The author discusses that recent amendment by Finance Act, 2018 to section 50C of allowing 5% deviation may be curative in nature and hence there is a case that the same may be treated as having a retrospective effect from the date on which section 50C came into force i.e. 1-4-2003. IT will reduce burden on assessees’.

Complete text of the Judgement of Supreme Court relied upon and the text of relevant amendments to legislation is re-produced in a file available for download.

Take away points

Current scenario-:

  • A curative amendment has come 15 years after the original amendment.
  • Section 50C [further read with section 43CA and section 56] has a cascading effect on both buyer and seller with the same portion of “deemed income” being taxed in multiple hands.
  • Real estate sector is already facing a rough weather.
  • Lot of resources in terms of the machinery of income tax department, valuation officer doing his job, assessees preferring an appeal and the same being pending at various forums with working capital being blocked by payment of [either partuial or total] demand raised.

Expectation

CBDT may issue a circular that

1. the amendment made by the Finance Act, 2018 to section 50C giving a 5% deviation being curative in nature be treated as having retrospective effect from 1-4-2003.

2. Mattes pending at various level i.e. whether scrutiny or CIT(A) or other judicial forums complying with the criteria of 5% be closed forthwith.

Section 50C was inserted by Finance Act, 2002 w.e.f. 1-4-2003

The section is a deeming provision so all the principles of interpretation of “deeming provisions” will apply. Secondly while explaining the purpose, the memorandum to the section says as follows

Computation of capital gains in real estate transactions

The Bill proposes to insert a new section 50C in the Income-tax Act to make a special provision for determining the full value of consideration in cases of transfer of immovable property. 

It is proposed to provide that where the consideration declared to be received or accruing as a result of the transfer of land or building or both, is less than the value adopted or assessed by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed shall be deemed to be the full value of the consideration, and capital gains shall be computed accordingly under section 48 of the Income-tax Act. 

It is further proposed to provide that where the assessee claims that the value adopted or assessed for stamp duty purposes exceeds the fair market value of the property as on the date of transfer, and he has not disputed the value so adopted or assessed in any appeal or revision or reference before any authority or Court, the Assessing Officer may refer the valuation of the relevant asset to a Valuation Officer in accordance with section 55A of the Income-tax Act. If the fair market value determined by the Valuation Officer is less than the value adopted for stamp duty purposes, the Assessing Officer may take such fair market value to be the full value of consideration. However, if the fair market value determined by the Valuation Officer is more than the value adopted or assessed for stamp duty purposes, the Assessing Officer shall not adopt such fair market value and will take the full value of consideration to be the value adopted or assessed for stamp duty purposes. 

It is also proposed to provide that if the value adopted or assessed for stamp duty purposes is revised in any appeal, revision or reference, the assessment made shall be amended to recompute the capital gains by taking the revised value as the full value of consideration. 

These amendments will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-2004 and subsequent years.

Now consider the amendment by the Finance Act, 2018

Rationalization of section 43CA, section 50C and section 56.

At present, while taxing income from capital gains (section 50C), business profits (section 43CA) and other sources (section 56) arising out of transactions in immovable property, the sale consideration or stamp duty value, whichever is higher is adopted. The difference is taxed as income both in the hands of the purchaser and the seller. 

It has been pointed out that this variation can occur in respect of similar properties in the same area because of a variety of factors, including shape of the plot or location. In order to minimize hardship in case of genuine transactions in the real estate sector, it is proposed to provide that no adjustments shall be made in a case where the variation between stamp duty value and the sale consideration is not more than five percent of the sale consideration. 

These amendments will take effect from 1st April, 2019 and will, accordingly, apply in relation to the assessment year 2019-20 and subsequent assessment years.

Read More at-No adjustment if variation between stamp duty value & sale consideration not exceeds 5%

Emphasis by underline – mine

Recently Supreme court in the case of CIT v. Calcutta Export Company dated April 24, 2018, while dealing with the matter of date of effectiveness of a curative amendment in the case of section 40(a)(ia) i.e. “no TDS, No deduction” has observed as follows 

[2018] 93 taxmann.com 51 (SC) CIVIL APPEAL NOS. 4339-4340 OF 2018 AND OTHERS†

CIT v. Calcutta Export Company dated April 24, 2018 

5. Whether the amendment made by the Finance Act, 2010 in Section 40(a)(ia) of the IT Act is retrospective in nature to apply to the present facts and circumstances of the case.

Discussion:— 

13. The dispute in the present case revolves around the fact that whether the amendment made by the Finance Act, 2010 to the provisions of Section 40 (a) (ia) of the IT Act is retrospective in nature so as to apply to the present case or not. If it is so, then the tax duly paid by the assessee on 01.08.2005 is well in accordance with law and the assessee is allowed to claim deduction for the tax deducted and paid to the government, in the previous year in which the tax was deducted.

15. The purpose of bringing the said amendment to the existing provision of Section has been highlighted in the memorandum explaining the provision which reads as under:— 

“With a view to augment compliance of TDS provisions, it is proposed to extend the provisions of the section 40(a)(ia) to …….

… the provisions of other provisions of Chapter XVII-B.” 

16. The purpose is very much clear from the above referred explanation by the memorandum that it came with a purpose to ensure tax compliance. The fact that the intention of the legislature was not to punish the assessee is further reflected from a bare reading of the provisions of Section 40(a)(ia) of the IT Act. It only results in shifting of the year in which the expenditure can be claimed as deduction. In a case where the tax deducted at source was duly deposited with the government within the prescribed time, the said amount can be claimed as a deduction from the income in the previous year in which the TDS was deducted. However, when the amount deducted in the form of TDS was deposited with the government after the expiry of period allowed for such deposit then the deductions can be claimed for such deposited TDS amount only in the previous year in which such payment was made to the government. 

17. However, it has caused some genuine and apparent hardship to the assesses especially in respect of tax deducted at source in the last month of the previous year, the due date for payment of which as per the time specified in Section 200 (1) of IT Act was only on 7th of April in the next year. The assessee in such case, thus, had a period of only seven days to pay the tax deducted at source from the expenditure incurred in the month of March so as to avoid disallowance of the said expenditure under Section 40(a)(ia) of IT Act.

….

18. With a view to mitigate this hardship, Section 40(a)(ia) was amended by the Finance Act, 2008 and the provision so amended read as under:—

….

19. The above amendments made by the Finance Act, 2008 thus provided that no disallowance under Section 40 (a) (ia) of the IT Act shall be made in respect of the expenditure incurred in the month of March if the tax deducted at source on such expenditure has been paid before the due date of filing of the return. It is important to mention here that the amendment was given retrospective operation from the date of 01.04.2005 i.e., from the very date of substitution of the provision.

21. The amendment though has addressed the concerns of the assesses falling in the first category but with regard to the case falling in the second category, it was still resulting into unintended consequences and causing grave and genuine hardships to the assesses who had substantially complied with the relevant TDS provisions by deducting the tax at source and by paying the same to the credit of the Government before the due date of filing of their returns under Section 139(1) of the IT Act. The disability to claim deductions on account of such lately credited sum of TDS in assessment of the previous year in which it was deducted, was detrimental to the small traders who may not be in a position to bear the burden of such disallowance in the present Assessment Year.

22. In order to remedy this position and to remove hardships which were being caused to the assessees belonging to such second category, amendments have been made in the provisions of Section 40(a) (ia) by the Finance Act, 2010.

….

….

25. The controversy surrounding the above amendment was whether the amendment being curative in nature should be applied retrospectively i.e., from the date of insertion of the provisions of Section 40(a)(ia) or to be applicable from the date of enforcement.

26. TDS results in collection of tax and the deductor discharges dual responsibility of collection of tax and its deposition to the government. Strict compliance of Section 40(a)(ia) may be justified keeping in view the legislative object and purpose behind the provision but a provision of such nature, the purpose of which is to ensure tax compliance and not to punish the tax payer, should not be allowed to be converted into an iron rod provision which metes out stern punishment and results in malevolent results, disproportionate to the offending act and aim of the legislation. Legislature can and do experiment and intervene from time to time when they feel and notice that the existing provision is causing and creating unintended and excessive hardships to citizens and subject or have resulted in great inconvenience and uncomfortable results. Obedience to law is mandatory and has to be enforced but the magnitude of punishment must not be disproportionate by what is required and necessary. The consequences and the injury caused, if disproportionate do and can result in amendments which have the effect of streamlining and correcting anomalies. As discussed above, the amendments made in 2008 and 2010 were steps in the said direction only. Legislative purpose and the object of the said amendments were to ensure payment and deposit of TDS with the Government. 

27. A proviso which is inserted to remedy unintended consequences and to make the provision workable, a proviso which supplies an obvious omission in the Section, is required to be read into the Section to give the Section a reasonable interpretation and requires to be treated as retrospective in operation so that a reasonable interpretation can be given to the Section as a whole.

 

30. Hence, in light of the forgoing discussion and the binding effect of the judgment given in Allied Moters (P.) Ltd. case (supra), we are of the view that the amended provision of Sec 40(a)(ia) of the IT Act should be interpreted liberally and equitable and applies retrospectively from the date when Section 40(a)(ia) was inserted i.e., with effect from the Assessment Year 2005-2006 so that an assessee should not suffer unintended and deleterious consequences beyond what the object and purpose of the provision mandates. As the developments with regard to the Section recorded above shows that the amendment was curative in nature, it should be given retrospective operation as if the amended provision existed even at the time of its insertion. Since the assessee has filed its returns on 01.08.2005 i.e., in accordance with the due date under the provisions of Section 139 IT Act, hence, is allowed to claim the benefit of the amendment made by Finance Act, 2010 to the provisions of Section 40(a)(ia) of the IT Act.

Emphasis by underline – mine

The author is of the opinion that the above-mentioned characteristics very aptly apply to the current situation at hand for an amendment to section 50C which has ramifications u/s 43CA and section 56.

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