Personal Finance

Stamping out ambiguities

Neha Malhotra | Updated on June 30, 2019 Published on June 30, 2019

Increased transparency and steps to reduce litigation will help make India more tax-compliant

Improving tax collection, reducing litigation and tax burden, rationalisation of the provisions of the Income Tax Act, and removal of cumbersome processes are always on top of the priority list for every government. While everyone is waiting to be rewarded for electing this government for the second time, with some tax perks, there are certain things that Budget 2019-20 can do to make taxpayers happy without taking any hit on the fiscal target.

Middle-class taxpayers fear tax litigation not only due to the time and cost involved but also to avoid any harassment that follows litigation. They long for tax certainty.

Taxpayer’s responsibility

To provide a non-adversarial, conducive tax environment and make India a more tax-compliant society, it is necessary that the social responsibility of filing income tax returns be duly respected. Whether one is required to file an ITR or not depends on their total income.

As per Section 139 of the I-T Act, if a person’s total income before allowing deductions under Chapter VI-A exceeds the maximum amount not chargeable to tax, they are mandatorily required to file the return of income. Thus, individuals claiming heavy exemptions under other sections of the I-T Act are spared from this requirement. For instance, if an individual has income from only long-term capital gains from sale of residential house property, and he/she reinvests it in another residential house in India to claim tax exemption under Section 54, he/she shall not be under an obligation to file an ITR, as his/her total income is nil.

The government may thus consider making it mandatory for all individual taxpayers to file their ITR if their income, before claiming any exemption under Sections 54 to 54GB, exceeds the maximum exemption limit. This shall not only increase transparency and bring clarity, but also ensure a better reporting mechanism for real estate transactions.

Ironing out the ambiguities

Tax policies and structures must be tailored from time to time to remove ambiguities. One grey area, which has been a reason for contestation between taxpayers and tax officials is the exemption under Section 54/54F. The exemption from capital gains under Sections 54, 54F, 54EC and 54B are allowed only when an assessee reinvests the capital gain in some specified assets. Assesses claiming exemption under these sections are often denied such exemption if the new asset is purchased in the name of their close relative (ie, spouses/children). The I-T Act does not specifically provide that the exemption shall be available only in case the new asset has been acquired by the assessee in his/her own name. Thus, the ambiguity must be removed and suitable amendments must be brought about to widen the scope of the exemption and stop the litigation around the issue.

Another obstruction that arises while claiming deduction under Section 54/54F is that these sections allow exemption only when a new residential house property, after the sale of an old one, is purchased either a year before or two years after the date of sale, or if the same is constructed within three years of the date of transfer.

However, practically, it sometimes takes more than the prescribed time limits, especially in case of township projects by developers. Such buyers are thus denied exemption, without any delay on their part.

A suitable amendment is therefore sought, allowing exemption under these sections to genuine taxpayers who invest in such development projects by builders registered under RERA. The government could either increase the time limit to invest in a new house to at least five years, or it can be clarified that the taxpayer shall be allowed deduction for all investments made within the given time limit even if the purchase or construction is not completed within the stipulated time limits.

This is especially important considering that an amendment on the same ground was made by the Finance Act 2016, by increasing the time limit for construction or purchase of a house property for claiming deduction of interest on housing loan, from three years to five years. Further, Sections 54(2) and 54F(2) require that the amount of capital gains not utilised towards the purchase/construction of a new residential house, before the due date of filing of returns under Section 139, must be deposited in the Capital Gains Account Scheme (CGAS).

The glitch is that, even though various judicial pronouncements assert that the due date for furnishing of income returns, as provided under Section 139(1), is subject to an extended period as provided under Section 139(4), the issue is still a matter of speculation. Therefore, the government must offer a clarification to remove uncertainty and ensure timely compliance.

Another grey area requiring elucidation is the period of limitation for issue of notice under Section 143(2). The provisions of the I-T Act prescribe that a notice for scrutiny assessment must be sent within six months from the end of the financial year in which the return is furnished. However, the time limit for issue of intimation is a year from the end of the financial year in which the return is furnished.

Thus, if ITR is processed by the CPC (Central Processing Centre, Bengaluru) after six months from the end of the financial year in which it is furnished and any major discrepancy is found, the Assessing Officer will not be able to issue the notice for scrutiny assessment as it will have become time-barred. Hence, in the forthcoming Budget, this asymmetry between the two time limits must be dealt with.

The writer is Executive Director, Nangia & Co.

With inputs from Vasudha Arora

Published on June 30, 2019
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