Sep 252018
 

Tax implication of forfeiture of advance

Meaning of forfeiture:

According to the dictionary meaning of the word ‘forfeiture’, the loss or the deprivation of goods has got to be in consequence of a crime, offence or breach of engagement or has to be by way of penalty of the transgression or a punishment for an offence.

Unless the loss or deprivation of the goods is by way of a penalty or punishment for a crime, offence or breach of engagement, it would not come within the definition of forfeiture.”

Section 56: Income from other sources.

(1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head “Income from other sources”, if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.

(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head “Income from other sources”, namely :—

 (ix) any sum of money received as an advance or otherwise in the course of negotiations for transfer of a capital asset, if,—

(a)  such sum is forfeited; and

(b)  the negotiations do not result in transfer of such capital asset;

Section 56(2)(ix) was inserted by the Finance (No 2) Act 2014, with effect from assessment year 2015-16. It provides for taxability as Income from Other Sources of any sum of money received as an advance or otherwise in the course of negotiations for transfer of a capital asset, if such sum is forfeited and the negotiations do not result in transfer of such capital asset. Section 51 has now been amended to provide that any amount taxed under section 56(2)(ix) shall not be deducted from the cost or written down value.

A forfeiture has to be either in terms of the right to forfeit such advance under the contractual terms of the agreement, or as agreed upon with the prospective purchaser.

It must be a positive action on the part of the assessee. However, once the assessee has forfeited the amount, then the matter will be taxed under this clause.

A mere notice of forfeiture by the assessee, which is contested by the other party, may not amount to forfeiture. In such a case following one situation may arise:

  1. if the amount is not written back by the assessee, taxing of such amount is not required merely on the grounds of issue of notice of forfeiture.
  2. In case such amount is written back by the assessee, such amount should be reported under this clause, giving the stand of the assessee.

Mere unilateral writing back of an advance by credit to the profit and loss account, asset account or capital account may not by itself amount to an act of forfeiture by the assessee. Such a write back is however an indication of a possible act of forfeiture

Requirement in Tax Audit form 3CD:

  1. Whether any amount is to be included as income chargeable under the head ‘income from other sources’ as referred to in clause (ix) of sub-section (2) of section 56? (Yes/No)
  2. If yes, please furnish the following details:
    1. Nature of income:
    2. Amount thereof:

A new clause 29A has been inserted, requiring disclosure of whether any amount is chargeable to tax under section 56(2)(ix), and if so, to furnish prescribed details of such income.

Point to consider in taxing forfeiture of advance:

  1. The auditor is not required to report any such forfeited amount if it is in respect of a personal capital asset, where neither the asset, the advance nor the forfeiture is recorded in the books of account relating to the business or profession.
  2. The requirement of reporting arises only on forfeiture of such amount.
  3. If an advance has been received and has been outstanding for a considerable period of time, there is no requirement to report such amount unless and until it is forfeited by an act of the assessee.
  4. Only forfeiture of amounts received as advance towards transfer of a capital asset is required to be reported under this clause.
  5. Any advances received and forfeited towards sale of stock-in-trade would be taxable under section 28(i), and would not be required to be reported since the amount would be credited to profit & loss account.
Sep 242018
 

Taxability of gifts under income tax act

Meaning of gifts:

The gifts were taxable earlier till 1st October, 1998 under the Gift Tax Act, 1958. The provisions regarding receipts without consideration have been introduced w.e.f. 1st September, 2004. Since most of such receipts tantamount to gifts, the provisions are popularly known, as relating to gifts and deemed gifts, although the coverage is wider to include all other specified receipts without consideration or for inadequate consideration.

The provisions initially covered only sum of money received without consideration. Thereafter, the provisions have been expanded from time to time. Till 30th September, 2009, only sum of money exceeding prescribed limit received without consideration was taxable if the recipient was either an individual or an HUF. W.e.f. 1st October, 2009, the provisions include cases of immovable properties in the nature of land or building or both received without consideration to be taxed on the basis of stamp valuation. Thereafter, the cases of such immovable properties purchased at less than fair market value are also included in the net of 56(2).

W.e.f. 1st June, 2010, the provisions are applicable to firms and closely held companies in respect of shares of closely held companies without consideration or for inadequate consideration. Valuation rules were introduced in Rule 11U and 11UA. Thereafter, w.e.f. 1st April, 2013, share premium received by closely held companies in excess of fair market value of issued shares was also covered. However, w.e.f. 1st April, 2017, the scope of section 56(2) in respect of receipts without consideration or for inadequate consideration has been further expanded to include every person.

Section 56: Income from other sources.

(1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head “Income from other sources”, if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E.

(2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head “Income from other sources”, namely :—

where any person receives, in any previous year, from any person or persons on or after the 1st day of April, 2017,—

  1. any sum of money, without consideration, the aggregate value of which exceeds fifty thousand rupees, the whole of the aggregate value of such sum;
  2. any immovable property,—
  3. without consideration, the stamp duty value of which exceeds fifty thousand rupees, the stamp duty value of such property;
  4. for a consideration which is less than the stamp duty value of the property by an amount exceeding fifty thousand rupees, the stamp duty value of such property as exceeds such consideration:

Following item (B) shall be substituted for the existing item (B) of sub-clause (b) of clause (x) of sub-section (2) of section 56 by the Finance Act, 2018, w.e.f. 1-4-2019 :

(B) for a consideration, the stamp duty value of such property as exceeds such consideration, if the amount of such excess is more than the higher of the following amounts, namely:—

  • the amount of fifty thousand rupees; and
  • the amount equal to five per cent of the consideration:

Provided that where the date of agreement fixing the amount of consideration for the transfer of immovable property and the date of registration are not the same, the stamp duty value on the date of agreement may be taken for the purposes of this sub-clause :

Provided further that the provisions of the first proviso shall apply only in a case where the amount of consideration referred to therein, or a part thereof, has been paid by way of an account payee cheque or an account payee bank draft or by use of electronic clearing system through a bank account, on or before the date of agreement for transfer of such immovable property:

Reporting requirement in tax audit form 3CD:

29B. (a) Whether any amount is to be included as income chargeable under the head ‘income from other sources’ as referred to in clause (x) of sub-section (2) of section 56? (Yes/No)

(b) If yes, please furnish the following details:

  • Nature of income:
  • Amount (in Rs.) thereof:

A new clause 29B has also been introduced, requiring reporting of amount includible as income chargeable under the head “Income from Other Sources” under section 56(2)(x).

The term “property” has been defined to include only specific types of assets. It has been defined to mean the following capital asset of the assessee, namely:—

I. immovable property being land or building or both;
II. shares and securities;
III. jewellery;
IV. archaeological collections;
V. drawings;
VI. paintings;
VII. sculptures;
VIII. any work of art; or
IX. bullion

Receipt of assets, other than these, would not be covered by the provisions of this section, and would therefore not be required to be reported.

Sep 202018
 

Who and what is required to be audit in form 3CD (Tax Audit)

Notification no 33/2018:

With the season of tax audit compilation in at your door step the income tax department thrown a major reform in tax audit forms (commonly known as form 3CD) by shifting majority of work of assessing officer to an auditor. Here our endeavor is pre prepare assessee for extra audit requirements with the changes made in tax audit forms.

Effective date of implementation of revised 3CD forms:

Amendments to Form No. 3CD (other than clauses 30C and 44) are effective from 20th August 2018, these amendments would not apply to tax audits which have already been signed and uploaded before the amendments come into effect. In such cases, the revised particulars need not be given.

Thus, all audits concluded and uploaded on portal upto 20th August 2018 need not to be uploaded again on the portal with revised particulars.

Whether incomes other then business and / or professional incomes are to be consider in revised 3CD forms:

The audit is required to be compiled for the books and accounts maintained in respect of the business or profession carried on by the assessee.

So far as the reporting requirements under clauses relating to heads of income other than “Profits and Gains of Business or Profession” are concerned, these can only be only in relation to entries made in such books of account, and does not extend to transactions not recorded in such books of account.

Meaning of business and profession for the purposes of tax audit:

The expression “profession” involves the idea of an occupation requiring purely intellectual skill or manual skill controlled by the intellectual skill of the operator, as distinguished from an operation which is substantially the production or sale or arrangement for the production or sale of commodities.

Whether tax audit is required in case of incomes outside the preview of income tax law and exempt under the income tax law:

Neither the section 44AB nor any other provisions of the Act stipulate exemption from the compulsory tax audit to any person whose income is exempt from tax. This section makes it mandatory for every person carrying on any business or profession to get his accounts audited where conditions laid down in the section are satisfied and to furnish the report of such audit in the prescribed form.

Case 1: A trust/association/institution carrying on business may enjoy exemptions as the case may be under sections 10(21), 10(23A), 10(23B) or section 10(23BB) or section 10(23C) or section 11. Such institutions/associations of persons will have to get their accounts audited and to furnish such audit report for purposes of section 44AB if their turnover in business exceeds the prescribed limit

Case 2: A co-operative society carrying on business may enjoy deduction under section 80P. Such co-operative society will have to get their accounts audited and to furnish such audit report for purposes of section 44AB if their turnover in business exceeds the prescribed limit.

Case 3: An agriculturist, who does not have any income under the head “Profits and gains of business or profession” chargeable to tax under the Act and who is not required to file any return under the said Act, need not get his accounts audited for purposes of section 44AB even though his total sales of agricultural products may exceed the prescribed limit.

Case 4: A non-resident assessee is also required to get his accounts audited and to furnish such report under section 44AB if his turnover/sales/gross receipts exceed the prescribed limits. This audit, however, would be confined only to the Indian operations carried out by the non-resident assessee since he is chargeable to income-tax in India only in respect of income accruing or arising or received in India.

It may be appreciated that the object of audit under section 44AB is only to assist the Assessing Officer in computing the total income of an assessee in accordance with different provisions of the Act.

Therefore, even if the income of a person is below the taxable limit laid down in the relevant Finance Act of a particular year, he will have to get his accounts audited and to furnish such report under section 44AB, if his turnover in business exceed the prescribed limit.

Sep 182018
 

Tax implications of payments made for use of railway assets

With a view to ensure the prompt payment of dues to railways for use of the railway assets, section 43B is expanded and the same is reproduce below:

Section 43B. Certain deductions to be only on actual payment.

Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—

  1. any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or – for example – GST
  2. any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, or
  3. any sum referred to in section 36(1)(ii) or
  4. any sum payable by the assessee as interest on any loan or borrowing from any PFI or a SFI or a State industrial investment corporation, or
  5. any sum payable by the assessee as interest on any loan or advances from a scheduled bank [or a co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank], or
  6. any sum payable by the assessee as an employer in lieu of any leave at the credit of his employee, or
  7. any sum payable by the assessee to the Indian Railways for the use of railway assets,

shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him :

Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under section 139(1) in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return

Reporting requirements as to payment being made for use of railway assets by tax auditor:

 (A) pre-existed on the first day of the previous year but was not allowed in the assessment of any preceding previous year and was

  1. paid during the previous year;
  2. not paid during the previous year;

(B) was incurred in the previous year and was

(a) paid on or before the due date for furnishing the return of income of the previous year under section 139(1);

Payments for the use of railway assets would not include basic rail freight, as such freight is for the service of transport and not for use of railway assets. The distinction between contracts of transportation and contracts for user (hire) of assets needs to be clearly made as per terms of contract entered into with the railways.

What are examples of payment made to railways for use of its assets:

  1. Amounts payable for hire of railway wagons, or
  2. for hire of rail sidings, or
  3. lease rent payable for use of railways land or buildings
  4. Advertisements in the premises of railways

Payments for use of hoarding / display panels:

In case of payments for use of hoardings/display panels put up on railway premises, whether the payment is for use of railway assets would depend upon the terms of the contract.

  • In case the payment is being made by an advertising agency to the railways for putting up hoardings/display panels on railway premises, such payment would amount to payment for use of railway assets, as the payment is for the use of space on the premises.
  • An advertiser is making payment to the railways for display of advertisements on hoardings/displays in railway premises, such a payment is in the nature of payment for the services of advertisement, and not for the use of railway assets
Sep 052018
 

Due dates for the Month of September 2018
7th
Income Tax
– TDS Payment for August
10th
GST
– Details of outward supplies of taxable goods and/or services effected – GST1 for August
– Return for authorities deducting tax at source – GSTR 7 for August
– Details of supplies effected through e-commerce operator and the amount of tax collected –
GSTR 8 for August
13th
GST
– Return for Input Service Distributor – GSTR 6 for August
15th
Income Tax
– Advance Income Tax for all Assessees
15th
Providend Fund
– PF Payment for August
ESIC
– ESIC Payment for August
15th
GST
– Details of inward supplies of taxable goods and/or services effected claiming input tax credit – GSTR 2 for August
20th
GST
– Monthly return on the basis of finalisation of details of outward supplies and inward supplies along with the payment of amount of tax – GSTR 3 for August
– Return for Non-Resident foreign taxable person – GSTR 5 for August
28th
GST
– Details of Inward Supplies to be furnished by a person having UIN and claiming refund – GSR 11 for August.
30th
Profession Tax
– Monthly Return (covering salary paid for the preceding month) (Tax Rs. 50,000 or more)
30th
Income Tax
– Return of Income for others covered under Audit and Companies but other than covered under Transfer Pricing Regulations.
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