Eminent jurist Nani Palkhivala once remarked, “The time has come for Parliament to enact some new legislation — say, Prevention of Cruelty to Taxpayers Act — which should override all fiscal legislation.” This holds true given our ever growing complex tax laws. Every year innumerable amendments proliferate, revamping or clarifying the already complicated law. A case in point is amendments to Section 68 proposed by Budget 2022.

For starters, Section 68 taxes unexplained amounts credited in the books of account of any assessee as income if the explanation on its identity and whereabouts is not furnished or found inadequate to the satisfaction of the assessing officer (AO).

A proviso to the section, wef April 1, 2013, extended its reading to tax certain capital receipts from residents in the hands of a closely-held company, by way of share capital, share premium, share application or any other amount by whatever name called, if the paying resident is also unable to explain the source and nature of such amounts to the satisfaction of the AO.

So the proviso calls for twin explanations/verifications — one by the company, similarly corroborated/counter verified by the contributory as well. The utility of this proviso was best manifested in the “penny stocks” case.

Loans, borrowings

Debates arose as to whether the section can cover loans or borrowings in its scope, besides on the reading as to what would tantamount to adequate satisfaction of the assessing officer. And now comes a clarificatory amendment vide Finance Bill 2022, which through a proviso says that loans, borrowings or any such amount by any other name credited will be deemed as not properly explained to the AO if the assessee in the first place and then the giver/lender as well is unable to corroborate the source/explanation as to why the money was received/given by/to the assessee.

The amending clause uses the word “person”, hence it will extend to all types of assessees residents/non-residents and corporates/non-corporates. Post facto this amendment, all amounts from any type of person resident/non-resident/corporate/non-corporate will get covered under Section 68 if not properlyexplained to the satisfaction of the AO.

Non-residents who were not in the ambit for contributions of share capital, etc., may unduly get covered in the proposed provision, under “any such amount”, in the hands of all assessees.

Whether an affidavit with the identity of the non-resident will satisfy the AO needs to be seen. It is quite likely certain contributing non-residents may not be assessed to tax in India nor may be having a PAN number.

Residents alone will get covered for amounts akin to share capital, etc., received in the hands of closely-held companies.

An exclusion clause confirms that both these provisos will not apply for venture capital companies consequential to the proposed amendment.

Care to review the existing sections, their scope, choice of wording, etc., will simplify our laws to a great extent.

The writer is a chartered accountant

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