The Hindu Business Line : Income escaping assessment

Section 147 supplies the mechanism to tax any income that has escaped assessment, with such escaped income harking back to the relevant assessment year and not to the assessment year in which such escapement was discovered. This is as it should be.

But this principle enshrined in Section 147, salutary as it is, is not followed consistently elsewhere in the Income-Tax Act, 1961.

Principle bypassed

The following is a catalogue of instances, by no means exhaustive, where this salutary principle has been given a go-by:

If a charitable or religious trust fails to apply the accumulated income for charitable or religious purposes within the prescribed time of five years, then the income thus not applied would be treated as income of the previous year in which the deadline of five years ended. Ditto if the trust fails to keep invested its assets in the prescribed avenues;

Under Section 25AA, unrealised rent subsequently recovered would be taxed as the income of the previous year in which it is recovered to the extent such unrealised rent resulted in understatement of the annual value of the property in the original assessment year;

Under Section 25B, arrears of rent — which can arise if rent is revised with retrospective effect — is taxable as the income of the previous year in which it was revised to the extent the same contributed to lowering of annual value in the original assessment year;

Under Section 54 which gives tax shelter to those who have sold their shelter, that is, a long-term residential house and replaced it with another residential house within the prescribed time but transfer the new house within three years of its acquisition, then not only will the capital gains from the second sale be taxed as short-term capital gains, which in any case it is, but also the long-term capital gain that was exempted on the first sale.

In other words, the long-term capital gains on the first sale would be deemed to be short-term gains of the year in which the second sale took place;

Under Section 54EC, if the specified bonds, investments in which conferred one exemption from long-term capital gain of any hue, are transferred or given as security for loan within three years of subscribing to the bonds, then the amount of long-term capital gains exempted earlier would become taxable as long-term capital gain in which the specified bonds were thus transferred before the statutory lock-in period of three years; and

Under Section 54F, if an individual or HUF claims exemption from long-term capital gains emanating from transfer of any long-term capital asset other than a residential house and invests the net consideration or part thereof in a residential house within the prescribed time but, among others things, sells the residential house before the expiry of three years from the date of its acquisition, then the long-term capital gain exempted earlier would be taxable as long-term capital gain in which the house was sold prematurely.

Equity and fairness

In all these cases, equity and fairness demands that the escaped income harks back to the original year to which it belongs lest avoidable distortions either in favour or against the taxpayer are introduced.

If a trust, for example, accumulates 50 per cent of its income as it can and within five years it is unable to apply the same for charitable purposes it would find it difficult to conceal its glee if in the meanwhile the slab rates have been liberally revised in favour of taxpayers.

To wit, if the income of Rs 1.25 lakh is accumulated in an assessment year when the initial exemption limit was Rs 1 lakh and five years later the tax exemption limit is hiked to Rs 1.5 lakh the trust need not take the trouble of applying the accumulated income for charitable or religious purposes in the last year of accumulation if it has no other taxable income.

A distorted regime

In fact, this regime could encourage trusts to accumulate rather than immediately apply whatever they are allowed to accumulate secure in the knowledge that with passage of time the exemption thresholds are bound to be liberally revised upwards.

The Revenue could be similarly short-changed in the other instances as well.

For example, if long-term capital gains of Rs 1.5 lakh were invested in specified bonds in a year when the assessee had ample taxable income but within three years they were transferred and in that year the assessee had no taxable income, he would once again have thumbed his noise at the taxman.

To be sure, it may also be the other way round — the taxpayer may have to pay more, thanks to revision of tax rates in favour of the Revenue. But that is not the point.

The point is an income escaping assessment must be traced back to the year to which it belongs. The I-T Act has got it right at Section 147, but somehow gave this salutary principle embedded in the Section a go-by at several other places.

(The author is a Delhi-based chartered accountant. blfeedback@thehindu.co.in)