The Hindu Business Line : Milching of zilch has gone a bit too far

The legal eagle succeeds in halting the tax authorities in their tracks for which the grateful management pays him a fee of Rs 1 lakh. Can he now smugly say that this fee is not taxable for the simple reason that he did not spend anything at all except his cerebral energy to earn it?

Those in professions have so far not pressed this argument. But they might as well take a cue from the intrepid earners of capital gains. And their new-found confidence laced with and born of defiance would beget legal support if only an analogy is drawn between the language of Sections 29 and 48.

After all, if earners of capital gains can press in Section 48, professionals can press in Section 29, which is in pari materia. The appropriate portions of the two Sections are quoted hereunder for ready reference:

"48. The income chargeable under the head `capital gains' shall be computed by deducting from the full value of consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely:

i) Expenditure incurred wholly and exclusively in connection with such transfer;

ii) The cost of acquisition of the asset and the cost of any improvement thereto."

" 29. The income referred to in Section 28 shall be computed in accordance with the provisions contained in Sections 30 to 43D."

One may self-righteously say that two wrongs do not make a right. But courts, which have found the no-cost-no-gains argument convincing in the context of capital gains, cannot possibly demur if a similar argument is made in the context of professional income.

It is time, therefore, Parliament stepped in to say in so many words — trite though they may be — by way of preamble to the Income-Tax Act that where there is no cost or where cost defies determination, it would be nil and income computed accordingly. There is parallel for this seemingly needless exercise.

Section 80A(2) says that deductions from the gross total income (GTI) cannot exceed the GTI itself. And Section 80AB says that deductions granted under the various Sections of Chapter VI-A will be with reference to the income included in the GTI. To wit, if the gross income is Rs 10,000 and the net income Rs 8,000 after deducting expenses, only Rs 8,000 would be deductible from the GTI.

These were trite but Parliament nevertheless had to insert them, thanks to the intrepid attempts by some die-hard tax planners to extract more out of the deductions.

The Supreme Court itself could have seized the initiative in CIT vs B. C. Srinivasa Setty (128 ITR 294) and laid down the commonsense law implicit in Section 48 that when there is no cost obviously, there will be no deduction.

But the court in its wisdom chose to turn this conventional wisdom on its head and held that no cost meant no gains and, hence, no tax.

This opened the Pandora's box paving the way for similar successful claims until Parliament partially retrieved the ground for the Revenue through piecemeal amendments — goodwill, tenancy rights, route permits and brands, and so on, will be deemed to be costing nil where actually nothing was incurred in acquiring them.

Owing to the piecemeal nature of the amendments, the Supreme Court's view in Srinivasa Setty (supra) still holds sway for assets and circumstances not coming within the ambit of these amendments. In the event, the Gujarat High Court recently was perhaps constrained to honour the apex court verdict when CIT vs Mandharsinhji P. Jadeja (2005 148 Tax 110) came before it for resolution.

It held that if an inheritor of property is not able to find out the cost thereof in the hands of his benefactor, there would not be any capital gains tax. Section 55(3) says that if the cost to the previous owner is not determinable, then the market value on the date of acquisition by the previous owner should be taken as the cost to the present owner in case of, among other things, inheritance.

Perhaps, the difficulty before the Gujarat High Court was there was absolutely no details even as to the date of acquisition by the previous owner. Only a specific insertion in the preamble on the lines suggested would check this drift.

The power of the zilch should be curbed in all-round interest — in the interests of the Revenue and equity.

(The author is a Delhi-based chartered accountant.)