the tax effect will mean quantum of penalty

deleted or reduced in the order to be appealed against.

5. The Assessing Officer shall calculate the tax effect separately for every assessment year in

respect of the disputed issues in the case of every assessee. If, in the case of an assessee, the

disputed issues arise in more than one assessment year, appeal, can be filed in respect of such

assessment year or years in which the tax effect in respect of the disputed issues exceeds the

monetary limit specified in para 3. No appeal shall be filed in respect of an assessment year or

years in which the tax effect is less than the monetary limit specified in para 3. In other words,

henceforth, appeals can be filed only with reference to the tax effect in the relevant assessment

year. However, in case of a composite order of any High Court or appellate authority, which

involves more than one assessment year and common issues in more than one assessment year,

appeal shall be filed in respect of all such assessment years even if the tax effect is less than the

prescribed monetary limits in any of the year(s), if it is decided to file appeal in respect of the

year(sj in which tax effect exceeds the monetary limit prescribed. In case where a composite

order/ judgement involves more than one assessee, each assessee shall be dealt with separately.

6. In a case where appeal before a Tribunal or a Court is not filed only on account of the tax

effect being less than the monetary limit specified above, the Commissioner of Income-tax shall

specifically record that even though the decision is not acceptable, appeal is not being filed only

on the consideration that the tax effect is less than the monetary limit specified in this instruction.

Further, in such cases, there will be no presumption that the Income-tax Department has

acquiesced in the decision on the disputed issues. The Income-tax Department shall not be

precluded from filing an appeal against the disputed issues in the case of the same assessee for

any other assessment year, or in the case of any other assessee for the same or any other

assessment year, if the tax effect exceeds the specified monetary limits.

7. In the past, a number of instances have come to the notice of the Board, whereby an

assessee has claimed relief from the Tribunal or the Court only on the ground that the Department

has implicitly accepted the decision of the Tribunal or Court in the case of the assessee for any

other assessment year or in the case of any other assessee for the same or any other assessment

year, by not fi l ing an appeal on the same disputed issues. The Departmental

representatives/counsels must make every effort to bring to the notice of the Tribunal or the Court

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that the appeal in such cases was not filed or not admitted only for the reason of the tax

effect being less than the specified monetary limit and, therefore, no inference should be

drawn that the decisions rendered therein were acceptable to the Department. Accordingly, they

should impress upon the Tribunal or the Court that such cases do not have any precedent value.

As the evidence of not filing appeal due to this instruction may have to be produced in courts, the

judicial folders in the office of CsIT must be maintained in a systemic manner for easy retrieval.

8. Adverse judgments relating to the following issues should be contested on merits

notwithstanding that the tax effect entailed is less than the monetary limits specified in para 3

above or there is no tax effect:

(a) Where the Constitutional validity of the provisions of an Act or Rule are under challenge,

or

(b) Where Boards order, Notification, Instruction or Circular has been held to be illegal or

ultra vires, or

(c) Where Revenue Audit objection in the case has been accepted by the Department, or

(d) Where the addition relates to undisclosed foreign assets/ bank accounts.

9. The monetary limits specified in para 3 above shall not apply to writ matters and direct tax

matters other than Income tax. Filing of appeals in other Direct tax matters shall continue to be

governed by relevant provisions of statute & rules. Further, filing of appeal in cases of Income Tax,

where the tax effect is not quantifiable or not involved, such as the case of registration of trusts or

institutions under section 12 A of the IT Act, 1961, shall not be governed by the limits specified in

para 3 above and decision to file appeal in such cases may be taken on merits of a particular case.

10. This instruction will apply retrospectively to pending appeals and appeals to be filed

henceforth in High Courts/ Tribunals. Pending appeals below the specified tax limits in para 3

above may be withdrawn/ not pressed. Appeals before the Supreme Court will be governed by the

instructions on this subject, operative at the time when such appeal was filed.

11. This issues under Section 268A (1) of the Income-tax Act 1961.

COMMENTS TO UNDERSTAND THE GENESIS

In this circular the monetary limits for filling appeals/ SLPs have been revised. The

CBDT has revised the monetary limits as specified in the circular. It is clarified that

an appeal should not be filed merely because the tax effect in a case exceeds the

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monetary limits prescribed. Filling in such cases is to be decided on merits

of case. However, the tax will not include any interest thereon, except

where chargeability of interest itself is in dispute. Thus, for e.g. monetary limit of

Rs. 10,00,000 for filling appeal before Tribunal will not include interest. There are

also welcome points of clarification given in the circular.

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INCOME� TAX� BAR� ASSOCIATION 44 IT�Mirror� 2016-17����� Vol:� 2

CIRCULAR NO. 23/2016 [F.NO. 370142/17/2016-TPL] DT. 24-6-2016

In order to curb the cash economy, Finance Act 2016 has amended section 206C of

the Income-tax Act to provide that the seller shall collect tax at the rate of one per cent

from the purchaser on sale in cash of certain goods or provision of services exceeding

two lakh rupees. Subsequent to the amendment, a number of representations were

received from various stakeholders with regard to the scope of the provisions and the

procedure to be followed in case of the amended provisions of Section 206C of the

Act. The Board, after examining the representations of the stakeholders, the issued

FAQs vide circular. No.22/2016 dated 8 June, 2016. The Board has further decided to

clarify the issue as regards applicability of the provisions relating to levy of TCS where

the sale consideration received is partly in cash and partly in cheque by issue of an

addendum to the above circular in the form of question and answer as under:

Question 1: Whether tax collection at source under section 206C(1D) at the rate of

1% will apply in cases where the sale consideration received is partly in cash and

partly in cheque and the cash receipt is less than two lakh rupees.

Answer: No. Tax collection at source will not be levied if the cash receipt does not

exceed two lakh rupees even if the sale consideration exceeds two lakh rupees.

Illustration: Goods worth Rs. 5 lakhs is sold for which the consideration amounting

to Rs. 4 lakhs has been received in cheque and Rs. 1 lakh has been received in

cash. As the cash receipt does not exceed Rs. 2 lakh, no tax is required to be

collected at source as per section 206C (ID).

Question 2: Whether tax collection at source under section 206C (ID) will apply only

to cash component or in respect of whole of sales consideration.

Answe: Under section 206C (ID), the tax is required to be collected at source on cash

component of the sales consideration and not on the whole of sales consideration.

Illustration: Goods worth Rs. 5 lakhs is sold for which the consideration amounting

Amendment in Section 206C of the Income-tax Act vide Finance Act 2016 -Clarifications regarding

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to Rs. 2 lakhs has been received in cheque and Rs. 3 lakh has been

received in cash. Tax is required to be collected under section 206C (ID)

only on cash receipt of Rs. 3 lakhs and not on the whole of sales consideration of

Rs. 5 lakh.

COMMENTS TO UNDERSTAND THE GENESIS

In this circular the application of sec 206© regarding collection of tax at

source has been clarify to mean that this provision is applicable only in

respect of cash receipt of Rs. More than 2Lakhs and not on the whole of

sale consideration

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INCOME� TAX� BAR� ASSOCIATION 46 IT�Mirror� 2016-17����� Vol:� 2

NOTIFICATION NO. 43/2016, DT. 2-6-2016[F.NO. 370142/7/2016-TPL]

S.O. 1949(E)--In exercise of the powers conferred by section 295 read with sub-

section (2) of section 14A of the Income-tax Act, 1961 (43 of 1961), the Central

Government hereby makes the following rules further to amend the Income-tax Rules,

1962, namely:

1. (1) These rules may be called the Income Tax (14th Amendment) Rules, 2016.

(2) They shall come into force on the date of their publication in the Official Gazette.

2. In the Income-tax Rules 1962, in rule 8D,

(I) for sub-rule (2), the following sub-rule shall be substituted, namely:- (2) The

expenditure in relation to income which does not form part of the total income shall

be the aggregate of following amounts, namely:- (i) the amount of expenditure

directly relating to income which does not form part of total income; and

(ii) an amount equal to one per cent of the annual average of the monthly averages

of the opening and closing balances of the value of investment, income from which

does not or shall not form part of total income:

Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the

total expenditure claimed by the assessee.;

(II) sub-rule (3) shall be omitted.

Note:- The principal rules were published vide Notification S.O. 969 (E), dated 26th

March, 1962 and last amended by Income-tax (13th Amendment) Rules, 2016 vide

Notification S.O.1923(E), dated 31-5-2016.

Income Tax (14th Amendment) Rules, 2016--Amendment in Rule 8D

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COMMENTS TO UNDERSTAND THE GENESIS

Very important circular has been issued in respect of disallowance u/s.

14A read with rule 8D should be an amount equal to 1% of the annual

average of the monthly averages of the opening and closing balances of

the value of investment , income from which does not or shall not form

part of total income. Provided that the amount of referred to in case

clause (i) and clause (ii) shall not exceed the total expenditure claimed by

the assessee. Further, sub rule (3) has been omitted. The most important

guideline is that the disallowance should not exceed the expenditure

claimed by the assessee.

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INCOME� TAX� BAR� ASSOCIATION 48 IT�Mirror� 2016-17����� Vol:� 2

OFFICE MEMORANDUM, DTD. 29-2-2016[F.NO.404/72/93-ITCC]

Instruction No. 1914 dated 21-3-1996 contains guidelines issued by the Board

regarding procedure to be followed for recovery of outstanding demand, including

procedure for grant of stay of demand.

2. In part C of the Instruction, it has been prescribed that a demand will be stayed only

if there are valid reasons for doing so and that mere filing of an appeal against the

assessment order will not be a sufficient reason to stay the recovery of demand. It has

been further prescribed that while granting stay, the field officers may require the

assessee to offer a suitable security (bank guarantee, etc.) and/ or require the

assessee to pay a reasonable amount in lump sum or in instalments.

3. It has been reported that the field authorities often insist on payment of a very high

proportion of the disputed demand before granting stay of the balance demand. This

often results in hardship for the taxpayers seeking stay of demand.

4. In order to streamline the process of grant of stay and standardize the quantum of

lump sum payment required to be made by the assessee as a pre-condition for stay of

demand disputed before CIT (A), the following modified guidelines are being issued in

partial modification of Instruction No. 1914:

(A) In a case where the outstanding demand is disputed before CIT (A), the

assessing officer shall grant stay of demand till disposal of first appeal on payment

of 15% of the disputed demand, unless the case falls in the category discussed in

para (B) hereunder.

(B) In a situation where,

(a) the assessing officer is of the view that the nature of addition resulting in the

disputed demand is such that payment of a lump sum amount higher than 15% is

warranted (e.g. in a case where addition on the same issue has been confirmed by

appellate authorities in earlier years or the decision of the Supreme Court or

Amendment of Instruction No.1914, dated 21-3-1996 to Provide For Guidelines For Stay of Demand

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jurisdictional High Court is in favour of Revenue or addition is based on

credible evidence collected in a search or survey operation, etc.) or,

(b) the assessing officer is of the view that the nature of addition resulting in the

disputed demand is such that payment of a lump sum amount lower than 15% is

warranted (e.g. in a case where addition on the same issue has been deleted by

appellate authorities in earlier years or the decision of the Supreme Court or

jurisdictional High Court is in favour of the assessee, etc.), the assessing officer

shall refer the matter to the administrative Pr. CIT/CIT, who after considering all

relevant facts shall decide the quantum/proportion of demand to be paid by the

assessee as lump sum payment for granting a stay of the balance demand.

(C) In a case where stay of demand is granted by the assessing officer on payment

of 15% of the disputed demand and the assessee is still aggrieved, he may

approach the jurisdictional administrative Pr. CIT/CIT for a review of the decision of

the assessing officer.

(D) The assessing officer shall dispose of a stay petition within 2 weeks of filing of

the petition. If a reference has been made to Pr. CIT/CIT under para 4 (B) above or a

review petition has been filed by the assessee under para 4 (C) above, the same

shall also be disposed of by the Pr. CIT/CIT within 2 weeks of the assessing officer

making such reference or the assessee filing such review, as the case may be.

(E) In granting stay, the Assessing Officer may impose such conditions as he may

think fit. He may, inter alia,-

(i) require an undertaking from the assessee that he will cooperate in the early

disposal of appeal failing which the stay order will be cancelled;

(ii) reserve the right to review the order passed after expiry of reasonable period

(say 6 months) or if the assessee has not co-operated in the early disposal of

appeal, or where a subsequent pronouncement by a higher appellate authority or

court alters the above situations;

(iii) reserve the right to adjust refunds arising, if any, against the demand, to the

extent of the amount required for granting stay and subject to the provisions of

section 245.

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5. These instructions/guidelines may be immediately brought to the notice of

all officers working in your jurisdiction for proper compliance.

COMMENTS TO UNDERSTAND THE GENESIS

This is a very important and beneficial circular for the tax payer. It is the

experience of every one that all kinds of huge assessments are being

made by the income tax department and when application is made for

stay of outstanding demand the same is rejected or you are told 50% of

the demand must be paid otherwise bank accounts will be attached. The

worst situation is when the AO does not apply his mind and rejects the

stay petition and even does not pass any speaking order. Let me refer to

para 4 (a) which reads as under…

“In a case where the outstanding demand is disputed before CIT

(A), the assessing officer shall grant stay of demand till disposal of first

appeal on payment of 15% of the disputed demand, unless the case falls

in the category discussed in para (B)…….

In my opinion this is a very beneficial circular and apart from the above

referred relaxation there are other guidelines also which must be referred

to for the purpose of stay petition.

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THANK YOU

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