TAXATION- Concept Book

ANALYSIS 1 Rule 6DD – Cases and circumstances in which a payment or aggregate of payments exceeding Rs.60,000 may be made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft No disallowance u/s 40A(3) shall be made and no payment shall be deemed to be the profits and gains of business or profession u/s 40A(3A) where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds Rs.20,000 in the cases and circumstances specified hereunder, namely: (a) where the payment is made to - (i) the Reserve Bank of India or any banking company as defined in section 5(c) of the Banking Regulation Act, 1949; (ii) the State Bank of India or any subsidiary bank as defined in section 2 of the State Bank of India (Subsidiary Banks) Act, 1959; (iii) any co-operative bank or land mortgage bank; (iv) any primary agricultural credit society or any primary credit society as defined u/s 56 of the Banking Regulation Act, 1949; (v) the Life Insurance Corporation of India established u/s 3 of the Life Insurance Corporation Act, 1956: (b) where the payment is made to the Government and, under the rules framed by it, such payment is required to be made in legal tender; (c) where the payment is made by – (i) any letter of credit arrangements through a bank, (ii) a mail or telegraphic transfer through a bank; (iii) a book adjustment from any account in a bank to any other account in that or any other bank; (iv) a bill of exchange made payable only to a bank; (v) the use of electronic clearing system through a bank account; (vi) a credit card; (vii) a debit card. CFP Level 2 - Module 2 – Taxation - India Page 545

Explanation For the purposes of this clause and clause (g), the term \"bank\" means any bank, banking company or society referred to in sub-clauses (i) to (iv) of clause (a) and includes any bank not being a banking company as defined in section 5(c) of the Banking Regulation Act, 1949, whether incorporated or not, which is established outside India; (d) where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee (e) where the payment is made for the purchase of - (i) agricultural or forest produce; or (ii) the produce of animal husbandry (including livestock, meat, hides and skins) or dairy or poultry farming; or (iii) fish or fish products; or (iv) the products of horticulture or apiculture, to the cultivator, grower or producer of such articles, produce or products; (f) where the payment is made for the purchase of the products manufactured or processed without the aid of power in a cottage industry, to the producer of such products; (g) where the payment is made in a village or town, which on the date of such payment is not served by any bank, to any person who ordinarily resides, or is carrying on any business, profession or vocation, in any such village or town; (h) where any payment is made to an employee of the assessee or the heir of any such employee, on or in connection with the retirement, retrenchment, resignation, discharge or death of such employee, on account of gratuity, retrenchment compensation or similar terminal benefit and the aggregate of such sums payable to the employee or his heir does not exceed Rs.50,000; (i) where the payment is made by an assessee by way of salary to his employee after deducting the income-tax from salary in accordance with the provisions of section 192 of the Act, and when such employee - (ii) is temporarily posted for a continuous period of 15 days or more in a place other than his normal place of duty or on a ship and (iii) does not maintain any account in any bank at such place or ship; CFP Level 2 - Module 2 – Taxation - India Page 546

(j) where the payment was required to be made on a day on which the banks were closed either on account of holiday or strike; (k) where the payment is made by any person to his agent who is required to make payment in cash for goods or services on behalf of such person; (l) where the payment is made by an authorised dealer or a money changer against purchase of foreign currency or travellers cheques in the normal course of his business. 2. Circular no. 10/2008, dated 05-12-2008 (1) The following clarifications are being issued for proper implementation of rule 6DD of the Income-tax Rules, 1962:— (i) The expression ‘fish or fish products’ used in rule 6DD(e)(iii) would include ‘other marine products such as shrimp, prawn, cuttlefish, squid, crab, lobster etc.’ (ii) The 'producers' of ‘fish or fish products' for the purpose of rule 6DD(e) of I.T. Rules, 1962 would include, besides the fishermen, any headman of fishermen, who sorts the catch of fish brought by fishermen from the sea, at the sea shore itself and then sells the fish or fish products to traders, exporters etc. (2) It is further clarified that the above exception will not be available on the payment for the purchase of fish or fish products from a person who is not proved to be a 'producer' of these goods and is only a trader, broker or any other middleman, by whatever name called. (3) The Board is of the view that the expression ‘the produce of animal husbandry’ used under rule 6DD would include ‘livestock and meat’ and in a case where payment exceeding rupees twenty thousand is made to a producer of the products of animal husbandry (including livestock, meat, hides and skins) otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft for the purchase of such produce, no disallowance should be attracted u/s 40A(3) read with rule 6DD. It is further clarified that exception will not be available on the payment for the purchase of livestock, meat, hides and skins from a person who is not proved to be the producer of these goods and is only a trader, broker or any other middleman by whatever name called. (4) Section 40A(3) refers to the expenditure incurred by the assessee in respect of which payment is made. It means all outgoings are brought under the word ‘expenditure’ for the purpose of the sub-section. The expenditure for purchasing the stock-in-trade is one of such outgoings. (Attar Singh Gurmukh Singh 1991 – SC) CFP Level 2 - Module 2 – Taxation - India Page 547

(5) Even if the payments were made by way of advances and were ultimately treated as discharging the liability to pay the price of the goods purchased, the payments so made must be considered to fall within the expression ‘expenditure’ incurred for payment of the price of the goods. (Kejriwal Iron Stores 1988–Raj.) (6) Where the payment was made partly in cash and partly by way of post-dated cheques, section 40A(3) will apply only if the cash payment exceeded the prescribed limit. (H.A. Nek Mohd. & Sons 1982–All.) (7) Section 40A(3) concentrates on the size of the payment and the manner of the payment. If different items are included in a single bill, it would not be right to dissect the bill and find out whether each item of expenditure is above the statutory limit; the proper way is to read the entries in a wholesome fashion. (Shree Shanmuga Gunny Stores 1984–Mad.) (8) Irrespective of any number of transactions, where the amount does not exceed the above amount in each transaction, the rigours of section 40A(3) will not apply. (Triveniprasad Pannalal 1997–MP) (9) When income is estimated on gross profit rate, without allowing any deductions, there would be no need to look into the provisions of section 40A(3) and rule 6DD (Banwari Lal Banshidhar 1998–All.) 3. Circular No. 34 dated 5/3/1970 Question: Does the requirement apply also to loan transactions? Answer: No, because advancing of loans or repayment the principal amount of the loan do not constitute expenditure deductible in computing the taxable income. However, interest payments in amounts exceeding Rs.20,000 in a day are required to be made by crossed bank cheques or drafts, as interest is a deductible expenditure. Question: Does the requirement apply to payments made by commission agents (arhatias) for goods received by them for sale on commission or on consignment basis? CFP Level 2 - Module 2 – Taxation - India Page 548

Answer: No, this is because such a payment is not an expenditure deductible in computing the taxable income of the commission agent (arhatiya).For the same reason, the requirement does not also apply to advance payments made by the commission agent to the party concerned against supply of goods. However, where a commission agent (arhatiya) purchases goods on his own account, and not on commission basis, the requirement will apply in that case. The provisions of section 40A(3) would apply in computing the income under the heads “Profits and gains of business or profession” and “Income from other sources” as per section 58(2). All payments in excess of Rs.20,000 in a day whether for goods or services obtained for cash or credit, which are deductible in computing the income, have to be made by crossed cheque or bank draft. Thus, the price of goods purchased for resale or use in manufacturing process or payments for services will be covered by the provisions of section 40A(3).However, the section will not apply to repayment of loans or payment towards the purchase price of capital assets such as plant and machinery not for resale. 4. Purchase of processed fish which is fresh fish meat obtained after removal of its inedible portions like head, tail, shell, etc., would fall within definition of ‘fish products’ under rule 6DD entitling assessee to get benefit of exemption from operation of section 40A(3). (Inters as, Sea Food Exporters 2010–Ker.) Mode of taking or accepting certain loans and deposits – Section 269SS No person shall take or accept from any other person (hereafter in this section referred to as the depositor), any loan or deposit otherwise than by an account payee cheque or account payee bank draft or use of electronic clearing system through abank account if, - (a) the amount of such loan or deposit or the aggregate amount of such loan and deposit; or (b) on the date of taking or accepting such loan or deposit, any loan or deposit taken or accepted earlier by such person from the depositor is remaining unpaid (whether repayment has fallen due or not), the amount or the aggregate amount remaining unpaid; or (c) the amount or the aggregate amount referred to in clause (a) together with the amount or the aggregate amount referred to in clause (b),is Rs.20,000 or more: CFP Level 2 - Module 2 – Taxation - India Page 549

Provided that the provisions of this section shall not apply to any loan or deposit taken or accepted from, or any loan or deposit taken or accepted by- (a) Government; (b) any banking company, post office savings bank or co-operative bank; (c) any corporation established by a Central, State or Provincial Act; (d) any Government company as defined in section 617 of the Companies Act, 1956; (f) such other institution, association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette: Provided further that the provisions of this section shall not apply to any loan ordeposit where the person from whom the loan or deposit is taken or accepted and the person by whom the loan or deposit is taken or accepted are both having agricultural income and neither of them has any income chargeable to tax under this Act. Explanation For the purposes of this section- (i) “banking company” means a company to which the Banking Regulation Act, 1949, applies and includes any bank or banking institution referred to in section 51 of that Act; (ii) “co-operative bank” shall have the meaning assigned to it in Part V of the Banking Regulation Act, 1949; (iii) “loan or deposit” means loan or deposit of money. CFP Level 2 - Module 2 – Taxation - India Page 550

ANALYSIS 1. There shall be violation of section 269SS only if following conditions are satisfied: • Loan being taken is otherwise than by an account payee cheque or account payee bank draft • After including loan being taken with loan already taken & unpaid (if any), total amount repayable shall become Rs.20,000 or more. • It does not matter how the original loan was taken. 2. Loan taken from 2 separate persons shall not be aggregated for this purpose. 3. In the present times many banking transactions take place by way of internet banking facilities or by use of payment gateways. Accordingly, it is proposed to amend the provisions of the said sections 269SS and 269T so as to provide that any acceptance or repayment of any loan or deposit by use of electronic clearing system through a bank account shall not be prohibited under the said sections if the other conditions regarding the quantum etc. are satisfied. These amendments will take effect from 1st April, 2015 and will, accordingly, apply in relation to assessment year2015-16 and subsequent assessment years. Mode of repayment of certain loans or deposits – Section 269T No branch of a banking company or a co-operative bank and no other company or co-operative society and no firm or other person shall repay any loan or deposit made with it otherwise than by an account payee cheque or account payee bank draft drawn in the name of the person who has made the loan or depositor by use of electronic clearing system through a bank account if - (a) the amount of the loan or deposit together with the interest, if any, payable thereon, or (b) the aggregate amount of the loans or deposits held by such person with the branch of the banking company or co-operative bank or, as the case may be, the other company or co-operative society or the firm, or other person either in his own name or jointly with any other person on the date of such repayment together with the interest, if any, payable on such loans or deposits, is Rs.20,000 or more: Provided that where the repayment is by a branch of a banking company or co-operative bank, such repayment may also be made by crediting the amount of such loan or deposit to the CFP Level 2 - Module 2 – Taxation - India Page 551

savings bank account or the current account (if any) with such branch of the person to whom such loan or deposit has to be repaid: Provided further that nothing contained in this section shall apply to repayment of anyloan or deposit taken or accepted from - (i) Government; (ii) any banking company, post office savings bank or co-operative bank; (ii) any corporation established by a Central, State or Provincial Act; (iv) any Government company as defined in section 617 of the Companies Act, 1956; (v) such other institution, association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in this behalf in the Official Gazette. Explanation For the purposes of this section - (i) “banking company” shall have the meaning assigned to it in clause (i) of the Explanation to section 269SS; (ii) “co-operative bank” shall have the meaning assigned to it in Part V of the Banking Regulation Act, 1949; (iii) “loan or deposit” means any loan or deposit of money which is repayable after notice or repayable after a period and, in the case of a person other than a company, includes loan or deposit of any nature. Penalty for failure to comply with the provisions of section 269SS – Section 271D (1) If a person takes or accepts any loan or deposit in contravention of the provisions of section 269SS, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit so taken or accepted. (2) Any penalty imposable under sub-section (1) shall be imposed by the Joint Commissioner. CFP Level 2 - Module 2 – Taxation - India Page 552

Penalty for failure to comply with the provisions of section 269T – Section 271E (1) If a person repays any loan or deposit referred to in section 269T otherwise than in accordance with the provisions of that section, he shall be liable to pay, by way of penalty, a sum equal to the amount of the loan or deposit so repaid. (2) Any penalty imposable under sub-section (1) shall be imposed by the Joint Commissioner. 3.4.4. Dividend and Bonus Stripping Provisions - Shares, MF Schemes Including with Reinvestment Option BOND WASHING TRANSACTION (1) Where the owner of any securities (in this sub-section referred to as \"the owner\") sells or transfers those securities, and buys back or reacquires the securities, then, if the result of the transaction is that any interest becoming payable in respect of the securities is receivable otherwise than by the owner, the interest payable as aforesaid shall, whether it would or would not have been chargeable to income-tax apart from the provisions of this sub-section, be deemed, for all the purposes of this Act, to be the income of the owner and not to be the income of any other person. Explanation The references in this sub-section to buying back or reacquiring the securities shall be deemed to include references to buying or acquiring similar securities, so, however, that where similar securities are bought or acquired, the owner shall be under no greater liability to income-tax than he would have been under if the original securities had been bought back or reacquired. (2) The provisions of sub-section (1) shall not apply if the owner proves to the satisfaction of the Assessing Officer – (a) that there has been no avoidance of income-tax, or (b) that the avoidance of income-tax was exceptional and not systematic and that there was not in his case in any of the three preceding years any avoidance of income- tax by a transaction of the nature referred to in sub-section (1). CFP Level 2 - Module 2 – Taxation - India Page 553

DIVIDEND STRIPPING (1) Where - (a) any person buys or acquires any securities or unit within a period of 3 months prior to the record date; (b) such person sells or transfers - (i) such securities within a period of 3 months after such date; or (ii) such unit within a period of 9 months after such date; (c ) the dividend or income on such securities or unit received or receivable by such person is exempt, then, the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purposes of computing his income chargeable to tax. CFP Level 2 - Module 2 – Taxation - India Page 554

ANALYSIS 1. Section 94(7) nowhere requires that securities/units shall be held as capital asset. Therefore, even if securities/units are held as stock-in-trade, section 94(7) shall apply. 2. For the applicability of section 94(7), all the following conditions needs to be satisfied: a) Purchase of securities/units within last 3 months of record date b) Receipt of dividend/income which is exempt c) Resale of securities/units within 3/9 months of record date d) There is loss on resale. 3. If loss on resale exceeds amount of dividend/income, excess shall be allowed to be claimed by the assessee. BONUS STRIPPING (1) Where - (a) any person buys or acquires any units within a period of 3 months prior to the record date; (b) such person is allotted additional units without any payment on the basis of holding of such units on such date; (c ) such person sells or transfers all or any of the units referred to in clause (a) within a period of 9 months after such date, while continuing to hold allor any of the additional units referred to in clause (b), then, the loss, if any, arising to him on account of such purchase and sale of all or any of such units shall be ignored for the purposes of computing his income chargeable to tax and notwithstanding anything contained in any other provision of this Act, the amount of loss so ignored shall be deemed to be the cost of purchase or acquisition of such additional units referred to in clause (b) as are held by him on the date of such sale or transfer. CFP Level 2 - Module 2 – Taxation - India Page 555

ANALYSIS 1. Section 94(8) applies only to units and not to shares. 2. Applies even if units held as stock-in-trade. 3. For the applicability of section 94(8), all the following conditions needs to be satisfied: a) Purchase of units within last 3 months of record date b) Allotment of additional units without any payment c) Resale of all or some of the units within 9 months of record date d) There is loss on resale e) Assessee continues to hold atleast 1 of the additional units on the date of resale. 4. If loss is treated as CoA of additional units, other provisions of capital gains shall apply accordingly specifically of indexation. Explanation For the purposes of this section, - (a) “record date” means such date as may be fixed by – (i) a company for the purposes of entitlement of the holder of the securities to receive dividend; or (ii) a Mutual Fund or the Administrator of the specified undertaking or the specified company as referred to in the Explanation to section 10(35), for the purposes of entitlement of the holder of the units to receive income, or additional unit without any consideration, as the case may be; (b) “securities” includes stocks and shares; (c) securities shall be deemed to be similar if they entitle their holders to the same rights against the same persons as to capital and interest and the same remedies for the enforcement of those rights, notwithstanding any difference in the total nominal amounts of the respective securities or in the form in which they are held or in the manner in which they can be transferred; CFP Level 2 - Module 2 – Taxation - India Page 556

(d) “unit” shall have the meaning assigned to it in clause (b) of the Explanation to section 115AB. (i.e. “unit” means unit of a mutual fund specified u/s 10(23D) or of the Unit Trust of India) Example R, an individual resident in India, bought 1,000 equity shares of Rs.10 each of A Ltd. at Rs.50 per share on 30.5.2019. He sold 700 equity shares at Rs.35 per share on 30.9.2019 and the remaining 300 shares at Rs.25 per share on 20.12.2019. A Ltd. declared a dividend of 50%, the record date being 10.8.2019. R sold on 1.2.2020, a house from which he derived a long-term capital gain of Rs.75,000. Compute the amount of capital gain arising to R for the assessment year 2020-21. Answer The amount of capital gains arising to R has to be computed applying the provisions of subsection (7) of section 94, which provides that “where: (a) any person buys or acquires any securities or unit within a period of three months prior to the record date; and (b) such person sells or transfers - (c) such securities within a period of three months after such date; or (d) such unit within a period of nine months after such date; and (e) the dividend or income on such securities or unit received or receivable by such person is exempted, then the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purpose of computing his income chargeable to tax”. For this purpose, “record date” means such date as may be fixed by a company for the purpose of entitlement of the holder of the securities to receive dividend and “securities” includes stocks and shares. CFP Level 2 - Module 2 – Taxation - India Page 557

Computation of capital gains of Mr. R for the assessment year 2020-21 Particulars Rs. Rs. Long-term capital gain on sale of building 75,000 Less: Short-term capital loss on sale of shares 7,000 14,500 700 shares 7,500 300 shares 60,500 Taxable long-term capital gains Computation of capital gain on sale of shares of A Ltd. by Mr.R Date of purchase of shares 30.5.2019 Record date 10.8.2019 Date of sale of shares Number of shares sold 30.9.201 Sale price per share 9 20.12.2019 700 300 Rs.35 Rs.25 CFP Level 2 - Module 2 – Taxation - India Page 558

Particulars Rs. Rs. Sale consideration 24,500 7,500 Less: Cost of acquisition 35,000 15,000 10,500 7,500 Less: Dividend income as per section 94(7) [700×10×50%] [See Not Note below] deductible 3,500 Short-term capital loss on sale of shares 7,000 7,500 Note: 1. 700 shares are sold within 3 months after the record date, hence related dividend income should be deducted from the loss as per section 94(7). 2. 300 shares having been sold after 3 months of record date, section 94(7) is not applicable. So, the dividend income of Rs.1,500 should not be deducted. Such dividend is exempt u/s 10(34). 3. Short-term capital loss can be set-off against long-term capital gains as per the provisions of section 74(1)(a). Therefore, short-term capital loss on sale of shares can be set-off against long-term capital gains on sale of building. CFP Level 2 - Module 2 – Taxation - India Page 559

Example Compute capital gains in the following cases- Name of the units-Growth units of PNI Mutual Fund (Face value:Rs.10) Record date for allotment of bonus unit-December 5, 2019(a person holding 2 units will get 1 bonus unit). X purchases 1000 above-mentioned units on October 1, 2019 at the rate of Rs.23 per unit. On December 5, 2019 he gets 500 bonus units. Find out the tax consequences in the following different situations- 1. He transfers 800 original units on March 10, 2020 at the rate of Rs.26 per unit. He does not transfer remaining original units and bonus units till the expiry of 9 months from the record date (i.e., September 5, 2020). 2. He transfers 800 original units on March 10, 2020 at the rate of Rs.17 per unit. He does not transfer remaining original units and bonus units. 3. He transfers 900 original units on March 10, 2020 at the rate of Rs.18 per unit. He does not transfer remaining original units till the expiry of 9 months from the record date (i.e., September 5, 2020). On May 1, 2020, he transfers 100 bonus units at the rate of Rs.17 per unit. 4. He transfers 700 original units on March 10, 2020 at the rate of Rs.14 per unit. He does not transfer remaining original units till the expiry of 9 months from the record date (i.e., September 5, 2020). On May 1, 2020, he transfers 400 bonus units at the rate of Rs.13 per unit. 5. He transfers 400 original units on January 1, 2020 at the rate of Rs.24 per unit. On March 1, 2020, he further transfers 200 original units at the rate of Rs.19 per unit. He does not transfer remaining original units till the expiry of 9 months from the record date (i.e., September 5, 2020).However, 200 bonus units are transferred on September 10, 2020 at the rate of Rs.15 per unit. CFP Level 2 - Module 2 – Taxation - India Page 560

Case 1 Case 2 Case 3 Case 4 Case 5 ( Rs.) ( Rs.) ( Rs.) ( Rs.) ( Rs.) Original units (case of loss) - 13,600 16,200 9,800 3,800 Sale consideration - 16,100 4,600 Less-Cost of acquisition - 18,400 20,700 (- (- (-)6,300 (-)800 Short-term capital gain NA )4,800 )4,500 Short-term capital loss which 20,800 cannot be adjusted against any 18,400 4,800 4,500 6,300 800 other capital gain(a) Original Units 2,400 (case of gain) - - - 9,600 500 - - - 9,200 Sale Consideration - - - 400 Less: Cost of acquisition Nil Short-term capital gain 500 500 500 500 - Units held by X after the - 9.6 9 12.6 1.6 aforesaid transactions Bonus - Units (b) 1,700 5,200 3,000 Cost of acquisition of bonus 900 5,040 320 units (per unit) [(a)/(b)] 800 160 2,680 Bonus units Sale consideration Less: Cost of acquisition Short-term capital gain CFP Level 2 - Module 2 – Taxation - India Page 561