10 December 2013

Clarification on Applicability of CPE hours requirement for the newly enrolled members

Clarification on Applicability of CPE hours requirement for the newly enrolled
members during the block of three years 1.1.2011 to 31.12.2013. - (09-12-2013)1.

As per the Statement on CPE a member is exempted only for the particular calendar year during which he gets his membership for the first time.2.  For Example: members enrolled at any point of time during the Calendar year 2011 (1st January-31st December, 2011) are exempted for the Calendar Year 2011. For the Calendar Years 2012 & 2013 they would be required to comply with proportionate CPE hours requirement. Members enrolled during the year 2011 with COP would be required to complete 60 CPE hours in the calendar year 2012 and 13. Out of 60 CPE hours, minimum 40 CPE hours should be under Structured Learning and 20 CPE hours under Structured/Unstructured Learning as per choice and Non-COP holders are required to complete 30 CPE hours under Structured/Unstructured Learning as per choice.3   members enrolled at any point of time during the Calendar year 2012 (1st January-31st December, 2012) are exempted for the Calendar Year 2012. For the Calendar Year 2013 they would be required to comply with proportionate CPE hours requirement. Members enrolled during the year 2012 with COP would be required to complete 30 CPE hours for the calendar year 2013. Out of 30 CPE hours minimum 20 CPE hours should be under Structured Learning and 10 CPE hours under Structured/Unstructured Learning as per choice and Non-COP holders are required to complete 15 CPE hours under Structured/Unstructured Learning as per choice for the calendar year 2013.4   members enrolled at any point of time during the Calendar year 2013 (1st January-31st December, 2013) whether holding COP or not are exempted for this block of three years (2011 to 2013)5.  ICAI’s CPE Advisory on Unstructured Learning and prescribed format for claiming Unstructured CPE Credit hours is available at URL:http://www.cpeicai.org/Advisory-Unstructured%20Learning%20Activities.pdf. 

09 December 2013

Revision of Work Distribution-CBDT


CBDT revises work distribution in Foreign Tax and Research Tax division

REVISION OF WORK DISTRIBUTION IN FOREIGN TAX AND TAX RESEARCH (FT&TR) DIVISION UNDER CENTRAL BOARD OF DIRECT TAXES (CBDT)
OFFICE ORDER [F.NO.500/59/2003-FTD-I]DATED 6-12-2013
In partial modification of the office order No. 4/2003 dated 28th August, 2003 and 26th October, 2009, the work distribution in the Foreign Tax and Tax Research (FT&TR) Division under the Central Board of Direct Taxes (CBDT) is revised as under:-
Joint Secretary (FT&TR-I)Joint Secretary (FT&TR-II)
1Providing inputs on Policy issues relating to international Taxation, Transfer Pricing, Advanced Pricing Agreements, International tax Evasion and Avoidance and Exchange of Information in the work area related to JS (FT&TR-I), in consultation with JS(FT&TR-II).
2All matters relating to Double Taxation Avoidance Agreements (DTAA) and Agreement for the Exchange of Information and Assistance in Collection of Taxes (AEI & ACT) with countries in the following geographical regions:
a. North America including Caribbean Islands; and
b.Europe
3All matters relating to Exchange of Information in respect of countries in geographical regions referred to in serial no. 2 above.
4All matters relating to FATCA and Automatic Exchange of Information (Including at the Global Forum on Transparency and Exchange of Information for Tax Purposes and OECD Working Party 10}
5All matters relating to Mutual Agreement Procedures and bilateral Advance Pricing Agreements in respect of countries in geographical regions referred to in serial no 2 above.
6All matters related to unilateral APAs.
7All matters related to taxation in G20.
8Coordination with OECD in work related to BEPS, including In CFA and Working Parties 1, 6, 10 and 11; In relation to Forum on Tax Administration Including FTA MAP Forum; Global Forum on Tax Treaties and Transfer Pricing.
9All matters related to Central Direct Tax Advisory Committee and Tax Administrative Reforms Committee.
10All matters relating to sections 94A, 95, 115A, 115AB, 115AC, 115BBA, Chapter XII-A, 195 and 230 of the Income-tax Act, 1961.
11Any other matters relating to foreign tax that may be assigned by Chairperson, CBDT.
1Providing inputs on Policy issues relating to International Taxation, Transfer Pricing, Advanced Pricing Agreements, International Tax Evasion and Avoidance and Exchange of Information in the work area related to JS (FT&TR-II) in consultation with JS (FT&TR-I),
2All matters relating to DTAA and AEI & ACT with countries in the following geographical regions:
a.Asia including Japan;
b.Australia Including Pacific Islands;
c.Africa; and
d.South America
3All matters relating to Exchange of Information in respect of countries in the geographical regions referred to in serial no 2 above.
4All matters relating to Mutual Agreement Procedures and bilateral Advance Pricing Agreements in respect of countries in geographical regions referred to in serial no 2 above.
5All matters relating to multilateral agencies including United Nations, BRICS, IBSA, SAARC, CATA, CIAT and Global Forum on Transparency and Exchange of Information for Tax Purposes (excluding issues relating to automatic exchange of information).
6Coordination with OECD on issues relating to Global Relations, Training, Working Party 2, ITD, Tax and Crime, Tax and Development and Tax Inspectors without Borders,
7Capacity building in developing countries through bilateral and multilateral arrangements and coordination of training on international taxation, transfer pricing and exchange of information with NADT and RTIs.
8All matters relating to foreign training.
9All matters related to Dispute Resolution Panels and Standing Committee on Parliament.
10All matters relating to sections 6(2), 9, 10(15), 44B, 44BB, 44BBA, 44BBB, 44C, 44D, 44DDA, 44G, 44H, 90, 90A, 91, 163, 172, 173 and 174 of the Income-tax Act, 1961.
11All matters related to FIPB.
12Any other matters relating to foreign tax that may be assigned by Chairperson CBDT, and any other such matter not otherwise covered in the work area of JS(FT&TR-1).
2. This order is issued with the approval of Hon'ble Finance Minister.
3. This revised order comes into force with immediate effect.

IICA Vs ICAI

Amendment of Accounting Standards


Examination of various Rules and Accounting Standards under the Companies Act, 2013 is an ongoing process. Giving this information in written reply to a question in the Rajya Sabha today, Shri Sachin Pilot, Minister of Corporate Affairs, said that Accounting Standards are amended from time to time keeping in view the requirements of the situation. No amendment to the Standards is currently being considered. He also informed the House that the Indian Institute of Corporate Affairs, as part of its MOU with an agency had facilitated the release of a ready reckoner for acquainting stakeholders with various laws including the Companies Act, 1956. 
-----------------------------

01 December 2013

Changes in Excise Valuation


CE :- The Rule 8, 9, 10 of CEVR,2000 now covers the cases even where the part of excisable goods are captively consumed. Hence even in case of those partly captively consumed goods, the 110% clause shall be applicable. It is important to note that previously it covered only those cases where the whole of excisable goods were captively consumed.

Similarly amendment is also made in Rule 9 & 10 which governs the valuation in case of related parties / Interconnected Undertakings.


30 November 2013

Cenvat credit was allowable to assessee even if supplier hadn't discharged its duty

Requirement of taking "reasonable steps" does not mean that assessee is required to verify from department whether duty stands paid by supplier because that would be practically impossible and would lead to transactions getting delayed; therefore, assessee is entitled to credit even if supplier has not paid duty to department

In the instant case the assessee took deemed Modvat credit benefit under Notification No. 58/97-CE(NT) on basis of invoices issued by supplier of inputs, but on verification it was found that supplier had not paid duty. The Department opined that since rule 57A(6) required the assessee to take all reasonable steps to ensure that duty had been paid, no credit could be allowed if duty had not been paid on inputs supplied.
The Supreme Court held in favour of assessee as under:
1) In this case supplier of inputs had given declaration indicating that excise duty had been paid on said inputs. Fact that supplier had not discharged duty was a lapse on part of seller; it was different and not a condition or rather a precondition postulated in Notification;
2) When there was a prescribed procedure and that had been duly followed by the assessee, it could not be said that the assessee had not taken reasonable steps as prescribed in notification;
3) Due care and caution were taken by the assessee and it was not stated by Department what further care and caution could have been taken. Requirement of "reasonable care" does not mean verification from department whether duty stands paid by supplier because that would be travelling beyond notification and practically impossible and would lead to transactions getting delayed;
4) Thus, the Assessee was entitled to deemed credit under the Notification No. 58/97-CE(NT). - Commissioner of Central Excise, Jalandhar v. Kay Kay Industries (2013) 38 taxmann.com 336 (SC)

26 November 2013

Reduction of threshold limit for mandatory e-payment of service tax to Rupees One lakh from ten lakh

Reduction of threshold limit for mandatory e-payment of service tax to Rupees One lakh from ten lakh

NOTIFICATION NO

16/2013 - ST., Dated: November 22, 2013

In exercise of the powers conferred by sub-section (1) read with sub-section (2) of section 94 of the Finance Act, 1994 ( 32 of 1994), the Central Government hereby makes the following rules further to amend the Service Tax Rules, 1994, namely:-

1. (1) These rules may be called the Service Tax Third ( Amendment) Rules, 2013.

(2) They shall come into force on the 1 st day of January, 2014.

2. In the Service Tax Rules, 1994 , in rule 6, in sub-rule (2), in the proviso, for the words "rupees ten lakh" , the words "rupees one lakh" shall be substituted.

F.No : 137/116/2012- Service Tax

17 November 2013

CBDT SOP on Defective Returns

CBDT Issues SOP For Handling E-filed Returns With Unpaid S. A. Tax


November 14th, 2013
Further to the letter dated 22.10.2013 regarding the processing of 1.46 lakh defective returns submitted for AY 2013-14 where the self-assessment tax is unpaid, the Directorate of Income-tax (Systems) has issued a letter dated 13.11.2013 setting out a detailed Standard Operating Procedure (SOP) for handling such E-filed Returns where self assessment tax is not paid

09 November 2013

CBDT on Revenue Audit Objections


CBDT Revises Procedure For Dealing With Revenue Audit Objections

The CBDT has issued Instruction No. 16/ 2013 dated 31.10.2013 in which it has noted that despite a comprehensive procedure prescribed earlier for action at different stages of Revenue Audit objections, settlement track record is unsatisfactory and remedial action is delayed. It is also pointed out that there is a need to provide that Internal Audit should normally precede Revenue Audit. The CBDT has, therefore, decided to fine tune the procedure and strengthen the role of supervisory authorities so that quick and effective remedial action can be taken to prevent loss of revenue.

Guidelines for Appointment of Statutory Auditors in Bank-2013-14

Guidelines for Appointment of Statutory Auditors in Public Sector Banks
Based on the recommendations of a Working Group (WG) to review the norms for empanelment of statutory auditors for public sector banks and other related issues and after seeking the approval of GoI, it has been decided to revise the guidelines on appointment of statutory auditors in public sector banks with effect from the year 2013-14. The revised eligibility norms for empanelment of SCAs as prescribed by RBI in consultation with the WG have been indicated in Annex 1. The categorization/eligibility norms for empanelment of branch auditors which have been kept unchanged are indicated in Annex 2.
The guidelines/instructions relating to the selection procedure to be followed for appointment of statutory auditors in PSBs and details thereof are furnished in Annex 3



CBDT on Cyprus



Finance Ministry Notifies Cyprus For Fraud / Tax Evasion Non-Compliance

The Ministry of Finance has issued a Notification dated 1.11.2013 notifying Cyprus as a "notified jurisdictional area" u/s 94A of the Income-tax Act, 1961.
The consequences of the Notification are draconian and are broadly the following:
(i) All transactions with a person in Cyprus will have to meet the rigors of transfer pricing;
(ii) A deduction in respect of any payment made to any financial institution in Cyrus and deduction in respect of any other expenditure or allowance arising from the transaction with a person located in Cyprus is subject to specific conditions;
(iii) Sum received from a person located in Cyprus is deemed to be the income of the assessee unless the assessee satisfactorily explains the source of such money in the hands of the payer;
(iv) Payments to persons located in Cyprus is liable for TDS at 30 per cent

     Regards,

Supreme Court on Sec 271(1)(c)

Voluntary disclosure does not release assessee from mischief of penal proceedings under section 271(1)(c)
UPREME COURT OF INDIA
MAK Data (P.) Ltd.
v.
Commissioner of Income-tax – II
OCTOBER  30, 2013 
Under Explanation 1 to s. 271(1)(c), voluntary disclosure of concealed income does not absolve assessee of s. 271(1)(c) penalty if the assessee fails to offer an explanation which is bona fide and proves that all the material facts have been disclosed
The assessee filed a return of income for AY 2004-05 declaring an income of Rs.16 lakhs. During the course of the assessment proceedings, the AO noticed certain documents comprising of share application forms, bank statements, blank share transfer deeds etc had been impounded in the course of s. 133A survey proceedings conducted in the case of the assessee's. The AO sought specific information regarding the documents from the assessee. In reply to the show-cause notice, the assessee made an offer to surrender Rs.40.74 lakhs with a view to avoid litigation and buy peace and to make an amicable settlement of the dispute. The AO assessed the said sum of Rs.40.74 lakhs to tax and levied penalty u/s 271(1)(c) for concealment of income and not furnishing true particulars. This was upheld by the CIT(A) though the Tribunal reversed it on the ground that the surrender was without admitting any concealment. On appeal by the department, the High Court (87 DTR 172 (Del)) reversed the Tribunal on the ground that as there was absolutely no explanation by the assessee for the concealed income of Rs.40.74 lakhs, the first part of clause (A) of Explanation 1 to s. 271(1)(c) is attracted. On appeal by the assessee to the Supreme Court HELD dismissing the appeal:
(i) The Tribunal has not properly understood or appreciated the scope of Explanation 1 to s. 271(1)(c). The AO shall not be carried away by the plea of the assessee like "voluntary disclosure", "buy peace", "avoid litigation", "amicable settlement", etc. to explain away its conduct. The question is whether the assessee has offered any explanation for concealment of particulars of income or furnishing inaccurate particulars of income. Explanation to s. 271(1) raises a presumption of concealment, when a difference is noticed by the AO, between reported and assessed income. The burden is then on the assessee to show otherwise, by cogent and reliable evidence. When the initial onus placed by the explanation, has been discharged by him, the onus shifts on the Revenue to show that the amount in question constituted the income and not otherwise;
 
(ii) The assessee has only stated that he had surrendered the additional sum of Rs.40.74 lakhs with a view to avoid litigation, buy peace and to channelize the energy and resources towards productive work and to make amicable settlement with the income tax department. The statute does not recognize those types of defences under Explanation 1 to s. 271(1)(c) of the Act. It is trite law that the voluntary disclosure does not release the assessee from the mischief of penal proceedings. The law does not provide that when an assessee makes a voluntary disclosure of his concealed income, he had to be absolved from penalty;
(iii) On facts, the surrender of income is not voluntary in the sense that the offer of surrender was made in view of detection made by the AO in the search conducted in the sister concern of the assessee. In that situation, it cannot be said that the surrender of income was voluntary. AO during the course of assessment proceedings has noticed that certain documents comprising of share application forms, bank statements etc have been impounded in the course of survey proceedings u/s 133A conducted in the case of the assessee's sister concern. The survey was conducted more than 10 months before the assessee filed its return of income. Had it been the intention of the assessee to make full and true disclosure of its income, it would have filed the return declaring an income inclusive of the amount which was surrendered later during the course of the assessment proceedings. Consequently, it is clear that the assessee had no intention to declare its true income;
(iv) It is the statutory duty of the assessee to record all its transactions in the books of account, to explain the source of payments made by it and to declare its true income in the return of income filed by it from year to year. The AO has recorded a categorical finding that he was satisfied that the assessee had concealed true particulars of income and is liable for penalty proceedings u/s 271 read with s. 274 of the Act;
 
(v) The AO has to satisfy himself whether penalty proceedings be initiated or not during the course of the assessment proceedings. He is not required to record his satisfaction in a particular manner or reduce it into writing. The scope of s. 271(1)(c) has also been elaborately discussed by the Supreme Court in UOI vs. Dharmendra Textile Processors 306 ITR 277 (SC) and CIT vs. Atul Mohan Bindal 317 ITR 1 (SC). The principle laid down by this Court has been correctly followed by the Revenue and there is no illegality in the department initiating penalty proceedings in the instant case.



VCES Case Law



--
CASE LAW ON VCES 2013
We are pleased to share with you the following tax alert:
Bombay High Court in the case of M/s. Verchaska Infotech private Ltd. vs. Union of India and ors. (WRIT PETITION NO.9920 OF 2013) has given a judgement on declaration made under VCES.
Background:
In this case the petitioner has challenged the notice dated 1 October 2013 issued by the Superintendent, Group X, Anti Evasion, Service Tax II, Mumbai (respondent No.2) under Section 87(b) of the Finance Act 1994. By the impugned notice dated 1 October 2013, the respondent No.2 has directed the petitioner bankers viz. Respondent Nos 5 to 8 banks not to allow any withdrawal from the account of the petitioner to the extent of Rs.1.22 crores as the same is due to the revenue from the petitioner.
Petitioner Contention
The petitioner has contested that part of the period i.e. April 2012 to Dec 2012 is covered by VCES 2013 and that they have already applied for the same on 10.10.2013 and thus 50% of the demand for that period is payable by 31st December 2013.
Respondent Contention:
The Respondent department on the other hand has contested that the petitioner has made application under the Scheme on10 October 2013 and therefore, respondent would take a decision thereon by 10 November 2013. However, it is contended that till the petitioner's application is accepted, it cannot be exempted from its liability to pay the amount of the service tax which has admittedly not been paid. It is submitted that the petitioner has collected the service tax from its customers though the petitioner claims the benefit of Rs.60,40,684/as cenvat credit the same is subject to verification by the revenue.
Observation of the HC
The Hon'ble High Court while noting the above contentions has directed the petitioner to deposit Rs. 8 lacs being 50% of the amount payable by 31st December 2013. The High Court also for the time being allowed the contention of the petitioner that they had a total amount of Rs. 60.40 lac as cenvat credit. The High Court also directed the petitioner to file an undertaking with the department that they would be discharging the service tax liability from the month of September 2013 onwards in accordance with law. Thus, both the above observations of the Court being fulfilled, the order for releasing the attachment of bank account would be operational. The Court also made it clear that this order would be valid only till a decision is taken on the application of settlement under VCES 2013.          
The copy of the order is attached for your ready reference..
Regards,

CA. VMV S RAO
 SOURCE
CA Ankit Kanodia|Partner - Tax & Regulatory
S.K.Kanodia & Associates|Chartered Accountants
39A, Jorapukur Square Lane(Behind Girish Park),
Room # 202, Kolkata- 700006, WB, INDIA.

L & T-Supreme Court Case



L&T judgment opens a Pandora's box
Early implementation of Goods and Services Tax can help do away with uncertainty of tax costs for the real estate sector

Recently, the larger Bench of the apex court in the case of L&T vs state of Karnataka, held that any agreement to sell immovable property entered into prior to construction would fall within the purview of the term 'works contract', allowing state governments the power to levy value-added tax (VAT) on such contracts.

This issue has been a hot debate since the Raheja Development apex court judgment in 2005, which was with respect to real estate transaction structures in south India, wherein the sale of land was separate from the sale of flats unlike in most other parts of India.

The issue was also hotly contested in recent years by the real estate sector in Maharashtra, and in 2012, the Bombay High Court ruled that such real estate transactions wherein an agreement to sell immovable property was entered into prior to construction is subject to levy of VAT as 'works contract'. In fact, in recent months, states like Haryana have sought to issue trade notices to bring under purview such agreements to sell immovable property, entered into prior to construction within the purview of VAT as 'works contract'.

The L&T judgment has considered both the above judgments in arriving at the conclusion that states have the power to levy VAT on such transactions as 'works contracts'.

In the facts of this case, the main object/substance of the tripartite agreement was to sell and convey fraction of land with a fully constructed apartment. At no point was the construction for and on behalf of the purchaser, the apartment was to be sold as an apartment and not as an aggregate of its component parts. Even in the Bombay High Court case of MCHI, the agreement for sale is an agreement to transfer immovable property with no element of works contract.

Facts and well settled arguments such as even if there is a construction activity undertaken by a developer, he does not construct on behalf of the apartment owner; the owner of the apartment has no say in conceptualising the project or any control; that the ownership of materials used in construction in such cases remain with developer; and, that the accretion to the goods happens in the hand of the developer, allude to the fact that such an activity cannot be treated as a works contract. The fact and settled arguments that in a conventional sale, property of goods gets transferred as intended by the parties while in a works contract property in goods are transferred through accretion, have all been negated in coming to the conclusion by the apex court.

The apex court observes that though the ultimate transaction between parties may be a sale of flat, it cannot be said that characteristics of works contract are not involved in such a transaction. Hence, when a contract comprises both - a works contract and transfer of immovable property - it does not denude it of its character of 'works contract' and that Article 366(29-A)(b)) contemplates situations where goods may not be transferred in the form of goods, but maybe transferred in some other form which can even be in the form of immovable property.

This apex court judgment would be a matter of intense debate for years and will have wide implications on real estate transactions across states. The judgment is a challenge for the real estate industry and would bring about a plethora of complications on the ground for an industry already reeling from a slowdown and high interest rates.

The judgment will result in VAT authorities looking for recoveries from the industry within applicable limitation period. Further, this judgment is likely to trigger new valuation issues as the court has held that only the value addition made post-execution of an 'agreement to sell' an under construction flat would be subject to levy of VAT giving rise to practical difficulties in implementing at the ground level. Like in the case of Maharashtra, a practical solution can be a composition scheme with lower tax incidence of one per cent, though this judgment can embolden states to fix higher composition rates. Further, in situations where possession has been handed over by the developers against full and final settlements, the taxes may have to borne by the developer. This highlights the challenges of a long-drawn process of litigation in the country, which can produce outcomes creating a huge amount of uncertainty of tax costs for the industry, which may not be possible to recover.

Now a sale of an apartment would suffer stamp duty and VAT, both levied by state along with service tax levied by the Centre, making such apartments more expensive. The early implementation of the goods and service tax can be the only solution to such multiplicity of taxes and we hope the polity at large is seized of its importance.


27 October 2013

TARC

A government panel, set up to overhaul the country's tax policies and laws, had its first meeting on Monday and promised

A government panel, set up to overhaul the country's tax policies and laws, had its first meeting on Monday and promised to set about recommending structural changes in tax administration and creating an even more conducive environment for voluntary compliance.
The tax administrative reform commission (TARC) was announced by finance minister P Chidambaram in his FY14 Budget speech, in the backdrop of the controversy surrounding laws like general anti-avoidance rules (GAAR) last year and to avoid costly litigation against the government, especially after Vodafone dragged the government to court, regarding a $2-billion tax case.
At a press conference in the finance ministry, TARC chairman and advisor to Chidambaram, Parthasarathi Shome, said that the main aim of the panel will be to suggest ways to better enforce tax compliance and to increase the base of taxpayers. The panel will also look at bringing changes withing the Central Board of Direct Taxes (CBDT) and Central Board of Excise and Customs (CBEC) in terms of workforce deployment, hirings, performance assessment, etc.
"The whole idea is to look at it in a structural sense, to reduce litigation if possible, to try and make disputes less long, to make assessments more open, to computerise the whole process in a manner, that it is taxpayer-friendly," Shome said. The committee will also look at enabling better communication and flow of information among various departments like CBEC, CBDT, Central Economic Intelligence Unit (CEIB), Enforcement Directorate (ED), among others.
The panel also comprises former chief financial officer, TCS, S Mahalingam, former CDBT chairman SSN Moorthy and former CBEC chairman MK Zutshi, among others.
The panel, which has a tenure of 18 months, will present its first report to Chidambaram within the next six months, and will then submit reports on specific tax reforms every three months, Shome said.

CBDT on Refund and Defective Returns


CBDT Directive On Issue Of Refunds Without Adjustment Of Demand

The Directorate of Income-tax (Systems) has issued a letter dated 22.10.2013 stating that pursuant to the decision of the full Board the process has been initiated to issue refunds without adjustment of demand as an interim measure in certain cases. The AOs have been requested to carry out necessary verification following the procedure prescribed in s. 245 of the Act.

CBDT Directive Regarding Defective Returns For AY 2013-14

The Directorate of Income-tax (Systems) has issued a letter dated 22.10.2013 stating that about 1.46 lakh returns have been submitted for AY 2013-14 where the self-assessment tax was unpaid. It is stated that these returns are deemed defective under the law. The AOs have been requested to issue notices to the concerned assessees and follow-up to ensure that the unpaid self-assessment tax is deposited at the earliest.

25 October 2013

A Complete Guide to sections 54 & 54F Exemptions - T.V. GANESAN CS

 


A Complete Guide to sections 54 & 54F Exemptions
T.V. GANESAN
CS
If an individual transfers any long-term capital asset and plans to reinvest the sale proceeds in a new residential house property then he would be eligible to claim exemption under sections 54 and 54F of the Income-tax Act, 1961 subject to fulfilment of certain conditions. In the last couple of years there has been a phenomenal increase in the sale of properties resulting in capital gain including but not limited to the land owners giving the land to the developers and entering into Joint Development Agreement, receiving more than one flat from the builder and yet avoiding capital gains tax. In this article the author has enumerated various decisions and judgments of the Tribunals and the High Courts which have liberally interpreted the provisions of the Income-tax Act and extended the capital gains exemptions to the assessees.
Introduction
1. Out of the various investment options available, investment in real estate sector is considered to be one of the best, since the risk involved is much less as compared to investment in the stock markets, mutual funds and in debt securities. It is not uncommon to see now-a-days that the appetite for investment in this sector is not only increasing for owning a house for end-use but for investment purposes as well. Having said this, when a person is selling a residential flat in order to book profit he has to pay either short-term or long-term capital gain on the difference between the net sale consideration and the actual cost of acquisition. The Income-tax Act ('ITA') has also stipulated various exemptions that are available on long-term capital gains. It is expected that a person who is dealing in the investment in real estate sector should be aware of these provisions in order to maximize his profit or pay only a minimum capital gain. Further, exemption is also available in respect of long-term capital gains arising from the sale of original capital asset ( not being a residential house), where the net sale proceeds are invested in the purchase of a new residential house (new asset) within the prescribed time-limits. Although the law is clear in letter and spirit, but for availing exemption from capital gain certain nuances which will crop up while claiming such exemption, have been explained in this article with inputs from unique decisions of the High Courts in granting such capital gains exemptions.
Exemption from capital gain
2. As per section 54 of the ITA, the capital gain arises from the transfer of a long-term capital asset (being buildings or lands appurtenant thereto), being a residential house, the income of which is chargeable under the head "Income from house property" shall be exempt to the extent such capital gain is invested in the purchase of another residential house property. According to section 54F any long-term capital gain arising to an individual or HUF from the transfer of any capital assets, other than residential house property, shall be exempt in full, if the entire net sales consideration is invested in purchase of a residential house.
3. Relevant sections
3.1 Section 54 Section 54 provides exemption to capital gains arising from the transfer of a residential house property (being building or lands appurtenant thereto, the income of which is chargeable under the head "Income from house property")
In respect of the above section, following points should be noted:–
(1)Only an Individual or Hindu undivided family can claim exemption.
(2) Under section 54 exemption is available only if the capital asset which is transferred is a residential house property (i.e.,building or land appurtenant thereto) whose income is taxable under the head "Income from house property". The exemption is available whether the residential house property is self occupied (in such a case income of house property is nil or negative) or let out.
(3)The house property which is transferred should be a long-term capital asset, i.e., held for more than 36 months.
(4)To claim the exemption the taxpayer will have to invest the capital gains either for the purchase of another residential house property (old or new) within a period of one year before or two years after the date of transfer or in the construction of another residential house property within a period of three years after the date of transfer.
If the whole of capital gains are invested in the cost of the house so purchased or constructed, the entire capital gains will be exempt from tax. If, however, the amount of capital gains is greater than the cost of the house so purchased or constructed, the difference between the two will be chargeable to tax. Exemption under section 54 can be availed even if the taxpayer owns more than one house on the date of transfer.
As per the provisions of section 54, if the new house property is transferred within a period of three years of its purchase or construction, the amount of capital gains arising therefrom, together with the amount of capital gains exempted earlier, will be chargeable to tax in the year of transfer as short term capital gains.
3.1.1 Capital Gain Account Scheme - Although as per section 54 the assessee is given 2 years to purchase the house property or 3 years for the construction of the house property, yet the capital gains on the transfer of the original house property is taxable in the year in which it is sold. The Income-tax return of that year is required to be submitted in the relevant assessment year on or before the specified due date for filing the Income-tax return. Hence, the assessee will have to take a decision for the purchase/construction of the house property till the date of furnishing of the income-tax return, otherwise the capital gain would become taxable.
To avoid the above situation, the Income-tax Act specifies an alternative in the form of deposit under the Capital Gains Account Scheme.
The amount of capital gain which is not utilised by the assessee for the purchase or construction of the new house before the date of furnishing of the Income-tax return should be deposited by him under the Capital Gains Account Scheme, before the due date of furnishing the return. In this case the amount already utilised by the assessee for the purchase-construction of the new house shall be eligible for exemption.
In case the assessee deposits the amount in the Capital Gains Account Scheme but does not utilise the amount deposited for the purchase or construction of a residential house within the specified period, the amount not so utilised shall be charged as capital gains of the year in which the period of 3 years from the date of sale of the original asset expires and it will be long-term capital gain of that previous year.
3.2 Section 54F - The ITA grants exemption of capital gains arising from the transfer of a long-term capital asset other than a house property under section 54F. The conditions to be fulfilled are as follows:-
(i) The assessee should be an individual or a Hindu Undivided Family (HUF).
(ii)The asset transferred should be any long-term capital asset but other than a residential house.
(iii)The assessee should have purchased, within one year before the date of transfer or two years after the date of transfer or constructed within three years after the date of transfer (or from the date of receipt of compensation in the case of compulsory acquisition), a residential house (hereinafter referred to as "new house").
(iv)The assessee should not have sold or transferred the new house within three years of its purchase or construction.
(v) The assessee should not own on the date of transfer of the original asset more than one residential house (other than the new house). He should also not purchase within a period of one year after such date or construct within a period of three years after such date any residential house whose income is taxable under the head "Income from House property"(other than the new house).
(vi)The assessee also has the option of depositing this amount in Capital Gains Account Scheme as explained in section 54 above, before the due date of furnishing the Income-tax return.
Liberal Interpretations ny Courts/Tribunal of these provisions
4. In the context of the above referred to provisions of section 54 as well as of section 54F, some liberal and thought provoking interpretations have been laid down by the various High Courts/Tribunals, the gist of which are given below:–
4.1 Whether exemption under section 54 of ITA is available if capital gain arising from sale of more than one residential house is invested in one residential house? [Income Tax Appellate Tribunal order, in the case of Dy. CITv. Ranjit Vithaldas [2012] 137 ITD 267/23 taxmann.com 226 (Mum.)
In the above case the Tribunal held that no rulings had been brought on record by the counsel of Income Tax Deptt. to show that the capital gain arising from sale of more than one residential house could not be invested in one residential house. The provisions of section 54 as pointed out earlier apply to transfer of any number of residential houses by the assessee, provided the capital gain arising therefrom is invested in a residential house. The exemption under section 54 is available if capital gain arising from transfer of a residential house is invested in a new residential house within the prescribed time-limit. Thus, there is an inbuilt restriction that capital gain arising from the sale of one residential house cannot be invested in more than one residential house. However, there is no restriction that capital gain arising from sale of more than one residential house cannot be invested in one residential house. In case capital gain arising from sale of more than one residential houses is invested in one residential house, the condition, that capital gain from sale of a residential house should be invested in a new residential house, gets fulfilled in each case individually because the capital gain arising from sale of each residential house has been invested in a residential house. Therefore, it has been held that even if two flats are sold in two different years, and the capital gain of both the flats is invested in one residential house, exemption under section 54 will be available in case of sale of each flat, provided the time-limit of construction or purchase of the new residential house is fulfilled in case of each flat sold.
4.2 Whether exemption from capital gains is available if the assessee purchases two adjacent flats in the same building? [CIT v. D. Ananda Basappa [2009] 180 Taxman 4 (Kar.)
In the aforesaid case the Hon'ble Karnataka High Court observed that where the assessee had purchased two adjacent flats in the same building and made suitable modifications to treat them as a single residential unit, exemption under section 54 would be available in respect of investments made in both the flats.
4.3 Could exemption under section 54 be claimed in respect of more than one residential flat acquired by the assessee under a joint development agreement with a builder, wherein the property owned by the assessee was developed by the builder who constructed eight residential flats in the said property, four of which were given to the assessee? [CIT v. Smt. K. G. Rukminiamma [2011] 196 Taxman 87/[2010] 8 taxmann.com 121
The assessee, the owner of a property, entered into a joint development agreement with a builder to develop the property. Under the agreement the builder constructed eight residential flats and handed over four residential flats to the assessee. The entire cost of construction and other expenses were borne by the builder. The issue under consideration was whether capital gains exemption under section 54 could be claimed in respect of the four residential flats treating them as "a residential house"? In this case, the Revenue contended that the benefit of section 54 could be availed only in respect of one residential flat and in respect of the remaining three residential flats, the assessee would not be entitled to deduction under section 54.
The Karnataka High Court, applying the decision in D. Anand Basappa (supra) to the present case, held that all the four flats were situated in the same residential building and, hence, would constitute "a residential house" for the purpose of section 54. Therefore, the assessee would be entitled to deduction under section 54 in respect of all four flats.
4.4 Exemptions from capital gain under sections 54 and 54F can be claimed even if residential house is purchased outside India [Mrs. Prema Shah v. ITO [2006] 100 ITD 60 (Mum.)]
In the above case the Tribunal held that " In short we are of the considered view for the reasons stated hereinabove, the assessee is entitled to the benefit under section 54 of the Act. It does not exclude the right of the assessee to claim the property purchased in a foreign country, if all other conditions laid down in the section are satisfied, merely because the property acquired is in a foreign country".
4.4.1 Crucial points that emerge from the aforesaid judgment:–
From the aforesaid judgment, the following crucial points emerge:-
4.4.1.1 LOCATION OF THE NEW HOUSE PROPERTY - In availing both the exemptions under sections 54 & 54F, there are no restrictions in regard to the location of the new house property. Since there are no provisions in both the sections which say that the new house property should be located in India, it can be located very well outside India for claiming the said exemption. Thus, if an individual or an HUF sells any long-term capital asset to purchase a new house property outside India, he can still claim exemption under section 54 (sale of a residential house property) and under section 54F (sale of any long term capital asset, other than a residential house property).
4.4.1.2 RESIDENTIAL STATUS - Both the above sections restrict the exemption to an individual or an HUF. But the sections do not disallow the exemption on the basis of the residential status. Thus, the exemption is available independent of the residential status of the individual, e.g., a NRI residing in the USA and having foreign income can also claim exemption under sections 54 and 54F on the sale proceeds arising from the sale of any long-term capital asset in India.
4.4.1.3 REFUND CLAIM - The individual who is claiming exemption either under section 54 or under section 54F can also claim the refund if he has paid any tax on the capital gains arising on the sale of the long-term capital asset. After fulfilling the conditions for availing of the exemption as per the section applicable, including making an investment in a new residential property outside India, he can claim exemption through filing his return within the due date.
4.5 Capital gain exemption-whether available if the land is owned by assessee's spouse?
Section 54F provides deduction in respect of capital gain arising from the sale of any long-term capital asset, other than a residential property. If we apply the provisions, the deduction of the capital gain is available to the extent of the investment made in the cost of the new residential house purchased. The assessee may have a serious doubt whether the residential property should be owned in the assessee's name or not in order to claim the deduction? Further, to claim the exemption one of the requisite conditions is that the assessee should own the house property in his own name. However, in case the land on which the house is being constructed is owned by the spouse, exemption under section 54F would still be available, the reason being that the ownership of the house is important rather than the land on which it is constructed. Further, on interpretation of the section granting the said exemption, it can be seen that for the purpose of capital gains land and building, both are considered as separate capital assets and to avail of the benefit of exemption, the assessee must own the house. In contrast, it is strictly interpreted in section 54 that the assessee should purchase the house in his own name. But various contradictory rulings have been issued by the Income Tax Department wherein exemption from capital gains has been allowed to the assessee for investment in the sole or joint names with spouse under section 54 of the ITA.
4.6 Exemption from capital gain under section 54F is available when the house is purchased jointly with spouse, if the taxpayer, invests wholly in it. [CIT v. Ravinder Kumar Arora [2011] 15 taxmann.com 307/203 Taxman 289 (Delhi)]
In this case the taxpayer who was an individual sold a plot of land and claimed capital gains arising therefrom as exempt under section 54F by purchasing residential house property in the joint name with his wife to avoid litigation after his death. The tax authority allowed only half of the exemption claimed on the ground that the property was purchased jointly with his wife's name. On appeal, while the first appellate authority ruled in favour of the tax authority, the Tribunal ruled in favour of the taxpayer. Aggrieved by this the tax authority appealed to the High Court.
It was held that the taxpayer independently invested in the purchase of the house property, though jointly with his wife and paid stamp duty, corporation tax, commission and legal expenses in connection with the purchase. His wife did not invest any amount and, therefore, the conditions under section 54F of the ITA stood fulfilled and the property had to be treated as purchased in his name. Purchase of the property in joint name would not make any difference. The taxpayer was the actual and constructive owner of the property. Section 54F states that the property should be purchased by the taxpayer but does not stipulate that it should be purchased in the name of the taxpayer only. Hyper-technical ground should not impede the object of the provision which is to be provide impetus to housing construction. The court also placed reliance on various decisions of the High Courts in granting exemption under similar circumstances under section 54. Thus, the claim of the taxpayer was allowed.
4.7 Capital gains exemption from sale of multiple houses [Rajesh Keshav Pillai v. ITO [2011] 44 SOT 617/7 taxmann.com 11 (Mum.)
In the aforesaid case, the taxpayer sold two separate flats and earned long-term capital gains. The taxpayer bought two different flats and claimed that the long-term capital gain was exempt under section 54. The first appellate authority, following the judgement of the Special Bench in ITO vs. Ms. Sushila M. Jhaveri [2007] 107 ITD 327 (Mum.) (SB), held that the benefit of section 54 was available in respect of only one flat and not on two flats.
On appeal, the Tribunal held that, though section 54 refers to capital gains arising from 'transfer of a residential house', yet it does not provide that the exemption is available only in relation to one house. If the taxpayer has sold multiple houses, then the exemption under section 54 is available in respect of all houses, if the other conditions are fulfilled. If more than one house is sold and more than one house is bought, a corresponding exemption under section 54 is available. However, the exemption is not available on an aggregate basis, but has to be computed considering each sale and the corresponding purchase, adopting a combination beneficial to the taxpayer.
4.8 Whether capital gains of multiple years can be claimed? [Smt.Anagha Ajit Patnekar v. ITO [2006] 9 SOT 685 (Mum.)]
During assessment year 1997-98, the taxpayer had earned capital gain on account of sale of shares and claimed deduction under section 54F in respect of capital gain utilized for purchase of a residential flat in the one year preceding the sale of shares. The Assessing Officer argued that in the earlier assessment years 1995-96 and 1996-97, similar capital gain had arisen to the taxpayer in respect of sale of shares for which he had sought exemption under Section 54F in respect of purchase of the same residential flat and, hence, he could not claim exemption in respect of same residential flat in assessment year 1997-98.
The Mumbai Bench of the ITAT held that there was no bar in section 54F for claiming deduction for the second time or third time for the same property, if the capital gain which has arisen in the case of the taxpayer is within the cost of the property. In the instant case, the total capital gain in all the three assessment years 1995-96 to 1997-98 was less than the total cost of the residential flat. Further, from the language of section 54F it is clear that the Legislature has provided leverage to the taxpayer for claiming exemption under section 54F, by allowing him to invest in the purchase of residential property within one year prior to or within two years after the date of transfer. In all the assessment years, these conditions were satisfied. Therefore, until the cost of purchase of the residential property was exhausted by the amount of capital gain claimed to have been invested, exemption under section 54F could not be denied.
4.9 Capital gain exemption – Whether it can be granted partly for purchase of a residential house and partly for construction of the house? [B.B.Sarkar v. CIT [1981] 7 Taxman 239] (Cal.)
In the aforesaid case, the Calcutta High Court held that where a taxpayer spends capital gains partly for purchase of another house and partly for further construction on it, he is still entitled to exemption under section 54. The High Court held that section 54 contemplates fulfillment of two alternate conditions, viz., purchase or construction, but where both the conditions are fulfilled within the time stipulated, the taxpayer would also be entitled to the relief.
4.10 Construction of house started well before the transfer of old house - Whether exemption would be available [CIT v. J.R.Subramanya Bhat [1986] 28 Taxman 578 (Kar.)]
As held by the Karnataka High Court in the aforesaid case, construction of the new house property may be commenced even before the transfer of the old house property. It is not necessary that the construction should commence only after such transfer. The High Court held that the material condition is that the construction must be completed within stipulated period from the date of transfer and, thus, eligible for exemption.
4.11 Registered Purchase Deed not executed-whether capital gain exemption would be available? [CIT v.. Dr. Laxmichand Nagpal Nagda [1995] 78 Taxman 219 (Bom.)]
The Bombay High Court in the aforesaid case held that taking into consideration the letter as well as spirit of section 54, the word 'purchase' is not used in the sense of legal transfer. Further, the High Court held that in this case the taxpayer had paid the full consideration, obtained the possession of the flat and it was actually put to use and, hence, exemption under section 54 was clearly available, though no registered purchase deed was executed.
4.12 Builder handed over the possession of the flat to the taxpayer beyond the specified period-whether capital gain exemption would be available [CIT v. R.L. Sood [2000] 108 Taxman 227 (Delhi)]
The Delhi High Court in the aforesaid case also held that payment of substantial amount to the builder for purchase of a new flat within the specified period would entitle the taxpayer to exemption under section 54, even though the builder might have handed over the possession of the flat to the taxpayer beyond the specified period.
4.13 Investment made within time-but construction not completed within the statutory time-limit-whether exemption from capital gain would be available? [Smt. Shashi Varma v. CIT [1997] 224 ITR 106 (MP)]
The Madhya Pradesh High Court in the aforesaid case, held that where the investment of capital gains in the purchase of a flat had been duly made within two years of the sale, the taxpayer would be entitled to exemption under section 54, even though the construction was not completed within the statutory time-limit. In this connection, the High Court relied upon the CBDT's circular clarifying to the effect that investment made under the self financing scheme of the Delhi Development Authority or other co-operative societies or similar bodies, where a house property was allotted to a taxpayer, would be treated as a case of construction for the purpose of section 54.
4.14 Construction undertaken from borrowed funds and the sale proceeds invested in private bank - Whether capital gain exemption would be available? [ITO v. K.C. Gopalan [1999] 107 Taxman 591 (Ker.)]
In the aforesaid case, the taxpayer had sold his land along with the building. His claim under section 54 in respect of exemption from capital gains was rejected by the Assessing Officer on the ground that the sale price received by the taxpayer was deposited in private banks and the construction of the building had been undertaken from borrowed funds. The Kerala High Court held that there was no provision in the Statute that the taxpayer should utilize the same amount which he obtained by way of sale consideration for the purpose of meeting the cost of the new asset. The taxpayer was entitled to the exemption under section 54, which squarely related to the cost of the acquisition of a new asset in the nature of a house property for the purpose of the taxpayer's residence. The said asset having been acquired within the specified period and the conditions prescribed under section 54 having been fulfilled, the benefit of the exemption could not be denied.
4.15 Where assessee invested sale proceeds of capital asset into residential house which was again sold and sale proceeds whereof were invested in other residential house, deduction under section 54F was allowable. Asstt. CIT v.Sultana Nazir [2012] 21 taxmann.com 385 (Chennai)
In yet another interesting and unique case, the Chennai Bench of the Income Tax Appellate Tribunal in the aforesaid case held that the taxpayer was eligible to claim an exemption under section 54F in respect of such deemed long-term capital gain arising from the sale of the new asset by investing the sales proceeds in another new residential house within the specified period. The facts of the case were as follows:-
The taxpayer sold a plot of land (property X) during the tax year 2005-06 and a part of these sale consideration arising sale was invested by the taxpayer in the purchase of a residential house (property Y) within the same tax year. Accordingly, the long-term capital gain (LTCG) arising on sale of property X was claimed as exempt under Section 54F. The taxpayer sold Property Y in the tax year 2006-07 and purchased another residential property (property Z) within two days of the sale of Property Y.
The Assessing Officer (AO) considered the LTCG claimed as exempt in the tax year 2005-06 as the taxpayer's income for the tax year 2006-07.
On appeal by the taxpayer the CIT(Appeals) granted the claim for exemption in respect of the investment in Property Z by disregarding the purchase/sale of property Y altogether.
The matter reached the Tribunal and the Tribunal ruled as follows:-
The Tribunal pointed out that since the taxpayer had sold the property Y within three years of purchase, the AO was correct in adding back the deemed LTCG. But the taxpayer had invested the sale proceeds in the purchase of property Z within a period of two years in which Property X was sold. Therefore, the taxpayer was eligible for exemption in respect of the said investment out of this deemed LTCG.
4.16 Several Independent units can constitute "a residential house" and would be eligible for section 54/54F deduction. [CIT v. Gita Duggal [2013] 30 taxmann.com 230/214 Taxman 51 (Delhi)]
The assessee entered into a development agreement pursuant to which the developer demolished the property and constructed a new building comprising of three floors. In consideration of granting the development rights, the assessee received Rs. 4 crores and two floors of the new building. The Assessing Officer held that in computing capital gains, the cost of construction of Rs. 3.43 crores incurred by the developer on the development of the property had to be added to the sum of Rs. 4 crores received by the assessee. The assessee claimed that as the said capital gain was invested in the said two floors, she was eligible for exemption u/s 54. The AO rejected the claim on the basis that the units on the said floors were independent & self-contained and not "a residential house" and granted exemption for only one unit. The CIT(A) and Tribunal upheld the assessee's claim by relying on decisions in D. Ananda Basappa (supra) and K.G. Rukminiamma (supra). On appeal by the department to the High Court, the High Court dismissed the appeal and observed as follows:–
As held in D. Ananda Bassappa & K.G. Rukminiamma's cases (supra), the Revenue's contention that the phrase "a" residential house would mean "one" residential house was not correct. The expression "a" residential house should be understood in a sense that building should be of residential in nature and "a" should not be understood to indicate a singular number. Also, section 54/54F uses the expression "a residential house" and not "a residential unit". section 54/54F requires the assessee to acquire a "residential house". So long as the assessee acquires a building, which may be constructed, for the sake of convenience, in such a manner as to consist of several units which can, if the need arises, be conveniently and independently be used as an independent residence, the requirement of the section should be taken to have been satisfied. There is nothing in these sections which requires the residential house to be constructed in a particular manner. The only requirement is that it should be for the residential use and not for commercial use. If there is nothing in the section which requires that the residential house should be built in a particular manner, it seems that the income-tax authorities cannot insist upon that requirement. A person may construct a house according to his plans, requirements and compulsions. A person may construct a residential house in such a manner that he may use the ground floor for his own residence and let out the first floor having an independent entry so that his income is augmented. It is quite common to find such arrangements, particularly post-retirement. One may build a house consisting of four bedrooms (all in the same or different floors) in such a manner that an independent residential unit consisting of two or three bedrooms may be carved out with an independent entrance so that it can be let out. He may even arrange for his children and family to stay there, so that they are nearby, an arrangement which can be mutually supportive. He may construct his residence in such a manner that in case of a future need he may be able to dispose of a part thereof as an independent house. There may be several such considerations for a person while constructing a residential house. The physical structuring of the new residential house, whether it is lateral or vertical, cannot come in the way of considering the building as a residential house. The fact that the residential house consists of several independent units cannot be permitted to act as an impediment to the allowance of the deduction under section 54/54F. It is neither expressly nor by necessary implication prohibited.
Conclusion
5. Since the taxing provisions have included the exemption from capital gains tax for the benefit of individuals and HUF, one can plan his tax planning exercise in order to save maximum taxes on the income earned. The aforesaid judgments and precedents would definitely help in formulating the investment plan combined with tax planning avenues which will help not only to lower the tax liability but will also help in effectively structuring the transactions without getting into contentious issues. Further, there is a phenomenal increase in giving the property to be developed by the builders wherein for certain developed portions of the property [mostly in the form of one or more floors] payment is made to builder by way of consideration. K.G. Rukminiamma's (supra) Judgment of the Karnataka High Court comes handy to help the persons who wish to structure the transaction to avoid the aspects of capital gains arising on such transfer and development of the property through the Joint Development agreement entered into with the builder and receive more than one residential apartment in lieu of such Joint Development Agreement and yet avoid capital gains tax. It is suggested that the above cited cases should be borne in mind while claiming the exemption either under section 54 or section 54F and can be usefully relied upon after careful consideration of the facts of the case and the appropriate circumstances.
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• DT - Secs. 54 & 54F.

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