Undisclosed Income scheme 2016 and its impact on Penny Stock or Unquoted Shares
Now a day there are so many advertisement /Articles /Seminars conducted by different Professionals and/or Income tax officer to promote the Income Declaration Scheme 2016 (the “Scheme”). CBDT has also issued FAQs for better understanding of the scheme and to address the issues of stakeholders.
I have tried to cover all aspect of the scheme with regards to investment in penny stocks/ unquoted shares and therefore restricted this Article by specifically focusing on investment in Penny Stocks / Unquoted Shares.
To understand the provision let us first discuss important terms used in the Scheme, Rules and FAQ regarding undisclosed Income.
Scope of the Scheme (income which can be declared)
A declaration under the aforesaid Scheme may be made in respect of
1. any income or income in the form of investment in any asset located in India and acquired from income chargeable to tax under the Income tax Act for any assessment year prior to the assessment year 2017-18 for which the declarant had, either failed to furnish a return under section 139 of the Income tax Act, or failed to disclose such income in a return furnished before the date of commencement of the Scheme, or
2. Such income had escaped assessment by reason of the omission or failure on the part of such person to make a return under the Income tax Act or to disclose fully and truly all material facts necessary for the assessment or otherwise.
3. Where the income chargeable to tax is declared in the form of investment in any asset, the fair market value of such asset as on 1st June, 2016 computed in accordance with Rule 3 of the Income Declaration Scheme Rules, 2016 shall be deemed to be the undisclosed income.
Eligibility to apply in the scheme
As per the provisions of the Scheme, no declaration can be made in respect of any undisclosed income chargeable to tax under the Income tax Act for assessment year 2016-17 or any earlier assessment year in the following cases
(i) where a notice under section 142 or section 143(2) or section 148 or section 153A or section 153C of the Income tax Act has been issued in respect of such assessment year and the proceeding is pending before the Assessing Officer. For the purposes of declaration under the Scheme, it is clarified that the person will not be eligible under the Scheme if any notice referred above has been served upon the person on or before 31st May, 2016 i.e. before the date of commencement of this Scheme.
(ii) where a search has been conducted under section 132 or requisition has been made under section 132A or a survey has been carried out under section 133A of the Income tax Act in a previous year and the time for issuance of a notice under section 143 (2) or section 153A or section 153C for the relevant assessment year has not expired. In the form of declaration (Form 1) the declarant will also verify that these facts do not prevail in his case.
(iii) cases covered under the Black Money (Undisclosed Foreign Income & Assets) and Imposition of Tax Act, 2015.
A person in respect of whom proceedings for prosecution of any offence punishable under Chapter IX (offences relating to public servants) or Chapter XVII (offences against property) of the Indian Penal Code or under the Unlawful Activities (Prevention) Act or the Narcotic Drugs and Psychotropic Substances Act or the Prevention of Corruption Act are pending shall not be eligible to make declaration under the Scheme.
A person notified under section 3 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act or a person in respect of whom an order of detention has been made under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, subject to the conditions specified in the Scheme, shall also not be eligible for making a declaration under the Scheme.
Determination of Fair Market Value of Shares:
As per Rule 3(c) the value of shares and securities of
(I) quoted share and securities shall be the higher of
(i) its cost of acquisition; and
(ii) the price determined by taking(
A) the average of the lowest and highest price of such shares and securities quoted on a recognised stock exchange as on the 1st day of June, 2016; or
(B) the average of the lowest and highest price of such shares and securities on a recognised stock exchange on a date immediately preceding the 1st day of June, 2016 when such shares and securities were traded on a recognised stock exchange, where on the 1st day of June, 2016 there is no trading in such shares and securities on a recognised stock exchange;
(II) unquoted equity shares shall be the higher of
i) its cost of acquisition; and
(ii) the value, on the 1st day of June, 2016, of such equity shares as determined in the following manner, namely: the fair market value of unquoted equity shares = (A+B – L) × (PV)/ (PE)
Extract of Relevant FAQ from the Circulars issued by the CBDT
Question No.1: Where an undisclosed income in the form of investment in asset is declared under the Scheme and tax, surcharge and penalty is paid on the fair market value of the asset as on 01.06.2016, then will the declarant be liable for capital gains on sale of such asset in the future? If yes, then how will the capital gains in such case be computed?
Answer: Yes, the declarant will be liable for capital gains under the Income tax Act on sale of such asset in future. As per the current provisions of the Income tax Act, the capital gains is computed by deducting cost of acquisition from the sale price. However, since the asset will be taxed at its fair market value the cost of acquisition for the purpose of Capital Gains shall be the fair market value as on 01.06.2016 and the period of holding shall start from the said date (i.e. the date of determination of fair market value for the purposes of the Scheme). But subsequently on 18th August 2016 CBDT comes out with circular no 29 wherein in has stated that period of holding will starts from date of original acquisition and not from 01.06.2016 (refer question no 2 below)
Question No.2: Though the fair market value as on 1st June, 2016 is taxed under IDS, and such amount will be treated as cost of acquisition at the time of future sale of concerned asset, whether such treatment shall affect the character of the asset as long term or short term?
Answer: The issue was earlier considered and it was clarified vide Circular No.17 dated 20.05.2016 that in such cases period of holding shall be deemed to begin from 01.06.2016 as the asset has been revalued on such date. However, considering the representation received from various stakeholders and the fact that this may lead to complications in calculation of capital gain at the time of sale of asset which was partly funded from undisclosed income now declared under the Scheme, the matter has been reconsidered. Accordingly, in supersession to the earlier clarification as referred above, it is clarified that the period of holding of asset declared under the Scheme shall be based on the actual date of acquisition of such asset. However, the indexation benefit in respect of the amount declared under the Scheme shall be available from 01.06.2016 only.
Question No.3: Where a notice under section 142(1)/ 143(2)/ 148/ 153A/ 153C of the Income tax Act has been issued to a person for an assessment year will he be ineligible from making a declaration under the Scheme?
Answer: The person will only be ineligible from declaration for those assessment years for which a notice under section 142(1)/143(2)/148/153A/153C is issued prior to 01.06.2016 and the proceeding is pending before the Assessing Officer. He is free to declare undisclosed income for other years for which no notice under above referred sections has been issued.
Question No.4 : If undisclosed income relating to an assessment year prior to A.Y. 2016-17, say A.Y. 2001-02 is detected after the closure of the Scheme, then what shall be the treatment of undisclosed income so detected?
Answer: As per the provisions of section 197(c) of the Finance Act, 2016, such income of A.Y. 2001-02 shall be assessed in the year in which the notice under section 148 or 153A or 153C, as the case may be, of the Income-tax Act is issued by the Assessing Officer. Further, if such undisclosed income is detected in the form of investment in any asset then value of such asset shall be as if the asset has been acquired or made in the year in which the notice under section 148/153A/153C is issued and the value shall be determined in accordance with rule 3 of the Rules.
Question No 5 :If any proceeding is pending before the Settlement Commission, can a person be considered eligible for the Scheme?
Answer: No, a person shall not be eligible for the Scheme in respect of assessment years for which proceeding is pending with Settlement Commission.
Question No 6:- Whether cases where summons under section 131(1A) have been issued by the Department or letter under the Non-filer Monitoring System (NMS) or under section 133(6) are issued are eligible for the Scheme?
Answer:– Cases where summons under section 131(1A) have been issued by the department or letters for enquiry under NMS or under section 133(6) are issued but no notice under section 142 or 143(2) or 148 or 153A or 153C [as specified in section 196(e)] of the Finance Act, 2016 has been issued are eligible for the Scheme.
Question No 7: The declaration made in respect of cash, investment etc. under the Scheme would result in increase in capital in the Balance Sheet in extra ordinary manner. Whether such cases of the declarants would be selected for scrutiny under the CASS for this reason?
Answer: The cases of the declarant shall not be selected for scrutiny under the CASS only on the ground that there is increase in capital in the balance sheet as a result of the declaration made under the Scheme.
Question No. 8: In a case the declarant earned undisclosed income of Rs. 90 lakh in previous year 2010-11. Out of the same, he acquired an immovable property in the previous year 2011-12 for Rs.50 lakh, made personal expenditure to the extent of Rs.20 lakh and balance Rs.20 lakh is left with him as cash in hand on 01.06.2016. The fair market value of the immovable property as on 01.06.2016 is Rs.80 lakh. What is the amount to be declared under the Scheme?
Answer: The declarant in this case has to declare the following:
(i) Rs. 80 lakh being fair market value of the immovable property as on 01.06.2016
(ii) Rs. 20 lakh being the cash in hand as on 01.06.2016
(iii) Rs. 20 lakh being the balance of undisclosed income [Rs. 90 lakh – (Rs.50 lakh + Rs. 20 lakh)] which is not represented in the form of investment in any asset.
Thus the total undisclosed income to be declared in this case will be Rs. 1.20 crore.
Question No 9: Rule 3(1)(c)(I) of the Income Declaration Scheme Rules, 2016 provides for manner of determination of fair market value of quoted shares and securities. In this context, it may be clarified that if a share is listed on more than one recognised stock exchange and the quoted price of the share as on 01.06.2016 on the recognised stock exchanges is different, then what shall be the quoted share price for determining the fair market value of such share under the Scheme?
Answer: In such a case the quoted price of the share shall be computed with reference to the recognised stock exchange which records the highest volume of trading in the share as on 01.06.2016.
Question No.10: What are the consequences if no declaration under the Scheme is made in respect of undisclosed income prior to the commencement of the Scheme?
Answer: As per section 197(c) of the Finance Act, 2016, where any income has accrued or arisen or received or any asset has been acquired out of such income prior to the commencement of the Scheme and no declaration is made under the Scheme, then such income shall be deemed to have been accrued, arisen or received or the value of the asset acquired out of such income shall be deemed to have been acquired in the year in which a notice under section 142/143(2)/148/153A/153C is issued by the Assessing Officer and the provisions of the Income tax Act shall apply accordingly.
Question No.11: Whether the payment of amount payable under the Scheme can be made in cash to the Banks? Further, whether the amount disclosed under the Scheme can be deposited in the bank account in cash?
Answer: Reserve Bank of India (RBI) has been requested to issue instructions to banks to allow payment of tax under the Scheme in cash. RBI has also been requested to instruct the banks to allow deposit of cash over the counter in accordance with its existing master circular No. DBOD No.Leg.BC.21/09.07.006/2014-15 dated 01.07.2014.
Question No.12: Whether the information of cash deposits made in bank as a consequent to declaration made under the Scheme shall be picked up by FIU or reported to the income-tax department?
Answer: It is clarified that no adverse action shall be taken against the declarant by FIU or the income-tax department solely on the basis of the information regarding cash deposit made consequent to the declaration under the Scheme.
Important Point to take away:-
1. If declaration is made in respect of any investment in shares and subsequently such shares were sold then capital gain is to be calculated and tax to be paid on the difference between the sale considerations and fair market value such assets ( i:e the date of determination of fair market value for the purpose of the scheme). Further, the Holding period of such investments will starts from the date of original purchase. But index benefit will starts from the date of determination of fair market value for the purpose of the scheme i:e 01.06.2016. Refer circular no 29 of 2016 FAQ no 4 dated 18.08.2016 issued by CBDT
2. Under the scheme the declarant has to pay tax @ 45% of his undisclosed Income, but by taking facility of instalments it effective tax rate is works out to be 42.30%. CBDT by press release dated 14.07.2016 given the option to pay tax on instalment: 25% by 30th November, 2016, 50% by 31st March 2017 25% by 30th September, 2017. Effective Tax rate has been calculated taking into account interest @ 12% that could be saved because of instalment facility.
3. If any Person declared undisclosed cash or investment then such person can deposit such cash in his or her bank account/ can passed journal entries in investment a/c and corresponding entries to be passed in his or her Capital Accounts. CBDT has not answered this question anywhere but we can very well draw conclusion from the FAQ no 3 circular no 27 of 2016 dated 14th July 2016 also see FAQ no 8 circular no 29 of 2016 dated 18.08.2016
4. As per explanatory notes on income declaration scheme, 2016 it was stated that, the declarant shall not be liable for any adverse consequences under the Scheme in respect of, any income which has been duly declared but has been found ineligible for declaration. However, such information may be used under the provisions of the Income-tax Act.
5. Investment shown and appeared in the Balance sheet of any person cannot be declared as undisclosed income under the scheme technically. However, if any person still chooses to declare such investment in the scheme to buy peace department in author opinion will accept the same.
Suggestion to CBDT
In the opinion of the author:
1. CBDT should come out with clarification stating whether investment appeared in the balance sheets is eligible to declared as undisclosed income because technically it is declared investment and should not be eligible under the scheme.
2. if any person wants declare any single investment in penny stock under the scheme then will adverse opinion be formed for his other investments in shares which may be penny stock.
3. Accounting treatment in the books of accounts of the person who declared undisclosed income under the scheme .
Article is written by CA. Rahul Sureka, FCA, CS, LLB and can be reached at email@example.com
Disclaimer: This articles is for general guidance on matters of interest only and does not constitute any professional advice from us. One should not act upon the information contained in this article without obtaining specific professional advice. Further, no representation or warranty (expressed or implied) is given as to the accuracy or completeness of the information contained in this article.