Under a typical joint development agreement, land owner contributes his land and enters into an arrangement with the developer to develop and construct a real estate project at the developer’s cost.

Joint Development Agreements (JDA) are prevalent in India as they are beneficial both for the owner and the developer. The owner gets a better built house and the developer gets his remuneration either in the form of a part of the building or money. Under a typical joint development agreement, land owner contributes his land and enters into an arrangement with the developer to develop and construct a real estate project at the developer’s cost.

The deal
Thus, land is contributed by the land owner and the cost of development and construction is incurred by the developer. The land owner may get consideration in the form of either lump sum consideration or percentage of sales revenue or certain percentage of constructed area in the project, depending upon the terms and conditions agreed upon between them. In this manner, the resources and efforts of land owner and developer are pooled together so as to bring out the maximum productive result. However, as is the case with any business deal, there are various ifs and buts attached to a JDA as well. Real estate development is subject to approvals from various government authorities, owing to which the consideration under a JDA is also dependent of these approvals. With things still not in the clear, the owner is expected to assess the tax liability and pay it. Is that fair, when the owner is not even sure, whether the deal will go through or fall apart?

Transfer of capital assets

Necessarily, there is a transfer of capital asset under the JDA and there should be a capital gain tax on the same, but various tax questions creep into the mind of the owner as to when to pay the tax? Would mere signing of a JDA lead to taxability in the hands of the owner? Is registration of the JDA is necessary for triggering the taxability? What if the consideration is not final at the time of signing the JDA and is actually dependent on an event/approval? Am I liable to pay tax on accrual basis or only when the consideration is received? There have been contradictory rulings on this matter till now and the income tax law was amended in this year’s Budget, which provides for taxation of such gains on completion of the project under certain circumstances. Till then, Indian tax authorities aggressively took the view that capital gains arise on signing of the development agreement and when the owner gives possession of the property to the developer.

Even the apex court of India has recently dealt with this matter and taken a favourable view. It laid down the law after considering the facts of the case and holding that the answer to these questions depends on two aspects:
Part performance of an unregistered agreement by the owner, by giving possession of the property for the limited purpose of development, would not amount to a transfer, and hence did not give rise to capital gains. Meaning thereby that where the owner continues to be the owner of the property throughout the development of the property, and did not seek to transfer rights similar to ownership to the developer, there was no transfer giving rise to capital gains.
As per income tax law, the income is liable to tax on accrual of receipt, whichever is earlier. But if the right of the owners to receive consideration is dependent on receipt of the necessary approvals and permissions for development of the property, the income can at best be called hypothetical income and hence cannot be taxed on accrual principle. This is an important aspect since these permissions need not necessarily come in and may lead to a situation where the JDA falls through. Accordingly, it becomes all the more important to agree to the terms of the JDA after a thorough analysis. The law on taxability arising on signing of a JDA is now clear and the court ruling makes it easier for the owners to assess their tax liability
Source : Financial Express


Provisions under the Income Tax Act, 1961 in relation to retention of records / books of accounts of a Company?

The applicable section of Income tax act are sections 44AA read with rule 6F – maintenance of books of accounts and Section 92D read with rule 10D for international transactions. Some case laws on this issue are as under:

Important decisions: The Income Tax Appellate Tribunal Delhi in its decision (1998) 97 Taxmann 273(Magzine)/60T.T.J. 278 has held that there is no rule made to the effect that which books of accounts are required to be made by the persons carrying on business covered u/s 44AA (2), therefore if the assessee has kept the details of Incomes and expenditures then no penalty shall be levied u/s 271A.

Similar decision was made by Amritsar bench of Tribunal in case of Sujan Singh v. AO [2007] 110 TTJ (Asr.) 818 wherein it was decided that Rule 6F has not been made applicable to the persons carrying on business or Profession other than those mentioned u/s 44AA(1) and covered u/s 44AA(2). The case of the assessee falls u/s 44AA (2), as the assessee was carrying on a business of poultry farm. the board has not specified or notified the books of account to be maintained by persons covered under sub-section 2 of section 44AA.Therefore, rule 6F is not applicable to the case of the assessee- ITO v. Dinesh Paper Mart [1999] 64 TTJ (Nag.) 674 : [1999] 70 ITD 274(Nag.) relied on.

Period of Preservation of Accounts/Records under Different laws are as under.


• A company is required to maintain its books of account and vouchers for a period of 8 years immediately preceding the current year.
• A S. 25 company is required to maintain its books of account and vouchers for a period of not less than 4 years.
• The books and papers of the Amalgamated/Transferor Company must be not be disposed of without the prior permission of the Central Government.
• The books and papers of a company which has been wound-up and of its liquidator shall not be destroyed for a period of 5 years from the date of its dissolution. They may be destroyed earlier with prior Central Government permission.
• Every Company (not being an NBFC) accepting public deposits must maintain a Register of deposits for 8 calendar years from the financial year in which the latest entry is made in the Register.
• The Register and Index of Members must be maintained permanently.
• The Register and Index of debenture-holders must be maintained for 15 years after the redemption of debentures.
• The copies of all Annual Returns and Certificates annexed thereto must be maintained for 8 years from date of filing with the ROC.


• Every NBFC accepting public deposits must maintain a Register of deposits for each branch and a consolidated Register for 8 calendar years following the financial year in which the latest repayment/renewal entry is made in the Register.
• NBFCs should maintain all necessary records of transactions for at least ten years from the date of cessation of transaction between the NBFCs and the client.


• Assessees are required to preserve the specified books of account for a period of 6 years from the end of the relevant assessment year, i.e., for a total period of 8 previous years. Thus, accounts must be maintained for P.Y. 2008-09 and onwards and accounts up to 31st March, 2008 (P.Y. 2007-08) need not be maintained for income-tax purposes.
• Period of six years gets extended if the assessment is reopened u/s. 147, till the time assessment is completed.
• Transfer Pricing documents and information specified under Rule 10D must be maintained for a period of 8 years from the end of the relevant assessment year, i.e., for a total period of 10 previous years.
• In a case where any income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax has escaped assessment for any assessment year — 16 years from the end of relevant assessment year.


• Records including books of account and source documents and data in any electronic media must be maintained for 5 years immediately after the financial year to which such records pertain.


• Records including books of account and source documents and data in any electronic media must be maintained for 5 years immediately after the financial year to which such records pertain.


• Under the SEBI Regulations for Stock Brokers, Merchant Bankers, Portfolio Managers, Underwriters, Debenture Trustees, FIIs, Custodian of Securities and Depository Participants the Records prescribed by SEBI under relevant Regulations must be maintained for a minimum period of 5 years. In case of any investigation by CBI or police books and records to be maintained up to settlement of case (see circular dated 4-8-2005).
• Under the SEBI Regulations for Venture Capital Funds and Mutual Funds the records prescribed by SEBI under relevant Regulations must be maintained for a minimum period of 8 years.
• SEBI Regulations for Registrar & Transfer Agents and Bankers to an Issue the records prescribed by SEBI under relevant Regulations must be maintained for a minimum period of 3 years.


• CAs should preserve records relating to audit and other work done by them, routine correspondence and other papers for a minimum period of 10 years

Chit fund scheme, Salient features, Auctions & Dividends

In the chit scheme, once a member gets the prize, his ticket is ignored for the later draws, tenders, auctions etc. Irrespective of the fact that the member is prized or not he continues to pay his share, throughout the process at each successive interval. Every member is identified with a ticket number. The member’s contribution is called the subscription. Each successive interval is called the installment. The collective sum which passes through the draw is called the prize. The person who organizes the whole exercise is called the foreman.

The salient features of a chit scheme are –
• Every member subscribes equally
• The subscription value to a member is the same for all installments.
• Every member receives the prize only once.
• All members receive the prize which is equal in value.
• The number of members (tickets or subscribers) and the number of installments are same
• The number of prizes and the number of members are same.
• The total subscription in value for one installment is equal to one prize in value.

Auction is a process of open competition among the subscribers to purchase the prize amount of the chit. It involves biddings by the subscribers. The purchase price will be as high as the necessity of a subscriber. The needs vary from subscriber to subscriber and accordingly the purchase price varies. The prize amount will be declared in favour of the member who is the highest bidder . After all, the motive of chit fund is only to enable the subscriber to meet the emergent needs like medical treatment, weddings and long distance travels. These cannot wait and the subscriber does not mind paying the price to get the money. Practically, the tendency to bid in auction is evident only in the beginning. Half way through, very few members have interest in the auction. For the last few installments, there may not be any auction at all. When there is no auction, the prize is declared by a draw. It is not open to the prizewinner to participate in a future auction.

Auction dividend is the amount of purchase price received in consideration of the prize from a prize-winner in an auction to distribute among the subscribers equally. The auction dividend is also called variously as auction benefit, auction discount and auction profit. How the auction dividend is shared depends upon the bye-laws or rules of the concern which conducts the chit. The maximum amount of discount a chit subscriber can forego is 30 per cent. The foregone chit discount is distributed among the chit subscribers as chit dividend. As an incentive for timely payment of the subscription and safeguard against delays conditions may be imposed for eligibility to get the auction dividend. Some foremen impose time limits for claiming the discount of auction dividend. In such cases the share of auction dividend of such of those members who could not remit their subscriptions in time is forfeited. They do not get the auction dividend.

Recovery & Stay Proceedings under the Income tax

Collection and Recovery of Tax – Chapter XVII

1. Dictionary, meaning.
Collection – An act or process of collecting – or gathering Law Lexicon – To collect – when used with reference to – the collection of money, it often implies much more than the mere act of receiving the money.
Recovery – Law Lexicon – The word “Recover” has a technical meaning in law whereby it signifies, to recover by action and by the judgment of the court.

2. This Chapter contains Section 190 to 234.
Collection – Deduction at source – B – Section 1 90-206B
Collection at source – BB – Section 206C-206CA
Advance payment of tax – C – Section 207-219 Recovery – Chapter XVII – D – Section 220 to 232

3. Miscellaneous – Chapter XXIII
Section – 281
Section – 281B

4. The procedure for recovery is provided in Schedule II to the Income Tax Act, 1961.
Some important Rules are as under:
(i) Rule 1 – provides definitions of certain words – Certificate, defaulter, execution, movable property, officer, etc.
(ii) Rule 2 – Notice to the defaulter after the certificate is drawn u/s 222 to pay within 15 days.
The provisions of this rule correspond to Rule 22(1), order 21 of the CPC. Under the Act, the notice is mandatory.
(iii) Rule 4 – Mode of Recovery.
(a) by attachment and sale of movable property.
(b) by attachment and sale of immovable property.
(c) by arrest of the defaulter and his detention in prison.
(d) by appointing a receiver for the management of the defaulter’s movable and immovable property.
Speakers Note:
• In order to be attachable under this chapter the property must be saleable property and the capable of being transferred.
• Even benami property is capable of being attached.
(iv) Rule 6 – The scope of purchaser’s title is defined.
(1) Rule 94, Order 21 of CPC.
(2) The implied covenant of absolute title in Section 5 5(2) of the Transfer of Property Act, 1882 is not applicable to sale in execution of Certificate.
The purchaser buys the property in such sale with all rights and defects.
Kunjikavna vs. Janaki (1957) Ker 321.
Caveat Emptor – let the purchaser beware.
Ahmedabad Municipal Corporation vs. Haji Abdul Gaffur AIR 1971 SC 101
(v) Rule 8 – procedure and order in which proceeds to be disposed off.
(vi) Rule 9 – Issue between the TRO and defaulters are not subject matter jurisdiction of civil courts unless and until there is a allegation of fraud.
(vii) Rule 10 – Provides for the properties which are exempt from attachment. Clause (2) of the Rule is very important. It vests discretion with TRO.
(viii) Rule 11 – Any person affected by the attachment or sale can raise objections before the TRO. Clause (6) provides that an order this Rule can be challenged by instituting a suit in a civil court.

5. Appeals against the order of TRO.
II Schedule Rule 86 of Income-tax Act, 1961, specifically provides right of appeals from the any original order passed by the TRO under the II Schedule, not being an order which is conclusive.
Such appeal shall be filed before the Chief Commissioner of Income Tax (CCIT) or Commissioner of Income Tax (CIT) [II Schedule Rule 86(1)] Every appeal under the rule 86 is to be presented within 30 days from the date of order appealed against [II schedule Rule 86(2)].
Pending the decision of appeal, execution of the certificate may be stayed, if the appellate authority so direct. [II schedule Rule 86(3)].
An appeal can be preferred against the order of rejection of claim / objection to attachment or sale of property passed under rule 11 (Rule Eleven of II schedule).
An appeal can also be preferred against the order of TRO – confirming a sale under Rule 63 of II schedule [see (1977) 106 ITR 77 (Bom) – Balkisandas vs. Addl Collector]

6. Provisional Attachment u/s 281B
Section 281B with an intention to protect the interests of the revenue empowers the Assessing Officer for provisional attachment of any property belonging to the assessee. The conditions precedent is ‘during the pendency of any proceedings’. The provisional attachment can be effected after prior approved for the Chief Commissioner, Commissioner, Director General or Director. The sub-section (2) provides that the provisional attachment shall not continue after expiry of 6 months from the date of the order. However, the first proviso provides that the Chief Commissioner, Commissioner, Director General or Director after recording the reasons in writing can extend the period of provisional attachment cannot exceed two years. It is very important to note that while computing period of two years the period starting from the date of filing application before settlement commission u/s. 254C to the date of an order u/s. 245D( 1) shall be excluded.
Circular explaining the provision of section 281 B (1976) 102 ITR St. 9 (20) Gandhi Trading vs. Asst. CIT (1999) 239 ITR 337 (341) (Bom.)
The Hon’ble Andhra Pradesh High Court in the case of Society for integrated Development in Urban and Rural Areas v CIT (2001) 252 ITR 642 (AP), observed that the power given to the authorities under Section 28 1B must be exercised with extreme care and caution. It should neither be used as a tool to harass the assessee nor should it be used in a manner which may have an irreversible detrimental effect on the business of the assessee. Attachment of bank accounts and the trading assets should be resorted to only as a last resort. In any event, attachment under section 281 B should not be equated with attachment in the course of recovery proceedings. In this case the Hon’ble Court has recognized difference in the proceedings under Section 222 and Section 28 1B.
The Apex Court has held that the membership right in the Stock Exchange is not property of the assessee and therefore it cannot be attached under section 28 1B. Please refer to Stock Exchange, Ahemadabad v Asst. CIT (2001) 248 ITR 209(SC). Vinay Bhubana v Stock exchange Mumbai JT 1999 (S) SC 164 AIR COMPANY LAW. Stock Exchange, Bombay Vs. V.S. Kandalgaonkar 261 ITR 577.

Applicability: Section 226 is applicable in the following situations –
(a) No certificate u/s 222 has been drawn by the Tax Recovery Officer, then the Assessing Officer can recover the tax through the following modes.
(b) Where a certificate has been drawn u/s 222, the Tax Recovery Officer, without any prejudice to the modes of recovery specified in Section 222, can recover by any one or more of the other modes u/s 226.

8. What is a Certificate of Recovery u/s 222(1)?
Certificate of Recovery [Section 222(1)]: When an Assessee is in default or deemed to be in default in payment of tax, the Tax Recovery Officer may draw up
a statement under his signature in Form No. 57 specifying the amount of arrears due from the Assessee. Such a statement is called certificate.
The Assessee cannot dispute the correctness of any certificate drawn up by the TRO on any ground. [Section 224]
It is lawful on the part of the TRO to cancel the certificate for any reason he thinks necessary so to do or to correct any clerical or arithmetical mistake therein. [Section 224]

9. Assessee in default –
Assessee deemed to be in default [section 220(4)]: the assessee shall be deemed to be in default if the amount specified in the notice u/s 156 is not paid within the time allowed or within such extended time u/s 220(3) Amount of default [Section 220(5)]: where the payment is allowed by installments, and if the assessee commits default in paying any one
installment, then amount of default shall be the whole amount outstanding at the time of default. All the subsequent installments shall be deemed to be in default on the same date as the installment actually in default. Circumstances under which the Assessee is not deemed to be in default:
(a) If the Assessee presents an appeal to the CIT(Appeals), the Assessing Officer may, in his discretion and subject to such conditions as he may think fit to impose, treat the Assessee as not being in default as long as the appeal is not disposed of. [Section 220(6)]
(b) Where the income of an Assessee arising in India is assessed in a Country where the laws prohibit or restrict the remittance of money to India, such as Assessee shall not be treated as Assessee in default in respect of tax due on the income which cannot be brought into India. [Section (220(7)]
(c) Where the demand in dispute has arisen because the Assessing Officer has adopted an interpretation of law in respect of which there are conflicting High Court decisions and the Department has not accepted the interpretation of the Court, the Assessee shall not be deemed in default. [Circular No. 530/6-3-1989]
(d) Where the demand in dispute relates to issues which are decided earlier in the Assessee’s favour by an appellate authority/Court in his own case (say, for preceding assessment years), the Assessee shall not be deemed to be in default to the extent of tax liability relatable to such disputed points. [Circular No. 530/6-3-1989]
As per section 220 the assessee is required to pay the tax with in of 30 days from the date of service of the demand notice at the place and to the person mentioned in the notice. For the service of notice the officer has to follow the procedure of order v Rule 17,18 & 19 of the CPC. Here it is important to note that service of a notice means something subsequent and distinct from the making of the order. Srevice of a notice of demand implies formal communication of the notice of demand after it has been made of the completion of proceedings.
In, Sri Mohan Wahi v CIT (2001) 248 ITR 799 (SC) the Hon’ble Apex Court held that valid service is mandatory, failure to serve notice recovery proceedings not valid.
If the notice of demand is sent by registered post. As per section 27 of the General Clauses Act 1897, presumption is service is proper. In CIT vs. Mulchand Surana (1958) 28 ITR 684 (Cal.). However, the presumption can be rebutted by filing an affidavit. When service on person if it is served on the adult family member is proper service. Though the Brother is not authorized to receive the notice of demand.

10. Recovery of Company Dues from director:
Under Section 179: Directors of a Private Company are personally liable for tax due if the person was director at any time during the period for which the tax is due ans cannot be recovered. Under the provisions of this section the directors are jointly and severally liable for the tax due. The provisions apply for a private company which is later converted into a public company.
• Director is liable in respect of arrears of tax of company only for assessment year when he was functioning as a director; further arrears of company for period prior to its becoming deemed public company coumd not be recovered from director as held in the case of Arvind Kumar Gupta Vs. TRO 276 ITR 373 (All) .
• Revenue has to establish that recovery of tax due cannot be made against company and then, and than alone would it be permissible for revenue to initiate action against the director or directors responsible for conducting affairs of company during the relevant accounting period as held in the case of Indubhai T. Patel Vs. ITO 146 Taxman 163 (Guj.).

11. Filing Appeal and Stay of Demand before the CIT and Tribunal
(i) Valid Appeal must be pending.
The appeal must be filed within 30 days of receipt of the order. An appeal filed beyond 30 days of service of the impugned order is not a valid appeal. It is very important to note that the appeal should satisfy the conditions. In Umesh Popatlal Shah v DCIT. The Mumbai tribunal held that the appeal should be treated as belated till the tax was paid and consequently condonation of delay to be considered, if there is no valid appeal is pending there is no question of granting an stay. Section 249 (4) refers only tax not interests under section 234 A, 234B and 234C not paid the appeal is maintainable. Subbaiah Nadar v Asst CIT (2003) 84 ITD 55 (Chenai). In Harsad Shantilal Mehata v Custodian & others (1998) 231 ITR 871 (SC) the apex court held that tax will not include interest and penalty.

12 Stay by assessing officer.
Section 220(6) provides that where an assessee has preferred an appeal before the first appellate authority disputing any part or the shole of the amount demanded, the assessee may make an application to the assessing officer and the assessing officer may, in his discretion and subject to such conditions as he may think fit treat the assessee not being in default in respect of the amount in dispute even though, the time for payment has expired, as long as such appeal remains undisposed off. The discretion u/s 220(6) is to be exercised by the by the Assessing Officer and not the commissioner as held by the Kerala High Court in the case of Pradeep Ratanshi Vs Asst CIT 221 ITR 502 .
Here the A.O. has the power coupled with responsibility, he should use his discretion in the best possible manner ensuring there is no genuine hardship caused to the assessee at the same time ensure that there is no loss of revenue to the Government. In any case the A.O. shall provide reasons for granting stay or rejecting the same by passing an order in writing.

13. Instruction For Recovery Of Tax Demands.
No 1914 -F. NO 404/72/93-ITCC dt 2-12-1993.
(i) Stay petition must be disposed of with in two weeks.
(ii) Appeal effect must be given with in two weeks of receipt of order.
(iii) Rectification application with in two weeks of receipt of application
(iv) Higher authorities should dispose of stay application with in two weeks.
1. If issue decided earlier in favour buy appellate authority.
2. Conflicting of decision of High Courts.
3. Decision of High Court not accepted by the dept
Circular no 530 dt 6-3-1989 176 ITR (st) 240
Circular no 589 dt 16-1-1991.187 ITR (st) 79.
Assurance by Minister of Revenue Lok Sabha dt 11-12-70.
Request under section 220 (6) cannot be summarily being dismissed. Shri Sakarpal Vibag Jangal Kmdar Sahakari Mandali Ltd v ITO (1992) 198 ITR 68(Guj).
Instruction no 96F no 1/6/69 dt 21-8-1969 165 ITR 650 (Ker).N. RAJAN Nair v ITO (1987)

14 Guidelines For Tax Authorities To Stay The Recovery:
(i) KEC International Ltd v B. R. Balakrishnan (2001) 251 ITR 158 (BOM)
(ii) Golam Momen vs. Dy. CIT (2002) 256 ITR 754(Cal).
Where the income determined on assessment is more than twice the income returned, collection of tax should be stayed during appeal.
(iii) Maharana Shri Bhagwat Singahiji of Mewar v ITAT (1997) 223 ITR 192 (Raj).

15. Stay By Commissioner Of Income Tax.
(i) Prem Pakash Tripathi v CIT (1994) 208 ITR 461 (ALL) (463,464).
(ii) Paulsons Litho Works v ITO (1994) 208 ITR 676(Mad) (689).
(iii) Tin Mfg Co of India v CIT(1995) 212 ITR 451(All) 452.
(iv) Bongaigan Refinary & Petro Chemicals v CIT (1999) 239 ITR 873 (Gauh).

16. Stay by Tribunal. Rule 35 A of the Appellate Tribunal Rules. Rs 500 / Apendix X (E)
Stay petition before the tribunal can be filed only when a valid the appeal is pending before the tribunal. Therefore, when an appeal is pending before the CIT (A) commissioner rejected the stay cannot be filed before the tribunal. You have only remedy to approach High court under article 226 of the constitution of India
Unless the commissioner rejects the application the tribunal will not entertain the stay application.
If assessee agrees for installment and thereafter cannot approach for stay.
If commissioner refusing to give in writing for rejecting the stay the assessee has to file an affidavit stating the fact than only the stay will be kept for hearing.

17. Whether Separate Application Is Required For Each Appeal.
The Mumbai tribunal has held that one application is sufficient Chiranjilal vs. Goenka v WTO (2000) 66 TTJ (Mum) 728.However in Wipro Ltd v ITO (2003) 86 ITD 407 (Bang) separate application required to be filed for each appeal separately.

18. When application is pending the revenue authorities should not recover the tax.
(i) Mahindra & Mahindra Ltd v CCE (1992) ELT 505 (Bom).
(ii) RPG Enterprises Ltd v Dy CIT (2001) 251 ITR 20(AT)
(iii) Western Agencies (2003) 86 ITD 462(Mad)
(iv) Security and Detective Bureau ltd v Asst CIT (1993) 44 ITD 452 (Mad.)

19. Tribunal has power to pass interim order.
(i) Bulk India Transport co v CIT (2004) 266 ITR 144(ALL).

20. The tribunal power to stay the assessment proceedings.
(i) Ritz Ltd v Vyas (1990) 185 ITR 311(Bom).
(ii) ITO v Khalid Mohdi Khan (1977) 110 ITR 79(AP).
(iii) Puranmal v ITO (1975) 98 ITR 39 (Pat).

21. Once the stay granted the appeals will have to be disposed on priority basis.
(i) Endeavourer Investments Ltd v Dy CIT (1999)70 ITD 17 (Chennai) (TM).

22. Time Limit For Stay Granted Appeals To Be Disposed Off :
Proviso to section 254 (2A) deals with the Time limit within which the stay granted matters should be disposed off. The timelimiet provided in the first proviso is 1 80days and if no order was passed within the time limit then the stay granted stands vacated. Prior to 01-06-2007 the third proviso to the section provided that the Tribunal may extend the time period for stay granted matters to 365 days if the delay caused could not be attributed to the assessee. But the Finance Act, 2007, brought about an amendment whereby the Tribunal has no power to grant extension for stay granted matter. After the amendment, the Bombay High Court in the matter of Narang Developers Vs. Income-tax Appelate Tribunal 295 ITR 22 held that the the Tribunal has the power to extend the period of stay of good cause being shown and on being satisfied that matter could not be heard abd disposed of for reasons not attributable to the assessee. This decision resulted in the Act being amended again by the Finance Act, 2008, whereby the Tribunal has been provided with the power to extend the stay granted for a maximum period 365 days if the other conditions are satisfied.

23. Priority for tax revenue over secured creditors.
Dena Bank v Bhikhabhai Prabhudass Parekh & co Ors (2001) 247 ITR 165 (SC). Tax due to Govt is crown Debt. Which was recognized by India High courts, prior to 1950 “Law in force “ within the meaning of Article 372(1) of the constitution of India and will have priority over others.

(i) Circular no 551 dt. 23-1-1990. (1990) 183 ITR (ST) 7 (54) explaining the scope and effect of collection & recovery of tax.

Taxability of share premium received by closely held companies in excess of Fair Market Value

Section 56(2)(viib) of the Income Tax Act, 1961, provides that there shall be chargeable to income-tax under the head “Income from other sources” the following:

“……………(viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares:

Provided that this clause shall not apply where the consideration for issue of shares is received—
(i) by a venture capital undertaking from a venture capital company or a venture capital fund; or
(ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf.
Explanation.—For the purposes of this clause,—
(a) the fair market value of the shares shall be the value—
(i) as may be determined in accordance with such method as may be prescribed; or
(ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature,

whichever is higher;
(b) “venture capital company”, “venture capital fund” and “venture capital undertaking” shall have the meanings respectively assigned to them in clause (a), clause (b) and clause (c) of Explanation to clause (23FB) of section 10.
Issues that need to be addressed under clause (viib) of sub-section (2) of section 56:

(i) Cut off time to examine the status of Company: The status of company at the time of receipt of consideration is relevant and not its status at the time of allotment of shares. Hence, if the company was not closely held company at the time of receipt of consideration, no taxability under clause (viib) arises. Further, if the company was closely held company at the time of receipt of consideration but is converted to a widely held company at the time of allotment of shares the question of taxability under new clause (viib) needs to be considered.

(ii) Consideration was received from a non-resident who became a resident at the time of allotment: As observed in point (i) above, since clause (viib) applies to consideration received from a resident, the residential status at the time of receipt of consideration by company and not residential status at the time of allotment is relevant. Hence, as person from whom the consideration was received was non-resident at the time of receipt of consideration, no question of taxability under new clause (viib) arises.

(iii) Consideration received in kind taxable under clause (viib):The word “any” is used in Clause (viib) and it refers to “any consideration for issue of shares” and hence will take in its scope consideration received in kind as well. It is worthwhile to note here that clause (viib) consideration only deciphers about of how fair market value of shares will be determined. The clause is silent on how the consideration in kind will be valued for comparison with fair market value of shares.

(iv) Taxation under section 56(2)(viib) as well as section 68: The proviso to section 68 states that any explanation offered by assessee-company, being a closely held co., in respect of share application money/share premium/share capital credited in its books shall be deemed to be not satisfactory unless the resident in whose name such credit is recorded also offers a satisfactory explanation about the nature and source of such sum so credited. Therefore, if the explanation that amounts represent share capital/share premium/share application is deemed unsatisfactory, then Revenue cannot resort to section 56(2)(viib) which can be invoked only when amounts received are established to represent consideration for issue of shares. Nor can the assessee-company without discharging the additional onus under section 68 insist that section 56(2)(viib) be applied as that is more beneficial. Thus, it appears that double taxation under both provisions is not possible.

Proviso to Section 68 inserted by Finance Act, 2012 w.e.f. April 1, 2013 read as under:
“Provided that where the assessee is a company (not being a company in which the public are substantially interested), and the sum so credited consists of share application money, share capital, share premium or any such amount by whatever name called, any explanation offered by such assessee-company shall be deemed to be not satisfactory, unless—

(a) the person, being a resident in whose name such credit is recorded in the books of such company also offers an explanation about the nature and source of such sum so credited; and

(b) such explanation in the opinion of the Assessing Officer aforesaid has been found to be satisfactory….”
It has been held in Subhlakshmi Vanijya (P.) Ltd. v. Commissioner of Income-Tax-I, Kolkata, [2015] 60 taxmann.com 60 (Kolkata – Trib.), that this Proviso to Section 68 casting onus on closely held company to explain source of share capital is applicable with retrospective effect.

(v) Refund of share application if shares are not allotted:As per the wordings of the clause, it follows that mere receipt of consideration will attract taxability under new section 56(2)(viib) and hence subsequent refund is irrelevant for the purpose of this clause.

(vi) Deduction of loss if fair market value exceeds the consideration: If FMV exceeds the consideration whether a deduction of ‘loss’ will be allowed is the not adequately deal in the Act. An inference can be drawn from Section 92(3) of the Act which provides that transfer pricing provisions (which contemplate a rewrite of international transactions and specified domestic transactions by substituting arm’s length price for actual transfer price) can be invoked only where it benefits the revenue and not where it benefits the assessee. In the absence of a clear provision, along the lines of section 92(3) in section 56(2)(viib), it is possible to argue that where FMV exceeds consideration, the difference can be claimed as a loss since loss is nothing but negative income.

Benefit of indexation to Charitable Trust

Section 11(IA) is not meant for calculation of capital gains tax but is to operate after capital gains are worked in accordance with the provisions of Sections 45 to 55 [Akhara Ghamanda Dass v. Asstt CIT [68 TTJ 244 (Asr)]
In the light of above, whether a charitable trust will get the benefit of indexation?

Yes, Explanation (ii) to this sub-section provides that “cost of the transferred asset” means the aggregate of the cost of acquisition (as ascertained for the purposes of Sections 48 and 49) of the capital asset which is subject to transfer and cost of any improvement there with the meaning assigned to that expression in Section 55(1)(b) of the Act.

Further, second proviso to Section 48 provides that where long term capital gain arisens from the transfer of a long term capital asset, other than capital gains arising to non-resident from the transfer of shares in, or debentures of an Indian company referred to in the first proviso, the provision of clause (ii) [i.e. the cot of acquisition of the asset and the cost of improvement thereto] shall have effect as if for the words “cost of acquisition” and cost of any improvement the words “indexed cost of acquisition” and “indexed cost of any improvement had respectively been substituted.

Thus reading the above, it is clear that capital gains has to be calculated by the assessee including trust as Per provisions of Section 45 to 55 of the Income tax Act, 1961. This is also supported in para 14 of Akhara Ghamanda Das v. ACIT [114 Taxman 27 (Asr)], which reads as under:

“In fact this section is to operate after capital gains are worked in accordance with Chapter E of the IT Act. This gives an additional benefit to the appellant, if, he has to make a claim that income arising out of capital gains is to be exempted under section 11(1) then he has to fulfil various conditions mentioned in section (1A).”

Difference between Explanation to Sections 11(2) and 11(3) of Income tax Act 1961

What is the difference between the explanation given under Sections 11(2) and 11(3)?.

Explanation below Section 11(2) provides that any amount paid or credited out of income from property held under wholly charitable trust or partly charitable trust which is not applied but accumulated or set apart to any trust or institution or to any fund either during the period of accumulation or thereafter shall not be treated as application of income for charitable or religious purposes. Thus, payment to other trusts and institutions out of income from property held under trust in the year of receipt will continue to be treated as application of income. However, any such payment out of accumulated income shall not be treated as application of income and will be taxed.

While Section 11(3) provides that if in any year the income which is accumulated for the specified purpose or purposes of the trust is applied to purposes other than charitable or religious purpose or ceases to be accumulated or set apart for such application to such purposes, it will become chargeable to tax as the income of that year. Further, if in any year, the accumulations cease to remain invested in Government securities or other approved securities or deposited in any account in the Post Office Savings Bank or with a banking company, co-operative bank etc.; or with a financial corporation, then also the income so accumulated will become chargeable to tax as income of that year. It further provides that if accumulations are not utilised for the specified purposes during the period of accumulation or in the year immediately following the expiry of that period, then, the accumulations to that extent they are not so utilised, shall be chargeable to tax as income of the previous year immediately following the expiry of that period.