Income Tax 01 Feb,2020
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Expectations related to relief from double taxation and ambiguities from Budget 2020
Neelam Kumar JainFCA, DISA

1. Preliminary

It is fundamental principles of taxation that it should produce the right amount of tax at the right time, while avoiding both double taxation and unintentional non-taxation. In addition, the potential for evasion and avoidance should be minimised. If there is a class of taxpayers that are technically subject to a tax, but are never required to pay the tax due to inability to enforce it, then the tax can be seen as unfair and ineffective. The practical enforceability of taxation is an important consideration for policy makers. In addition, because it influences the collectability and the administerability of taxes, enforceability is crucial to ensure efficiency of the tax system.

In the scheme of income tax in India, certain provisions was introduced as anti abuse measure but with passage of time, presently they seems irrelevant and cause undue hardship to the taxpayers as well as adversely affecting the economy of the country. These provisions are discussed in this article with the aim that Govt. may consider the same in the upcoming budget.

2. Provisions cause Double Taxation

Sections 43CA and 50C of the Act provides a deeming fiction under which if consideration received or accruing as a result of transfer of an immovable property is less than the value adopted or assessed or assessable by the Stamp Valuation Authority (SVA) for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall be deemed to be the full value of the consideration for the purpose of computing profits and gain or capital gains from such transfer. However such deeming fiction is not applied where the value adopted or assessed or assessable by the stamp valuation authority does not exceed one hundred and five per cent of the consideration received or accruing as a result of such transfer.

It may be noted that section 43CA is applicable to seller on transfer of land and/or building (not being a capital assets) for the purpose of computing income under the head "Profits and Gains of Business or Profession". Whereas section 50C applicable to seller on transfer of a capital assets, being land and/or building for the purpose of computing income under the head "Capital Gain".

Similarly Section 50CA of the Act provide that where consideration for transfer of a capital asset being share of a company (other than quoted share) is less than the FMV of such shares determined in accordance with the manner prescribed under rule 11UAA, the FMV shall be deemed to be the full value of consideration for computing Capital Gains u/s 48.

"Quoted share" means the share quoted on any recognised stock exchange with regularity from time to time, where the quotation of such share is based on current transaction made in the ordinary course of business.

It may be noted that the deeming fiction of taxability as contemplated in sections 43CA, 50C and 50CA of the Income Tax Act, do not remain restricted to just in the hands of transferer of land/building/share but it has got extended in the hands of transferee too by virtue of Section 56(2)(x) of the Income Tax Act.

As Clause (x) to section 56(2) of the Act provide to charge tax in the hands of purchaser/transferee of property* like land, building, shares etc. if the purchase is made without consideration or for consideration less than the stamp duty value (SDV) or aggregate fair market value (FMV) of such property/shares, as the case may be. However this provision would apply only if the difference between the consideration paid and the SDV/FMV exceeds Rs. 50,000/-.

* The definition of 'property' for the purpose of this section included immovable property, jewellery, shares, paintings, etc.

It may be noted that the Finance Act, 2017 inserted the clause (x) in sub-section (2) of section 56 of the Act. Before this clause, the clause (vii) to section 56(2) cover the cases where any sum of money or any property which is received without consideration or for inadequate consideration (in excess of the specified limit of Rs. 50,000) by an individual or HUF is chargeable to income-tax in the hands of the recipient under the head "Income from other sources" subject to certain exceptions. Further under clause (viia) and (viib) to section 56(2) of the Act, receipt of certain shares by a firm or a company in which the public are not substantially interested is chargeable to income-tax in case such receipt is in excess of Rs. 50,000 and is received without consideration or for inadequate consideration. Thus these provisions earlier applicable only in case of individual or HUF and firm or company in certain cases. Therefore, receipt of sum of money or property without consideration or for inadequate consideration does not attract these provisions in cases of other assessees. In order to prevent the practice of receiving the sum of money or the property without consideration or for inadequate consideration, the clause (x) in sub-section (2) of section 56 was inserted by the Finance Act, 2017.

Thus the aforesaid provisions cause the double taxation. The same income or rather the deeming income taxed both in the hands of seller and the buyer of land or building or shares and as such the provision of such deeming fiction of taxation is resulting in "Double Taxation". This 'double taxation' is contrary to the well-established and well settled principle of Law and canons of direct taxation that "a same income can't be taxed twice".

The issue of double taxation may also arises in case of section 45(3) of the Act, wherein a partner/member contributes any capital asset being land and/or building in a firm/AOP/BOI then the value of the capital asset recorded in the books of accounts of the firm/AOP/BOI is deemed to be the full value of the consideration for the purpose of computing capital gain.

Though the Constitution of India does not prohibits the Legislature for enacting and incorporating the express and specific provisions in the Income Tax Act resulting in 'double taxation'. [ Refer judgments of Laxmipat Singhania v. CIT [1969] 72 ITR 291 (SC), Jain Brothers v. UOI [1970] 77 ITR 107 (SC) and case of Mahaveer Kumar Jain v. CIT, Jaipur [2018] 92 taxmann.com 340 (SC)].

However one should also keep in mind that the Income Tax Act itself contains numerous sections wherein the 'double taxation' of any income has been considered as impermissible and unlawful in the Act. The well known examples include non-taxability of the partners' share of profits in the partnership firm/LLP, in the hands of partners by virtue of section 10(2A) of the Income Tax Act, , the provisions of sections 90 and 91 of the Income Tax Act and the provisions related to Double Taxation Avoidance Agreements (DTAA) etc. The well-established and well settled "real income theory" postulates that only real and actual income can be taxed and any notional income can't be brought under the purview of taxation.

In view of aforesaid discussion it is expected and suggested that the Govt. may propose specific provisions in the act to avoid such double taxation.

3. Double taxation on dividends and distributed profits

The provisions related to tax on distributed profits and dividends are contained in section 10(34), Section 10(35), Section 115BBDA, Section 115O, Section 115R etc.. Under existing provisions dividends on shares taxed twice in case of distribution by domestic companies. Firstly the company distributing dividends required to pay dividend distribution tax (DDT) @ 15% (plus surcharge and cess extra) [ section 115-O of the Income Tax Act, 1961 ] and secondly the recipient being a resident individual/HUF/Firm etc. also required to pay tax @ 10% on dividends in aggregate exceeding Rs. 10 lakh (section 115BBDA ). Further DDT is payable by a domestic company in addition to the normal income-tax (ranging from 15% to 30%) on total income( plus Surcharge @ 0% to 12% and Health and Education Cess @ 4% extra).) Further no deduction under any other provision of the Act is allowed to the company or a shareholder in respect of such dividend or tax charged thereon. [Section 115-O(5)].

It is also worthy to point out that no deduction in respect of any expenditure or allowance or set off of loss is allowed to the assessee under any provision of the Act in computing the income by way of aforesaid dividends. [Refer sub-section (2) of Section 115BBDA of the Act].

Thus the effective tax in respect of distributed profits is too high and also leads to double taxation. One side it discourages the shareholders to invest more whereas other side slow down the economic growth. Indian corporates demanding since from long time to remove the dividend distribution tax (DDT ) on the plea of double taxation. It is expected that the Govt. may address this issue suitably in the upcomiong budget.

It may be noted that income/dividend received in respect of the units of a mutual fund are exempt from income tax. [Refer Section 10(35) of the Act]. However MFs are required to pay tax on any income distributed to its unit holders @ 10% to 30% (plus 12% surcharge and 4% cess) depending on the type of MFs viz. Equity oriented Fund, Money Market MF, Liquid Fund etc. [Refer section 112R of the Act].

Note: Refer Explanation to Chapter XII-E of the Act for definitions of Equity Oriented Fund, Money Market MF, Liquid Fund, etc.

4. Controversy related to full value of consideration

According to section 45(3) of the Act, where a partner/member contributes any capital asset in a firm/AOP/BOI then the value of capital asset recorded in the books of accounts of the firm/AOP/BOI is deemed to be the full value of the consideration for the purpose of computing capital gain.

On the other hand, as per section 50C, if the consideration received or accruing as a result of transfer of a capital asset, being land or building or both is less than the value adopted or assessed or assessable by the Stamp Valuation Authority (SVA) for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall be deemed to be the full value of the consideration for the purpose of computing capital gains. However where the value adopted or assessed or assessable by the stamp valuation authority does not exceed one hundred and five per cent of the consideration received or accruing as a result of the transfer, the consideration so received or accruing as a result of the transfer shall, for the purposes of section 48, be deemed to be the full value of the consideration.

A Controversy is arises in case of contribution of land or building in partnership firm that whether the value recorded in books of accounts of the firm or the value adopted/assessed for stamp duty purpose would be considered as the full value of the consideration for the purpose of computing capital gain.

Similarly Section 54F of the Act provides exemption from charging long term capital gain where the assessee invests net consideration in acquiring a residential house.. The term 'net consideration' has been defined to mean the full value of the consideration received or accrued as a result of the transfer of the capital asset as reduced by any expenditure incurred wholly and exclusively in connection with the transfer.

In case of transfer of land and/or building, the controversy is arises that for the purpose of claiming exemption u/s 54F of the Act, the assessee needs to invest whether the actual consideration received or accrued as a result of the transfer or the full value of consideration as defined under section 50C of the Act . The similar controversy is also arises in case of exemption u/s 54 of the Act.

Different courts have different ruling on the aforesaid issues. Some have opinion that Section 50C is a general provision, whereas Section 45(3) is a special provision and law is well settled that specific provision prevail over the general provision (CIT v. Shahzada Nand & Sons [1966] 60 ITR 392). However this issue is itself controversial to determine that which provision is the general and which is the special. For example Section 50C is special provision in the sense that it applicable to land and/or building only whereas section 45(3) is special provision in the sense that it applicable to only such transfer that made by partner/member (existing or proposed) to a firm/AOP/BOI.

Further sections 45(2), 45(4), 45(5), 50, 50B etc. also provide different basis for determination of full value of consideration in case of specific transfers as contained in these sections. Applicability of section 50C in case of such specific transfers as contained in these sections is also a controversial issue and different judicial authorities/Courts have different opinions. In this respect some relevant case laws are as follows:-

(a) Carlton Hotels (P) Ltd. vs. ACIT (2009) 122 TTJ 515 (Lucknow) where it was held that where immovable property is transferred by a partner to the firm as a capital contribution and registration does not take place by paying stamp duty, the case would be covered under section 45(3) and the provisions of section 50C cannot be invoked. Section 50C overrides section 45(3) only if the sale deed is sought to be registered by paying stamp duty. (However the said decision was given in the light of unamended Section 50C which has been amended by Finance Act 2009).

(b) Case of ITO v. United Marine Academy [2011] 9 ITR(T) 639 (Mumbai) (SB)/[2011] 130 ITD 113 (Mumbai) (SB)/[2011] 138 TTJ 129 (Mumbai) (SB)-Section 50C read with section 50, of the Income-tax Act, 1961 - Capital gains - Full value of consideration in certain cases - Whether in a case where capital gain arising from transfer of depreciable asset is computed as per special provisions contained in section 50, provisions of section 50C can be applied so as to adopt value assessed for purpose of payment of stamp duty to be full value of consideration received or accruing as a result of such transfer - Held, yes

(c) Case of Panchiram Nahata v. Joint CIT [ 2010] 127 TTJ 128 (ITAT-KOL) (UO)-Section 50 of the Income-tax Act, 1961 - Capital gains - Computation in case of depreciable assets - Assessment year 2005-06-Where it was not in dispute that office premises belonging to assessee was sold in assessment year in question, which was a depreciable asset and assessee had claimed depreciation on same in earlier year, which had been granted, for computing STCG section 50 was applicable and adoption of stamp duty valuation as full value of consideration in place of that shown by assessee in sale deed, was not justified. Section 50C applies only for the purpose of section 48 and in no case, it deals with the provision of section 50.

(d) In Asstt. CIT v. ETC Industries Ltd. [2012] 21 taxmann.com 457 (Indore - ITAT), the Indore Tribunal held that Section 50C applicable even in a case in which section 50 applies since section 50C makes no distinction between depreciable asset and non-depreciable asset.

(e) Since, section 50C deems the valuation done by Stamp Valuation Authority as full value of consideration for the purposes of section 48 and there is no reference to section 50, the deeming fiction of section 50C cannot be applied to computation of capital gains under section 50. [Re. - Panchiram Nahata v. Jt. CIT [2010] 127 TTJ 128 (Kol.) (UO).

(f) Jagdish C. Dhabalia v. ITO, 25(2)(1), Mumbai [2019] 104 taxmann.com 208 (Bombay): Section 54EC, read with section 48 and 50C, of the Income-tax Act, 1961 - Capital gains - Not to be charged on investment in certain bonds (Effect of section 50C) - Assessee sold a plot of land for sale consideration of Rs.25 lakhs and invested entire amount in bond as specified under section 54EC - In return of income, assessee had declared long-term capital gain on transfer of land at Rs. 21.19 lakhs and claimed full exemption of such capital gain under section 54EC - During course of scrutiny assessment, Assessing Officer determined long-term capital gain of assessee at Rs.49.47 lakhs for purpose of levying stamp duty and, accordingly, passed order of assessment and charged Rs. 24.47 lakhs (Rs. 49.47 lakhs - Rs. 25 lakhs) to tax as capital gain - Assessee contended that since entire sale consideration of Rs.25 lakhs was invested in specified bond, assessee must get full exemption from capital gain, irrespective of computation of deemed sale consideration under section 50C - Whether computation of capital gain and consequently computation of exemption under section 54EC, shall have to be worked out on basis of substituted deemed sale consideration of transfer of capital asset in terms of section 50C - Held, yes - Whether, therefore, assessee would be chargeable to capital gains to extent of enhanced and notional sale consideration under section 50C and it could claim exemption only in relation to amount of investment made in specified bond and not qua entire capital gain computed as per section 50C - Held, yes [Para 13] [In favour of revenue]

(g) The Mumbai Bench of ITAT in the case of Raj Babbar v. ITO [2013] 29 taxmann.com 11/56 SOT 1 (Mumbai - Trib.) held that where investment in new asset was more than net consideration received as well as full value of consideration computed as per section 50C, assessee would not be chargeable to capital gains

(h) The ITAT Jaipur Bench in the case of Nand Lal Sharma v. ITO [2015] 61 taxmann.com 271 (Jp. - Trib.) following the decision of the Delhi High Court in the case of CIT v. Smt. Nilofer I. Singh [2009] 309 ITR 233/176 Taxman 252 (Delhi) held that while computing exemption under section 54 of the Act, actual sale consideration has to be taken into consideration and not stamp duty valuation under section 50C of the Act. The Delhi High Court in Smt. Nilofer I. Singh's case (supra) held that "the expression 'full value of consideration' used in section 48 does not have any reference to market value but only to consideration referred to in sale deeds as sale price of assets which have been transferred".

(i) Gouli Mahadevappa v. ITO [2010] 8 taxmann.com 22 (Jp.)/[2011] 128 ITD 503/[2010] 8 taxmann.com 15 (Bang.); Gyan Chand Batra v. ITO [2010] 8 taxmann.com 22 (Jp.); Prakash Karnawat v. ITO [2011] 16 taxmann.com 357/[2012] 49 SOT 160 (Jp.): When valuation done by SVA is adopted as full value of consideration under section 50C then such value adopted will result in larger capital gain for the assessee as compared to what is disclosed by him. For the purpose of getting benefit under section 54F the assessee cannot be expected to invest more than actual amount of consideration received or accrued to him as per instrument of transfer. The legal fiction created by section 50C in determining the capital gains cannot be extended to section 54F or other provisions allowing exemption from capital gains, as deeming section can be applied only for the definite and limited purposes for which it is created. Net consideration mentioned in section 54F can be worked out only on the basis of apparent sale consideration without imposing fiction created under section 50C.

(j) Smt. Sabita Devi Agarwal v Income-tax Officer, Ward-2(3), Siliguri [2019] 104 taxmann.com 12 (Kolkata - Trib.): Section 54F, read with section 50C, of the Income-tax Act, 1961 - Capital gains - Exemption of, in case of investment in residential house (Applicability of section 50C) - Assessment year 2012-13 - Whether deeming fiction provided under section 50C in respect of term 'full value of consideration' is to be applied only to section 48, however, provisions of said section cannot be applied while computing deduction allowable to assessee under section 54F - Held, yes [Paras 6.3 and 6.4] [In favour of assessee]

(k) Deputy CIT, Circle-2 (1), Vijayawada v. Dr. Chalasani Mallikarjuna Rao [2016] 75 taxmann.com 270 (Visakhapatnam - Trib.): Section 54F, read with section 50C, of the Income-tax Act, 1961 - Capital gains - Exemption of, in case of investment in residential house (Applicability of section 50C) - Assessment year 2007-08 - Whether meaning of 'full value of consideration' as referred to in Explanation to section 54F(1) is not governed by meaning of words 'full value of consideration', as mentioned in section 50C - Held, yes - Whether, therefore, where assessee invests net sale consideration for purpose of purchase/construction of new residential house property, then he is eligible for exemption even though full value of consideration as per section 50C is more than net sale consideration as a result of transfer - Held, yes [Para 12] [In favour of assessee]

5. Conclusion

While some issues has been well settled by judicial pronunciation but many ambiguities yet to be clarified. It is expected that Govt. may consider to introduce some specific provisions in the statute through upcoming budget to remove the aforesaid double taxation and controversies.