Key Pointers for Filing Income Tax Returns in India: 2022

The tax laws in India are perceived to be complicated by all. Having said that, the government of India, along with the Central Board of Direct Taxes (CBDT), has over the years tried to make tax compliance simpler for the taxpayers. It is important to note that paying the taxes due and filing tax returns is everyone’s duty as well as responsibility towards building the nation of our dreams.

With the due date for filing your income tax return for the Financial Year 2021-22, i.e., Assessment Year 2022-23, just round the corner, we bring to you a few pointers while filing your tax return, which can ensure that your tax filing process is smooth and hassle-free:

 

1. Assessees for whom the due date of 31st July is applicable:

All assesees, except the following, are required to file their returns on or before 31st July:

  1. Assessees who are subject to a tax audit and/or transfer pricing.
  2. Partners of Partnership Firms/LLP to whom tax audit and/or transfer pricing is applicable.
  3. A company.
  4. Any person whose accounts are required to be audited under any other law.

 

2. Income Tax Website and Account:

  • To file your income tax returns, you need to visit the Income Tax website at https://www.incometax.gov.in
  • If you are a first-time filer, you will have to register yourself by clicking on the “Register” tab at the top right corner of the ‘’Home’’
  • If you are a registered user, you can click on the “Login” tab at the top right corner of the home page.
  • Your Permanent Account Number [PAN] is the default user ID to login to the income tax portal.

 

3. Sources of Income:

As per the tax laws in India, there are primarily, 5 sources of income, which are explained as under:

  1. Income from Salaries: If you are a salaried employee, your income will be chargeable under this category. Furthermore, pensions earned by retired people will be taxed under this head. Also, taxable portion of the gratuity earned on retirement and leave encashments received from employers, is also taxed under this head. Please ensure you have your Form 16 received from your employer handy while you proceed to file your tax returns.
  2. Income from House Property: The rentals earned from your house property rented out is taxable under this head. Further, if you own multiple house properties which are not let out, each of such house properties, other than one[1] self-occupied house property, shall be deemed to be let out and a notional rental shall be considered as income. You would be allowed to reduce from the aforesaid rentals, the municipal taxes paid during the year towards the said let-out properties. Further, there would be a statutory deduction of a flat 30% from the net income of each house property. The interest component of your housing loan EMI paid on your housing loan will be reduced up to a maximum of Rs. 2 Lakhs from the said income.
  3. Income from Business and Profession: If you own a business or are a professional, your net profits will be taxed under this head. It is advisable to reconcile the turnover as per books of accounts and as per the Goods and Services Tax [GST] returns filed during the year.
  4. Income from Capital Gains: If you have sold any shares, mutual funds, bonds, land, commercial or residential property, or any other capital asset during the year, the net gains, i.e., sale price less cost/indexed cost of acquisition of the same, shall be taxable under this head, unless you have made an eligible reinvestment, which gives you exemption from the capital gain tax. It is to be noted that a ‘’switch out’’ from a mutual fund scheme and a ‘’switch into’’ another mutual fund scheme is also a taxable transfer on which capital gains tax is required to be paid. It is advisable to obtain a capital gain statement from your broker or download it from the application/software used to transact in shares and mutual funds, to help you calculate the long-term and short-term capital gains amounts.

Long-term capital losses can only be set off against long-term capital gains in the event of a loss; however, short-term capital losses can be set off against both long-term and short-term capital gains. Unexhausted losses can be carried forward for the next eight assessment years.

5. Income from other sources: This head of income is a residual head where incomes such as dividends, bank interest, etc. are taxed.

It is critical to scrutinise all your bank statements thoroughly and verify the income received during the year and also obtain relevant interest certificates from the bank to enable you to compute the due taxes appropriately.

 

4. New Regime vs. Old Regime:

It is necessary to estimate your tax liability, both as per the old regime and the new regime, at the beginning of the financial year itself, to enable you to plan your taxes accordingly. Having said that, the Income Tax Department has clarified that you may, while filing your tax returns, select an option different from the option selected while filing your declarations and providing investment details to your employer.

 

5. Treatment of losses:

In the event the return is not filed by the due date, you will not be allowed to carry forward losses from business, capital gains, and activity of owning and maintaining racehorses. However, losses from house property and unabsorbed depreciation can be carried forward even if the return is filed belatedly.

 

6. Return Form vis-a-vis Sources of Income:

Following are the ITR forms to be filed for the corresponding incomes:

  • ITR 1 – For residents with a total income of up to Rs.50 lakh from salaries, one house property, or other sources.
  • ITR 2 – For individuals and HUFs not having income from profits and gains of business or profession.
  • ITR 3 – For individuals and HUFs having income from profits and gains in business or profession.
  • ITR 4 – For Individuals, HUFs and Firms (other than LLPs) being a resident having total income up to Rs.50 lakh and income from business and profession computed under sections 44AD, 44ADA or 44AE (Presumptive Income).
  • ITR 5 – For persons other than- (i) individual, (ii) HUF, (iii) company and (iv) charitable trust, NGOs and similar organisations.

You can file the online utility of the aforesaid forms by logging into your income tax portal and clicking on E-File > Income Tax Returns > File Income Tax Return > Assessment Year – 2022-23 > Mode of filing: Online. You can also download the common Java utility for ITR 1 to 4 or ITR 5 from the Download tab on the income tax website, fill it in and submit it. The Income Tax Department also gives you the option to pre-fill your return using the data filed in the previous year by clicking on E-File > Income Tax Returns > Download Prefilled Data. Before submitting your return for the year, you must reconcile the information being submitted with the pre-filled data that is available on the portal against each assessee’s name, to ensure its correctness and also make necessary changes, wherever necessary.

 

7. Form No. 26AS and Annual Information Statement (AIS):

Before starting with the process of filling in details of income in the return of income, you should download Form No. 26AS from E-File > Income Tax Returns > View Form 26AS > click ‘view tax credit (form 26AS) < Assessment Year 2022-23 – View as HTML < Export as PDF, so as to ensure that all the incomes on which Tax Deducted at Source [TDS] has been deducted and the corresponding TDS amounts, are taken into consideration while calculating your taxes. In case Tax Collected at Source [TCS] has been collected from you, the credit  for that will be taken into account when calculating your tax payable.

Further, you need to download the AIS on the tab Services > Annual Information Statement (AIS), which has the information of various transactions reported to the Income Tax Department during the year. The same shall be taken into consideration, to the extent applicable, while computing the taxability during the year. (The password to open the AIS is your PAN in small case followed by your date of birth; eg: aaapa1111f15121960).

 

8. Deductions under Chapter VI A (80C, 80G, 80D, etc):

All the eligible deductions under Chapter VIA of the Income Tax Act 1961 [Act] can be claimed while filing the return of income, even if the same were inadvertently left out while making declarations, or while submitting actual proof of the same to the employer, for consideration on Form 16. The excess TDS deducted by the employers, consequently, can be claimed back as a refund.

 

9. Payment of Self-Assessment tax and Credit of Taxes Paid:

The taxes paid in the form of Advance Tax and TDS/TCS shall be available as a credit against the tax, cess, surcharge and interest as computed on the total income and the balance amount payable along with interest thereon shall be paid as self-assessment tax using challan 280 on https://www.tin-nsdl.com.

 

10. Consequence of late filing or non-filing of Income Tax Returns:

In case a taxpayer fails to file the return within the normal due date applicable to him, a penalty of Rs. 5,000 would be levied if the return is filed past the due date but before December 31st. In other cases, the fine could be up to Rs. 10,000. However, in the case of willful defaulters, failing to file the return can lead to a fine and even imprisonment.

 

11. Verification of the tax returns:

The return filed online needs to be verified by the taxpayer within 120 days from the date of filing. The tax return can be e-verified using the Aadhar OTP, Electronic Verification Code (EVC), or by using your net banking account with selected banks. If none of these options work, you may send a signed copy of the acknowledgment to CPC Bangalore. A tax return filed but not verified is treated as an invalid return by the I.T. department. It would mean that you have not filed the return at all.

 

12. Donations made to charitable institutions are eligible for deduction u/s 80G:

If you have made donations to charitable institutions and wish to claim a deduction for the same u/s 80G of the Act, kindly ensure such institutions have reported your donations to the Income Tax Department and obtained a certificate of donation on Form No. 10BE.

 

 
Note:
  • If your total income does not exceed Rs. 2,50,000 no tax is due. Further, if your total income does not exceed Rs. 5,00,000, you are eligible to claim a rebate u/s 87A to the extent of Rs. 12,500/-, which effectively would result in nil tax payable.
  • For non-resident taxpayers, only their Indian income is chargeable to tax in India.
  • In cases where Indian tax residents own foreign assets, including shares of foreign companies, foreign bank accounts, etc., the same needs to be disclosed in their income tax returns.
  • Every individual having a total income of over Rs 50 Lakh is required to give a list of his/her assets and liabilities at cost while filing his/her tax returns.
  • Though clarity on taxing crypto currencies came vide Finance Act 2022, the sale of crypto currencies prior to Finance Act 2022 would also be chargeable to tax as per the prevailing law. You may need to seek a detailed opinion if you have traded in crypto currencies and made a profit thereon.
  • If you are a legal heir to a taxpayer who has died during the year and has earned taxable income or is required to file his/her tax returns as per the law, you are required to register yourself as a ‘legal heir’ to such a deceased taxpayer through your Income Tax portal and file his/her tax return through your income tax portal using his/her PAN.
 

For further advice and detailed assistance in filing your Income tax returns kindly contact our following Fox Mandal and Associates representatives:

Sandip Mukherjeesandip.mukherjee@foxmandal.in

Salusalini Jhasalusalini.jha@foxmandal.in

Nikhil Bhise – nikhil.bhise@foxmandal.in

Akshita Bhandari – akshita.bhandari@foxmandal.in

References:

[1] Increased to two in last Finance Act, subject to conditions being met.

With the due date for filing your income tax return for the Financial Year 2021-22, i.e., Assessment Year 2022-23, just round the corner, we bring to you a few pointers while filing your tax return, which can ensure that your tax filing process is smooth and hassle-free.

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Faceless Appeal Scheme 2021: A Forward-Looking Initiative

The Central Board of Direct taxes (“CBDT”), with an objective of bringing in more transparency in the appeal proceedings and “honoring the honest”, had introduced the “Faceless Appeal Scheme 2020”[1] (“Old Scheme”), on September 25, 2020. The Old Scheme was introduced with an aim to eliminate human interference between the taxpayer and the First appellate authority (Commissioner Appeals), thereby ensuring that the appeals are disposed in a fair manner and are not influenced by any relation and human biasness.

The Old Scheme was introduced with the noble intention of curbing malpractices, easing compliance and make appeal process seamless and faceless. However, there were some post implementation hiccups experienced and accordingly taxpayers requested certain modifications in the Old Scheme.

In order to fix the hiccups and incorporate the changes requested by taxpayers, the CDBT, in supersession of the Old Scheme, has introduced a new appeal scheme called as “Faceless Appeal Scheme 2021”[2] (“New Scheme”) on December 28, 2021.

In this alert, we have made an effort to apprise the readers with the changes introduced in the New faceless appeal Scheme vis-à-vis the Old Scheme.

Key Changes in the New Faceless Appeal Scheme, 2021

The key changes brought in by the New Appeal Scheme are as follows:

  1. Mandatory personal hearing, if requested

In the Old Scheme, the appellant or his authorized representative had to make a request for personal hearing and the Chief Commissioner or Director General in charge of the Regional Faceless Appeal Centre (RFAC) had the discretion to approve such request, if he was of the opinion that the request is covered by the circumstances laid down by the CBDT.

In the New Scheme, there is no requirement for prescribed circumstances and the discretion for grant of personal hearing has been completely removed. CIT(A) shall allow personal hearing if requested by the appellant anytime during the course of the proceedings.

  1. Restructuring of the appeal center

In the Old Scheme, CBDT had set up a three-layer structure with National Faceless Appeal Centre (NFAC) at the top to conduct appeals in a centralized manner (nodal agency), followed by RFAC to support NFAC and Appeal Unit (AU) at the bottom, to facilitate the conduct of e-appeal proceedings and dispose them. In the composition structure, each AU unit had one or more Commissioner Appeals [CIT(A)].

In comparison, the New Scheme has done away with the RFAC and has set up a two-layered structure headed by NFAC and AU will directly coordinate with NFAC and conduct the appeal and dispose them. Further, in the New Scheme, each AU will have only one CIT(A).

  1. Elimination of review by multiple AUs

In the Old Scheme, the NFAC on receipt of draft order from AU, would  review the order and if the payable amount in respect of disputed issue was more than a specified amount, then send the draft order to another AU, other than the AU which had prepared it. In any other case, the NFAC would  examine the order based on the specified risk management strategy and then finalise the appeal or send the draft order to another AU.

The other AU who was assigned such case, would  either concur with the order or suggest variations as it would  deem fit. In case of variation, the NFAC would  assign the said appeal to another AU other than the one who had prepared or reviewed the draft order. The NFAC would then pass the final order, based on the order received from the last AU.

In the New Scheme, the CIT(A), after examining the submissions, shall now pass the order by digitally signing the same and send it to NFAC, along with details of penalty proceedings, if any, to be initiated therein.

Such order shall be final and will not be reviewed at multiple AUs as provided in the erstwhile scheme. NFAC shall communicate such order to the appellant and such other officers as may be prescribed.

  1. Penalty Proceedings

In the Old Scheme, AU in the event of any non-compliance during the appeal proceedings, had to send a recommendation to NFAC to initiate penalty proceedings. However, in the New Scheme, there is no need to send such recommendation and the CIT(A) can directly send the penalty notice through NFAC.

FM Comments:

The modifications provided in the New Scheme are certainly a move in the right direction by easing the process and building a robust appeal scheme. The CDBT, by removing the discretionary power of the authorities for grant of personal hearing, has also made an effort to meet the constitutional validity criteria, which has also been one of the matters, challenged before the Courts.

References: 

[1] Notification No 76/2020 dated 25 September 2020

[2] Notification No 139/2021 dated 28 December 2021

Image Credits: Photo by Arina Krasnikova from Pexels

In order to fix the hiccups and incorporate the changes requested by taxpayers, the CDBT, in supersession of the Old Scheme, has introduced a new appeal scheme called as “Faceless Appeal Scheme 2021”[2] (“New Scheme”) on December 28, 2021.

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Additional Guidelines Issued on TDS/TCS Under Sections 194-O, 194Q & 206C(1H)

The Central Board of Direct Taxes (CBDT) has issued Circular No 20/2021 dated November 25, 2021, providing more clarification on deduction and collection of tax at source on certain transactions under sections 194-O, 194Q & 206C(1H) of the Income Tax Act.

Finance Act, 2020 inserted section 194O and section 206(C)(1h), effective from 01 October 2020, requiring E-commerce operators and sellers, respectively, to deduct Tax at Source (TDS)/ collect tax (TCS) on sale of goods, under prescribed circumstances. Subsequently, Finance Act, 2021 inserted section 194Q, effective from 01 July 2021, requiring buyer of goods, to deduct TDS on payment made to seller under prescribed circumstances.

In this regard, CBDT vide Circular no. 17/2020, dated 29.09.2020 and Circular no. 13/2021, dated 30.06.2021, issued guidelines to clarify the scope and applicability of the above sections and thereby removing the difficulties faced by the assessee.

In continuation to the above, to further remove the difficulties, CBDT with the approval of the Central Government (CG), has issued the following guidelines to clarify on the scope of the above TDS provisions:

 

Guidelines:

 

I. E-auction services carried out through electronic portal

It has been represented by various stakeholders involved in the business of e-auction services that provisions of section 194-O shall not be applicable to them based on the following arguments:

  • E-auctioneer conducts e-auction services for its clients in its electronic portal and is responsible for the price discovery only which is reported the client.
  • The price negotiations may happen directly between the parties and may not necessarily happen at the price discovered through e-auction process.
  • The transaction of purchase / sale takes place directly between the buyer and the seller party outside the electronic portal maintained by the auctioneer.
  • The e-auctioneer is not responsible for purchase / sale of goods except for limited purpose of price discovery.
  • Negotiation and payments terms happens only between the purchaser and seller offline and e-auctioneer does not have any further information or role to play to in this.
  • On the service charges payable to e-auctioneer, the client deducts TDS under the relevant provisions other than section 194-O of the Income tax Act (Act).

In this regard, it has been clarified by the CBDT that provisions of section 194-O shall not be applicable in cases where all the above features are cumulatively satisfied. Further, the buyer and seller would still be liable to deduct/ collect tax u/s. 194Q / 206C(1H) of the Act, as the case may be.

II. Adjustment of various State levies and taxes other than GST

It has been represented that while the clarification with respect to treatment of TDS on GST component is provided in the earlier Circular no. 13/2021, the same is silent on other non-GST levies such as VAT, Excise duty, Sales tax, etc.

In this regard, it has been clarified by CBDT that in case of purchase of goods exigible to other levies, if the component of VAT/Sales tax/Excise duty/CST, as the case may be, has been indicated separately in the invoice, then the tax is to deducted u/s. 194Q of the Act, without considering levies such as VAT/Sales tax/Excise duty/CST. However, in case of advance payment, the tax is to be deducted on the whole amount, as it will not be possible to identify the VAT/Sales tax/Excise duty/CST component to be invoiced in the future.

 

III. Applicability of Section 194Q of the Act in case where exemption has been provided under section 206C (1A) of the Act

Section 206C(1A) of the Act provides that, if the buyer furnishes to the seller a declaration in respect of  goods viz liquor, forest produce, scrap etc (specified in section 206C(1)) are to be utilized for the purpose of manufacturing, processing or producing article or thing or for the purposes of generation of power and not for trading purposes, than tax is not required to be collected. It has been requested to clarify whether the provisions of section 194Q of the Act will be applicable in such a case.  

Section 194Q of the Act does not apply in respect of those transaction where tax is collectible u/s. 206C [except sub-section (1H)]. Accordingly, it is noted that since section 206C(1A) exempts tax collection in respect of goods specified in section 206C(1),  it is hereby clarified that in such cases, the provisions of section 194Q of the Act will apply and the buyer shall be liable to deduct tax under the said section, if the conditions specified therein are fulfilled.

 

IV. Applicability of the provision of section 194Q in case of department of Government not being a public sector undertaking or corporation

It has been represented by both Central and State Government (department), to enquire if such department is required to deduct tax under the provision of section 194Q of the Act.

The provision of section 194Q requires tax to be deducted by a person, whose total sales, gross receipt or turnover from business carried on by that person, exceeds specified limit. Accordingly, it is clarified that in case department is not carrying any business or profession, the primary requirement of being considered as “buyer” will not be fulfilled. Hence, provision of section 194Q will not be applicable. However, if such department is carrying business or profession, then the provisions of section 194Q will be applicable.

In case where department is a seller, it is clarified that for the purpose of deduction of tax under section 194Q, department shall not be considered as “seller” and no tax should be deducted by the buyer.

In continuation to the above, it is further clarified that any other person, such as a public sector undertaking or corporation established under central or state Act, shall be liable to comply with provisions of section 194Q.

 

FM Comments:

The above are  welcome clarifications issued by the CBDT to bring more clarity and remove the hardship faced by the stake holders. However, there is still no clarity with respect to transactions where TDS / TCS is already deducted / collected and if by virtue of this clarification, the above provisions were not applicable, then whether in such cases refund can be claimed or not.

 

Image Credits: Photo by Nataliya Vaitkevich from Pexels

Finance Act, 2020 inserted section 194O and section 206(C)(1h), effective from 01 October 2020, requiring E-commerce operators and sellers, respectively, to deduct Tax at Source (TDS)/ collect tax (TCS) on sale of goods, under prescribed circumstances. Subsequently, Finance Act, 2021 inserted section 194Q, effective from 01 July 2021, requiring buyer of goods, to deduct TDS on payment made to seller under prescribed circumstances.

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Tax Alert: Latest COVID-19 Related Relaxations and Exemptions Issued by the Government

In view of the prevailing COVID-19 pandemic situation in the country, resulting in hardship and difficulty vis-à-vis complying with various due dates under the Indian Income tax Act, 1961 (‘the Act’) and causing severe impact on the cash flows, the Central Board of Direct Taxes (‘CBDT’) has time and again issued relevant Notifications, Circulars and Press Releases extending the due date w.r.t  various direct tax compliances.

 

Updated as on 13th July 2021

 

In the table below, we have summarized the key Notifications and Circulars issued by the CBDT, which has extended the due dates of various direct tax compliances under the Act:

Sr No

Compliance Particulars

Original Due Date

Extended Due Date[1]

1

Objections to Dispute Resolution Panel (DRP) and Assessing officer under section 144C

01 June 2021

31 August 2021 (note 1)

2

Statement of Deduction of Tax for the last quarter of the Financial Year 2020-21

31 May 2021

15 July 2021

3

Certificate of Tax Deducted at Source in Form 16

15 June 2021

31 July 2021

4

Statement of income paid or credited in Form 64D by Investment Fund to its unit holders for Financial Year 2020-2021

15 June 2021

15 July 2021

5

Statement of income paid or credited in Form 64C by Investment Fund to its unit holders for Financial Year 2020-2021

30 June 2021

31 July 2021

6

The application under Section 10(23C), 12AB, 35(1)(i i)/(iia)/(iii) and 80G of the Act in Form No. 10Af Form No.10AB. for registration/ provisional registration/ intimation/ approval/ provisional approval of Trusts/ Institutions/ Research Associations

30 June 2021

31 August 2021

7

Compliances for claiming exemption under provisions contained in sections 54 to 54GB

01 April 2021 to 29 September 2021

01 April 2021 to 30 September 2021

8

Quarterly Statement in Form 15CC to be furnished by Authorized Dealer in respect of foreign remittances made for quarter ended 30th June 2021

15 July 2021

31 July 2021

9

Equalization Levy Statement in Form 1 for Financial Year 2020-21

30 June 2021

31 July 2021

10

Time Limit for processing Equalization Levy return

30 September 2021

11

Annual Statement in Form 3CEK to be furnished under section 9A(5) by Eligible Investment Fund

29 June 2021

31 July 2021

12

Uploading declaration received from recipients in Form No 15G / 15H for quarter ended 30th June 2021

15 July 2021

31 August 2021

13

Exercising of option under section 245M(1) in Form No. 34BB for withdrawing application before Settlement Commission

27 June 2021

31 July 2021

14

Last date of linking of Aadhar with PAN under section 139AA

31 March 2021

30 September 2021

15

Last date of payment under Vivad se Vishwas (without additional amount)

31 August 2021

16

Last date of payment under Vivad se Vishwas (with additional amount)

31 October 2021

17

Time Limit for passing assessment / reassessment order

31 March 2021

30 September 2021

18

Time Limit for passing penalty order

30 September 2021

19

Due date for furnishing Return of Income – Non Audit Case

31 July 2021

30 September 2021

20

Due date for furnishing Tax Audit Report

30 September 2021

31 October 2021

21

Due date for furnishing Transfer Pricing Audit

31 October 2021

30 November 2021

22

Due date for furnishing Return of Income – Audit case

31 October 2021

30 November 2021

23

Due date for furnishing Return of Income where Transfer Pricing is applicable

30 November 2021

31 December 2021

24

Belated / Revised return for Assessment Year 2021-22

31 December 2021

31 January 2022

Note:

1) If the last date allowed u/s. 144C is later than 31 August 2021 then such a later date shall prevail.

 

References:

[1] Notification No 74/2021 & 75/2021 and Circular No 9/2021 dated 20 May 2021 and 12/2021 dated 25 June 2021

Image Credits: Photo by Nataliya Vaitkevich from Pexels

We have summarized the key notifications and circulars issued by the CBDT, extending the due dates of various direct tax compliances under the Act.

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Tax Alert: New Rules for Determining Taxability on Reconstitution of Firms

The Central Board of Direct Taxes (CBDT), vide notification[1] dated 2nd July 2021, has inserted a new sub-rule 5 under Rule 8AA of the Income-tax Rules, 1962 (Rules) which deals with the characterisation of capital gains under section 45(4) of the Act. The CBDT has also notified Rule 8AB, which deals with the attribution of income taxable under section 45(4) of the Act to the capital assets remaining with the specified entity. Additionally, the CBDT, vide circular[2] dated 2nd July 2021, has also issued guidelines for practical application of provisions under section 9B and section 45(4) of the Act.
Background
Finance Act, 2021 had inserted a new section 9B under the Income-tax Act, 1961 (Act) which provides that where a specified person[3] receives any capital asset or stock in trade or both from a specified entity [4] on dissolution or reconstitution of such specified entity, then such specified entity shall be deemed to have transferred such capital asset or stock in trade, or both, in the year in which such capital asset or stock in trade or both are received by the specified person and shall be chargeable to tax as income of the specified entity in that year, under the head “Profits and gains of business or profession” or under the head “Capital gains”, as the case may be. It is also provided that fair market value (FMV) of such capital asset or stock in trade, shall be deemed to be the full value of consideration as a result of such deemed transfer. Further, Finance Act, 2021 had also substituted the provisions of section 45(4) of the Act, which now provides that where a specified person receives any money or capital asset or both from a specified entity in connection with the reconstitution of such specified entity, then any profits or gains arising from such receipt by the specified person shall be chargeable to tax as income of the specified entity under the head “Capital gains” in that year. The amount chargeable to tax under section 45(4) of the Act shall be calculated as per the below-mentioned formula. A = B + C – D where, A = Income chargeable to tax under section 45(4) of the Act B = Value of any money received by the specified person C = Amount of FMV of the capital asset received by the specified person D = Amount of balance in the capital account [represented in any manner (excluding increase due to revaluation of any asset or due to self-generated goodwill or any other self-generated asset)] of the specified person in the books of account of the specified entity at the time of reconstitution. It is also clarified that the provisions of section 45(4) shall operate in addition to the provisions of section 9B and accordingly the taxation under these provisions need to be worked out independently. The Finance Act, 2021 has also inserted a new clause (iii) under section 48 of the Act (deduction from the full value of consideration) which provides that the amount of income chargeable to tax under section 45(4) which is attributable to the capital asset being transferred by the specified entity shall be calculated in the prescribed manner. It may be noted that the above-mentioned provisions are applicable w.r.e.f 1 April 2021 i.e. from the tax year 2020-21 onwards.
Notification/Circular
The Central Board of Direct Taxes (CBDT), vide notification[1] dated 2nd July 2021, has inserted a new sub-rule 5 under Rule 8AA of the Income-tax Rules, 1962 (Rules) which deals with the characterisation of capital gains under section 45(4) of the Act. The CBDT has also notified Rule 8AB, which deals with the attribution of income taxable under section 45(4) of the Act to the capital assets remaining with the specified entity. Additionally, the CBDT, vide circular[2] dated 2nd July 2021, has also issued guidelines for practical application of provisions under section 9B and section 45(4) of the Act. This tax alert summarizes the notification and guidelines issued by the CBDT as under: In order to avoid double taxation of the same amount, the provisions of section 45(4) r.w.s 48(iii) of the Act requires that the amount taxed under section 45(4) of the Act should be attributed to the remaining capital asset(s) of the specified entity, such that when these capital asset(s) get transferred in the future, the amount attributed to such capital asset(s) gets reduced from the full value of consideration.
Capital Gains Charged under Section 45(4)

It is further clarified that the revaluation of an asset or valuation of self-generated asset or goodwill does not entitle the specified entity for deprecation on such increased value. 

The specified entity is required to furnish, electronically, the details of the amount attributed to the capital asset remaining with the specified entity in Form No 5C on or before the due date as prescribed under section 139(1) of the Act.

 
Applicability of Attribution Rule (Rule 8AB) to Capital Assets Forming Part of Block of Assets

 

It was observed that the current provisions provide attribution of capital gains under section 45(4) of the Act only for the purpose of section 48 of the Act. It may be noted that provisions of section 48 apply to capital assets that do not form part of block of assets.

Accordingly, in order to provide clarity and remove the difficulty, the CBDT has stated that the attribution rule i.e. Rule 8AB of the Rules shall also apply in relation to capital assets forming part of the block of assets.

It is further clarified that the amount attributed under Rule 8AB of the Rules shall be reduced from the full value of the consideration received or accruing as a result of the subsequent transfer and accordingly net consideration shall be reduced from the written-down value (WDV) of the block of assets under section 43(6)(c) of the Act or for the purpose of calculating capital gains under section 50 of the Act.

 
Characterization of capital gains under section 45(4) of the Act

 

The CBDT has notified Rule 8AA(5) under the Rules which provides for characterization of the nature of capital gains (i.e. long term or short term) under section 45(4) of the Act. It provides that where the amount of capital gains chargeable under section 45(4) is attributed to short term capital asset, capital asset forming part of a block of assets or capital asset, being self-generated asset or goodwill, then the capital gains under section 45(4) shall be deemed to be from the transfer of short-term capital asset; otherwise, it shall be deemed to be transferred from long term capital asset.

 
Examples under the Guidelines

 

In order to better understand the provisions, few examples have been given in the guidelines:

 
Example 1

 

Facts

There are three equal partners A, B and C in a Firm ‘FR’ having a capital balance of INR 10 lacs each. The details of capital assets held by the firm are as under.

Partner ‘A’ wishes to exit and accordingly the firm decides to give him INR 11 lacs of money and Land ‘U’ to settle his capital balance.

 

Tax Implications

A. Under section 9B of the Act

It shall be deemed that the Firm ‘FR’ has transferred the Land ‘U’ to Partner ‘A’ and accordingly an amount of INR 35 lakhs (50 – 15) shall be chargeable to tax in the hands of ‘FR’ under the head capital gains as long-term capital gains and a tax liability of INR 7 lakhs (assuming no surcharge or cess) shall be payable.

For Partner ‘A’, the cost of acquisition Land ‘U’ would thus be INR 50 lakhs.

B. Accounting in the books of Firm ‘FR’

The net book profit after tax of INR 33 lakhs (computed as amount of capital gains without indexation INR 40 lakhs less tax of INR 7 lakhs) shall be credited to each Partner’s capital account i.e. INR 11 lakhs each.

Pursuant to the above, the capital balance of Partner ‘A’ would increase to INR 21 lakhs (10+11).

C. Under section 45(4) of the Act

Capital gains in the hands of the firm shall be calculated as per the afore-mentioned formula.

Capital Gains under Section 45(4)

The capital gains of INR 40 lakhs shall be chargeable to tax in the hands of Firm ‘FR’ in addition to INR 35 lakhs chargeable under section 9B of the Act.

D. Attribution of capital gains as per Rule 8AB of the Rules to the remaining capital assets

Characterization of capital gains under section 45(4) of the Act

Subsequently, when the Land ‘S’ or Land ‘T’ would be transferred by the Firm ‘FR’, the amount of attribution would get reduced from the full value of consideration as per the provisions of section 48(iii) of the Act.

E. Characterization of capital gains

Since the amount of INR 40 lakhs charged to tax under section 45(4) of the Act has been attributed to Land ‘S’ and Land ‘T’, being long term capital assets, such amount shall be chargeable as long term capital gains as per Rule 8AA(5) of the Rules.

 

Example 2

 

Facts

The facts of Example 2 are the same as in Example 1 with a modification that the Firm ‘FR’ sells the Land ‘U’ at FMV of INR 50 lakhs to an outsider and on the exit of Partner ‘A’, the Firm decides to give him INR 61 lakhs to settle his capital balance.

 

Tax Implications

A. Under section 9B and section 45 of the Act

Since neither ‘capital asset’ nor ‘stock in trade’ have been distributed to Partner ‘A’, the provisions of section 9B of the Act do not get triggered. However, the Firm would be liable to normal capital gains tax on the sale of Land ‘U’. Accordingly, an amount of INR 35 lakhs (50 – 15) shall be chargeable to tax in the hands of ‘FR’ under the head capital gains as long-term capital gains and tax liability of INR 7 lakhs (assuming no surcharge or cess) shall be payable.

B. Under section 45(4) of the Act

Capital gains in the hands of the firm shall be calculated as per the afore-mentioned formula.

Characterization of capital gains under section 45(4) of the Act

The capital gains of INR 40 lakhs shall be chargeable to tax in the hands of Firm ‘FR’ under section 45(4) of the Act.

C. Attribution of capital gains as per Rule 8AB of the Rules to the remaining capital assets

Characterization of capital gains under section 45(4) of the Act

Subsequently, when the Land ‘S’ or Land ‘T’ would be transferred by the Firm ‘FR’, the amount of attribution would get reduced from full value of consideration as per the provisions of section 48(iii) of the Act.

D. Characterization of capital gains

Since the amount of INR 40 lakhs charged to tax under section 45(4) of the Act has been attributed to Land ‘S’ and Land ‘T’, being long term capital assets, such amount shall be chargeable as long term capital gains as per Rule 8AA(5) of the Rules.

In effect, the final result in both Example 1 and 2 would be same due to operation of section 9B of the Act.

 

Example 3

 

Facts

There are three equal partners A, B and C in a Firm ‘FR’ having capital balance of INR 100 lacs each. The details of capital assets held by the firm are as under.

Characterization of capital gains under section 45(4) of the Act

Partner ‘A’ wishes to exit and accordingly the firm decides to give him INR 75 lacs in money and Land ‘S’ to settle his capital balance.

 

Tax Implications

A. Under section 9B of the Act

It shall be deemed that the Firm ‘FR’ has transferred the Land ‘S’ to Partner ‘A’. However, since the full value of consideration is equal to indexed cost of acquisition, there would be no capital gain tax in the hands of the Firm.

For Partner ‘A’, the cost of acquisition would be INR 45 lakhs.

B. Accounting in the books of Firm ‘FR’

The net book profit after tax of INR 15 lakhs (computed as amount of capital gains without indexation) shall be credited to each Partners capital account i.e. INR 5 lakhs each.

Pursuant to above, the capital balance of Partner ‘A’ would increase to INR 105 lakhs (100+5).

C. Under section 45(4) of the Act

Capital gains in the hands of the firm shall be calculated as per afore-mentioned formula.

Characterization of Capital Gain - Circular No. 14 of 2021 - Tax Circular - CBDT

The capital gains of INR 15 lakhs shall be chargeable to tax in the hands of Firm ‘FR’. 

D. Attribution of capital gains as per Rule 8AB of the Rules to the remaining capital assets

d) Attribution of capital gains as per Rule 8AB of the Rules to the remaining capital assets

Subsequently, when the Firm transfers ‘Patent’ or ‘Goodwill’, the amount of attribution would get reduced from full value of consideration as per the provisions of section 48(iii) or section 43(6)(c) or section 50 of the Act, as the case may be.

It may also be noted that for the purpose of computing depreciation under section 32 of the Act, the WDV of the block of asset of which ‘Patent’ is a part, shall remain INR 45 lakhs only and should not be increased to INR 60 Lakhs. Similarly, no depreciation would be allowed on self-generated ‘Goodwill’.

E. Characterization of capital gains

Since the amount of INR 15 lakhs charged to tax under section 45(4) of the Act has been attributed to asset forming block of asset i.e. Patent and to self-generated Goodwill, such amount shall be chargeable as short term capital gains as per Rule 8AA(5) of the Rules.

 
FM Comments

 

The detailed guidelines and notification issued by the CBDT is indeed a welcome move and shall certainly help in addressing various concerns of the taxpayers. However, beyond the 3 specific Examples illustrated, in our view, there would be certain other issues which may require similar deliberation and clarification.

It is pertinent to note that the substituted provisions 45(4) and section 9B of the Act are applicable w.r.e.f. 1 April 2021 (i.e. from tax year 2020-21 onwards), whereas the rules for attribution of income and its characterization have been notified on 2 July 2021. The notification is silent with respect to the date of its applicability.

Generally, such notifications come into force on the date of its publication in the Official Gazette, unless the effective date of its applicability is already provided in the notification itself. CBDT, while notifying Rule 8AA(5) and Rule 8AB, has not provided any ‘effective applicable date’ for the same and accordingly it may be inferred that such Rules are to be made effective from 2 July 2021. Thus, the question which may arise is whether Rule 8AA(5) and Rule 8AB would be applicable to the reconstitution of specified entities that have already been undertaken between 1 April 2020 to 1 July 2021.

It may further be noted that the earlier provisions of section 45(4) provided that the transfer of a capital asset on the dissolution of a firm was made chargeable to tax as the income of the firm. But the distribution of money on dissolution was neither chargeable to tax in the hands of the firm nor in the hands of the recipient Partner.

However, the new provisions of section 45(4) state that distribution of money or capital asset exceeding the balance in the capital account of Partner would now be chargeable to tax under the head “capital gains”. Accordingly, the new provisions create a charge of capital tax on the distribution of money. It may be noted that, generally, ‘money’ or ‘currency’ is not considered as a ‘capital asset’ and accordingly the issue which may arise is that whether the distribution of money could be taxed under the head ‘capital gains’ as there is no transfer of capital asset.

It is also pertinent to note that the attribution rules under Rule 8AB of the Rules would lead to a premature collection of the taxes by the Government, the benefit of which may or may not be obtained by the specified entity.

The specified entity would get the benefit of attribution only when they transfer the remaining capital assets subsequently, which is a contingent event, that may or may not happen. Further, in a case where the excess payment chargeable to tax under section 45(4) of the Act, relates to the valuation of self-generated goodwill, then the entity may not be able to claim the benefit of attribution unless the entity hives off its business undertaking, which is highly unlikely. Another interesting question that would arise is how the specified entity would be eligible to claim the benefit of attribution where remaining capital assets are transferred under tax-neutral arrangements.

Moreover, in a scenario, where the aggregate value of money received by the specified person exceeds the balance in his capital account and it does not relate to the revaluation of any capital assets, then the following issues may arise:

  • Characterization of capital gains as ‘Short-term’ or Long-term’ as no attribution of income would be made by the specified entity to the remaining capital assets under Rule 8AB.
  • Such excess payment may have been made by a specified entity due to other business reasons such as payment for non-compete, etc. Accordingly, the deductibility of such excess amount while computing the taxable income of the specified person, would be a challenge.

Going forward, it would be imperative for specified entities to carefully assess the impact of the above provisions while carrying out any reconstitution activity in order to avoid double taxation.

References: [1] “specified person” means a person, who is a partner of a firm or member of other association of persons or body of individuals (not being a company or a co-operative society) in any previous year. [2] “specified entity” means a firm or other association of persons or body of individuals (not being a company or a co-operative society). [3] Notification No. 76/2021 [4] Circular No. 14 of 2021 Image Credits: Photo by Nataliya Vaitkevich from Pexels

It is pertinent to note that the substituted provisions 45(4) and section 9B of the Act are applicable w.r.e.f. 1 April 2021 (i.e. from tax year 2020-21 onwards), whereas the rules for attribution of income and its characterization have been notified on 2 July 2021. The notification is silent with respect to the date of its applicability.

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