Tuesday 28 February 2017

Budget 2017 proposals in tax relating to assessments, search and seizure and TDS                        
-         Sahil Garud [Chartered Accountant]
 
Click here to directly go to icai link to read a copy of this article as published in CA Journal March 2017 edition

The Union budget 2017 raised a lot of eyebrows especially with the Modi Government breaking its promises about not bringing any retrospective amendments and by proposing changes which do not facilitate the creation of a tax-payer friendly environment. The Finance Bill 2017 saw certain amendments where the powers of the Taxmen were increased, some even with corresponding decrease in their accountability, which might cause hardship to taxpayers.

SEARCH, SEZURE AND SURVEY


Around 1100 searches have been conducted by the department in the demonetization phase which may be in the assessment stage in near future. In order to curb the practice of certain assessee’s who simply challenge the “reasons ” behind initiation of search proceedings before CIT(A) or ITAT and succeed in making the search proceedings invalid, an amendment has been retrospectively proposed by the government. In a landmark ruling in case of DGIT (Investigation) v. Spacewood Furnishers (P.) Ltd., SC had ruled that the reasons shall not be communicated to the persons against whom the warrant is issued at that stage; it’s only at the stage of commencement of assessment proceedings after the completion of search and seizure, if any, the requisite material may have to be disclosed to the assessee.   

Owing to ambiguities from certain other judicial pronouncements in this regard and to maintain the confidentiality and sensitivity of the proceedings under section 132 and 132A an amendment has been proposed wherein the Department would not be liable to disclose the ‘reasons’ of search to ‘any person’, ‘any authority’ or ‘ITAT’. The expression ‘any authority’ logically should not be said to include High Courts since High Courts are specifically empowered by Article 226 of the Constitution. In case of Shri Parma Ram Bhakar Vs The DCIT, Jodhpur it was held by ITAT that that authorization to conduct search based on reason u/s 132(1) did not exist, so search was held to be invalid. Consequently, assessment order based on invalid search was quashed. Also, in case of CIT Vs Chitra Devi Sons, the Rajasthan High Court upheld the decision of Tribunal to quash the Assessment Order on the ground that the Revenue could not produce document to show the reasons for existence of conditions u/s 132 to the ITAT. Thus, after such an amendment these decisions could be said to be overruled. A remote possibility of undue harassment of taxpayers cannot be overruled due to unaccountable increase in powers of Assessing Officers, and after such an amendment, taxpayers would be bound to travel to high court where they seek to challenge the jurisdiction of search proceedings.

Power to attach property and its valuation:
Under the existing provision of the act, right of provisional attachment of property is available u/s 281B. This power can only be exercised when proceeding is pending for assessment of income or for assessment/reassessment of any income which has escaped assessment.

Explanation to sub-section 1 of section 281B, which has been omitted by the Finance Act 2016, included search cases in its ambit. The mentioned explanation implied that the expression ‘proceedings’ as mentioned in the section includes ‘proceedings’ as defined in section 132, which also included the proceedings completed on or before the date of search or which may be commenced after the date of search. This understanding had been further affirmed by the Delhi HC in the case of Nimitya Properties Ltd vs. CIT. The Delhi HC had observed that though proceedings stood abated because of the search, proceedings for that assessment year will have to be commenced u/s 153A or 153C of the Act. Such proceedings which are to be necessarily commenced as a result of search, are to be treated as proceedings under this Act. Since by virtue of Explanation to Section 281B of the Act, these are to be treated as the proceedings within the meaning of sub-Section (1) of Section 281B of the Act, order for attachment u/s 281B could be rightly passed even if no assessment proceedings were pending on date of search. However, omission of the Explanation to sub-section 1 of section 281B by the Finance Act 2016 resulted in the Revenue losing the power to provisionally attach property of assessees' in search cases w.e.f. 01/06/2016. 
W.e.f. 01/04/2017, by making an amendment in Sec. 132, the Finance Bill 2017 has sought to further reintroduce and expand the powers of the Revenue by proposing to allow Revenue to provisionally attach any property of an assessee, with the prior approval of Principal Director General or Director General or Principal Director or Director, during the course of a search or seizure or within a period of sixty days from the date on which the last of the authorisations for search was executed, i.e. even before issuing notice under section 153A. This proposed amendment by the Finance Bill 2017 affirms, clarifies and expands the view expressed by Delhi HC in Nimitya Properties. It is important to note that as the Explanation to sub-section 1 of Sec. 281B was omitted w.e.f. 01/06/2016, and the proposed amendment by the Finance Bill 2017 is set to come into force w.e.f. 01/04/2017, it could be inferred that for searches conducted between 01/06/2016 and 01.04.2017, no power of provisional attachment was available with the Revenue.

Further, in order to enable correct estimation undisclosed income held in the form of investment or property by the assessee, the authorized officer has been empowered to make a reference to a Valuation Officer. A doubt which arises here is how during the course of a search or seizure can one know the liability burden on taxpayer so as to take the harsh step of attachment of property of the taxpayer? Practically, such power may be misused to further pressurize the taxpayers in during the search and seizure phase.

Section 133 Power to call for information:

As per the existing provisions, the power in respect of an inquiry, in a case where no proceedings are pending, cannot be exercised by any income-tax authority below the rank of the Director or Commissioner or without the prior approval of these authorities. However, considering the requirement of the work profile of the authorities working in the Investigation Directorate and the plethora of data that the investigation wing of the department expects to receive post demonetization, the said power is proposed to be granted even to Joint Director, the Deputy Director and the Assistant Director.

Section 133A Power of Survey:

The existing provisions of section 133A empower an income-tax authority to enter any place, at which a business or profession is carried on, or at which any books of account etc relating to the business or profession are kept. W.e.f. 01.04.2017, the scope of this power is widened in way that a survey can also be carried on at premises an activity for charitable purpose is carried on.
            A doubt which arises here is since the power to make such surveys has been prospectively introduced w.e.f. 01.04.2017, whether surveys conducted on charitable trusts whose consequential assessments must be under process now, are valid?

ASSESSMENTS

AO’s Power to withhold refund:

In the case of Tata Tele services vs. CBDT, the Delhi High Court quashed CBDT Instruction No. 1/2015 dated 13 January, 2015 vide which the AOs used to decline processing of return and granting of consequential refund to assessees. The Court stated that in the garb of its power under section 119 of the Act, the CBDT could not proceed to interpret the law or instruct the Income-tax Department to not issue refund.

While overruling the above decision and with a view to further boost the recovery or tax collection, a new section 241A is proposed to be inserted vide which the AO is empowered to withhold the refund of a return processed u/s 143(1) till completion of assessment, if he is of the opinion that granting of such refund may adversely affect the recovery of revenue. However, the AO has to record his reasons for doing so and take previous approval of the Principal Commissioner or Commissioner.

Section 153 Time limit for completion of assessment, reassessment and recomputation:

The Government has, in last 3-4 years, carried out massive computerization and has tried to make most of processes system-driven, without much of manual interference. In order to further add-up to the efficiency of system and functioning of the Department, the Finance Bill proposes to reduce the time limit for making assessment u/s 143 and s. 144 from existing period of 21 months from the end of that assessment year to 18 months for assessments in relation to AY 18-19. The time limit is proposed to be further reduced to a period of 12 months for AY 19-20 onwards. Similarly, to bring uniformity, for notices served u/s 148 on or after 01/04/2019, the time limit for completion of assessment shall be 12 months from the end of the financial year in which notice under section 148 is served. These amendments will take effect from 1st April, 2017.

Similarly, the time limits of making fresh assessment in pursuance of an order passed or received in the financial year 2019-20 and onwards under sections 254 or 263 or 264, are also changed. In case of an order u/s 250, 254, 260,262, 263 or 264 which requires to be verified by giving an opportunity of making submissions to the assessee, the time limit shall 12 months from the end of the financial year in which order u/s 254 is received or order u/s 263 or 264 is passed by the authority referred therein.

153A - Assessment in case of search or requisition:

As per existing provisions of Sec. 153A, where search has been conducted u/s 132 or books of accounts are requisitioned u/s 132A, the AO shall issue notice to assessee requiring him to furnish returns of six immediately preceding AYs and the AO shall make assessment of such 6 AYs preceding the assessment year relevant to previous year in which the search is conducted or requisition is made.

Apparently, the Modi Government has stood-up to what it claims, in a positive or a negative manner. The Government gave number of chances to the citizens of India to disclose their undisclosed income and assets without any enquiry or search, seizure etc. The Government even announced the Income Declaration Scheme (IDS) or the PMGKY Scheme to facilitate its motive. However, allegedly there seems to be large no. of cases where people though possessing undisclosed assets did not to come forward voluntarily. This may be one of the factors behind the changing the fundamental aspect of limiting the backward enquiry period of six assessment years to a period beyond than six.

The Finance bill proposes to make an amendment in such a way that where the AO is in possession of books of accounts or other documents or evidence which reveal that income in form of an ‘asset’ has escaped assessment and such amount exceeds or is likely to exceed 50 lakh rupees, then he can issue a notice of assessment u/s 153A for a period beyond 6 years but not exceeding 10 years. In other words, the power to assess u/s 153A has been increased beyond 6 years but upto 10 years subject to escapement of income equal to or exceeding 50 lakhs rupees in aggregate for the period of 6 to 10 years. Further, the expression ‘asset’ has been defined by way of an inclusive definition.

This amendment is prospectively applicable w.e.f. 01.04.2017. Thus, for searches which are made after 01.04.2017, i.e. say in FY 17-18 the AO has the power to go back till AY 08-09 where he has evidence in his possession which reveals that income, in form of an asset, has escaped assessment amounting to Rs. 50 lakh or more, between the aggregate period of AY 11-12 to AY 08-09.

In case of searches made after 01.04.2017, a genuine difficulty and hardship may arise where pursuant to provisions of Rule 6F of Income Tax Rules, an assessee has destroyed or not maintained his books of accounts beyond a period of 6 years from the end of a relevant assessment year, and a scenario of search arises where the AO seeks to go beyond such a period of 6 years. Thus, practically though there is no corresponding amendment in rule 6F, the taxpayers may be advised to maintain books of accounts for a period of 10 AYs from the end of relevant AY.

For exercise of such a power to go beyond a period of 6 years upto 10 years, three conditions must be fulfilled viz. (i) AO must be in possession of books of accounts, or other documents or evidence, (ii) Income alleged to have escaped assessment must be in form of asset, and (iii) such escapement must amount to Rs. 50 lakh or more in any of the assessment years between 6 to 10 assessment years or in aggregate for 6 to 10 assessment years. It is pertinent to note here that the amendment regarding no liability of Revenue to disclose reasons of search before any person, any authority or ITAT, is in relation to initiation of search proceedings u/s 132 only. Thus, the AO should be made liable to disclose his reasons of re-opening a case pertaining to more than 6 AYs backward, alongwith material evidence in his possession which led him to believe that there has been such escapement of Rs. 50 lakh rupees or more beyond a period of 6 AYs upto 10 AYs.

Further, the Finance Bill 2017 has proposed to omit Sec. 197(c) of Finance Act 2016 to avoid genuine hardships to the assessees. The existing provisions of Sec 197(c) of the Finance Act, 2016 had a deeming fiction of considering escaped income of any past year to be the escaped income of year in which notice of assessment was issued by the AO, if no declaration was made regarding it in the IDS.

Section 153B – Time limit for completion of assessment in case of search or requisition:

For completion of search assessment, the existing time limit of 21 months from the end of financial year in search was conducted, has been revised to 18 months in case where such search is conducted on or after 01.04.2018. Further, for searches conducted on or after 01.04.2019, the time limit for completion of assessment has been revised to 12 months. Further, period of limitation for making the assessment or reassessment in case of other person referred to in section 153C is also consequentially revised. In cases where a reference u/s 92CA is made by the AO during the course of his assessment proceedings u/s 153A, the above time limits of Sec. 153B and Sec. 153C shall be further extended by 12 months.

TDS PROVISIONS

With a view to increase the database of persons coming under tax net and to collect more taxes timely by way of deduction of tax at source, government has introduced new provisions relating to TDS and has amended certain existing provisions. In order to boost the economy by way of introduction of foreign capital, the concessional rate of TDS u/s 194LC of the Act has been extended till 01.07.2020. Similarly, in order to enhance the investment of FIIs and QFIs in government securities and rupee denominated bonds the concessional rate of TDS has been extended till 01.07.2020.

206CC Requirement to furnish PAN by Collectee:

In order to strengthen the PAN mechanism and in order to increase the database of persons for tax purposes, a new section 206CC has been introduced vide which any person responsible for paying any amount on tax is collectible at source shall furnish his PAN to the person responsible for collecting such tax. In case no PAN is furnished, tax shall be collected at the twice the rate mentioned in the relevant provisions of TCS or at the rate of 5%, whichever is higher.

New Section 194IB:

Currently, there is no provision to deduct tax on rent by individuals and HUFs which not liable to audit u/s 44AB. A new section 194IB is proposed to be inserted w.e.f. 01.06.2017 wherein a person [though he is not liable to audit] who is liable to pay rent to an Indian resident for use of any land or building or both exceeding Rs. 50,000/-, for a month or part of a month, shall deduct TDS at rate of 5%. The necessity of obtaining a TAN has been done away with and that TDS is to be done only once in a previous year per tenancy.

In a scenario where the deductee does not furnish his PAN to the deductor or the PAN furnished by him is invalid, the TDS which has to be done at a higher rate [20%] shall be restricted to amount of rent payable for the last month of the previous year or the last month of tenancy.

Due to introduction of this section, the tax authorities should be able to track whether all the receivers of rent are paying their due income tax and filing returns as per law. Additionally due to exchange of information between income tax and service tax departments, the service tax department should also be able to track whether the person receiving the rent is registered under service tax and is duly complying with service tax liabilities.

Section 194-IC:

A new section 194IC has been introduced w.e.f. 01.04.2017 which provides that TDS @ 10% shall be made in case of payment of consideration by [not being consideration in kind] pursuant to a joint development agreement [JDA] by the developer to the land owner. This section specifically starts with a non-obstante clause w.r.t. Sec. 194-IA thereby meaning that TDS on consideration relating to JDA shall be governed by 194-IC only and not by 194-IA.
            It is pertinent to note here that the event of TDS occurs at the time of payment of monetary consideration though the taxation of capital gains u/s 45(5A) is deferred till the receipt of certificate of completion. Thus there will a mismatch in Form 26AS in each case related to a JDA wherein TDS on monetary portion of consideration would appear in one assessment year and the same consideration is taxable under capital gains in some future year.

Further, as per section 198, all sums deducted in accordance with provisions of chapter of TDS are deemed to be income received. A query which arises here is that, if TDS on monetary part is included as income of a previous year as per Sec. 198, and if as per Sec. 45(5A) stamp duty value as increased by gross consideration received in cash is to be treated as ‘full value of consideration’, will there be a double taxation to the extent of amount of TDS which already included as income? [Note: Section 48 where the term ‘full value of consideration’ is used, is applicable in context of all sub-sections of Sec. 45]

The Budget 2017 has increased the scope and power of Taxmen and has in some cases even reduced their accountability towards taxpayers. The provisions regarding TDS and TCS seek to widen the tax-net and to bring more and more people under the tax database. The gradual reduction in time-limits for completion of assessments is a positive step resulting in overall period of cases being reaching finality.