V Swaminathan B.Sc., B.L., FCA

Prologue

This is a follow-on, intended as supplement to the previously published article on the subject Section 194 IA (the enactment) of a recent origin:

To recap, is given a gist of the viewpoints set out therein:-

The enactment suffers from certain lacunae and loopholes of a vital nature. The predominant of all is this: The TDS requirement as mandated has, in terms, application to a case of transfer, ONLY if it is of “a building or PART OF A BUILDING “.  Had, however,  the legislative history not been over sighted by the North Block, it would have been realised that the term “part of a building” cannot rightly be regarded to cover within its ambit the not-so-independent ‘units’ of a building comprising flats or apartments. Presumably, that is an unintended lacuna. And has the potential to have repercussions on, could rather seriously defeat, the very objective of the requirement,- that is, trying and circumventing tax evasion of all types of transactions in immovable property, as intended, -not excluding ‘units’.

The referred primary lacuna is not difficult to be readily perceived, should the issues which came to be raised and litigated for long in the past not have been lost sight of.  Eventually, that was why the need for amendments felt and came to be made in the IT Act, way back in 1988; and much later, in 1996, in the WT Act as well.

Why say the enactment is incomplete, with pitfalls?

2. Mentioned below, are some of the other deficiencies in the enactment, being pointers to the ineptness and lack of vision in structuring and drafting. More so, as the enactment is a stand-alone code by itself, the basic objective whereof is not so much to collect tax in advance as curbing tax evasion.

These mainly pertain to following:

(A)        Requiring TDS uniformly, including a case of deductee- taxpayer who will have no chargeable income – fully or partly- out of the transaction; hence will give rise to a refund of excess TDS situation.

For an appreciation in proper light, suggest a close study of the enactment, in comparison, with the other erstwhile provisions of the Act encompassing the TDS regime; for instance, Sections 195 (2), 197, and 197 A.

(B)        Not made unambiguously clear, albeit warranted, that TDS is called for only on such payment (s) as made after the effective date of 1st June 2013.

2.1. Taxation of income from transfer of immovable property of the kinds sought to be covered in section 194IA would primarily arise and be governed by two sets of provisions of the Act; those are respectively governing, (i) capital gains, and (ii) business income.

2.2. (i)  Capital gains:

By virtue of the extant overriding provisions of sections 54 and /or 54EC, any income by way of long term capital gains will not be ‘assessable’, in the event the transfer qualifies for tax exemption as envisaged. That is, by reason of transferor having complied with the specified conditions. Glaringly so, if even on the date of a given  transaction (of transfer) he has already qualified for tax exemption, hence will have no tax to pay; that is, if he has already purchased or constructed a new asset, even before transfer of old asset as envisaged by the scheme of exemption.

That is to say, at no point in time, he will have income ‘assessable’ , be it in the year of transfer (of old property), or the year in which he has utilized and appropriated the amount of capital gains for purchase of a new asset, as contemplated by the law.

The point for emphasis is that, withholding tax is a mode of collection at source and in advance. And, as such, by necessary implication, in order to attract tax withholding, the transferor should have chargeable income, and eventually be ‘assessable’. That will not be so, in a case qualifying for the tax exemption in terms of sections 54 and /or section 54EC. To be precise, in such cases the requirement of withholding tax should not come into play; hence ought not require to be complied with or insisted upon. As, otherwise, it will be offending, and be in patent violation of, the very scheme of things under the law.

To say it differently, under the present wording of section 199, rwr there under, if it were strictly construed, in a case where the income eventually qualifies for full tax exemption, the allowing of credit for tax withheld is quite likely to pose a problem; for, in any such case, deductee will have no chargeable income so as to be regarded as “assessable” as envisaged there under.

(ii)  Business income:

In a case where the subject matter of transaction is ‘stock-in-trade’ of its holder, hence income that arises will be chargeable under the head of business income, the fear or apprehension about getting a proper credit allowed for TDS and inherent hassles, it needs to be underlined, is very much real, not imaginary.

For knowing more, and an appreciation in proper light, attention is invited to a couple of material authored by accounting experts published in the ICAI’s Book, titled, -A Comprehensive Workshop on Real Estate and Property Development (November 2011). Particularly, the one on the relevant topic of “Accounting for Real Estate Transactions” (pgs. 191-244) is noted to cover the implications of the Accounting (also of the Tax Accounting) Standards on Construction Contracts; and makes for a useful reading,

The 1% deduction is required to be made on the amount of ‘gross receipt’; not on the ‘income’ (profits or gains) embedded therein unlike under other connected provisions.

In the case of transfer by a business man, of a property held as his stock-in-trade, he may, as is permissible, follow, for accounting of income, what is known as the percentage- of- completion method (i.e. progressive basis). Under the extant law, so far as one could see, there is no rule clearly providing for an apportionment, on a suitable and acceptable basis, of the gross income or profits embedded therein, on a year-to-year basis; hence, no way to reckon, without hassle or a possible dispute, credit for TDS to be spread over more than one year.

Key Note: The specially marked words in the Rule reproduced below, be noted:

<Credit for tax deducted at source for the purposes of section 199.

37 BA. (1) (3) (i) Credit for tax deducted at source and paid to the Central Government, shall be given for the assessment year for which such income is assessable.

(ii) Where tax has been deducted at source and paid to the Central Government and the income is assessable over a number of years, credit for tax deducted at source shall be allowed across those years in the same proportion in which the income is assessable to tax.>

In one’s perceptive view, the above mentioned facets do not seem to have been kept in mind and duly taken into consideration, before having gone ahead with the enactment in its present form.

3. As regards the point in time when to withhold tax, there seems to be scope for two alternate views:

3.1. If special regard be had to the purport of the provision, – to be precise, the clinching words used namely, “payment on transfer”, “consideration for transfer”, ‘transferor’ and ‘transferee’, -the emphasis must be rightly on the event of actual transfer. If so, withholding will, logically speaking, be called for only at the time when the ‘transfer’ can be regarded to become conclusive in law. That is if and when the document of transfer is duly stamped and registered.

3.2. According to case law, the rule against retrospective operation of a statute unless so provided in the statute either expressly or by necessary implication is well settled. For one such court ruling, may refer the decision of the apex court in re. Govinddas v. ITO (103 ITR 123).

“Now it is well settled rule of interpretation hallowed by time and sanctified by judicial decisions that unless the terms of a statute expressly so provide or necessarily require it, retrospective operation should not be given to a statute so as to take away or impair an existing right or create a new obligation or impose a new liability otherwise than as regards matters of procedure. The general rule as stated by Halsbury in volume 36 of the Laws of England (third edition) and reiterated in several decisions of this Court as well as English courts is that all statutes other than those which are merely declaratory or which relate only to matters of procedure or of evidence, are prima facie prospective and retrospective operation should not be given to a statue so as to affect, alter or destroy an existing right or create a new liability or obligation unless that effect cannot be avoided without doing violence.”

In the instant case, therefore, one could validly urge that, the enactment cannot be given a retrospective effect without doing violence to the explicit language. For, there is nothing in its language to suggest or imply even remotely that, any part of the consideration for the transfer, even if had been made before 1st June 2013, would invite the mandate of 1% TDS.

Thus, saddling the liability to TDS on the transferee by treating the requirement as retrospective and in case of default, treating him to be an assessee-in-default, in one’s conviction, is farfetched.

Aside:  The awakening, so much so the attendant developments of the State law on realty,- to be precise, the special acts in force governing the construction and conveyance (sale) of ‘units’ in a building comprising Flats (which include Apartments)- have not met squarely the need for speedy legislation. And even after legislation, its effective implementation and enforcement have remained very much to be desired. In consequence, the basic objective of the measures taken has remained to be fulfilled even after a few decades have passed by. As regards corresponding developments of tax laws, – specially in relation to the peculiar property rights in ‘units’ (flats or apartments)  of a building,  have been unbelievably slow, lagging far behind; and in a manner of saying, lop sided.

4. As is commonly known, transactions in units came in vogue dating back to over 5 decades. But it was not until in the late 1980s that the concerned Ministries –   Finance and Law- happened to wake up to the realities. That was so stands evidenced by the fact that the requisite amendments of the law came to be thought of, realised and given shape in the form of new insertions in the Income-tax Act, as late as in 1988; and, not until 1996, that similar amendments were made, -which could rationally have been thought of at that point in time itself, that is 1987/88, and been made in the Wealth Tax Act as well.

5. The present scheme for tax exemption of capital gains (section 54 and 54 EC), as of now, is still in force. Notwithstanding that, in the DTC Bill pending enactment, it is going to be drastically changed/ differently covered. Further, one has no clue as yet, how the claims made but pending consideration as per the extant law are going to be taken care, on and after the coming into force of the DTC.

Be that as it may, should a taxpayer opt to, or intend opting for, such exemption under the present law, by complying with the stipulated conditions within the specified time frame, then he will be entitled to get an extended time (2/3 years) to be taxed/to pay tax. As such, it would have been in the fitness of things had the other inter-related/-connected provisions also been correspondingly changed. Reference is to the saving section 197 and section 199, rwr 37 BA there under. One fails to see any reason or logic as to why such changes have not been made, though required, which could have been easier done than said.

Not being free from doubt, however, for the sake of uniformity in enforcing the requirement, categorical confirmation/clarifications by the CBDT, to be closely followed by suitable changes in the law, might help; so as to avoid varying practices being followed by deductors.

6. As urged herein before, if the legislative history were to be given a close look, this, perhaps, is not a solitary instance but is just one in a series of its kind. What is deplorable is the fact that such issues as indicated have come to be raised time and again, and led to prolonged disputes and court litigation; thereby proving an irritant both to taxpayers and adjudicating authorities.

To recall, one of the rudimentary principles of jurisprudence, well settled by case law, is that in a taxing enactment, nothing must be read in or implied. Even so, one will find that is the very rule often broken ; butchered and made a casualty by assessing officers dictated by own whims and fancies.

7. The instant enactment brings to one’s mind a closely related provision of a later but again recent origin; that is, section 200A, and the new insertions in section 201 (2). On a tentative study, one’s irresistible feeling is, that the said provisions do not cover, adequately or otherwise, all possible situations giving rise to excess or short TDS, and for whatever reason. So much so, seem to bristle with immense scope for problems and potentials for disputes and a right royal legal battle.

For clues: Section 200A talks of computerised processing of TDS statement (s) made by the deductor. But that concerns itself to such statement(s) on record for any one year. In a case where any incorrect particulars are furnished in that year’s statement , but not having been detected hence left to be reflected in that year’s statement, there appears to be no way for making any such ‘adjustments’ as envisaged in section 200A (1)- (a) and/ or (b) in a later year.

It goes without saying that these are bound to add to the woes already faced with by honest taxpayers because of the messed-up TDS regime; especially, after the set-up of the CPC .

For a quick idea of the enormity of the problems in store, the recent Delhi High Court Writs in the PIL matter exclusively devoted to such hassles and hardships in the form of TDS woes is worthwhile to go through.

Epilogue

 We live in an age which has been increasingly and overwhelmingly surrounded by so called ‘information technology’ (IT). The IT, with its improvements devised almost with a day -to- day recurrence, refers to the tools for storing and dissemination of information, aimed at catering to, besides several others, those having an appetite or taste, real and sincere, or otherwise,  for so-called ‘knowledge’. In today’s context, the mission to spread ‘knowledge’ has reached an all time high that it won’t be wrong to call it a knowledge explosion. Even so, it is inconceivable that there can be justifiable reason or excuse to remain blinded, or be struck or stuck-up or  stung ; if, instead,  one can easily find clues for searching and pitching at the right kind of information to suit own needs or aspirations.

Albeit, as a wise man pithily quipped, – present day knowledge is by and large narrowed down to one thing- that is, the quest to simply know which side of the bread is buttered.

Bound to be so, so long as the tendency is to try vainly or vaingloriously take the posture of being a jack of all trade. Never taking care to get to know not to bite more than what can be chewed, much less digested. In essence, solution, perhaps, lies only in ‘moderation’ in every sense. For that matter, that is a must, particularly in every sphere of human activity that has something to do with legislations and legal system impacting and impairing gravely the ‘public interest’.

 Selectively, confining to the objective exercise or study on hand, intelligence so also intellect  lies in identifying what and where to look for, also which one is more likely to be largely useful or of practical value in life.

For instance, information on past experience or legislative history could be the safest source of inspiration and useful guide, particularly if one is talking of a lacuna or loophole that is suspect.

All the more regrettable is that, many write-ups thus far published on the topic of 1% TDS mandated by section 194 IA wef June 1, 2013 , as is perceived, are, by and large, a ‘run of the mill’ kind of write-ups. To be honest, any such write-up would have proved useful and been of practical guidance to the common tax payers not familiar with the nitty-gritty of any such enactment; in particular, should there be a not-so -obvious but hidden lacuna or loophole going to the very root of such an enactment, impairing its strict enforceability in the discerning eyes of law.  Ideally, qualified and equipped professionals could have, as expected, made an attempt at adding value by covering certain areas so far remaining uncovered. So as to  providing the most needed and urgently called-for clues or guidance to the intended beneficiaries on some of the worrisome aspects on which any such new enactment is prima facie very much lacking in clarity.

More importantly, that would have been of assistance also to the government to resort to suitable amends on being convinced and satisfied about the sincerity of purpose behind any such involuntary feedbacks.

There is no gainsaying that, unless and until the lacunae/loopholes are removed by plugging in the suitable amendments of the provision, it has an inevitable potential to lead to controversies and litigation which are likely to thwart or defeat the very objective behind the new tds requirement. 

More so, as in the current scenario, the tds regime has, admittedly, for several reasons come to prove itself to be more than tolerably muddled.

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