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GENERAL ANTI-AVOIDANCE RULES (GAAR)

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GENERAL ANTI-AVOIDANCE RULES (GAAR)

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The General Anti Avoidance Rule (GAAR) in India aims to stop businesses and individuals from finding ways to pay less tax by exploiting loopholes or aggressive tax avoidance strategies. The article will explore the GAAR meaning and discover its provisions and applicability.

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SECTION 95: APPLICABILITY OF GAAR

GAAR provides that an agreement entered into by an assessee may be declared to an impermissible avoidance agreement (IIA) and the consequences in relation to tax arising there from may be determined as the provisions of this chapter.

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The section starts with a non obstante clause which means, if there is a conflict with provisions in other sections, then this section shall prevail over other conflicting provisions.

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SECTION 96: IMPERMISSIBLE AVOIDANCE AGREEMENT

Impermissible avoidance agreement means an arrangement which satisfies two conditions:

1. Main purpose/ one of the main purposes of which is to obtain a tax benefit; and

2. It:

• Creates rights/ obligations which are not ordinarily created between persons dealing at arm’s length price or
• Results (directly or indirectly) in misuse or abuse of provisions of Act or
• Entered/ carried in a manner, which are not ordinarily employed for bonafide purposes or
• Lacks commercial substances or
• Deemed to lack commercial substance.

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TRANSACTIONS SHALL BE DEEMED TO LACK COMMERCIAL SUBSTANCE

S.NO

NATURE OF TRANSACTION

EXAMPLE

1.

Substance of the transaction differs significantly from its Form

A transaction has been stated to be sales and lease transaction, but in substance it is only a make and believe story.

2.

The only purpose of selection of such Location of asset/ transaction/ place of residence of any party is to obtain tax benefit and there is no substantial commercial purpose for selecting such Location of asset/ transaction/ place of residence of any party.

A transaction between A Ltd. of Netherlands and B Ltd. of Hong Kong is executed through a conduit C ltd in a Tax Heaven.

3.

Arrangement does not significantly affect business risk/ net cash outflows of any party to the arrangement but only attributes tax benefits

X. ltd located in tax holiday area take a Plant & Machinery on rent of Rs. 4 Crores from sister concern and given it on rent to another sister concern for rent of Rs. 10 crores.

4.

Transaction involves:

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i.

Round Tripping, which includes any arrangement in which, through series of transaction: –

(a)Funds are transferred among parties.
(b)Such transactions have no substantial commercial purpose other than obtaining tax benefit.

It is irrelevant that:

• Funds involved in round trip financing can be traced to any funds transferred/ received (direct nexus not relevant).
• Time or sequence in which funds are transferred/ received.
• Manner/ mode in which funds are transferred/ received.

(a) A group company in profit, obtains loan from market and gives loan to sister concern interest free; and claims it to be for business purposes.

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(b) A company (X. Ltd.) purchases shares of group company, from another group company at a high value and sells it to another group company at low value. This result in a loss to X ltd. This transaction can be vice versa.

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(c) A group company in profit, obtains loan from market. Uses the loan for business, and gives loan to sister concern out of own funds (direct nexus not relevant).

ii.

An accommodating party i.e. a party, the main reason for whose participation is to obtain (directly or indirectly) a tax benefit.

It is irrelevant that the accommodating party is associated person or not.

A ltd. sells shares to subsidiary company B ltd. at a lower value and books a loss (A ltd. wanted a loss) B ltd. transfers the shares at higher value in the market and books a profit (Subsidiary wanted a profit). Here B ltd is the accommodating party.

iii.

Elements have the effect of offsetting or cancelling each other

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iv.

A transaction conducted through one or more persons and disguises the value/ location/ source/ ownership/ control of funds

A share capital is invested in India by a company in Mauritius, the source of investment is not disclosed.

Further, it has been provided that following shall be irrelevant for deciding whether a transaction lacks commercial substance or not: –

• Period/ time for which arrangement exists.
• Fact of payment of taxes, directly or indirectly, under the arrangement.
• Fact that an exit route (including transfer of any activity/ business/ operations) is provided by the arrangement.

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While treating a transaction as Impermissible Avoidance Arrangement (IIA)

• An equity may be treated as debt or vice versa.
• Capital receipt may be treated as revenue receipt or vice versa.
• Expenditure/ deduction/ relief/ rebate any may be recharacterized.

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BASIC NOTES:

1.Provision of this chapter shall apply in addition to, or in lieu of, any other basis for determination of tax liability. Specific Anti- Avoidance Rules (SAAR) would be applicable in respective cases. Some examples of SAAR are 40A(2), 94A, 2(22)(e), Transfer Pricing etc.
2.GAAR override the provisions of Double Taxation Avoidance Agreement (DTAA).
3.GAAR would apply in respect of tax benefit in aggregate by all enterprises out of an arrangement in an A.Y exceeds Rs. 3 crores. GAAR provisions are applicable from A.Y 2018-19.
4.GAAR not applicable in case of (a) FII who has invested in securities in India with prior permission of competent authority and has not taken any benefit under DTAA or (b) Investment made by NR in off-shore derivative instruments of FII.
5.If any arrangement is declared to be IAA, then the consequences shall be determined in such manner as is deemed appropriate, in the circumstances of the case. Circumstances of case may results in denial of tax benefit or benefit under DTAA.
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SEARCH & SEIZURE

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SEARCH & SEIZURE

WHO CAN AUTHORIZE SEARCH (ISSUE SEARCH WARRANT)

According to Section 132(1) of Income Tax Act, the

–Principal Director General or Director General of income tax, or
–Principal Director or Director of income tax, or
–Principal Chief Commissioner or Chief Commissioner of income tax, or
–Principal Commissioner or Commissioner of income tax.

May authorize:

–Additional Director, or
–Additional Commissioner, or
–Joint Director, or
–Joint Commissioner, or
–Assistant Director, or
–Deputy Director, or
–Assistant Commissioner, or
–Deputy Commissioner, or
–Income tax officer.

To conduct an Income Tax Raid.

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WHEN SEARCH CAN BE AUTHORIZED

If Income Tax authority has reason to believe that:

–Any person to whom Notice u/s 142(1) or summon u/s 131 issued or might be issued to produce Books of Accounts or documents & Assessee failed to produce/ will not produce such Books of Accounts or documents.
–Any person is in possession of any money, jewellery or any other valuable articles and such assets, which has not been disclosed/ would not be disclosed for the purpose of Income Tax Act.

Note: However, the reason to believe, as recorded by the Income Tax Authority, shall not be disclosed to any person or any authority or the Appellate Tribunal (ITAT).

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POWER OF AUTHORIZED PERSON IN COURSE OF SEARCH

i.Enter & Search any building, place, vessel, vehicle or aircraft where the officer suspects that Books of Accounts, money are kept.
ii.Power to break lock of any door, box, locker etc. if keys are not available.
iii.Search any person who has got out of, or is about to get into, or is in, the building, vessel, place, vehicles etc.
iv.Require any person who is in control of any Books of Accounts maintained in electronic form, to provide password.
v.Seize any books of accounts, documents, money, bullion, jewellery etc. found under search. However, stock cannot be seized.
vi.Authorized officer may take help of any police officer or any officer of Central Government or any person or entity as may be approved by Principal Chief Commissioner of Income Tax, Chief Commissioner of Income Tax or Principal Director General of Income Tax or Director General of Income Tax in accordance with prescribed procedure.

Notes:

1. Deemed/ constructive seizure: where it is not possible/ practical to take physical possession of any asset due to volume, weight, nature etc. then authorized officer may serve an order on the owner of the person who is in immediate possession thereof, that he shall not remove/ deal with/ part with such asset without the approval of Authorized officer.

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2. Prohibitory order/ order of restraint: where it is not practical to take physical possession of any Books of Accounts or other assets for reason other than mentioned in Note-1 above, then authorized officer may serve an order on the owner of the person who is in immediate possession that he shall not remove/ deal with/ part with such asset without approval of Authorized officer. This order is valid for maximum 60 days.

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3. Presumption (Assumption) under Search: Where any Books of Accounts other documents, money, bullion, jewellery etc. found in possession of any person, it may be presumed: –

• That such Books of Accounts, documents, money, bullion, other valuable articles belong to such person.
• That the contents of such Books of Accounts & documents are true.
• That the signature & every other part of such Books of Accounts & other documents which purport (seems) to be in the handwriting of any particular person are in that person’s handwriting.
• That the document which purports to be attested or stamped by particular person are presumed to be attested or stamped by such person.

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4. Section 132A: Reacquisition: Where a search has already been conducted by any Authority under any other law e.g. GST, CBI, Election commission etc. or search was conducted by Income Tax Authority but Books of Accounts or assets with any other authority then the authorized officer shall require such other authority (FEMA/CBI) to deliver such books of accounts, assets seized, as early as possible.

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5. Section 132(9A): Where the authorized officer has no jurisdiction over the person searched by him, the books of accounts or any money, bullion, jewellery etc. shall be handed over by authorized officer to the Assessing Officer having jurisdiction over such other person within period of 60 days from the date on which search was completed.

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6. Section 132(9B) Provisional Attachment: During the course of search/ within 60 days from the date of conclusion of search, the search party, may, provisionally attach any property belonging to assessee. However, before doing so,

• Reason shall be recorded in writing.
• Interest of revenue shall be involved.

Provisional attachment so made shall be operational for 6 months, after which it shall be automatically vacated (Section 132(9C)).

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7. Section 132(9D) Valuation Officer: During the course of search/ within 60 days of conclusion of search the authorized officer, may make a reference to Valuation Officer or any other person/ entity/ registered valuer approved by Principal Chief Commissioner of Income Tax, Chief Commissioner of Income Tax or Principal Director General of Income Tax or Director General of Income Tax, Valuation officer or any other person/ entity/ registered valuer shall estimate the Fair Market Value (FMV) of the property. Report shall be submitted in 60 days of receipt of such reference.

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8. Conclusion of Search or Requisition

• Search- Date of Last Panchnama drawn.
• Requisition- Date of actual receipts of Books of accounts or assets.
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PENALTIES AND PROSECUTION UNDER INCOME TAX ACT

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PENALTIES AND PROSECUTION UNDER INCOME TAX ACT

PENALTIES UNDER INCOME TAX

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SECTION

NATURE OF DEFAULTS

QUNTAUM OF PENALTY

WHO CAN IMPOSE

222(1)

Failure to pay the whole or part of the self-assessment tax, demand of tax, TDS, TCS

Maximum amount of tax in arrears

AO

270A

Penalty for under reporting or misreporting of income

50% of the tax payable in case of under reporting and 200% of tax payable in case of misreporting of income

AO, JC(A), CIT(A), CIT PCIT.

271A

Failure to keep, maintain or retain books of accounts as required by section 44AA.

Rs. 25,000

AO, JC(A), CIT(A).

271AA & 271G

Failure to keep, maintain information and documents in respect of an international or specified domestic transactions

2% of value of such transactions.

AO, CIT(A).

271AAB

Undisclosed income found in search: –

–Assessee during search admits the undisclosed income, and
–Specifies the manner in which such income was earned and
–Pays tax plus interest on undisclosed income and
–Furnished the return of income declaring undisclosed income, before due date u/s 139(1)/ period specified u/s 148 notice.

30% of undisclosed income

AO, CIT(A).

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In any other case

60% of undisclosed income

AO, CIT(A).

271AAC

Deemed income u/s 68 to 69D

10% on tax on deemed income u/s 115BBE

AO, JC(A), CIT(A)

Note: Penalty u/s 270A not applicable when penalty has been levied u/s 271AAB or 271AAC.

271AAD

Penalty for false entry or omission of any entry which is relevant for computing of total income of such person, to evade tax liability

100% of amount of such false entry or omitted entry

AO, JC(A), CIT(A)

“False entry” includes use or intention to use-

–Forged or falsified documents such as false invoices or, in general, a false piece of documentary evidence; or
–Invoice in respect of supply or receipt of goods or services or both issued by the person or any other person without actual supply or receipt of such goods or services or both; or
–Invoice in respect of supply or receipt of goods or services or both to or from a person who does not exist.

This penalty applicable on: –

–Person who makes such false entry or omits an entry to evade tax liability; and
–Any other person, who caused the person in any manner to make a false entry or omit any entry to evade tax liability.

271AAE

Any trust referred u/s 11 or institution u/s 10(23C) gives any benefit to related person u/s 13(1) (Benefit to trustee, founder etc.)

100% of the amount applied in case of 1st Time violation.

200% of amount applied in subsequent violation.

AO

271B

Failure to get accounts audited up to due date u/s 44AB

0.5% of the turnover

(Max Rs. 1,50,000)

AO

271BA

Transfer pricing audit report not furnished u/s 92E

Rs. 1,00,000

AO

271J

Furnishing of incorrect information in any report or certificate by CA/ Merchant Banker/ Registered Valuer

Rs. 10,000 per failure

AO, JC(A), CIT(A).

271K

Institution notified u/s 35 or 80G fails to submit statement to prescribed authority or certificate to owner

Rs. 10,000 to Rs. 1,00,000

AO

271C

Failure to deduct TDS or ensure payment of TDS u/s 194B or 194R or 194S or 194BA.

Note: – In all four sections mentioned above, the winnings/ benefits/ perquisite/ consideration of VDA, as the case may be, is wholly in kind or partly in cash and partly in kind and the part in cash is not sufficient to meet TDS liability.

100% amount of tax which he failed to deduct or pay or ensure payment of said tax at source.

Jc

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PROSECUTION UNDER INCOME TAX

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SECTION

NATURE OF DEFAULT

RIGOROUS IMPRISONMENT

271A

Contravention of order of deemed seizure or restrain order u/s 132(2)

Upto 2 years plus fine.

275B

Failure to provide necessary facility to the Authorized officer to inspect books of a/c u/s 132(1)(iib)

Upto 2 years plus fine.

276

Removal, concealment, transfer or delivery of property to thwart tax recovery

Upto 2 years plus fine.

276B & 276BB

Failure to pay TDS or TCS or ensure that TDS paid u/s 194B, 194R, 194S & 194BA

3 months to 7 years plus fine.

276C(1)

Willful attempt to evade tax, penalty or interest chargeable or imposable or under report his income

Evasion/ tax on Unreported income is greater than Rs. 25 lakhs : 6 months to 7 years (otherwise: 3 months to 2 years) plus fine.

276C(2)

Willful attempt to evade payment of tax, penalty or interest

3 months to 2 years plus fine, at the discretion of the court.

276CC

Willful failure to furnish ROI in DD u/s 139(1), 142(1)(i), 148

Evasion of tax is more than Rs. 25 lakhs: 6 months to 7 years (otherwise: 3 months to 2 years) plus fine.

276D

Willful failure to produce accounts and documents u/s 142(1)/ 142(2A)

Upto 1 year plus fine.

277

False Statement in verification

Evasion of tax is more than Rs. 25 lakhs: 6 months to 7 years (otherwise: 3 months to 2 years) plus fine.

277A

Falsification of books of a/c or documents etc. to induce or abet any person to evade any tax, penalty or interest chargeable or imposable under the act.

It is not necessary to prove that the other person has actually evaded any tax, penalty or interest under the Act for the purpose of establishing charge under this section.

3 months to 2 years plus fine.

278

Abetment of false return etc.

Evasion of tax is more than Rs. 25 lakhs: 6 months to 7 years (otherwise: 3 months to 2 years) plus fine.

278A

Second and subsequent offences u/s 276B, 276BB, 276C(1), 276CC, 277, 278

6 months to 7 years for every subsequent offence plus fine

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SECTION 68 TO 69D : DEEMED INCOME

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DEEMED INCOME (SECTION 68 TO 69D)

SECTION 68: CASH CREDIT

Where any sum is found credited in the books of the assessee and the assessee offers no explanation about the nature and source or the explanation offered is not satisfactory in the opinion of the Assessing Officer, the sum so credited may be treated as the income of the assessee of the Previous Year.

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However, where the sum so credited consists of loan or borrowing or any such amount, by whatever name called, any explanation offered by the assessee shall not be deemed to be satisfactory, if, the person in whose name such credit is recorded also offers no explanation about the nature and source or explanation not satisfactory.

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Further, any explanation offered by a closely held company in respect of any sum credited as share application money, share capital, share premium or any such amount, in the a/c’s of such company shall be deemed to be not satisfactory, if, the resident person, in whose name such credit is recorded in the books of such company also not explains about the nature and source of sum or explanation is not satisfactory.

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These additional conditions would not apply if the person, in whose name the sum is recorded, is a venture capital fund or venture capital company registered with SEBI.

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NOTE: Income mentioned as above u/s 68 will be taxable @ 60% (+25% Surcharge + 4% HEC i.e. 78%).

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SECTION 69: UNEXPLAINED INVESTMENT

Where in the Previous Year, the assessee has made investments which are not recorded in the Books of Accounts and the asseesee offers no explanation about the nature and the source of investments or explanation is not satisfactory in the opinion of the Assessing Officer, the value of the investments are taxed as deemed income of the assessee of that Previous Year.

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NOTE: Income mentioned as above u/s 69 will be taxable @ 60% (+25% Surcharge + 4% HEC i.e. 78%).

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SECTION 69A: UNEXPLAINED MONEY, ASSETS ETC.

Where in any Previous Year, the assessee is found to be the owner of any money, bullion, jewellery or other valuable article and the same is not recorded in the Books of Accounts and the assessee offers no explanation about the nature and source of acquisition of such money, bullion, jewellery etc. or the explanation is not satisfactory in the opinion of the Assessing Officer, the money and the value of bullion, Jewellery etc. may be deemed to be the income of the assessee of that Previous Year.

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NOTE: Income mentioned as above u/s 69A will be taxable @ 60% (+25% Surcharge + 4% HEC i.e. 78%).

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SECTION 69B: AMOUNT OF INVESTMENT, OTHER ASSETS ETC. NOT FULLY DISCLOSED IN THE BOOKS OF ACCOUNTS

Where in any Previous Year, the assessee has made investments or is found to be the owner of any bullion, jewellery or other valuable articles and the Assessing Officer finds that the amount spent on making such investments or in acquiring such articles exceeds the amount recorded in the Books of Accounts by the assessee and he offers no explanation for the differences or the explanation is unsatisfactory in the opinion of the Assessing Officer, such excess may be deemed income of the assessee of that Previous Year.

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NOTE: Income mentioned as above u/s 69B will be taxable @ 60% (+25% Surcharge + 4% HEC i.e. 78%).

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Example: Suppose a taxpayer purchases a property worth Rs. 50 lakhs, but only shows an investment of Rs. 20 lakhs in the books of accounts. In such a case, the remaining Rs. 30 lakhs could be treated as deemed income under Section 69 of the income tax act if the assessee is not able to explain the source of income for remaining Rs. 30 lakhs or the Assessing Officer founds the explanation not satisfactory.

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SECTION 69C: UNEXPLAINED EXPENDITURE

Where in any Previous Year, an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or the explanation is unsatisfactory in the opinion of the Assessing Officer, then the Assessing Officer can treat such expenditure as the income of the assessee for such Previous Year. Such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as deduction under any head of income.

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NOTE: Income mentioned as above u/s 69C will be taxable @ 60% (+25% Surcharge + 4% HEC i.e. 78%).

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SECTION 69D: AMOUNT BORROWED OR REPAID ON HUNDI

Where any amount is borrowed on a hundi or any amount due thereon including interest on such loan is repaid other than through an account payee cheque drawn on a bank, the amount so borrowed or repaid shall be deemed to be the income of the person borrowing or repaying for that Previous Year in which the amount was borrowed or repaid, as the case may be.

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However, where any amount borrowed on a hundi has been deemed to be the income of any person, he will not be again liable to be assessed in respect of such amount on repayment of such amount. The amount repaid shall also include interest paid on the amount borrowed.

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NOTE: If amount is borrowed or repaid through other financial institutions then this section cannot be invoked.

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NOTE: Income mentioned as above u/s 69C will be taxable @ 60% (+25% Surcharge + 4% HEC i.e. 78%).

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269ST OF INCOME TAX ACT

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269ST OF INCOME TAX ACT

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WHAT IS SECTION 269ST?

Any person should not receive an amount of Rs. 2,00,000 or more except by specified means:

a.In aggregate from a person in a day; or
b.In respect of a Single transactions; or
c.In respect of transactions relating to one event or occasion from a person.

Notes:

1.In respect of receipt in the nature of repayment of loan by NBPF or Housing Finance Companies, the receipt of one installment of loan shall constitute a “Single Transaction” & all installments paid for a loan shall not be aggregated.
2.Receipt related to dealership/ distributorship contract by the Co-operative Society on any day in a Previous Year, which is within the limit of (a) & (b), may not be aggregated across multiple days for purposes of (c) for that previous year.

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SPECIFIED MODES OF TRANSACTION

As per income tax rules, the specified modes to do transactions as per Section 269ST are as follows:

i.Account payee cheque/ bank draft.
ii.Electronic Clearing System (ECS) through a bank account.
iii.Net Banking.
iv.Credit Card.
v.Debit Card.
vi.RTGS.
vii.NEFT.
viii.BHIM.
ix.IMPS
x.UPI

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EXCEPTION TO SECTION 269ST:

Section 269ST is not applicable in the following cases:

i.Any receipt by Government, Bank, Post Office or Co-operative Bank.
ii.Transactions referred in Section 269SS.
iii.Such other persons as may be notified by the central government.

Notification No. 28 & 57/2017 (exempt transaction from 269ST)

iv.Cash withdrawals from Banks, Co-operative Bank, Post Office.
v.Receipts by bank correspondent by bank or co-operative bank.
vi.Receipts by ATM operator.
vii.Receipt from an agent by an issuer of pre-paid payment instruments.
viii.Receipt by a credit cards company against bills raised in respect of one or more credit cards.
ix.Receipt of Awards from Government exempt u/s 10(17A).

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PENALTY U/S 271DA:

If assessee fails to follow Section 269ST of the Income Tax Act, then penalty u/s 271DA will be levied @ 100% of such receipt. It shall be imposed by Joint Commissioner.

However, no penalty shall be levied if that person proves that there were good & sufficient reasons for the contravention.

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EXAMPLES:

Example 1: Mr. Hari buys gold chain worth Rs. 2 lakhs and pays the amount by cash to Mr. Rahul on a single day in 4 equal installments of Rs. 50,000 each, does this amount to violation of Section 269ST?

Ans: As Mr. Rahul has accepted the payments in cash worth Rs. 2,00,000 from a single person in a single day. Hence, this amounts to violation of Section 269ST and Mr. Rahul will be liable to pay penalty of Rs. 2,00,000 as per Section 271DA.

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Example 2: Mr. Kejriwal goes through a surgery and the hospital charges him a bill of Rs. 4 lakhs. Kejriwal clears the bill in 4 installments of Rs. 1 lakh each on four different dates. Hence, the cash receipts got by hospitals are less than Rs. 2 lakhs and have been received on different dates. Whether the transactions violate 269ST?

Ans: Yes, Hospital has to pay the penalty because, they received the payments with respect to single bill/ transaction as spitting of payments over several days is prohibited. Hence, hospital has violated the provision of Section 269ST and as result hospital is liable to pay a penalty of Rs. 4 lakhs under Section 271DA.

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NOTE:

If a person has done work of different nature in a marriage of his customer, say, given hall on rent for marriage reception, given tent house services, done decoration, and has issued three different bills of Rs. 1.5 lakhs each for each separate service totaling to Rs. 4.5 lakhs, then he can only receive less than Rs. 2 lakhs from his customer in cash, made in respect of all the 3 bills/ transactions. If entire Rs 4.5 lakhs are taken in cash or any other way other than the specified means stated above then even though the limit of per transaction and also limit per day per entity is not crossed, he shall be liable to pay penalty as per Section 271DA i.e. 100% of the amount involved and since all the transactions are related with the single occasion of a marriage, then the total limit of less than Rs. 2 lakhs will be a consolidated limit for all the related transactions.

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DIFFERENCE BETWEEN 269SS AND 269ST?

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PARTICULARS

269SS

269ST

Section covers

It prohibits acceptance of any loans or deposits or specified sum of Rs. 20,000 or more from any other person otherwise than by an account payee cheque or account payee demand draft or use of electronic clearing system.

It prohibits receipt of cash of Rs. 2,00,000 or more otherwise than by an account payee cheque or account payee demand draft or use of any electronic clearing system. Moreover this section will not come into picture where Section 269SS is applicable.

Penalty for contravention

If assessee fails to follow Section 269SS, then penalty shall be levied @ 100% of such loan/ Deposit/ Advance. It shall be imposed by Joint Commissioner u/s 271D.

If assessee fails to follow Section 269ST, then penalty shall be levied @ 100% of such cash received. It shall be imposed by Joint Commissioner u/s 271DA.

Applicability

Applicable to all persons i.e Individual, HUF, firm, company, trust, society etc.

Applicable to all persons i.e Individual, HUF, firm, company, trust, society etc.

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269SS AND 269T OF INCOME TAX ACT

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269SS AND 269T OF INCOME TAX ACT

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WHAT IS SECTION 269SS?

As per Section 269SS of Income tax Act, any person should take/ accept:

–Loan/ deposits or
–Advance in relation to immoveable property.

Only by account payee cheque or D.D., any other prescribed electronic modes, if the amount is Rs. 20,000 or more.

Note: On the date of taking or accepting such loans or deposits or advance in relation to immoveable property, any loan or deposit or advance in relation to immoveable property taken or accepted earlier by such person and unpaid on such date shall also be considered for Rs. 20,000 limit.

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SPECIFIED MODES OF TRANSACTION

As per income tax rules, the specified modes of accepting loans or deposits or specified sums are:

i.Account payee cheque/ bank draft.
ii.Electronic Clearing System (ECS) through a bank account.
iii.Net Banking.
iv.Credit Card.
v.Debit Card.
vi.RTGS.
vii.NEFT.
viii.BHIM.
ix.IMPS
x.UPI

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EXCEPTION U/S 269SS

Section 269SS is not applicable if loans/ advances/ deposit is taken from or by:

i.Government.
ii.Banks, Co-operative Banks, Post office.
iii.Government Company.
iv.Person having only Agriculture Income.
v.Corporation established by Central, State, Provincial Act.
vi.Any others as notified by CBDT.

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AMMENDMENT TO SECTION 269SS

Limit of Rs. 2,00,000 is applicable in case of any deposits or loan where:

i.Deposit is accepted by Primary Agricultural Credit Society (PACS) or Primary Co-operative Agricultural and Rural Development Bank (PCARD) from its members, or
ii.A loan is taken from Primary Agricultural Credit Society (PACS) or Primary Co-operative Agricultural and Rural Development Bank (PCARD) by its members.   

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PENALTY U/S 271D:

If assessee fails to follow Section 269SS, then penalty shall be levied @ 100% of such loan/ Deposit/ Advance. It shall be imposed by Joint Commissioner. A person accepting the loans and deposits in cash above the prescribed limits is liable to pay such a penalty. Hence, the receiver of the money is required to ensure that the provisions of Section 269SS are complied with while accepting such payments. However, if the person can prove that there was a reasonable cause for such transactions and no malafide intentions, he/ she may not be penalized.

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EXAMPLES:

Example 1: Kamal accepted Rs. 12,000 as a loan and Rs. 13,000 as a deposit from Mr. Sharma on 16/12/2024 by way of a bearer cheque

Ans: Since bearer cheque is not covered under the specified means as stated above and he took a total of Rs. 25,000 in loan and deposits from Mr. Sharma on 16/12/2024 he violated the conditions of Section 269SS and 100% penalty i.e. Rs. 25,000 shall be attracted u/s 271D.

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Example 2: Kamal accepted loan from Mr. Sharma as follows:

on 26/07/24 Rs. 15,000 by way of account payee cheque

on 10/12/24 Rs. 15,000 by way of cash.

Ans: Since, On the date of taking or accepting such loans or deposits or advance in relation to immoveable property, any loan or deposit or advance in relation to immoveable property taken or accepted earlier by such person and unpaid on such date shall also be considered for Rs. 20,000 limit as a result Mr. Kamal Violated the conditions of Section 269SS and 100% penalty i.e. Rs. 15,000 shall be attracted u/s 271D.

.

Example 3: Kamal accepted loan from Mr. Sharma as follows:

on 26/07/24 Rs. 15,000 by way of cash.

on 10/12/24 Rs. 15,000 by way of account payee cheque.

Ans: In the given case since Mr. Kamal accepted Rs. 15,000 by way of account on 10/12/2024 the provision of Section 269SS have been complied with and no penalty u/s 271D arises.

.

WHAT IS SECTION 269T?

As per Section 269T of Income Tax Act, any person should repay:

–Loan or deposit (together with interest).
–Advances in relation to immoveable property.

Only by account payee cheque or D.D., any other prescribed electronic modes, if the amount is Rs. 20,000 or more.

.

Note: On the date of repayment of such loans or deposits or advance in relation to immoveable property, any loan or deposit or advance in relation to immoveable property outstanding on such date shall also be considered for Rs. 20,000 limit.

.

SPECIFIED MODES OF TRANSACTION

As per income tax rules, the specified modes of accepting loans or deposits or specified sums are:

i.Account payee cheque/ bank draft
ii.Electronic Clearing System (ECS) through a bank account.
iii.Net Banking.
iv.Credit Card.
v.Debit Card.
vi.RTGS.
vii.NEFT.
viii.BHIM.
ix.IMPS
x.UPI

.

EXCEPTION U/S 269T

Section 269T is not applicable if loans/ advances/ deposit is taken or accepted from:

i.Government.
ii.Banks, Co-operative Banks, Post office.
iii.Government Company.
iv.Corporation established by Central, State, Provincial Act.
v.Any others as notified by CBDT.

.

PENALTY U/S 271E:

If assessee fails to follow Section 269T, then penalty shall be levied @ 100% of such loan/ Deposit/ Advance repayment. It shall be imposed by Joint Commissioner.

.

DIFFERENCE BETWEEN 269SS AND 269T?

PARTICULARS

269SS

269T

Section covers

It prohibits acceptance of any loans or deposits or specified sum of Rs. 20,000 or more from any other person otherwise than by an account payee cheque or account payee demand draft or use of electronic clearing system.

If prohibits Payment of any Loan or deposits or specified advance together with interest thereon, whatever of Rs. 20,000 or more to any other person otherwise than by an account payee cheque or account payee demand draft or use of electronic clearing system.

Penalty for contravention

If assessee fails to follow Section 269SS, then penalty shall be levied @ 100% of such loan/ Deposit/ Advance. It shall be imposed by Joint Commissioner u/s 271D.

If assessee fails to follow Section 269T, then penalty shall be levied @ 100% of such loan/ Deposit/ Advance repayment. It shall be imposed by Joint Commissioner u/s 271E

.

.

.

.

.

.

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PRESUMPTIVE TAXATION FOR RESIDENTS

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PRESUMPTIVE TAXATION FOR RESIDENTS

.

SECTION 44AD: PROFIT & GAINS OF BUSINESS ON PRESUMPTIVE BASIS

.

A.Eligible Assessee: Eligible assessee’s are Resident Individual/ Resident HUF/ Resident Firms (excluding LLP) who has not claimed deduction u/s 10AA or 80IA or 80RRB.
B.This section is applicable for any Business except– Section 44AE Business, Agency Business, Commission & Brokerage Business.
C.Gross Turnover/ Receipts is up to Rs. 2 Crores, provided where, the amounts received during the P.Y in cash does not exceed 5% of the total turnover or gross receipts of such P.Y then limit of turnover/ gross receipts will be Rs. 3 crores instead of Rs. 2 crores.

Note: Cheque/ DD, which is not account payee, shall be treated as cash.

D.Presumptive PGBP income: Turnover/ Gross receipts * 8%, if Turnover/ Gross receipts realized by Account payee Cheque/ DD/ ECS up to due date of return filing then presumptive income will be Turnover/ Gross Receipts * 6%.
E.If assessee declares income as per Section 44AD or higher income and whose Turnover is up to Rs. 2cr/ 3cr as the case may be then assessee is not required to maintain books of accounts & get it audited.
F.If assessee declares income for any P.Y as per Section 44AD & he does not declare income as per 44AD in any of the five consecutive P.Y’s, then he shall not eligible to claim benefit of Section 44AD for 5 Years subsequent to the year in which assessee did not declare income as per Section 44AD.
G.If point (f) is applicable & Net Taxable Income is more than basic exemption limit, then assessee is required to maintain books of accounts & get it audited.

.

Example: Let us consider the following particulars relating to a resident Individual, Ms. Harsha being an eligible assessee whose turnover does not exceeds Rs. 2 Crores in any of the A.Y between A.Y 24-25 to A.Y 26-27.

.

In the above case Ms. Harsha, an eligible assessee opts for presumptive taxation u/s 44AD for A.Y 24-25 & A.Y 25-26. However, for A.Y 26-27, he offers income of only Rs. 10 lakhs on turnover of Rs. 2 Crores, which amounts to 5% of his gross receipts. She has to maintain books of accounts u/s 44AA & gets the same audited u/s 44AB. Since she has not offered income in accordance with the provisions of Section 44AD, for five consecutive years after A.Y 24-25, she will not be eligible to claim the benefit of Section 44AD for next 5 A.Y succeeding A.Y 26-27 i.e. from A.Y. 27-28 to 31-32.

.

Particulars

A.Y 24-25

A.Y 25-26

A.Y 26-27

Total T/o (All cash)

1,80,00,000

1,90,00,000

2,00,00,000

Income offered for Tax

14,40,000

15,20,000

10,00,000

% of gross receipts

8%

8%

5%

Offered income as per 44AD

Yes

Yes

No

SECTION 44ADA: PROFIT & GAINS OF PROFESSION ON PRESUMPTIVE BASIS

.

A.Eligible Assessee: Eligible assessee’s are Resident Individual or Resident Firm (excluding LLP) engaged in profession as referred to in Section 44AA.
B.This Section is applicable if Gross Receipts is up to Rs. 50 lakhs. However, if the amount received during the P.Y in cash does not exceed 5% of the gross receipts of such P.Y the limit of Gross Receipts of Rs. 75 lakhs shall apply instead of Rs. 50 lakhs.

Note: Cheque/ DD, which is not account payee, shall be treated as cash.

C.Presumptive PGBP income: Gross Receipts * 50%.
D.if assessee declares income as per Section 44ADA or higher then, he is not required to maintain books of accounts & get it audited.
E.If assessee declares income lower than 50% and his net taxable income is more than the basic exemption limit, he is required to maintain books of A/c’s and get it audited.

COMMON POINTS FOR 44AD AND 44ADA

1.

Deduction u/s 30-38 shall not be allowed. (Assume it deemed to be already applied)
2.

WDV is to be calculated considering notional depreciation every year.
3.

Partner’s remuneration & interest are not allowed from deemed PGBP.
4.

100% Advance Tax can be paid by 15Th March of P.Y.

.

.

SECTION 44AE: PROFIT & GAINS OF TRANSPORTER ON PRESUMPTIVE BASIS

.

If assesse is engaged in the business of plying, hiring, leasing such goods carriage the PGBP will be:

.

Heavy good Vehicle: Rs. 1,000 per ton of gross vehicle weight or unladen weight, as the case may be, for every month or part of a month.

.

Other Vehicle: Rs 7,500 for every month or part of a month.

.

Notes:

.

1.

The assessee can also declare a higher amount in his return of income. In such case, the latter will be considered to be his income.
2.

This section is applicable if assessee owns Max 10 vehicles. If assessee owns more than 10 vehicles at any time during the P.Y then this section shall not apply.
3.

Income calculated even vehicle not put to use but own by assessee.
4.

Partner’s remuneration, salary, interest etc. as per Section 40(b) shall be deductible while computing income u/s 44AE.
5.

Heavy goods vehicle means any goods carriage, the Gross Vehicle Weight of which exceeds 12,000 kilograms (12 tons).
6.

As per CBDT clarification we have to consider Gross Vehicle Weight (GMW) for calculating income however if GVW is not available then we have to consider unladen weight.
7.

Assessee opting for presumptive taxation are not required to maintain books of accounts as per Section 44AA or get them audited u/s 44AB. However, where an assessee wishes to declare income lesser than as computed u/s 44AE, he is required to mandatorily maintain books of accounts and get the same audited.
8.

Deduction u/s 30-38 shall not be allowed

9.

WDV is to be calculated considering notional depreciation every year.

.

.

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SECTION 43B : EXPNESES ALLOWABLE ON PAYMENT BASIS

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EXPNESES ALLOWABLE ON PAYMENT BASIS SECTION 43B

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Section 43B of the Income Tax Act is concerned with Profit and gains of business or profession. This provision states that assessee’s can claim certain payments as expenses; however, they can do so in the year it was paid not in the year it was incurred. The Following expenses (except point (h)) are allowed only if they are actually paid up to the due date of return filing as per Section 139(1).

(a)Any tax, Duties, Cess & Fees.
(b)Employer’s contribution towards Superannuation Provident Fund (SPF), Recognized Provident Fund (RPF), Approved Gratuity Fund, Approved Superannuation Fund, New Pension Scheme, any other fund as per law.
(c)Bonus or Commission to employees.
(d)Interest on loan to any Public Financial Institution, State Financial Corporation, State Industrial Investment Corporation, Scheduled Banks (Scheduled Banks include co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank).
(e)Leave encashment (Leave Salary) to employees.
(f)Any sum payable to the Indian Railways for use of Railway Assets.
(g)Any sum payable by the assessee to a micro or small enterprises beyond the time limit specified in Section 15 of the Micro, Small and Medium Enterprises Development Act, 2016 (Added w.e.f. Assessment Year 24-25 by Finance Act, 2023).

Note: If payment (a to g) made after due date of return filing & payment (h) made after time limit of MSMED Act, then such expenses shall be allowed in the Year of Actual Payment.

.

NOTES:

1.Where the interest payable on loans has been converted into loan or borrowing, it shall not be deemed that the interest is paid off. Interest shall be allowed as deduction in the Previous Year in which such installments are paid off.
2.If interest payable on loan is converted into debentures or any other instrument by which the liability to pay is deferred to a future date shall not be treated as actual payment.
3.Any payment made to Micro & Small enterprises allowed as deduction in current year if payment is made within the time allowed u/s 15 of MSMED Act otherwise allowed in the year of Actual Payment.
4.Time limit as per Section 15 of MSMED Act: Where any person purchases goods or services, from a micro or small enterprise, the payment shall be made before the date agreed upon between him and supplier in writing. In no case the period agreed upon between the supplier and the buyer in writing shall be more than 45 days. If, however, there is no such agreement, the payment shall be made within 15 days of acceptance or deemed acceptance of goods or services.

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Definition of Micro and Small Enterprises

The Definition of Micro and Small Enterprises as amended in Budget 2025 is as follows:

.

.

Micro Enterprises

Small Enterprises

Investment in Plant and machinery or equipment’s

.

Upto Rs. 2.5 Crores

.

Upto Rs. 25 Crores

Turnover

Upto Rs. 10 Crores

Upto Rs. 100 Crores

.

Example 1: Kunal Ltd. purchased goods from Sharma Ltd. (a small enterprise as per MSME Act) for Rs. 15 lakhs on 2nd March 2025. As per written agreement payment is to be made upto 30th April 2025. However, payment is made as follows:

.

2,00,000 paid on 30th March 2025.

4,00,000 paid on 6th April 2025.

3,00,000 paid on 15th April 2025.

6,00,000 paid on 6th May 2025.

Solution:

Date of acceptance of goods is 2nd March 2025. As per agreement the due date was 30th April 2025, but as per MSMED Act in no case the period agreed upon between the supplier and the buyer in writing shall be more than 45 days. Hence, the payment is to be made on or before 16th April 2025 (i.e. the agreed date of payment or 45 days, whichever is earlier).

.

Deduction will be available to Kunal Ltd. as Follows:

Amount

Payment Date

Due date as per MSMED Act

Payment made before due date?

Basis of Deduction

P.Y in which expense is allowed

2,00,000

30th April 2025

16th April 2025

Yes

Accrual

P.Y 24-25

4,00,000

6th April 2025

16th April 2025

Yes

Accrual

P.Y 24-25

3,00,000

15th April 2025

16th April 2025

Yes

Accrual

P.Y 24-25

6,00,000

6th May 2025

16th April 2025

No

Payment

P.Y 25-26

.

Example 2: Suppose in example 1 if there is no agreement about the time of payment of goods.

.

In case there is no agreement between the buyer and seller regarding payment of goods to seller registered under the MSMED Act as Micro or Small Enterprise then the payment shall be made within 15 days of acceptance or deemed acceptance of goods. In our case since no written agreement was made regarding payment of goods, the due date of payment as per MSMED Act is 17th March 2025 as the date of acceptance of goods is 2nd March 2025.

.

Deduction will be available to Kunal Ltd. as Follows:

Amount

Payment Date

Due date as per MSMED Act

Payment made before due date?

Basis of Deduction

P.Y in which expense is allowed

2,00,000

30th April 2025

17th March 2025

No

Payment

P.Y 24-25

4,00,000

6th April 2025

17th March 2025

No

Payment

P.Y 25-26

3,00,000

15th April 2025

17th March 2025

No

Payment

P.Y 25-26

6,00,000

6th May 2025

17th March 2025

No

Payment

P.Y 25-26

.

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ACTUAL COST/ COST OF ACQUISITION OF ASSET ACQUIRED (SECTION 43(1))

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ACTUAL COST/ COST OF ACQUISITION OF ASSET ACQUIRED (SECTION 43(1))

ACTUAL COST AS PER SECTION 43(1)

.

Particulars

Amount (in Rs.)

Cost of Asset (Purchase Price)

xxx

Add: Installation charges

xxx

Add: Transportation expenses for test

xxx

Add: Trial run/ Test run expenses

xxx

Add: Taxes & Duties (if ITC is not available)

xxx

Add: Interest on loan taken for acquisition of asset (upto the date of asset put to use)

.

xxx

.

xxx

Less: Amount received on sale of trial run product

xxx

Less: Subsidy/ Government Grants received for acquisition of assets

xxx

Actual Cost

xxx

.

Note: If assessee occurs any expenses for acquisition of any asset & payment made to single person in a single day, otherwise than by an a/c payee cheque/ Demand Draft or through any other electronic clearing service exceeds Rs. 10,000, such expenditure shall not form part of actual cost of such asset.

.

EXPLANATION TO SECTION 43(1): ACTUAL COST IN CERTAIN CASES

.

S.NO

CASE

ACTUAL COST
1.

Asset previously used for Scientific Research brought into regular business

Actual Cost = NIL (because deduction is already claimed u/s 35).
2.

Stock converted into capital asset and used for business or profession

Fair market Value on the date of conversion.
3.

Asset acquired by way of gift/ will/ inheritance

Actual cost to the previous owner less depreciation already allowed to him.
4.

Asset acquired with an intention to claim higher depreciation

Amount determined by the Assessing Officer with the approval of Joint Commissioner (JC) (Normally AO takes Fair Market Value of such assets).
5.

Re-acquisition of asset sold

Lower of: –

i.Written down value at the time of sale.
ii.Reacquisition Cost.
6.

Asset Purchased & leased back to the same person

Written down value of the previous owner (Lessee).
7.

Building was used for other purpose now brought into business.

Original Cost

xxx

(-) Notional Dep.

xxx

Actual Cost

Xxx

.
8.

Capital Asset transferred by holding company to 100% subsidiary company or 100% subsidiary company to holding company

Cost/ opening written down value to the transferor company.
9.

Transferred by Amalgamating company to Amalgamated company

Cost/ opening written down value to the amalgamating company.
10.

Transferred by Demerged company to Resulting company

Cost/ written down value (at the time of demerger) to demerged company.
11.

Asset acquired out of Borrowed Funds

Interest upto first put to use form part of Actual Cost.
12.

Gst, Custom duty, etc.

Duty in respect of which ITC claim not allowed forming part of actual cost.
13.

Government grant/ Subsidy

If related to any asset, then reduce from actual cost.
14.

Asset brought into India by Non Resident for use in his Business or Profession

Actual Cost

xxx

(-) Depreciation calculated at the rate in force as if the asset was used in India from date of acquisition

.

.

.

xxx

.
15.

Any capital asset acquired under corporatization of Recognized Stock Exchanges (AOP/ BOI to company)

Cost/ Written down value of AOP/ BOI
16.

Actual cost allowed as deduction u/s 35AD and capital asset transferred to non specified business after 8 Years from the year of acquisition or transfer by way of transaction referred in section 47

Actual cost of transferee shall always be Nil.

.

Explanation 7 of Section 43(6): In cases where assessee has partly income from Business and partly from Agriculture, for the purpose of computing written down value, the depreciation shall be computed as if the entire income of the assessee is from PGBP. The depreciation so computed shall be deemed to have been “actually allowed” to the assessee.

Eg: Mr. Kamran engaged in Growing & Manufacturing of Tea in this case only 40% income is taxable under PGBP. If the turnover is Rs. 20 lakhs, the depreciation is Rs. 1 lakhs and other expenses are Rs. 4 lakhs, then the income would be Rs. 15 Lakhs. PGBP would be Rs. 6 lakhs (being 40% of Rs. 15 lakhs). As per earlier court decisions, only the deprecation “actually allowed” i.e. Rs. 40,000, being Rs. 40% of Rs. 1 Lakh, has to be deducted to arrive at the Written down value but as per this explanation total Rs.1 lakh shall be reduce to compute WDV.

.

Example:

Sai Ltd has a block of assets carrying 15% rate of depreciation, whose written down value on 01.04.2024 was Rs. 40 lakhs. It Purchased another asset (second hand plant and machinery) of the same block on 01/11/2024 for Rs. 14.40 lakhs and put to use on same day. Sai Ltd. was amalgamated with Shirdi Ltd. with effect from 01.01.2025.

You are required to compute the depreciation allowable to sai ltd. & Shirdi ltd. for the previous year ended on 31.03.2025 assuming that the assets were transferred to Shirdi ltd at Rs. 60 lakhs.

.

Statement of computation depreciation allowable to Sai Ltd. & Shirdi Ltd.

Particulars

Amount (in Rs.)

Written down value (WDV) as on 01.04.2023

40,00,000

Addition during the year (used for less than 180 days)

14,40,000

Total

54,40,000

Depreciation on Rs. 40,00,000 @ 15%

6,00,000

Deprecaition on Rs. 14,40,000 @ 7.5%

1,08,000

Total Depreciation for the year

7,08,000

Apportionment between two companies:

(a)Amalgamating company, Sai ltd.

6,00,000 * 275/366

1,08,000 * 61/152

.

.

4,50,820

43,342

.

4,94,162
(a)Amalgamated company, Shirdi Ltd.

6,00,000 * 91/366

1,08,000 * 91/152

.

1,49,180

64,658

.

2,13,838

.

Notes:

1.The aggregate deduction, in respect of depreciation allowable to the amalgamating company and the amalgamated company in the case of amalgamation shall not exceed in any case, the deduction calculated at the prescribed rates as if the amalgamation had not taken place. Such deductions shall be apportioned between the amalgamating company and the amalgamated company in the ratio of the number of days for which such assets were used by them.
2.The Price at which the assets were transferred, i.e. Rs. 60 lakhs has no implications in computing eligible depreciation.
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HOW TO CALCULATE DEPRECIATION

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HOW TO CALCULATE DEPRECIATION

Calculation of Depreciation (Block of assets/ WDV method)

Deprecation as per Written Down Value Method can be calculated as per the following formula:

.

Particulars

Amount (in Rs.)

Opening Written Down Value (WDV) of block

xxx

Add: Actual cost of asset acquired during the Previous Year

• Put to use for 180 days or more (upto 3rd Oct)
• Put to use for less than 180 days (on or after 4th Oct)
• Acquired but not put to use

.

xxx

xxx

xxx

Less: Money Payable (selling price of asset)

xxx

Less: Written down value of assets transferred in slump sale (compute Written down value of asset assuming this is the only asset in block)

.

xxx

**Written Down Value of Block for the purpose of Depreciation

xxx

Less: Depreciation Actually Allowed

xxx

Closing Written Down Value of Block

xxx

.

** Written down Value of Block of asset: –

.

Asset Acquired but not put to use.

No Depreciation

Put to used for less than 180 days

Half rate of Depreciation

Balance Assets

Full rate of Depreciation

  

NOTES:

.

1.

If asset is acquired during the current Previous Year and not put to use the depreciation shall not be allowed for such assets but that asset should be added to Block of assets.
2.

Actual Sale Price of asset shall be reduced and not the Fair Market Value of asset sold.
3.

If assessee transferred the building, then actual sales price shall be reduced and not the stamp duty value. However, if Section 50 gets attracted then Stamp Duty Value shall be considered for computation of capital gains.
4.

Money payable means sales price or insurance compensation in respect of asset sold, discarded, demolished, or destroyed during the Previous Year and the amount of Scrap Value.

.

Proviso to Section 32(1):

Depreciation is restricted to 50% if asset is put to use for less than 180 days in the year of acquisition, restriction applies only in the year of acquisition.

.

Year of Acquisition

Year of Put to use for less than 180 days

Depreciation Allowed

Rate

P.Y 24-25

P.Y 24-25

P.Y 24-25

Half Rate

P.Y 24-25

P.Y 25-26

P.Y 25-26

Full Rate

.

Depreciation in case of Amalgamation/ Demerger/ Succession

In these cases, depreciation is calculated normally and after that it shall be distributed between Amalgamating Company/ Demerged Company/ Predecessor and Amalgamated Company/ Resulting Company/ Successor in the Ratio of the number of days for which assets were used by them.

.

Succession means:

• Conversion of Firm/ Proprietorship into Company as per Section 47(xiii)/ (xiv).
• Conversion of company into LLP as per Section 47(xiiib).
• Any other succession other than death.

.

.

SALE OF ASSET/ CAPITAL GAIN IN CASE OF DEPRECIABLE ASSETS (BLOCK OF ASSETS)

.

PART A: Where a block of assets ceases to exist (All assets Transfer)

Sale Price of Asset

5,20,000

7

9,30,000

7

Particular

Rs.

No.

Rs.

No.

Opening WDV of Block

6,00,000

5

6,00,000

5

Add: Actual cost of asset acquired

.

2,00,000

.

2

.

2,00,000

.

2

.

8,00,000

7

8,00,000

7

Less: Sale Value of assets

(5,20,000)

7

(8,00,000)*

7

Capital loss

2,80,000

–

–

–

.

Asset

WDV

Depreciation

Capital Gain

No

No

No

Yes

Asset

WDV

Depreciation

Capital Gain

No

No

No

Yes

Computation of CG

Full Value of Consideration

Less: Cost of Acquisition

.

5,20,000

(8,00,000)

.

.

9,30,000

(8,00,000)

.

STCL/ STCG

(2,80,000)

.

1,30,000

.

.

* Block of Asset can be nil but can never be negative

NOTE: In case of Depreciable assets there is always Short term Capital Gain/ Short term Capital Loss.

.

PART B: Where some assets of block get transferred

Sale Price of Asset

9,10,000

4

6,20,000

4

Particular

Rs.

No.

Rs.

No.

Opening WDV of Block

6,00,000

5

6,00,000

5

Add: Actual cost of asset acquired

.

2,00,000

.

2

.

2,00,000

.

2

.

8,00,000

7

8,00,000

7

Less: Sale Value of assets

*(8,00,000)

4

(6,20,000)

4

Capital loss

–

3

1,80,000

3

.

Asset

WDV

Depreciation

Capital Gain

Yes

No

No

Yes

Asset

WDV

Depreciation

Capital Gain

Yes

Yes

Yes

No

Computation of CG

Full Value of Consideration

Less: Cost of Acquisition

.

9,10,000

(8,00,000)

.

.

Normal Depreciation is allowed

.

STCG

1,10,000

.

.

.

.

* Block of Asset can be nil but can never be negative

NOTE: In case of Depreciable assets there is always Short term Capital Gain/ Short term Capital Loss.

.

Depreciation for Power Units/ Sale of Assets/ SLM method/ Individual asset system

If power units follow Straight Line Method, then they are subject to Individual Asset System Profit & loss is calculated on every sale.

.

Example:

Actual cost of Asset = Rs. 100

Rate of Depreciation = 10% SLM

In the 3rd Year if asset is sold for – a) Rs. 72, b) 89, c) 117, then compute the Capital Gain (if any) and Depreciation for all 3 years.

Depreciation and tax treatment will be as follows: –

.

.

A

B

C

Purchase Price of asset

100

100

100

Depreciation (1st year)

(10)

(10)

(10)

Balance at 1st year end

90

90

90

Depreciation (2nd Year)

(10)

(10)

(10)

Balance at 2nd Year end

80

80

80

Sales Value

72

89

117

Profit/ (loss)

(8)

9

37

NOTES:

A: In this case Terminal Depreciation of Rs. 8 is allowed as deduction in the Profit/ loss Debit side.

.

B: The balancing charge is taxable u/s 41(2) under the head of income from Business & Profession.

.

C: Rs. 20 (Upto Cost) balancing charge is taxable u/s 41(2) under the head of income from Business & Profession and Rs. 17 (Sales Price > Cost) Short Term Capital Gain is taxable u/s 50A.

.