Tax Gurjari_book title

Tax Gurjari

Assessment of HUF under the Income Tax Act 1961 - Some Issues
Upendra Bhatt
Advocate

1. Preamble 3.2 (i) As per section 40(b)(i) any payment of salary,
bonus, commission or remuneration to any
Under the Income tax Act, Hindu undivided family partner who is not a working partner.
hereinafter referred to as HUF is enjoying a special
status for Income tax purpose. It is a separate (ii) Any payment of remuneration to working partner
assessable entity under the Income Tax Act. which is not authorised in the partnership deed
Definition of the HUF is not given in the Income Tax or is not in accordance with the terms of
act but definition of person is given in sec. 2(31) which partnership deed etc.
includes a Hindu Undivided Family. As per Sec.4 of
the Income tax act, a person will be liable to pay tax 3.3 As per section 40(b)(iv) any payment of interest to
at the rate or rates as prescribed. In this paper, I have any partner which is authorised by, and in accordance
tried to discuss some of the Issues in relation to with, the terms of partnership deed and relates to any
assessment of HUF. In this paper I have also covered period falling after the date of such partnership deed
some relevant provision Under Hindu Law and the in so far as amount exceeds the amounts calculated
Hindu Succession Act. at the rate of 12% simple interest per annum.

2. Corpus of HUF 3.4 As per section 40(b)(v) any payment of remuneration
to any partner who is a working partner, which is
2.1 If the HUF is not having any corpus, a gift can be authorised by, and is in accordance with, the terms
given to the HUF. This gift will form corpus for HUF. of partnership deed and relates to any period falling
Any income received or receivable out of this corpus after the date of such partnership deed and such
will be taxable under the status of HUF. payment to all the partners during the previous year
exceeds the amount computed as per this section.
2.2 Whether HUF can become partner ?
4. Daughter’s right in HUF property
For this purpose, we have to examine definition of
partnership as per Partnership Act. 4.1 After commencement of Hindu Succession
(Amendment) Act 2005 as per section 5, in a joint
As per definition of partnership, it is a relation between Hindu family governed by Mitakshara Law, the
persons who have agreed to share the profits of daughter of a coparcener shall,
business carried on by all or any one of them acting
for all. a. By birth become a coparcener in her own right
in the same manner as the son
Thus HUF can become partner in the partnership firm
through its Karta. For giving salary and interest to b. Have the same right in coparcenary property
partners from partnership firm, certain issues are as she would have had if she had been a son
discussed in this paper under separate head. and

2.3 HUF can become director in the company by investing c. Be subject to the same liabilities in respect of
its funds. Taxability of income in this situation is also the said coparcenary property as had that of a
discussed in this paper. son.

3. Provisions of Salary / remuneration and interest 5. Assessment of HUF under the Income Tax Act
to partners under the Income Tax Act
5.1 HUF can start its own business and income will be
3.1 Section 40 of the Income Tax Act deals with amounts assessable under the status of HUF.
not deductible while computing business income. This
section starts with, words “Notwithstanding anything 5.2 Whether HUF can become partner in partnership
to the contrary in section 30 to 38, the following firm ?
amounts shall not be deducted while computing
income under the head, “Profits and gains of business The Partnership Act recognises only partner and not
or profession”. his status. As per rule 232(3), a Karta or manager
acting on behalf of the family can enter into a
partnership with a stranger. This partnership is
exclusively between the contracting members and the

GUJARAT FEDERATION OF TAX CONSULTA 1
L
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Tax Gurjari GUJARAT FEIndividual or HUF. The cases are discussed AX CONSULTA
L hereunder.
partner. Other than Karta or Manager is not
accountable to the members of the family. 6.4 Authorities

5.3 A contract of partnership has no concern with the (i) CIT V/S. KALU BABU LAL CHAND
obligation of partners to others in respect of their share
of profit in the partnership. It only regulates the rights 37 ITR Pg. 123 SUPREME COURT
and liabilities of the partners. A partner may be the
karta of HUF or trustee of a trust or benami for another In this case the HUF was one of the promoters of a
etc. In all such cases he occupies a dual position. company to be floated. The articles of association of
Qua the partners, he functions in his personal capacity the company provided the remuneration of the
: Qua the third parties, in his representative capacity. member. The shares were acquired with funds
In this regard decision given in the case of CIT V/S. belonging to the joint family. The family enjoyed the
BHAGYALAKSHMI & CO. 55 ITR Pg. 660 dividend paid on these shares. There was no
SUPREME COURT can be relied. Thus HUF can contribution by the member in his individual capacity.
become partner in partnership firm. The company was all along financed by the family.
The Managing Directors remuneration received was
6. INCOME ASSESSABLE IN THE CASE OF credited in the books of the family. For the first time it
INDIVIDUAL OR HUF ? was claimed that the remuneration of M.D. should be
assessed as personal income and should not be
6.1 From A.Y. 1993-94 there has been a radical change added in the income of the family.
in the assessment of partnership firm. Salary to
working partner is allowable as per section 40(b). As The Supreme Court held that looking to the facts of
per explanation of this section “working partner” the case it was the income of the family.
means an individual who is actively engaged in
conducting affairs of the business or profession of (ii) PALANIAPPA CHETTIAR V/S. CIT
the firm of which he is a partner; Thus plain reading
of this section indicates that salary will be allowed to 68 ITR Pg. 221 SUPREME COURT
an individual partner and who is not a partner in
representative capacity. In this case out of 300 shares of the company 90
shares were acquired with the funds of the family.
6.2 Partner who is actively engaged in the conduct of the After some time the member of HUF became M.D. of
business was decided by Gujarat High Court in the the company. The only qualification of M.D. was
case of CIT V/S NATWARLAL TRIBHOVANDAS holding of not less than 25 shares in the company.
reported in 87 ITR Pg. 703 The question was whether the remuneration and
commission and sitting fees received by the Karta
As per this judgement, this word (i.e. working partner) were assessable as income of the family?
should be given a liberal meaning. It does not signify
active and continuous participation in actual It was held by the Supreme Court that the shares
transaction of the day-to-day business of the firm. were not acquired by the family with the object that
the karta should become M.D. There was no real
In this case the partner in a construction business connection between the investment of the family and
was sent abroad to obtain higher educational appointment as karta and M.D. The remuneration of
qualification in civil engineering and the assessee was the M.D. was not earned by any detriment to the joint
away from India. It was held by the Gujarat High Court family assets. The remuneration, commission and
that his stay abroad would ultimately benefit the firm sitting fees were not assessable as income of the
and help it in carrying its business more efficiently family.
and also to expand its business. The partner was
considered to be actively engaged in the conduct of (iii)
the business of the firm.
I. V.D. DHANWARTEY V/S. CIT [M.P.]
6.3 In the partnership firm if the partner is representing
his HUF and drawing salary as a working partner, 68 ITR Pg. 365 SUPREME COURT
the attempt of the Department will be to disallow such
salary and specially after radical change in the II M.D. DHANWARTEY V/S. CIT [M.P.]
assessment of partnership firm with effect from 1993-
94. On the basis of facts of each case, the taxability 68 ITR Pg. 385 SUPREME COURT
of salary depends. The Income should be taxed in
the hands of real owner as per the Principle of “REAL In this case, the karta was a partner. The contribution
INCOME”. The ratio laid down by the Honorable to the capital of the firm belonged to the family. Interest
Supreme Court and other Courts should be born in was payable on the capital contributed by each
mind to decide the taxability of income in the case of partner. In the partnership deed, the general
management and supervision of the partnership was
2 in the hands of the karta.

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It was held by the Supreme Court that the kartaGUJARAT FEAX CONSULTA Tax Gurjari
became partner on account of investments of the jointL
family assets. There was real and sufficient daughter. Thus family must consist of more than 1
connection between the investment and the person for the purpose of assessment as HUF under
remuneration to karta. The salary paid to the karta the Income Tax Act.
was assessable as income of the HUF.
8. TWO MALE COPARCENERS WHETHER
(iv) CIT V/S. GURUNATH V. DHAKAPPA NECESSARY

72 ITR Pg. 192 SUPREME COURT 8.1 The word HUF used in the Income tax Act is in the
sense in which a Hindu Joint Family is understood
In this case Rs. 6000/- per annum was paid to the under the personal law of Hindus. In order to
karta as salary over and above the share of profit as constitute a joint family it is not always necessary
he was a partner in the firm representing the family. that there should be two male coparceners. Even prior
to Hindu Succession Act 1956, a wife female member
It was held by the Supreme Court that there was was entitled to maintenance under the Hindu
no finding that the salary received by the karta Women’s Right to Property Act, 1937. The limited
was directly related to any assets of the family utilised right has been converted to a full right under section
by the firm. The salary income could not be treated 14 of the Hindu Succession Act. After marriage, a
as income of the family. person can form a HUF and will be assessed in the
status of HUF. Judgments of the Supreme court and
(v) RAJ KUMAR SINGH HUKAM CHANDAJI V/S. CIT other court are given hear under.

78 ITR Pg. 33 S.C. 8.2 Authorities

This is a very important judgement regarding (i) GOWLI BUDDANNA V/S. CIT 60 ITR Pg. 293 S.C.
assessment of remuneration received whether
individual income or income of family. The test has In this case the HUF was consisting of Karta, his wife,
been laid down in this case. The test is :- two unmarried daughters and adopted son. After
death of karta, question arose whether HUF continues
i. Whether the remuneration received by the coparcener and whether the income was taxable under the status
in substance though not in form is one of the modes of HUF ?
of return made to the family because of the family
fund in the business? If the reply is in yes, it is the It was held that property of the joint family did not
income of the family. cease to belong to the family merely because the
family was represented after A’s death by a single
ii. Whether it was compensation made for the services coparcener.
rendered by the individual coparcener? If the reply is
in yes, it is the income of the individual coparcener. After amendment in Hindu Succession Act, a daughter
is considered to be coparcener and no question of
iii. If the income was essentially earned as a result of two male coparceners arises. HUF of two married
the fund invested, the fact that a Coparcener has daughters may continue in absence of male karta who
rendered some services would not change the passed away.
character of the receipt.
(ii) NARENDRANATH (N.V.) V/S. CIT (WEALTH TAX)
iv. If it is essentially a remuneration for the services 74 ITR Pg. 190
rendered by a coparcener, the circumstances that his
services were availed of because of the reason that In this case, assets were allotted to coparceners on
he was a member of the family which had invested partition. The family of coparcener was consisting of
funds in the business or that he had obtained the coparcener, his wife and minor daughters. It was held
qualification shares from the family funds would not that the income should be assessed as HUF.
make the receipt, the income of the HUF.
After amendment in Hindu Succession Act 2005
In this case the M.D.’s were appointed by a resolution daughter is considered as coparcener. Thus this
of the board of directors of the company and they judgment may not have any value in the present
were subject to removal at any time. The appointment situation.
as Managing Director was not a result of detriment of
the family property. Thus the remuneration received 9. Gift to son’s HUF before marriage
by the karta was assessable as individual income.
9.1 If gift is given to son with the intention that this gift is
7. HUF of husband and wife given for the benefit of son, his future wife and
children. Till son is unmarried, income received from
7.1 For assessing any income under the status of HUF, this gift will be taxable in the case of donee in his
their must exist minimum two persons. It may be individual capacity. As soon as he gets married, the
husband and wife or father and son or father and income will be taxed under the head HUF consisting
of husband and wife.
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Tax Gurjari GUJARAT FEto claim the payment as a deduction. The payment AX CONSULTA
L should be made wholly and exclusively for the
When a gift is given, intention of the donor is purpose of business.
important. To constitute an HUF, existence of two
male members is not necessary. It was held in the Authorities :
case of (FULL BENCH) CIT V/S. M.
BALASUBRAMANIAN reported in 182 ITR Pg. 117 (i) JITMAL BHURMAL V/S. CIT
MADRAS.
44 ITR Pg. 887 SUPREME COURT
In this case gift by father was given to his unmarried
son. This gift was given to his son, his to be wife and It was held in this case that, a Hindu undivided family
children. It was held in this case that the income was can be allowed to deduct salaries paid to members
assessable as HUF. of the family, if the payment is made as a matter of
commercial or business expediency; but the service
9.2 CIT V/S. ARUNKUMAR JHUNJHUNWALLA & rendered must be to the family.
SONS
It was further held that as the services were rendered
223 ITR Pg. 45 GAUHATI HIGH COURTS to the firm but not to the HUF, it cannot be said that it
was wholly and exclusively for the Hindu undivided
As held in this case, the expression “Hindu undivided family. Thus the salary paid to junior members of the
family” in the Income-tax Act, 1961, is used in the family was rightly disallowed.
sense in which a Hindu joint family is understood
under the personal law of Hindus. In order to constitute (ii) JUGAL KISHOR BALDEV SAHAI V/S. CIT [U.P.]
a joint family, it is not always necessary that there
should be two male coparceners. Even prior to the 63 ITR Pg. 238 SUPREME COURT
Hindu Succession Act, 1956, in a joint family property
a wife or other female member was entitled to It was held in this case that, if remuneration is paid to
maintenance under the Hindu Women’s Right to the karta of a Hindu undivided family under a valid
Property Act, 1937. The limited right has been agreement which is bona fide and in the interests of,
converted to a full right under section 14 of the Hindu and expedient for, the business of the family and the
Succession Act, 1956. payment is genuine and not excessive, such
remuneration would be an expenditure laid out wholly
Held, accordingly that, the assessee after his and exclusively for the purpose of the business of
marriage could form a Hindu undivided family and be the family and would be allowable as an expenditure
assessed in the status of a Hindu undivided family. under section 10(2)(xv) of the Indian Income-tax Act,
1922.
10. Payment out of income of the HUF whether
allowable? As per facts of this case, there was a valid agreement
in the interest of the family and the remuneration was
10.1 As per income tax act, any expenditure incurred to only for services to the family business and to look
earn income is an allowable expenditure like interest after the interest of the family in other businesses;
paid on borrowed capital, vehicle expenditure and as there was no finding that the payment was
including depreciation, travelling expenses, salary not commensurate with the services rendered by him,
and bonus to staff etc. the remuneration was deductible.

Authority : (iii) SUNDARLAL NATHALAL HUF V/S. CIT

(i) CIT V/S. RAMNIKLAL KOTHARI reported in 74 ITR 151 ITR Pg. 25 GUJARAT
PG. 57 S.C.
In this case salary paid to a member was a matter of
In this case the assessee was a partner in four firms commercial or business expediency and to protect
but did not carry on any independent business, was the interest of the family and the same was an
entitled to deduct from his share of profits from the allowable expenditure in the case of the HUF.
firms. Amounts paid as salary and bonus to staff,
expenses for maintenance and depreciation of motor 11. PARTNERSHIP IN DUAL CAPACITY
cars and travelling expenses expended by him in
earning the income from the firms. 11.1 As per definition of partnership it is a relation between
persons who have agreed to share the profits of
10.2 Similarly if salary is paid to member of the family to business carried on by all or any one of them acting
look after business of the firm, it is also an allowable for all.
expenditure. If the HUF which is a partner in a firm is
able to show that the payment of salaries to its Thus for forming valid partnership, there must be two
members was given as a matter of commercial persons. A partner can be in dual capacity, one as
expediency and for the purpose of earning profits from an individual and the other as representing the HUF
partnership business, then the family would be entitled or Company, AOP, BOI. The partner in representative

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capacity has to account for the share of profitsGUJARAT FEAX CONSULTA Tax Gurjari
received from the firm.L
v/s.
11.2 Authority :
INCOME-TAX OFFICER
(i) CIT V/S. BUDHALAL AMULAKHDAS
(Salary to partners in individual capacity for their
129 ITR Pg. 97 GUJARAT HIGH COURT skill. Allowable)

As held in this case, there was nothing in law As held in this case, as there was no provision for
preventing assessee from becoming a partner in a payment of commission to partners. The firm paid
dual capacity, one as an individual and the other as commission to two partners, in their individual
representing the HUF. As there were one or more capacities for the services rendered by them by virtue
other individuals joining in the partnership, the of the specialized qualification they possessed. The
requisite conditions for the purpose of grant of Assessing Officer held that the amount could not be
registration were fulfilled and the firm was entitled to allowed as deduction in the hands of the firm in view
registration. of section 40(b). This was confirmed by the Tribunal.
On appeal to the High Court, it was held that the
12. Allowbility of salary to working partner Tribunal was justified in disallowing the remuneration
representing HUF section 40(b)(i). Some issues paid to the qualified partners as a permissible
deduction under section 37.
(i) 288 ITR 211 Rajasthan
(v) 351 ITR 156 Allahabad
COMMISSIONER OF INCOME-TAX v/s. PARAS
COTTON CO. CIT AND ANOTHER v/s. GREAT CITY
MANUFACTURING CO.
(Presumption regarding document of partnership
ante-dated) (Whether salary can be disallowed considering
the same to be
As held in this case, there cannot be a presumption
that deed of partnership was ante-dated. Burden of excessive or unreasonable?)
proof is on the department. In this case no notice was
given to the assessee before rejecting genuineness As held in this case, partnership deed specifically
of document. Salary to HUF partner was allowable. provided for payment of remuneration to working
partners. Remuneration paid to partners was within
(ii) 323 ITR 368 (HP) statutory limit as prescribed. Officer cannot disallow
such remuneration on the ground of unreasonable
COMMISSIONER OF INCOME-TAX v/s. ANIL and excessive payments.
HARDWARE STORE
(vi) 358 ITR 531 Gujarat
(No disallowance of remuneration when provision
is made in the deed) COMMISSIONER OF INCOME-TAX v/s. J. J.
INDUSTRIES
In the case of this firm, there was provision of payment
of salary to the working partners. Method of computing (Interest on FDR to be considered for
remuneration payable to partners was also remuneration to partners)
mentioned. Under this circumstances it was held that
remuneration to partner was allowable. In this case the assessee was engaged in the
seasonal business of ginning cotton. Income
(iii) 347 ITR 325 Allahabad generated from spare funds was invested in fixed
deposits. Interest received was declared as part of
CIT v/s. JUGAL KISHOR AND SONS business income and which was assessed as such.
The firm was having only business income and no
(Salary to working partners representing HUF) other source of income. It was held that interest
income was to be considered into account for the
It was held in this case that, salary was paid to working purpose of ceiling of remuneration to partners.
partners though they were representing their Hindu
undivided families. As it was proved that partners (vii) 132 Taxman 39 Madras High Court
were working partners, salary was allowable as
deduction in the case of partnership firm. COMMISSIONER OF INCOME-TAX v/s. K.A.
RAJAGOPAL
(iv) 347 ITR 679 Karnataka
(AO considered remuneration in the case of HUF
1. DR. BIDARI ASHWINI HOSPITAL while assessee claimed it in his individual
capacity)
2. SRINATH DRUGS DISTRIBUTORS
In this case the position was different. The assessee
3. SHREE GURURAJ AGENCIES claimed remuneration received from the partnership

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Tax Gurjari GUJARAT FE(Excess stock disclosed during survey being AX CONSULTA
L acquired out of current year’s income.
firm as his individual income while the assessing Remuneration allowable)
officer considered it to be income of the HUF as the
karta was partner in the firm. In this case survey was conducted in the business
premises of assessee. Assessee offered excess
Salary was paid for special skill of the person and stock of Gold and Silver acquired out of business
there was no direct nexus of investment of HUF’s income of the current year. Appropriate entry was
fund and remuneration paid. passed in the books of account and book profit was
increased accordingly.
In the facts of the case it was held that income was
rightly taxed in the case of individual. While giving judgment, ITAT considered reply of the
assessee during survey in which he explicitly stated
(viii) 285 ITR (A.T.) 69 (ITAT[Amrit]) that excess stock was purchased out of the income
of the current year.
INCOME-TAX OFFICER v/s. J. M. P.
ENTERPRISES The assessing officer considered excess stock as
income from other sources u/s.69 and reduced the
(Instead of fixed remuneration, paid as admissible same for the purpose of allowing remuneration as
u/s.40(b) the same was not income from business.

In this case there was mention to pay remuneration It was further held that book profit is required to be
of Rs.120000/- to working partner per annum but computed in the manner laid down in Chapter IV-D.
remuneration was paid as admissible u/s. 40(b). ITAT also considered language of section 40(b)
There was no dispute that partners were working Explanation-3. The department could not bring any
partners. Remuneration was allowable. evidence that excess stock was not acquired out of
business income of current year. Thus it was held
(ix) 286 ITR (A.T.) 1 (ITAT[Pune]) that amount disclosed in survey was business income
of the assessee and remuneration was allowable.
INCOME-TAX OFFICER v/s. BHARAT
ENTERPRISES (xii) 141 TTJ 492 (ITAT[Jai])

(Salary to working partners representing HUF) ALLEN CAREER INSTITUTION v/s. ADDITIONAL
COMMISSIONER
In this case remuneration was given to two partners
representing their HUF. It was held that though a OF INCOME TAX
Hindu undivided family is a partner but only through
an individual, who functions in his personal capacity (Remuneration allowable on interest from FDRs)
qua the firm, hence, payment to such a person has to
be allowed as deduction as if paid to an individual It was held in this case that, the net profit was
partners. computed in the manner laid down in Chapter IV-D.
This computation was required for considering
(x) 90 TTJ 215 (ITAT[Ahm]) remuneration to partner as per section 40(b). While
deciding this appeal, ITAT also considered definition
ACIT v/s. PATEL QUARRY of partnership. Neither the assessing officer is
empowered to go behind the net profit shown in the
(Remuneration as a working partner from more P&L a/c except to the extent of the adjustments
than one firm) provided in the Expln. 3, nor he is empowered to
decide under which head the income is to be taxed.
It was held in this case that a partner represented the The net profit as shown, is not to be allocated into
firm in his capacity as karta of HUF, he rendered different components.
services to the firm though he may also be rendering
services/working for other firms as mentioned by AO Thus it was held that interest income on FDR was
in the assessment order. A person can work for one part of business income and remuneration was
or more firms in accordance with his capacity when allowable on such income.
the firms are operating in one premises. Keeping in
view the totality of the facts and circumstances of the (xiii) 140 ITD 1 (ITAT[Mum])
case, it was held that partner representing HUF was
a working partner. Thus ITAT accepted the view of SURESH A. SHROFF & CO. v/s. JOINT
the CIT(A) and declined to interfere. COMMISSIONER OF INCOME-TAX 11(3)

(xi) 99 TTJ 197 (ITAT[Rajkot]) (Income shown under different head in the books
still on this income remuneration allowable)
INCOME TAX OFFICER v/s. JAMANADAS
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In this case, in the books of accounts the assesseeGUJARAT FEAX CONSULTA Tax Gurjari
considered licence fees and use of shared facilitiesL
under the head income from other sources but while assessing officer, and even in appeal by CIT(A) and
computing the income, the same was considered ITAT.
under the head income from business.
While deciding this case, Madras High Court held that
It was held that, for the purpose of working book profit, for granting remuneration to partner, the mechanism
the working is to be done as per Chapter IV-D of the is prescribed in section 40(b)(v). While for granting
Income Tax Act. interest u/s.40(b)(iv) there is no such mechanism
prescribed. As per Explanation-5 of section 32
Simply because the income was shown under introduced w.e.f. A.Y.2002-03, even though the
different heads in the books of accounts, the assessee depreciation is not claimed in the books it will be
should not be deprived remuneration on such income. presumed that assessee has claimed the depreciation
and allowed in computing total income.
13. Allowbility of interest to partner/partners section
40(b)(iv) some issues Salary to partners is to be allowed as per book profit
and as computed in the manner laid down in Chapter-
(i) 251 ITR 704 Kerala IV-D but as no such formula is prescribed for granting
interest to partners. It was held that interest to be
NOVEL DISTRIBUTING ENTERPRISES v/s. DCIT allowed on the capital without considering
depreciation.
(Interest on current account)
(iii) 11 ITR (Trib) 70 (ITAT[Viskha])
In this case, interest was paid to partners on their
current accounts. The same was disallowed by (1) SWARAJ ENTERPRISES
assessing officer and CIT(A) and ITAT.
(2) SHIVRAM AGENCIES
Kerala High Court held against the assessee. As per
the view of the court, current account capital was not v/s. INCOME-TAX OFFICER
capital contribution. Thus the same cannot be allowed
as per section 40(b)(iv). Even though partners have (Depreciation not provided in the books)
paid tax on this interest in their individual returns does
not alter the situation. The authorities have to act only In this case also no depreciation was provided by the
in accordance with the provision of section 40(b). assessee in books of accounts. The assessing officer
reworked capital account and balances of partner.
* According to my view this decision needs
reconsideration. Capital of partners means any It was held by the Tribunal that computation of total
amount brought by them in the partnership firm income will not affect even if no depreciation was
whether it is fixed capital or current capital. In the provided in the books whether or not the assessee
balance sheet the amount will be credited to the claimed the deduction in respect of depreciation while
partner’s account because it is neither borrowings nor computing total income. If depreciation is not claimed
credited for goods or expenses. by the assessee in the return of income, the assessing
officer will deduct depreciation.
(ii) 215 Taxman 119 Madras
It is not mandatory for the assessee to claim
SRI VENKATESWARA PHOTO STUDIO v/s. depreciation but it is mandatory to the assessing
ASSISTANT officer to allow depreciation. Even as per Explanation-
5 to section 32 there is no statutory compulsion for
COMMISSIONER OF INCOME-TAX the firm to provide depreciation in the books of
accounts. The AO can disturb the method of
(Depreciation not debited in books but claimed accounting only if he / she is not able to determine
in computation of income) the correct total income. The AO was only authorized
to verify whether the payment of interest to any partner
There was survey in the case of the assessee and was authorized by and was in accordance with the
case of the assessee was reopened. terms of partnership deed.

In this case the appeal related to A.Y.1996-97 to Thus the matter was decided in favour of the
A.Y.2000-01. The depreciation on assets, used for assessee.
the purpose of business, was not debited in the books
of accounts but the same was claimed in computation (iv) 83 TTJ 1061 (ITAT[Chand])
of income.
ASSISTANT COMMISSIONER OF INCOME TAX v/
Interest was given to partners as per their balance in s. SANT SHOE STORE
the books of accounts. Claim of interest to the extent
of amount of depreciation was disallowed by the (Revaluation of asset)

DERATION OF T 7

2018-2019
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NTS AL

Tax Gurjari It was held by ITAT that if interest was calculated on
day-to-day basis, then profit should be considered
In this case, asset of the partnership firm was revalued on day-to-day basis. There is no power with the
and respective entry was passed in partner’s account. assessing officer to rewrite books of accounts. The
Thus partner’s capital was enhanced. Interest on this interest has to be allowed as computed by the
enhanced capital was given by the firm. assessee. The AO has only to say whether the interest
claimed is authorized by or is in accordance with the
The assessing officer was of the view that it was terms of the partnership deed. He is not entitled to
notional introduction of capital so interest was not make adjustment in P&L account or in the capital
allowable. As per the view of the assessee, capital accounts of the partners. There is no power with the
contribution includes appreciation to the capital of AO to rewrite the books of accounts. Thus the appeal
partnership. It was further argued that interest could was allowed in the favour of the assessee.
be disallowed only if it was not authorized or was not
in accordance with the terms of partnership deed. 14. Other issue

As per the view of Departmental representative that 344 ITR 274 Kerala
interest can be allowed on capital contributed by
partners and not on notional accretion in cost of Radha Picture Palace v/s. DCIT
building. It was further argued by DR that the excess
can be credited to reserve account. (Ex party assessment u/s.144 & section 184(5)

In this case revaluation of asset was done in If the assessment order is framed u/s.144 on account
A.Y.1993-94 while the rejection was made in of failure to file return, non compliance of notice u/
A.Y.1996-97. s.142(1) or non compliance of notice u/s.143(2), the
assessing officer is entitle to frame assessment order
It was held by the Tribunal that the building belonged u/s.144. If person assessable is a partnership firm,
to the partners under the general law as they were as per section 184(5) no deduction of salary or interest
the owners of all the assets that belonged to the firm. shall be allowed in computing business income and
Capital by partners does not mean what is initially such remuneration shall not be chargeable to income
and actually brought in by the partners. u/s.28(v) in the case of partner of the firm.

The accretion, increase, profit and gains during Allowbility of remuneration to working
subsistence of the partnership belong to the partners. partner as per section 40(b)(v)
The assessee was entitled to interest on the enhanced
amount of capital. Another factor that the partners CBDT Circular
were assessed on the interest allowed to them by
the firm also supported the case of the assessee. From A.Y. 1997-98, remuneration to partners will not be
Thus the matter was decided in favour of the allowed if the amount is not quantified or total remuneration
assessee. has been specified. Thus the remuneration cannot be
decided by partners in the end of the accounting year.
(v) 98 TTJ 501 (ITAT[Pune]) Specific provision is required to be made in the partnership
deed.
DEVAL UTENSILS FACTORY v/s. DEPUTY
COMMISSIONER OF INCOME TAX Detailed circular is given here under :

(Interest on opening balance of partners) C.B.D.T.Circulars

In this case, interest to partner was calculated on the Circular No. 739, dated March 25, 1996
opening balance carried forward from previous year.
Interest @ 18% as per section 40(b)(iv) was Subject : Provisions of section 40(b)(v) of the Income-
calculated. tax Act, 1961,regarding admissibility of remuneration
of working partner in the assessment of firms—
As per the view of the assessing officer, the profit Regarding.
was credited on the last date so the interest was
required to be calculated on day–to–day basis after The Board have received representations seeking
considering all outgoings from partner’s accounts. clarification regarding disallowance of remuneration paid
to the working partners as provided under section 40(b)(v)
In first appeal, CIT(A) held that interest should be of the Income-tax Act. In particular, the representations have
allowed only on the amount utilized by the partnership referred to two types of clauses which are generally
firm. Thus addition made by AO was confirmed. incorporated in the partnership deeds. These are :

Before ITAT it was the plea of the assessee that (i) The partners have agreed that the remuneration to a
amount of profit credited was more than the amount
withdrawn by partners. working partner will be the amount of remuneration

8 allowable under the provisions of section 40(b)(v) of

the Income-tax Act ; and

DERATION OF T
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(ii) The amount of remuneration to working partner willGUJARAT FEAX CONSULTA Tax Gurjari
be as may be mutually agreed upon between partnersL
at the end of the year. will not be taxable in the case of member who received
it.
It has been represented that the Assessing Officers
are not allowing deduction on the basis of these and 3. Transfer not regarded as transfer
similar clauses in the course of scrutiny assessments
for the reason that they neither specify the amount of As per section 47(i) any distribution of capital assets
remuneration to each individual nor lay down the on the total or partial partition of a Hindu undivided
manner of quantifying such remuneration. family shall not be regarded as transfer and no
question of capital gains will arise as per section 45
2.  The Board have considered the representations. of the Income Tax Act.
Since the amended provisions of section 40(b) have
been introduced only with effect from the assessment 4. Cost with reference to certain modes of
year 1993-94 and these may not have been acquisition
understood correctly the Board are of the view that a
liberal approach may be taken for the initial years. It As per section 49(1) where the capital asset became
has been decided that for the assessment years 1993- the property of the assessee on any distribution of
94 to 1996-97 deduction for remuneration to a working assets on the total or partial partition of Hindu
partner may be allowed on the basis of the clauses Undivided Family, the cost of acquisition of the asset
of the type mentioned at l(i) above. shall be deemed to be the cost for which the previous
owner of the property acquired it, as increased by
3.  In cases where neither the amount has been the cost of any improvement of the assets incurred
quantified nor even the limit of total remuneration has or borne by the previous owner or the assessee as
been specified but the same has been left to be the case may be.
determined by the partners at the end of the
accounting period, in such cases payment of As per explanation of this section, previous owner of
remuneration to partners cannot be allowed as the property in relation to any capital asset owned by
deduction in the computation of the firm’s income. the assessee means, the last previous owner of the
capital asset who acquired it by a mode of acquisition
4.  It is clarified that for the assessment years subsequent other than,
to the assessment year 1996-97, no deduction under
section 40(b)(v) will be admissible unless the i. On distribution of asset on HUF on partition
partnership deed either specifies the amount of
remuneration payable to each individual working ii. Under a Gift or Will
partner or lays down the manner of quantifying such
remuneration. iii. By succession, inheritance or devolution etc.

5.  The above clarification may be brought to the notice 5. Clubbing of income
of all the Assessing Officers of your region.
As per section 64(2) of the Income Tax Act, where
(Sd.) Nishi Singh, an Individual who is a member of HUF and who is
Secretary, having his separate property which has been
converted by such individual to be property belonging
Central Board of Direct Taxes to the family or throwing such separate property with
[F. No. 225/29/93/ITA.II] the Character of property belonging to the family after
31/12/1969, income from such property will be taxed
Other important provisions for HUF under in the case of an Individual and not in the case of
the Income Tax Act HUF.

1. Residential Status of HUF for the purpose of 6. PARTITION
Income Tax
(1) Provisions on partition of HUF section 171.
As per section 6(2) status of an HUF will be resident
in India except where during the previous year the (2) Unless the finding of partition has been given, the
control and management of its affairs is situated fully HUF will continue to be assessed as such.
outside India.
(3) The claim of partition is required to be put by a
2. Income not forming part of total income member or on his behalf. The assessing officer at
the time of making assessment u/s. 143 or 144 will
As per section 10(2) of the Income Tax Act, any sum inquire regarding partial or full partition in the HUF.
received by a member of HUF, where such sum has He will issue notice to all the members of the family
been paid out of the income of family, such income to inquire about partition.

DERATION OF T (4) On completion of the inquiry, the A.O. shall record
his finding regarding total or partial partition.
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Tax Gurjari GUJARAT FE(2) To Illegitimate Children, where both parents are AX CONSULTA
L Hindus.
(5) Till the date of partition, the income will be assessed
in the case of HUF. Each member or a group of (3) To Illegitimate children where, father is a Christian
member shall be liable for the tax payable by the HUF and mother is a Hindu and the children are brought
jointly and severally. up as Hindus.

(6) Where a partial partition has taken place after 31st of As per Hindu Law, father is the head of the family
December 1978 among the members of the HUF and the sons are Coparcenars by birth with rights of
hitherto assessed, survivorship, shall not apply to such children.

a. no inquiry shall be made in this regard and no finding (4) To Jains, Buddhists in India, Sikhs
shall be recorded and any finding recorded under
section 171(3) whether before or after 18th June 1980 (5) To Hindu by Birth who renounced Hinduism and
shall be null and void. reverted to it.

b. such family shall continue to be assessed as HUF as AND
if no partial partition had taken place.
(6) To Hindus who made a Declaration that they were
c. each member or group of members of such family not Hindus for the purpose of Special Marriage Act,
shall be jointly and severally liable for any tax, 1872.
penalty, interest or other sum payable by the family
for the period before or after such partial partition. [II] Hindu Law does not apply [Rule 7]

d. the liability of each member shall be limited to the (1) To Illegitimate children of Hindu father by a Christian
extent of the portion of family property allotted to him. Mother who are brought up as Christians or to
illegitimate children of a Hindu father by a Mahomedan
For the purpose of this section “partial” means : Mother.

A. Physical division of the income without the physical (2) To a Hindu who converts to Christianity the estate of
division of the property shall not be deemed to be a such person shall govern as per Indian Succession
partition Act.

OR (3) To Converts from the Hindu to the Mahomedan faith.

Mere severance of status without physical division of [III] Hindu Schools [Rule 11/Rule 24]
the property shall not be deemed to be a partition
There are two schools of Law :
B. Partial partition means partition as regards the
persons or the properties or both. (1) Mitakshara School, which prevails in India except
Bengal
7. Service of notice on HUF
This school recognises two modes of Devolution of
As per section 283 of the Income Tax Act, the property i.e. by survivorship and by succession. The
assessing officer after recording finding of total rule of survivorship applies to joint family property
partition has taken place as per section 171, a notice while the rule of succession applies to personal
shall be served on the person who was last manager property of the owner.
of Hindu family, or, if such person is dead, then on all
adults who were members of Hindu family According to this school each son acquires an equal
immediately before the partition. interest with his father on his birth. On the death of
father the property is devolved as per survivorship. It
Conclusion is interesting to note that in the self acquired
property of the father, mere existence of a son(s)
In this paper I have tried to cover certain issues which does not make this self acquired property into joint
are useful in day to day practice. I hope that it will family property.
help my professional friends in their scrutiny cases.
After amendment in Hindu Succession Act 2005, a
Relevant provision of Hindu Law girl also acquires equal interest with her father on
her birth.
PROVISIONS RELATING TO HINDU LAW
(2) Dayabhaga School which prevails only in Bengal and
[I] Hindu Law applicable [Rule 6] Assam.

(1) As per Rule.6 of the Hindu Law, it is applicable to [IV] Coparceners and coparcenary property [Rule 212]
Hindus by birth. It also applies to Hindu by religion,
means who converts to Hinduism. DERATION OF T

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A. Coparceners :-GUJARAT FEAX CONSULTA Tax Gurjari
L
(1) A joint Hindu Family consist of all persons lineally (1) Coparcenery property devolves by Survivorship and
descended from a common Ancestor and includes not by Succession.
their wives. By virtue of amendment in Hindu
Succession Act 2005, the daughter of a coparcener (2) It is a property in which the male / female issues of
is included as coparcener alongwith his son and is the coparcenars acquire an Interest by Birth.
recognised as coparcener in her own right.
H. Ancestral property [Rule 221]
(2) An HUF is ordinarily joint not only in estate, but also
in food and worship. The existence of Joint estate (1) All property inherited by a Male Hindu from his father,
is not an essential requisite to constitute a Joint grandfather or great grandfather is ancestral property.
family, at the same time a family which does not Thus any movable or immovable property inherited
own any property may nevertheless be joint. by a Coparcener is ancestral property as regards his
male issue. If he has no son, grandson or great
B. Coparcenary [Rule 213] grandson/daughter in existence at the time of
inheritance of the property, he holds the property as
(1) A Hindu coparcenary is a much narrow body than absolute owner thereof.
the joint family. It includes only those persons who
acquire by birth an interest in the joint or coparcenary (2) If the property is inherited from maternal grandfather,
property. i.e. the sons, grandsons and great- it is not an ancestral property.
grandsons of the holder of the Joint property. Thus,
property inherited by a Hindu from his father, his (3) If the property is inherited other than from his father,
fathers’ father, or fathers’ father’s father is an grandfather or great grandfather it will be his
ancestral property. If the same is inherited from other separate property, and his male issue do not take
relations it is a separate property. On death of Father any interest in it by birth. Thus the property received
the property passes by survivorship and not by from brother, uncle etc. or inherited from a female
succession. like mother, will be his separate property.

C. Coparcenary interest and property [Rule 214] (4) The share allotted to a Coparcenar on partition will
be his ancestral property as regards his male/female
A coparcenary is purely a creature of Law, it cannot issue. They take an interest in it by birth.
be created by act of parties. A stranger may be
introduced as a member of Coparcenary. (5) If the property is obtained by Gift or Will from a
paternal ancestor the intention will be material to
D. Females cannot be coparcener [Rule 215] decide whether the property will be his Individual
property or his HUF property. The intention of the
No female can be a Coparcener. A wife is entitled to Donor or the Testator is to be gathered from the terms
maintenance out of her husband’s property, still she of the Deed of Gift or Will. There is no presumption
is not her husband’s coparcener. Similarly, a mother that under such circumstances the property will be
is not a coparcener with her sons nor a mother-in- either Individual or HUF without specific direction.
law with a daughter-in-law.
(6) If there is accumulation of Income out of ancestral
After amendment in Hindu Succession Act 2005 and property or if any property is purchased or acquired
with the substitution of Section 6 of the Act which out of the funds or income, it will be ancestral
stipulates a daughter of a coparcener would become property.
a coparcener in her own right.
I. Character of father and sons interest in ancestral
E. Coparcenery property [Rule 216] property [Rule 222]

Essence of coparcenery is Unity of ownership. The The son on his birth takes an interest equal to that of
share of the members in HUF is fluctuating. His share his father in ancestral property [Immovable or
enlarges by death in the family and reduces by birth Movable]. If any property is transferred by father which
in the family. It is only on a partition that the share in is allowed by Law, it cannot affect the interest of his
a Coparcenery is crystallised. son in the property. The father can disposed off
ancestral property for certain purposes like Gift of
F. Classification of property [Rule 218] Immovable and Movable Property within reasonable
Limit or for sale or Mortgage of Coparcenary
The property can be classified into two :- property for payment of an antecedent debt.

(1) Ancestral property J. Gift by father within reasonable limits of ancestral
movable property [Rule 223]
(2) Separate property of coparceners thrown into the
common coparcenery stock. A father can give a Gift of Movable property within
reasonable Limits without the Consent of his sons.
G. Coparcenery property [Rule 219] Thus a gift may be made to a wife, a daughter and

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Tax Gurjari GUJARAT FENo coparcener can dispose off his undivided interest AX CONSULTA
L in coparcenery property by gift, nor can he alienate
even to a son. But the gift should be within reasonable such interest even for value, except in Bombay,
limits. A gift of the whole, or almost the whole of the Madras and Madhya Pradesh.
ancestral movable property to one of the sons to the
exclusion of others cannot be held as a gift within Where a coparcener dies before partition of the
reasonable limits. coparcenery property, his undivided interest in the
property devolves by survivorship and not by
K. Gift by father / managing member of ancestral succession.
immovable property within reasonable limits
[Rule 224] O. Alienation by sole surviving coparcener [Rule 255]

Hindu father/managing member has power to Gift, A sole surviving coparcener is entitled to dispose off
within reasonable Limits, ancestral Immovable the coparcenery property as if it were his separate
property for Pious purposes. property. He may Sell, Mortgage or Gift it. If a Son is
subsequently Born to him or adopted by him, the son
L. Devolution of deceased coparcener’s interest cannot object alienation made by his father.
[Rule 227]
P. Gift of undivided interest [Rule 256]
As per rule.227 on the death of a Coparcener his
interest in the coparcenery property does not pass No coparcener can dispose of his undivided Interest
by succession to his heirs. It passes by survivorship in coparcenary property by Gift. Such transaction is
to the other Coparceners where the deceased void. However he can make a gift of his interest with
coparcener leaves male issue, they represent his the consent of other coparceners.
rights to a share on partition.
He can make a disposition of his share in the joint
The right of a coparcener to take by survivorship is family property by Will as per section 30 of the Hindu
defeated in the following cases :- Succession Act, 1956.

(1) Where the deceased coparcener has sold or Q. Sale or mortgage of undivided interest [Rule 257]
mortgaged his interest in states where such sale or
mortgage is allowed by Law. A Coparcener may sell, mortgage or otherwise
alienate for value his undivided interest in
(2) Where the interest of the deceased Coparcener has coparcenery property without the consent of other
been attached in his lifetime, in execution of a Decree coparceners. It is applicable in Bombay, Madras and
against him. Madhya Pradesh.

(3) Where the interest of the deceased coparcener has R. Sale or mortgage of undivided interest in other
vested in the official assignee or receiver on his states [Rule 258]
insolvency.
No coparcener can alienate even for value his
M. Ancestral business [Rule 232] undivided interest without the consent of other
coparceners unless the same is for legal necessity
Partnership with outsiders or for payment of antecedent debts. The consent of
other coparceners is necessary even if the alienation
A manager acting on behalf of the family can is made in favour of the coparcener.
enter into a partnership with a stranger or with a
karta of another family. The person who entered into S. What kind of property may be disposed of by gift
partnership with the stranger only becomes the [Rule 356]
partner and not all the other members of the family.
The manager is accountable to the family, but the (1) A Hindu can gift his separate or Self Acquired
partnership is exclusively between the contracting property.
members and the partnership would be governed by
the provision of the Indian Partnership Act, 1932. If (2) A Sole surviving Coparcener under the Mitakshara
manage dies, the partnership will be dissolve on his Law can dispose of the property by gift.
death.
(3) A female can dispose of her Stridhan by gift or will.
Karta can also enter into a partnership with member Her right has been enlarged by Sec.14 of the Hindu
of HUF. Succession Act.

N. Management and enjoyment of coparcenery IMPORTANT PROVISIONS OF HINDU
property and rights of coparceners [Rule 233] SUCCESSION ACT, 1956

A member of the family cannot predicate his share in This act came into force w.e.f 17th June, 1956. It has made
the joint family property. His share becomes final only radical changes in the matter of property and its devolution.
when a partition takes place.
DERATION OF T
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The changes made in 1956 Act and again amendment ActGUJARAT FEAX CONSULTA Tax Gurjari
2005 are having far reaching. Amendments made in 2005L
are incorporated in this paper. I. Father
II. (1) Son’s Daughters Son
1. Applicability of this Act Section 2
(2) Son’s Daughters Daughter
This Act is applicable to the whole of India except the (3) Brother
state of Jammu and Kashmir. (4) Sister
III. (1) Daughter’s Son’s Son
(1) As per sec.2 it is applicable to any person who is a (2) Daughter’s Son’s Daughter
Hindu by religion. (3) Daughter’s Daughter’s Son
(4) Daughter’s Daughter’s Daughter
(2) A Buddhist, Jain, Sikh by religion. IV. (1) Brother’s Son
(2) Sister’s Son
(3) To any other person who is not a Muslim, Christian, (3) Brother’s Daughter
Parsi or Jew by religion. (4) Sister’s Daughter
V. Father’s Father; Father’s Mother
2. Certain Definitions : VI. Father’s Widow; Brother’s Widow
VII. Father’s Brother; Father’s Sister
(1) INTESTATE Section 3 VIII. Mother’s Father; Mothers Mother;
IX. Mother’s brother; Mother’s Sister
As per Sec.3 Intestate is defined as, “A person is 3. Devolution of interest in coparcenary property
deemed to die intestate in respect of property of which section 6
he or she has not made a testamentary disposition (1) On and from the commencement of the Hindu
capable of taking effect” Succession (Amendment) Act 2005, in a joint Hindu
family the daughter of a coparcener shall,
(2) AGNATE : (a) by birth become a coparcener in her own right in the
same manner as the son
One person is said to be an agnate of another if the (b) has the same right in coparcenery property as she
two are related by Blood or adoption wholly through would have had if she had been a son
Males. (c) be subject to the same liabilities in respect of the said
coparcenery property as that of a son, and any
(3) COGNATE : reference to a Hindu coparcenery shall be deemed
to include a reference to daughter of a coparcener.
One person is said to be cognate of another if the (2) any property to which a female Hindu becomes
two are related by Blood or adoption but not wholly entitled by virtue of and held by her capable of being
through Males. disposed of and by her testamentary disposition.
(3) where a Hindu dies after commencement of Hindu
(4) General Rules of Succession, in the case of males Succession Act (Amendment) Act 2005 his interest
Section 8 in the property shall devolved by testamentary or
inteasted succession as the case may be and not by
As per Sec.8 of this act, if a male Hindu dying survivorship and the coparcenery property shall be
intestate, his property shall devolve : deemed to have been divided as if a partition had
taken place.
a. Firstly upon the heirs being the relatives as per Class (a) the daughter is allotted the same share as is allotted
I. to a son

b. If there is no heir of Class I, then upon the heirs 13
specified in class II.

c. If there is no heir of any of the two Classes, then
upon the agnates of the deceased.

d. Lastly, if there is no agnate, then upon the cognates
of the deceased.

HEIRS IN CLASS I

Son; Daughter; Widow; Mother; Son or Daughter of
a predeceased son; Son or Daughter of a
predeceased Daughter; Widow of a predeceased
son; Great-Grandson, grand-daughter of a
predeceased Son and grandson; Widow of a
predeceased Son of a predeceased son;

Thus from the above list it can be noticed that Father
is not appearing in the list of Class I heirs of a Hindu.

HEIRS IN CLASS II

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Tax Gurjari

(b) the share of pre deceased son or a pre deceased
daughter, as they would have got had they will alive
at the time of partition

(c) shall be allotting to the surviving child of such pre
deceased son or of such pre deceased daughter

4. Testamentary succession Section 13

As per Section 30 of this Act, a Hindu male / female
may dispose of by Will any property which is within
his / her power to bequeath by any testamentary
disposition. Thus interest of a male / female Hindu in
a Mitakshara Coparcenary property can be deemed
to be property capable of being disposed of by a Will.

5. Property of female Hindu Section 14

Any property [movable or immovable] possessed by
a Hindu Lady, shall be held by her as full owner
whether acquired by her before or after the
commencement of this act. Thus property received
on inheritance or a partition or in lieu of maintenance
or by gift or after her marriage or acquired by her
own skill and as shridhan can be disposed of as per
her desire by Will.



14 GUJARAT FEDERATION OF TAX CONSULTA
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Tax Gurjari
Analysis of the provisions relating to reassessment u/s 147 of the Income-Tax Act, 1961.

Advocate Deepak R. Shah

(A) Preamble:GUJARAT FEAX CONSULTA is now widened and the conditions precedent to be
L fulfilled under clause (a) and (b) of old s. 147 are made
(1) The provision relating to reassessment is one of the less strict. As per the substituted law, when an AO
most hotly debated issues in any tax jurisprudence has reason to believe that income has escaped
and income-tax Act is no exception to the same. For assessment, he can subject to provisions of sec. 148
our discussion we will restrict to only Income-tax Act, to 153 may reopen assessment originally completed.
1961 (the Act for short). While an assessee thinks However, in order to preserve the finality of an
that once an assessment is finalized, either in a assessment, the amended law should be construed
summary manner or after scrutiny, the reassessment perceptively. It is not to be interpreted so as to
should not be initialized, the tax authorities under any empower an AO to reopen merely because he has a
pretext wishes to reassess the same. Thus pulling the different opinion either of his own or of his predecessor
two end in two different directions in extreme situation on the same set of facts. The controlling words “reason
results into litigation and controversies. The stand of to believe” will still apply and should be given their full
an assessee in objecting to reassessment is effect, i.e. the belief of a reasonable man based on
vindicated by the observation of Hon,ble Supreme reasonable effect of the information in possession for
Court when in the case of Parshuram Potteries (106 formation of belief of a person familiar with the values
ITR 1 @11) it observed thus: of justice and fairness. The reason to believe should
be founded on some ‘tangible material’ which can lead
It has been said that the taxes are the price that we a reasonable man to believe so. The issue has been
pay for civilization. If so, it is essential that those amply clarified by Hon,ble supreme court in the case
who are entrusted with the task of calculating and of Kelvinator (320 ITR 561) where it is held thus:
realizing that price should familiarize themselves,
with the relevant provisions and become well- Therefore, post 1-4-1989 , power to reopen is much
versed with the law on the subject. Any remissness wider. However, one needs to give a schematic
on their part can only be at the cost of the national interpretation to the words “reason to believe” failing
exchequer and must necessarily result in loss of which, we are afraid, section 147 would give arbitrary
revenue. At the same time, one has to bear in mind powers to the Assessing Officer to re-open
that the policy of law is that there must be a point assessments on the basis of “mere change of opinion”,
of finality in all legal proceedings, that stale issues which cannot be per se reason to reopen. We must
should not be reactivated beyond a particular also keep in mind the conceptual difference between
stage and that lapse of time must induce repose power to review and power to re-assess. The
in and set at rest judicial and quasi-judicial Assessing Officer has no power to review; he has
controversies as it must in other spheres of human the power to reassess. But reassessment has to
activity. So far as the income-tax assessment orders be based on fulfilment of certain pre-condition and
are concerned, they cannot be reopened on the score if the concept of “change of opinion” is removed,
of income escaping assessment under section 147 as contended on behalf of the Department, then,
after the expiry of four years from the end of the in the garb of re-opening the assessment, review
assessment year unless there be omission or failure would take place. One must treat the concept of
on the part of the assessee to disclose fully and truly “change of opinion” as an in-built test to check
all material facts necessary for the assessment. abuse of power by the Assessing Officer. Hence,
after 1-4-1989 , Assessing Officer has power to
An attempt is made to resolve the controversy to the reopen, provided there is “tangible material” to come
best possible extent so as to save time, cost and to the conclusion that there is escapement of income
energy of all concerned. from assessment. Reasons must have a live link
with the formation of the belief.
(B) Analysis of the provisions.
(3) Analyzing the provisions further, the section states
(2) The provisions relating to reassessment are contained that if the AO has reason to believe that income has
in sections 147 to 152 of the Act. Sec. 147 was escaped assessment, he can initiate proceedings.
substituted w.e.f 1-4-1989. The provisions being Thus the pre condition is that the belief should be of
machinery provisions, will apply for any action initiated the AO and none else. If the AO at the instance of any
on or after 01-04-1989 and is not restricted to other authority like audit objections, valuation report,
applicable to proceedings for A.Y. 1989-90 and report of investigation wing etc. reopens the
thereafter only. The scope of powers for reassessment
15
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2018-2019
27th Year
NTS AL

Tax Gurjari GUJARAT FEc) where original assessment is framed u/s 143(3) AX CONSULTA
L and reopening is within a period of 4 years from
assessment without any application of mind by himself, end of relevant ass.yr.
the same will be invalid. It may be a case that
information provided by any of the above authority may d) where original assessment is framed u/s 143(3)
be prima facie considered as tangible material but and reopening is beyond a period of 4 years from
application of mind by AO is a pre requisite for end of relevant ass.yr.
formation of belief. He cannot mechanically merely
on direction of any other authority or such information (7) In all four situations enumerated above, different
can reopen. He cannot reopen to make inquiry first criteria will apply to judge the validity of reassessment
and then come to conclusion that income has escaped proceedings.
assessment. Satisfaction for formation of belief that
income has escaped assessment must precede any (7.1) In the first situation, mere reason to believe will be
action for issuing notice for reopening. sufficient to initiate the reassessment proceedings.
Only requirement will be to have tangible material,
(4) The next condition is that the AO should have reason which can be from any source, internal or external so
to believe. The words used are reason to believe and as to assume jurisdiction. At the same time, the
not reason to suspect. Reason to believe should be tangible material should have live link with the
based on tangible material and not mere ipsi dixit. formation of belief that income has escaped
There should be live link between information in assessment. Since original assessment is summary
possession and formation of belief that income has assessment, there is no question of formation of
escaped assessment. Though the court cannot opinion thereon and hence plea of change of opinion
examine the adequacy or sufficiency of the reasons, cannot be raised. This is made clear by Hon,ble
but it can definitely examine whether the reasons are Supreme Court in the case of Rajesh Jhaveri Stock
relevant and have a bearing on the matters in regard Brokers (291 ITR 500).
to which he is required to entertain the belief before
issuing notice. The expression reason to believe does (7.2) In second situation apart from the belief that income
not mean a purely subjective satisfaction on the part has escaped assessment, the income escaping
of the AO. Though the satisfaction can be subjective, assessment should be or likely to be more than one
the same should be based on objective analysis of lac Rs.
information in possession or tangible material.
(7.3) In the third situation, apart from the condition of income
(5) The next condition is that the income chargeable to escaping assessment, there should not be change of
tax should be escaping assessment. Even if there is opinion. Thus if in original assessment, if queries were
tangible material, but because of such material if there raised and relevant information were supplied, even
is no income escaping assessment, exercise of power if there is no discussion in the relevant order about
is not permissible. Thus where the reassessment is the same, it will amount to change of opinion and
for levying penalty u/s 269 D/E, or for charging interest reassessment proceedings will be invalid. In this
which was not charged in original assessment, the regard useful reference can be made to detailed order
proceedings for reassessment will not be valid. If as passed by Hon,ble Gujarat High court in the case of
per reasons recorded income is escaping assessment Gujarat Power Corporation (350 ITR 266) extracted
under regular provision but not as per book profit and herein:
if ultimately income will be assessed under book profit
u/s 115JB, the initiation of reassessment will not be • Bearing in mind these conflicting interests, if one
valid as held in the case of PKM Advisory case by revert back to central issue in debate, it can hardly
Gujarat High Court. Therefore, income escaping be disputed that once the Assessing Officer
assessment is a pre-condition of initiation of notices a certain claim made by the assessee in
proceedings. the return filed, has some doubt about eligibility
of such a claim and therefore, raises queries,
(6) The reassessment is done in four different situations extracts response from the assessee, thereafter
namely; in what manner such claim should be treated in
the final order of assessment, is an issue on which
a) where original assessment is framed u/s 143(1) the assessee would have no control whatsoever.
and reopening is within a period of 4 years from Whether the Assessing Officer allows such a
end of relevant ass.yr. claim, rejects such a claim or partially allows and
partially rejects the claim, are all options available
b) where original assessment is framed u/s 143(1) with the Assessing Officer, over which the
and reopening is beyond a period of 4 years from assessee beyond trying to persuade the
end of relevant ass.yr. Assessing Officer, would have no control
whatsoever. Therefore, while framing the
16
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NTS AL

assessment, allowing the claim fully or partially,GUJARAT FEAX CONSULTA Tax Gurjari
in what manner the assessment order should beL
framed, is totally beyond the control of the year. Thus if the assessee has disclosed all material
assessee. facts, which are primary facts and whether any query
is raised during original assessment proceedings or
• If the Assessing Officer, therefore, after not, reopening of original assessment concluded under
scrutinizing the claim minutely during the scrutiny cannot be reopened in view of the first proviso
assessment proceedings, does not reject such a to sec. 147. The disclosure should not only be full but
claim, but chooses not to give any reasons for also true. Thus if the original disclosure itself is not
such a course of action that he adopts, it can true, merely because it was accepted in scrutiny
hardly be stated that he did not form an opinion assessment and later on it is found to be untrue,
on such a claim. It is not unknown that reassessment will be valid as per Supreme Court in
assessments of larger corporations in the modern the case of Phoolchand Bajranglal (203 ITR 456). The
day, involve large number of complex claims, AO has to demonstrate that there was failure to
voluminous material, numerous exemptions and disclose material facts. Primarily, such allegation
deductions. If the Assessing Officer is burdened should be in the reasons recorded only; however, if it
with the responsibility of giving reason for several is otherwise discernible that the assessee has not fully
claims so made and accepted by him, it would and truly disclosed all material facts, reassessment
even otherwise cast an unreasonable expectation can be initiated. The benefit of first proviso to sec.
which within the short frame of time available 147 will not apply where income has escaped
under law would be too much to expect him to assessment in relation to any asset located outside
carry. Irrespective of this, in a given case, if the India in view of second proviso to sec. 147. Here
Assessing Officer on his own for reasons best though the benefit of first proviso may not be available,
known to him, chooses not to assign reason for but if during original assessment the issue has been
not rejecting the claim of an assessee after examined and whether any adverse view is taken or
thorough scrutiny, it can hardly be stated by the not, the protection in relation to change of opinion will
revenue that the Assessing Officer cannot be be surely available.
seen to have formed any opinion on such a claim.
Such a contention, it is held, would be devoid of (7.5) As per third proviso to S. 147, the AO may reassess
merits. such income, other than the income involving the
matters which are the subject matter of any appeal,
• If a claim made by the assessee in the return is reference or revision etc. Hence an issue which is
not rejected, it stands allowed. If such a claim is subject matter of further appeal before higher forums,
scrutinized by the Assessing Officer during the same cannot be subject matter of reassessment.
assessment, it means he was convinced about This is for the reasons that an issue which is before
the validity of the claim. His formation of opinion CIT(A) he has powers to examine the same from all
is thus complete. Merely because he chooses not angles and if it results into enhancement, the same is
to assign his reasons in the assessment order within powers of CIT (A).
would not alter this position. It may be a non-
reasoned order but not of acceptance of a claim (8) As per explanation (3) to sec. 147, the AO may
without formation of opinion. Any other view would reassess the income in respect of issue which has
give arbitrary powers to the Assessing Officer. escaped assessment and also on such issues which
comes to his notice during reassessment proceedings.
• It is, therefore, held that in a situation where the Thus reassessment is not confined to issues for which
Assessing Officer during scrutiny assessment, reasons are recorded but all the issues which comes
notices a claim of exemption, deduction or such to notice of AO in reassessment proceedings.
like made by the assessee, having some prima However, if in relation to reasons recorded for certain
facie doubt raises queries, asking the assessee issues, no income is found to have escaped
to satisfy him with respect to such a claim and assessment in reassessment proceedings, the AO
thereafter, does not make any addition in the final cannot travel beyond the reasons recorded. Thus if
order of assessment, he can be stated to have as per reasons recorded, income A has escaped
formed an opinion, whether or not in the final order assessment, but in reassessment no addition is made
he gives his reasons for not making the addition. in respect of issue A but in relation to X,Y,Z etc. the
same is not valid in view of Gujarat high court in the
(7.4) In the fourth situation, apart from income escaping case of Mohmed Juned Dadani (355 ITR 172).
assessment, the AO should demonstrate that income
has escaped assessment for the reason that there is (9) The provision relating to reassessment u/s 147 are
failure on the part of the assessee to fully and truly subject to provisions of sec. 148 to 153 of the Act.
disclose all the material facts for assessment for the Issue of notice u/s. 148, is mandatory. Before issue
of notice u/s 148, the AO has to record reasons for
DERATION OF T doing so. Thus before framing reassessment u/s 147,

2018-2019 17
27th Year
NTS AL

Tax Gurjari GUJARAT FEof time. The language of the new section must be read AX CONSULTA
L as applicable only to those cases where the right of
notice is to be issued u/s 148(1) and before issue of the ITO to reopen the assessment was not barred
notice u/s 148, recording of reasons is mandatory. The under the repealed section. The new statute does not
validity of assumption of jurisdiction is to be judged disclose in express terms or by necessary implication
only on the basis of reasons recorded and not beyond that there was a revival of the right of the ITO to reopen
it. Thus if from reasons recorded it cannot be culled an assessment which was already barred under the
out that the AO was satisfied that income has escaped old Act.
assessment, the proceedings will fail. One has not to This decision is also followed recently by Hon,ble
travel beyond reasons recorded as the reasons only Gujarat High Court in the case of Ravi Electronics in
speaks as to what is in mind of the AO to hold that issue arising in VAT cases in SCA no. 3832 of 2012
income has escaped assessment. This is an important dt. 26th Dec. 2012. The effect of these cases is that if
safeguard provided and will check the abuse of power on the date of amendment i.e. 1-7-2012, if
by the AO. This is succinctly explained by Gujarat High reassessment proceedings have become barred by
Court in the case of Aayojan Developers (335 ITR limitation, i.e A.Y 2005-06 and prior thereto, the same
234). Thus the reasons are the backbone of any cannot be reopened in view of the fresh limitation
reassessment proceedings. provided by the amendment.
(11) The other provisions contained in s. 151 is also
(9.1) When the condition is that before framing required to be strictly complied. As per s. 151, before
reassessment, notice u/s 148 is to be issued and it issue of notice u/s 148, approval as stated therein has
also provides for recording of reasons for doing so, to be obtained. Thus if the provision requires to obtain
can the two officers be different? Hon, ble Gujarat High approval of JCIT and if approval is obtained from CIT,
Court in the case of Hynoup Food case (307 ITR 115) the same is not valid in eye of law even though CIT is
held that the officer issuing notice u/s 148 cannot be higher in hierarchy under the scheme of the Act.
different than the officer recording reasons for doing Each case of reassessment is to be examined on
so. combined reading of scope of original assessment,
reasons recorded, tangible material referred and time
(10) U/s 149, the notice for reassessment u/s 148 is to be limit within which such proceedings are initiated. This
issued within certain time limits. If the notice is issued is only partial analysis of relevant provisions but final
beyond limitation period, the proceedings are void ab answer will be based on facts of each case. An attempt
initio. An interesting situation arises in view of insertion is made to familiarize the members with important
of clause (c) in sub-sec. (1) to s. 149 which is inserted points emanating. Hope it will be useful to one and
w.e.f. 1-7-2012. The amendment provides that the all.
notice can be issued within sixteen years from the
end of relevant A.Y. if the income escaping 
assessment is in relation to any asset located outside
India. Thus though assessment can be reopened for DERATION OF T
upto sixteen years from end of relevant A.Y. yet if on
date prior to amendment, proceedings for certain years 2018-2019
has become barred by limitation, can subsequent 27th Year
amendment can give fresh lease of life to initiate
reassessment. The issue is answered by Hon,ble
supreme court in the case of Induprasad Devshankar
Bhatt (72 ITR 595) wherein it was held thus:

It was admitted in this case that the right of the ITO to
reopen the assessment for the year 1947-48 was
barred under the old Act before the new Act came
into force. It was opined that it was not permissible to
construe sections 297(2)(d)(ii ) of the new Act as
reviving the right of the ITO to reopen the assessment
which was already barred under the old Act. The
reason was that such a that section which is not
warranted either by the express language of the
section or by necessary implication. The principle is
based on the well-known rule of interpretation that,
unless the terms of the statute expressly so provide
or unless there is a necessary implication,
retrospective operation should not be given to the
statute so as to affect, after or destroy any right already
acquired or to revive any remedy already lost by efflux

18

NTS AL

VALUE OF SUPPLY Tax Gurjari
CA. Brijesh Thakar

GUJARAT FEAs per section 9(1) of CGST Act, subject to the provisionsAX CONSULTA- Value of supply inclusive of integrated tax, central tax,
Lof sub-section (2), there shall be levied a tax called the State tax, Union territory tax (Rule 35) (Para-7.9)
central goods and services tax on all intra-State supplies
of goods or services or both, except on the supply of - Tariff value Section 15(5) (Para 8)
alcoholic liquor for human consumption, on the value - FAQs
determined under section 15 and at such rates, not Following chart explains the provisions of valuation under
exceeding twenty per cent., as may be notified by the GST
Government on the recommendations of the Council and
collected in such manner as may be prescribed and shall Para 6
be paid by the taxable person. Value of supply when the supplier and the recipient
are not related and the price is the sole consideration
It is clear from charging section i.e. section 9 (1), GST will Para 6.1
be levied on value as determined under section 15. Hence As per section 15(1) The value of a supply of goods or
we need to understand detailed provisions of section 15 services or both shall be the transaction value, which is
regarding determination of value. the price actually paid or payable for the said supply of
goods or services or both where the supplier and the
Content recipient of the supply are not related and the price is the
sole consideration for the supply.
- Value of supply when the supplier and the recipient It is important to note that the provisions of section 15 (1)
are not related and the price is the sole consideration will be applicable only when
(Para 6) 1. supplier and recipient are not related and
2. price is the sole consideration
- Transaction Value Section 15(1) (Para 6.1) If any of the above conditions is violated, value of supply
will not be determined under section 15(1) but it will be
- Inclusions in the value of Supply Section 15(2) (Para determined as per section 15 (4) i.e. as per valuation rules.
6.2) As per explanation to section 15 Related Persons are
defined as follows:
- Exclusion from value of supply Section 15(3) (Para Persons shall be deemed to be “related persons” if––
6.3) i. such persons are officers or directors of one another’s

- Valuation Rules Section 15(4) (Para 7) businesses;
ii. such persons are legally recognized partners in
- Value of supply of goods or services where the
consideration is not wholly in money (Rule 27) (Para business;
Para-7.1) iii. such persons are employer and employee;

- Value of supply of goods or services or both between 19
distinct or related persons, other than through an agent
(Rule 28) (Para-7.2)

- Value of supply of goods made or received through an
agent (Rule 29) (Para-7.3)

- Value of supply of goods or services or both based on
cost (Rule 30) (Para-7.4)

- Residual method for determination of value of supply
of goods or services or both (Rule 31) (Para 7.5)

- Determination of value in respect of certain supplies
(Rule 32) (Para 7.6)

- Value of supply of services in case of pure agent
( Rule 33) (Para-7.7)

- Rate of exchange of currency, other than Indian rupees,
for determination of value (Rule 34) (Para-7.8)

DERATION OF T

2018-2019
27th Year
NTS AL

Tax Gurjari GUJARAT FEIs his argument correct in the light of section 15? AX CONSULTA
L
iv. any person directly or indirectly owns, controls or holds Answer
twenty-five per cent or more of the outstanding voting
stock or shares of both of them; Section 15(2) mandates the addition of certain elements to
transaction value to arrive at taxable value. Clause (c) of
v. one of them directly or indirectly controls the other; section 15(2) specifies that amount charged for anything
done by the supplier in respect of the supply at the time of
vi. both of them are directly or indirectly controlled by a or before delivery of goods or supply of services shall be
third person; included in taxable value.

vii. together they directly or indirectly control a third person; Since AKJ Foods Pvt. Ltd. does the testing before the
or delivery of goods, the charges there for will be included in
the taxable value. Therefore, AKJ Foods Pvt. Ltd.’s
viii. they are members of the same family; argument is not correct. The testing fee should be added
to the price to arrive at taxable value of the consignment.
The term “person” also includes legal persons;
Example: The selling price of a notebook is Rs.50. For
Persons who are associated in the business of one another notebooks sold to students in Government schools, a
in that one is the sole agent or sole distributor or sole company uses its CSR funds to pay the seller Rs.30, so
concessionaire, howsoever described, of the other, shall that the students pay only Rs.20 per notebook.
be deemed to be related.
The taxable value of the notebook will be Rs.50, as this is
Para 6.2 a non-government subsidy. If the same subsidy is paid by
the Central Government or State Government, the taxable
Inclusions in the value of Supply Section 15(2) value of the notebook would be Rs.30.

As per section 15(1) of CGST Act, following will be Example: A philanthropic association makes a substantial
included in the value of supply donation each year to a reputed private management
institution to subsidise the education of low income group
- Any taxes, duties, cesses, fees and charges levied students who have gained admission there. The fee for
under any law for the time being in force other than these individuals is reduced thereby, coming to Rs.3
this Act, the State Goods and Services Tax Act, the Lakh a year compared to Rs.5 Lakh a year for other
Union Territory Goods and Services Tax Act and the students.
Goods and Services Tax (Compensation to States) Act,
if charged separately by the supplier. What would be the taxable value of the service of coaching
and instruction provided by the institution?
- Any amount that the supplier is liable to pay in relation
to such supply but which has been incurred by the Answer: As per section 15(2)(e), the value of a supply
recipient of the supply and not included in the price includes subsidies directly linked to the price, excluding
actually paid or payable for the goods or services or State Government and Central Government subsidies. In
both. this case, the subsidy is not from the Government but is
from a philanthropic association. Therefore, the subsidy is
- Incidental expenses, including commission and to be added back to the price to arrive at the taxable value,
packing, charged by the supplier to the recipient of a which comes to Rs.5 Lakh a year.
supply and any amount charged for anything done by
the supplier in respect of the supply of goods or Para 6.3
services or both at the time of, or before delivery of
goods or supply of services. Exclusion from value of supply Section 15(3)

- Interest or late fee or penalty for delayed payment of As per section 15 (3) the value of the supply shall not
any consideration for any supply. include any discount which is given

- Subsidies directly linked to the price excluding a) before or at the time of the supply if such discount has
subsidies provided by the Central Government and been duly recorded in the invoice issued in respect of
State Governments. The amount of subsidy shall be such supply; and
included in the value of supply of the supplier who
receives the subsidy. b) after the supply has been effected, if—

Example: i. such discount is established in terms of an
agreement entered into at or before the time of
AKJ Foods Pvt. Ltd. gets an order for supply of processed such supply and specifically linked to relevant
food from a customer. The customer wants the consignment invoices; and
tested for gluten or specified chemical residues. AKJ Foods
Pvt. Ltd. does the testing and charges a testing fee for the DERATION OF T
same from the customer. AKJ Foods Pvt. Ltd. argues that
such testing fees should not form part of the consideration 2018-2019
for the sale as it is a separate activity. 27th Year

20

NTS AL

Tax Gurjari

ii. input tax credit as is attributable to the discount as per section 15(2)(a)]
on the basis of document issued by the supplier
has been reversed by the recipient of the supply. CGST and SGST chargeable on the goods
[Not includible in the value as per
Example: A Ltd. gives a discount of 30% on the list price section 15(2)(a)]
to its distributors. List price of its product is Rs. 1000. Here
after deducting discount of Rs. 300, taxable value of Rs. Packing charges [Includible in the value 1,000
700 will be arrived. as per section 15(2)(c)]

Example: A company announces turnover discounts after Subsidy received from a non-Government body 2,000
reviewing dealer performance during the year. The [Since subsidy is received from a
discounts are based on performance slabs and are given non-Government body, the same is included
as cash-back. As these discounts were not known at the in the value in terms of section15(2)(e)]
time of supply of the goods, they will not be deducted from
taxable value of those goods. Total 58,000

Less: Discount @ 2% on Rs.50,000 1,000
[Since discount is known at the time of supply,
Example: Crunch Bakery Products Ltd sells biscuits and it is deductible from the value in terms of
cakes through its dealers, to whom it charges the list price section 15(3)(a)]
minus standard discount and pays GST accordingly. When
goods remain unsold with the dealers, it offers additional Value of taxable supply 57,000
discounts on the stock as an incentive to push the sales.Can
this additional discount be reduced from the price at which Para 7
the goods were sold and concomitant tax adjustments
made? Valuation Rules Section 15 (4)

Answer: The discounts were not known or agreed at the As per section 15(4) of CGST Act, where the value of supply
time of supply of goods to the dealers. Therefore, such of goods or services cannot be determined u/s 15(1), the
discounts cannot be reduced from the price on which tax same shall be determined in the manner prescribed under
had been paid in terms of section 15(3). valuation rules from Rule 27 to Rule 35.

Example: Black and White Pvt. Ltd. has provided the Value of supply can be determined by section 15(1) only
following particulars relating to goods sold by it to Colorful when following two conditions are fulfilled:
Pvt. Ltd.
1. supplier and recipient are not related and

Particulars Rs. 2. price is the sole consideration .

List price of the goods 50,000 If any of the above conditions is violated, value of supply
(exclusive of taxes and discounts) will not be determined under section 15(1) but it will be
determined as per section 15 (4) i.e. as per valuation rules.
Tax levied by Municipal Authority 5,000
on the sale of such goods
Valuation Rules

CGST and SGST chargeable on the goods 10,440

Packing charges (not included in price above) 1,000

Black and White Pvt. Ltd. received Rs.2000 as a subsidy
from a NGO on sale of such goods. The price of Rs.50,000
of the goods is after considering such subsidy.

Black and White Ltd. offers 2% discount on the list price of
the goods which is recorded in the invoice for the goods.
Determine the value of taxable supply made by Black and
White Pvt. Ltd.

Answer

Computation of value of taxable supply

Particulars Rs.

List price of the goods 50,000
(exclusive of taxes and discounts)

Tax levied by Municipal Authority on the sale 5,000
of such goods [Includible in the value

DERATION OF T
GUJARAT FE AX CONSULTA
L 21

NTS AL

2018-2019
27th Year

Tax Gurjari Supplied a Mobile Phone

Para-7.1-(Rule 27): Value of supply of goods or services
where the consideration is not wholly in money

Value of Supply

Mr. A Mr. B

Open Market Value of such supply Paid an old Mobile Phone worth
Rs.25000 in consideration

Market Value available Market Value not available Usually the new mobile phone is sold for Rs. 30000.
Thus, here the open market value of the new phone is
Value of Supply=MV of Supply Rs.30000. Hence value of supply is Rs.30000.
Let’s consider a different case consideration is paid partly
Consideration of Money in cash and partly in kind
+
New Mobile Phone is supplied
Any such further amount in
money as is equivalent to Mr. A Mr. B
the consideration not in money,
if such amount is known Paid Rs.27000 in Cash and a
headphone worth Rs.2000 in Barter
at the time of supply

If determination is not possible In this case the Value of Supply would be
through above method Rs.27000+Rs.2000=Rs.29000.

Value of supply of goods or Para-7.2(Rule 28): Value of supply of goods or services or
services or both of like kind both between distinct or related persons, other than through
an agent
and quality;
- The value of the supply of goods or services or both
As per Explanation to valuation rules- between distinct persons as specified in sub-
section (4) and (5) of section 25 or where the
a) “open market value” of a supply of goods or services supplier and recipient are related, other than where
or both means the full value in money, excluding the the supply is made through an agent, shall-
integrated tax, central tax, State tax, Union territory
tax and the cess payable by a person in a transaction, Open Market Value of such supply
where the supplier and the recipient of the supply are
not related and the price is the sole consideration, to Market Value available Market Value not available
obtain such supply at the same time when the supply
being valued is made; Value of Supply= Value of Supply=
MV of Supply Value of supply of
b) “supply of goods or services or both of like kind and goods or services of
quality” means any other supply of goods or services like kind and quality
or both made under similar circumstances that, in
respect of the characteristics, quality, quantity, Note- If value of supply is not determinable as through
functional components, materials, and the reputation above mentioned methods,
of the goods or services or both first mentioned, is the
same as, or closely or substantially resembles, that Value of Supply= as determined by the application of rule
supply of goods or services or both. 30 or rule 31

Note- If the value is not determinable through any of the - Where the goods are intended for further supply as
above mentioned methods, value of supply be the sum total such by the recipient, the value shall, at the option of
of consideration in money and such further amount in money the supplier, be an amount equivalent to 90% of the
that is equivalent to consideration not in money as price charged for the supply of goods of like kind and
determined by the application of rule 30 or rule 31 in that quality by the recipient to his customer not being a
order. related person.

Let us understand with the help of an example: DERATION OF T
GUJARAT FE AX CONSULTA
22 L

NTS AL

2018-2019
27th Year

Mr. B

Tax Gurjari

- Where the recipient is eligible for full input tax credit, respect of the characteristics, quality, quantity,
the value declared in the invoice shall be deemed to functional components, materials, and the reputation
be the open market value of the goods or services. of the goods or services or both first mentioned, is the
same as, or closely or substantially resembles, that
· As per Explanation to valuation rules- supply of goods or services or both.

a) “open market value” of a supply of goods or services Let’s understand with the help of an example:
or both means the full value in money, excluding the
integrated tax, central tax, State tax, Union territory Mr. A Supplies Mr. B Supplies Groundnuts
tax and the cess payable by a person in a transaction,
where the supplier and the recipient of the supply are Principal groundnut Agent further of like kind
not related and the price is the sole consideration, to and quality in
obtain such supply at the same time when the supply
being valued is made; subsequent

b) “supply of goods or services or both of like kind and Supplies supplies
quality” means any other supply of goods or services groundnut
or both made under similar circumstances that, in @Rs.5000/
respect of the characteristics, quality, quantity,
functional components, materials, and the reputation Mr. C Quintal
of the goods or services or both first mentioned, is the
same as, or closely or substantially resembles, that Other Independent
supply of goods or services or both. Supplier supplied
Groundnuts of like kind
Para-7.3 (Rule 29): Value of supply of goods made or and quality in subsequent
received through an agent supplies @Rs.4550/

The value of supply of goods between the Quintal
principal and his agent shall be
Value of Supply = Rs.4550/Quintal
Or at the option of supplier (i.e. Principal)

90% of 5000=Rs.4500/Quintal

The open market OR At the option of the Para-7.4 (Rule 30): Value of supply of goods or services
value of the goods supplier, be 90% of or both based on cost
the price charged
being supplied for the supply of Where the value of a supply of goods or services
or both is not determinable by any of the
goods of like kind and preceding rules of this Chapter
quality by the recipient
to his customer not being 110% of
a related person, where Cost of production or manufacture or
the goods are intended Cost of acquisition of such goods or

for further supply by Cost of provision of such services.
the said recipient.

Note- Where the value of a supply is not determinable Value of Supply
through the abovementioned method, the same shall be
determined by the application of rule 30 or rule 31 in that Para 7.5 (Rule 31): Residual method for determination of
order. value of supply of goods or services or both

As per Explanation to valuation rules- a) Where the value of supply of goods or services or
both cannot be determined under rules 27 to 30, the
a) “Open market value” of a supply of goods or services same shall be determined using reasonable means
or both means the full value in money, excluding the consistent with the principles and the general
integrated tax, central tax, State tax, Union territory provisions of section 15 and the provisions of this
tax and the cess payable by a person in a transaction, Chapter:
where the supplier and the recipient of the supply are
not related and the price is the sole consideration, to b) Provided that in the case of supply of services, the
obtain such supply at the same time when the supply supplier may opt for this rule, ignoring rule 30.
being valued is made;
Para 7.6 (Rule 32): Determination of value in respect of
b) “Supply of goods or services or both of like kind and certain supplies
quality” means any other supply of goods or services
or both made under similar circumstances that, in

DERATION OF T
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2018-2019
27th Year

Tax Gurjari A. Sold it for Rs.44 per USD. RBI reference rate at that
time is :
Notwithstanding anything contained in the provisions of this
Chapter, the value in respect of supplies specified below 1. Rs.45 per USD.
shall, at the option of the supplier, be determined in the
manner provided hereinafter. 2. N/A
1. Purchase or sale of foreign currency, including
B. Converted into £4500. RBI reference rate at that time
money changing is :

Foreign Exchange 1. Rs.46 per USD.

Value {(Buying Rate/ Selling Rate) Less 2. Rs.88 per UK Pound.
RBI Reference Rate at that time}
x No. of Units of currency For case A:

RBI Reference rate Value= 1% of Gross amount of 1. For a currency, when exchanged from, or to INR, the
is not available INR provided or received by value shall be equal to he difference in the buying
person changing the money. rate or the selling rate, as the case may be, the RBI
reference rate or selling rate as the case may be, and
In case where neither of the currencies exchanged is Indian the RBI reference rate for the currency at that time,
Rupees, the value shall be equal to one per cent of the multiplied by the total currency units.
lesser of the two amounts the person changing the money
would have received by converting any of the two currencies Thus, the value of supply = (Rs.45-Rs.44)*$9,000
into Indian Rupee on that day at the reference rate provided = Rs.9,000
by the Reserve Bank of India.
2. When RBI reference rate is unavailable, the value shall
A person supplying the services may exercise the option be 1% of gross amount of Indian Rupees provided or
to ascertain the value in terms of following table for a received, by the person changing the money.
financial year and such option shall not be withdrawn
during the remaining part of that financial year. Thus, the value of supply = 1% of Rs.(44*9,000)

Value of Foreign Value of Supply = 1% of Rs.3,96,000

Currency Exchange As per Clause (b) = Rs.3,960

(In INR/Per Transaction) For case B:

Up to Rs.1,00,000 1% of gross amount of When neither of the currencies are exchanged in INR, the
currency exchanged subject value shall be equal to 1% of lesser of two amounts the
to maximum of Rs.250. person changing the money would have received by
converting any of the two currencies into INR on that day
Rs.1,00,001 to Rs.1000+ 0.50% of Gross at the reference rate provided by RBI.
Rs.10,00,000 amount of currency
exchanged exceeding Rs. 1. USD to INR = $9000*Rs.46 = Rs.414000
1,00,000 and upto
10,00,0000. 2. UK Pound to INR = £4500*Rs.88 = Rs.396000

Above Rs.10,00,000 Rs.5500+ 0.10% of Gross Here lower = 396000 INR
amount of currency
exchanged exceeding Thus value of service = 1% of Rs.3,96,000
Rs.10,00,000 subject to
maximum amount of = Rs.3,960
Rs.60,000/-.
Case 1: Transaction where one of the currencies
Let’s understand with an example: exchanged is Indian Rupees.

EXIM ltd. exported some goods to SUN ltd. of USA. It Example: On 10th May, Mr. Doshi converted USD $ 100
received $9000 for consideration and; into Rs. 6,400 @ Rs. 64 per USD through Eastern Money
Changers. RBI reference rate on 10th May for US $ is Rs.
24 63 per US $. The value of supply in this case is (Rs. 63 –GUJARAT FE AX CONSULTA
Rs. 64)* $ 100 = Rs. 100 and GST will be levied on thisL
amount.

If the RBI reference rate is not available, then 1% of Rs.
6,400 i.e., Rs. 64 will be the value of supply of service

Case 2: Transaction where neither of the currencies
exchanged is Indian Rupees.

DERATION OF T

2018-2019
27th Year
NTS AL

Example: US $ 9,000 are converted into UK £ 4,500. RBI Tax Gurjari
reference rate at that time for US $ is Rs. 63 per US dollar
and for UK £ is Rs. 82 per UK Pound. In this case, neither The expression “basic fare” means that part of the air
of the currencies exchanged is Indian Rupee.Hence, in the fare on which commission is normally paid to the air
given case, value of taxable service would be 1% of the travel agent by the airline.
lower of the following:- Let’s understand with an example:
M/s. Indian Airlines sold tickets for transport of passengers
(a) US dollar converted into Indian rupees = $ 9,000 × to:
Rs. 63 = Rs. 5,67,000 Case-1: Delhi
Case-2: Singapore
(b) UK pound converted into Indian rupees =£ 4,500 × During December, 2017 the total amount charged is Rs.30
Rs. 82 = Rs. 3, 69,000 Lakhs on the flight (100 tickets) of which Rs.10 Lakh is
towards the passenger taxes. The airline pays commission
Value of taxable service = 1% of Rs. 3, 69,000 = Rs. @ 12.5% of the basic fare, which is equal to the total amount
3,690 charged by the airline (net of govt. taxes), to an agent M/s.
Udan Khatola who arranged the booking of the whole flight.
Example: Easy Coupons Ltd. sells coupons that are Here Basic Fare = Rs.30 Lakh – Rs.10 Lakh = Rs.20
redeemable against specified luxury food products at retail Lakh
outlets. Each coupon has a face value of Rs. 900 but is Value of supply:
redeemable for supplies worth Rs. 1000. What is the value For Delhi = Rs.20Lakh*5% = Rs.1Lakh
of supply of such coupon under GST laws? For Singapore = Rs.20Lakh*10% = Rs.2Lakh
3. Supply of services in relation to Life Insurance
Answer: In terms of rule 32(6) of the CGST Rules relating
to valuation, the value of a coupon is the money value of Business
the goods redeemable against it. Therefore, though the
coupon is sold for Rs. 900, its value is Rs. 1000. In terms Provided that nothing contained in this sub-rule shall apply
of rule 32(6) of the CGST Rules relating to valuation, the where the entire premium paid by the policy holder is only
value of a coupon is the money value of the goods towards the risk cover in life insurance.
redeemable against it. Therefore, though the coupon is sold
for Rs. 900, its value is Rs. 1000. 25

Example: Mr. X, a money changer, has exchanged US $
10,000 to Indian rupees @ Rs. 64 per US $. Mr. X wants to
value the supply in accordance with rule 32(2)(b) of CGST
Rules. Determine the value of supply made by Mr. X.

Answer: As per rule 32(2)(b) of CGST Rules, the value in
relation to the supply of foreign currency, including money
changing, is deemed to be-

i. 1% of the gross amount of currency exchanged for an
amount up to Rs. 1,00,000, subject to a minimum
amount of Rs. 250;

ii. Rs. 1,000 and 0.5% of the gross amount of currency
exchanged for an amount exceeding Rs. 1,00,000 and
up to Rs. 10,00,000. Therefore, the value of supply,
made by Mr. X, under rule 32(2)(b) of CGST Rules is
computed as under:

Particulars Rs. Rs.

Value of currency exchanged in 6,40,000
Indian rupees [Rs. 64 x US $ 10,000]

Upto Rs. 1,00,000 1,000

For Rs. 5,40,000 2,700
[0.50% x Rs. 5,40,000]

Value of supply 3,700

2. Supply of services in relation to booking of tickets
for travel by air provided by an air travel agent

GUJARAT FEDERATION OF TAX CONSULTA
L
2018-2019
27th Year
NTS AL

Tax Gurjari GUJARAT FEpoints for every quarter or part thereof, between AX CONSULTA
L the date of purchase and the date of disposal by the
Let’s understand with an example: person making such repossession.

¢ Beema ltd. has the following policies : 5. The value of a token, or a voucher, or a coupon,
or a stamp (other than postage stamp) which is
1. Premium = Rs.10000, investment (intimidated in policy redeemable against a supply of goods or services
receipt) = 80%.
The value of a token, or a voucher, or a coupon, or a
2. Single premium policy ; premium = Rs.10000 stamp (other than postage stamp) which is redeemable
against a supply of goods or services or both shall be
3. Miscellaneous policy ; premium = Rs.10000 equal to the money value of the goods or services
or both redeemable against such token, voucher,
4. Only Risk Cover Policy ; premium = Rs.10000 coupon, or stamp.

Here value of supply would be: 6. The Value of notified goods or services

1. When the value of investment in savings is intimidated The value of taxable services provided by such class
value of supply would be equal to premium less of service providers as may be notified by the
investment. Government, on the recommendations of the Council,
as referred to in paragraph 2 of Schedule I of the said
Thus value of supply = Rs.10000- Rs.8000 = Rs.2000. Act between distinct persons as referred to in section
25, where input tax credit is available, shall be deemed
2. In case of single premium policies value of supply to be NIL.
would be equal 10% of premium.
Example: A company X Ltd, which deals in buying
Thus value of supply = Rs.10000*10% = Rs.1000. and selling of second hand cars, purchases a second
hand Maruti Alto Car of March, 2014 make (Original
3. In case of policies other than 1 , 2 and only risk covers price Rs. 5 Lakh) for Rs. 3 Lakh from an unregistered
the value of supply would be calculated as follows : person and sells the same after minor furbishing for
Rs. 3,50,000. The supply of the car to the company
Year 1: 5% of premium for Rs.3 Lakh shall be exempted, and the supply of
the same by the company to its customer for Rs.3.5
Thus value of supply = Rs. 10000*5% = Rs.500 Lakh shall be taxed.

Year 2: 12.5% of premium The value for GST purpose shall be Rs. 50000/ i.e.,
the difference between the selling and the purchase
Thus the value of supply = Rs.10000*12.5% = price of the company. In case any other value is added
Rs.1250 by way of repair, refurbishing, reconditioning etc., the
same shall also be added to the value of goods and
4. In case of only risk cover full premium would be be part of the margin.
considered as the value of supply :
If margin scheme is opted for a transaction of second
Thus the value of supply = Rs.10000 hand goods, the person selling the car to the company
shall not issue any taxable invoice and the company
4. Taxable supply provided by a person dealing in purchasing the car shall not claim any ITC.
buying and selling of second hand goods
Para-7.7 ( Rule 33): Value of supply of services in case of
The provisions of this sub rule can be opted only in pure agent
following cases:
Notwithstanding anything contained in the provisions of this
1. Where a taxable supply is provided by a person Chapter, the expenditure or costs incurred by a supplier as
dealing in buying and selling of second hand a pure agent of the recipient of supply shall be excluded
goods i.e., used goods as such or after such from the value of supply, if all the following conditions are
minor processing which does not change the satisfied, namely,-
nature of the goods.
i. the supplier acts as a pure agent of the recipient of
2. No input tax credit has been availed on the the supply, when he makes the payment to the third
purchase of such goods party on authorization by such recipient;

If the above conditions are satisfied value of supply ii. the payment made by the pure agent on behalf of the
shall be the difference between the selling price and recipient of supply has been separately indicated in
the purchase price and where the value of such supply
is negative, it shall be ignored. DERATION OF T

In case of repossession of goods 2018-2019
27th Year
The purchase value of goods repossessed from a
defaulting borrower, who is not registered, for the
purpose of recovery of a loan or debt shall be deemed
to be the purchase price of such goods by the
defaulting borrower reduced by five percentage

26

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Tax Gurjari

the invoice issued by the pure agent to the recipient • Therefore, A’s recovery of such expenses is a
of service; and disbursement and not part of the value of supply
made by A to B.
iii. the supplies procured by the pure agent from the third
party as a pure agent of the recipient of supply are in Example: Some examples of expenditure/costs
addition to the services he supplies on his own incurred as pure agent are:
account.
1. Port fees, port charges, custom duty, dock dues,
Explanation - For the purposes of this rule, the expression transports charges etc. paid by customs broker
“pure agent” means a person who- on behalf of the owner of goods.

a) enters into a contractual agreement with the recipient 2. Expenses incurred by C&F agent and reimbursed
of supply to act as his pure agent to incur expenditure by principal such as freight, godown charges.
or costs in the course of supply of goods or services
or both; Example: Suppose a customs broker issues an
invoice for reimbursement of a few expenses and for
b) neither intends to hold nor holds any title to the goods consideration towards agency service rendered to an
or services or both so procured or supplied as pure importer. the amounts charged by the customs broker
agent of the recipient of supply; are as below:

c) does not use for his own interest such goods or S. Amount
services so procured; and
No. Component charged in invoice Rs.
d) receives only the actual amount incurred to procure
such goods or services in addition to the amount 1 Agency income 10,000
received for supply he provides on his own account.
2 Traveling expenses; 15,000
Example: A is an importer and B is a custom broker. Hotel expenses
A approaches B for customs clearance work in
respect of an import consignment. The clearance of 3 Customs duty 55,000
import consignment and delivery of the consignment
to A would also require taking service of a transporter. 4 Docks dues 5000
So A, also authorises B, to incur expenditure on his
behalf for procuring the services of a transporter and In the above situation, agency income and travelling/
agrees to reimburse B for the transportation cost at hotel expenses shall be added for determining the
actuals. value of supply by the customs broker whereas docks
dues and the customs duty shall not be added to the
Here, B is providing customs brokers service to A, value, provided the conditions of pure agent are
which would be on a principal to principal basis. The satisfied.
ancillary service of transportation is procured by B on
behalf of A as a pure agent and expenses incurred by Para-7.8 (Rule 34): Rate of exchange of currency, other
B on transportation should not form part of value of than Indian rupees, for determination of value
customs broker service provided by B to A. This, in
sum and substance is the relevance of the pure agent 1. The rate of exchange for determination of value of
concept in GST. taxable goods shall be the applicable rate of exchange
as notified by the Board under section 14 of the
Example: Corporate services firm A is engaged to Customs Act, 1962 for the date of time of supply of
handle the legal work pertaining to the incorporation such goods in terms of section 12 of the Act.
of Company B.
2. The rate of exchange for determination of value of
• Other than its service fees, A also recovers from taxable services shall be the applicable rate of
B, registration fee and approval fee for the name exchange determined as per the generally accepted
of the company paid to Registrar of the accounting principles for the date of time of supply of
Companies. such services in terms of section 13 of the Act.

• The fees charged by the Registrar of the Para-7.9 (Rule 35): Value of supply inclusive of integrated
Companies for registration and approval of the tax, central tax, State tax, Union territory tax
name are compulsorily levied on B.
Where the value of supply is inclusive of integrated tax or,
• A is merely acting as a pure agent in the payment as the case may be, central tax, State tax, Union territory
of those fees. tax, the tax amount shall be determined in the following
manner, namely,-
DERATION OF T
Tax amount = (Value inclusive of taxes X tax rate in %
2018-2019 of IGST or, as the case may be, CGST, SGST or UTGST)
27th Year ÷ (100+ sum of tax rates, as applicable, in %)

GUJARAT FE AX CONSULTA 27
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Tax Gurjari

Example: If the value inclusive of tax is Rs. 100/- and
applicable GST rate is 18% [IGST or CGST, SGST/UTGST]
then,

Tax amount = (Value inclusive of taxes x GST rate in %)
[IGST or CGST, SGST/UTGST]/(100 + sum of GST rates
in %)

Tax amount = (100x18)/(100+18)= 1800/118 = Rs.15.25

Para 8

Tariff value Section 15(5)

As per section 15(5) of CGST Act, notwithstanding anything
contained in section 15 (1) to Section 15 (4), the value of
supplies as may be notified by the government on the
recommendation of the Council shall be determined in such
manner as may be prescribed.



28 GUJARAT FEDERATION OF TAX CONSULTA
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2018-2019
27th Year
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Tax Gurjari

Section 44AD- Computation of income on estimated basis in the case of tax payers engaged in certain business

CA. Ashok Kataria
[email protected]

GUJARAT FEIntroduction:AX CONSULTA year relevant to the previous year in which the profit
L has not been declared in accordance with the
The scheme of presumptive taxation has been placed in provisions of sub-section (1).
the Income Tax Act, 1961 (Act) for small tax assessees
engaged in certain businesses. Businesses adopting the (5) Notwithstanding anything contained in the foregoing
presumptive taxation scheme are not required to maintain provisions of this section, an eligible assessee to whom
regular books of account or get them audited. They have the provisions of sub-section (4) are applicable and
an option to declare their income from such business at a whose total income exceeds the maximum amount
prescribed rate. The presumptive taxation scheme is framed which is not chargeable to income-tax, shall be required
under two sections - Section 44AD and 44AE of the Act. In to keep and maintain such books of account and other
this article, let’s go through the provisions of presumptive documents as required under sub-section (2) of section
taxation scheme under Section 44AD in detail. 44AA and get them audited and furnish a report of such
audit as required under section 44AB.]
Section 44AD:
(6) The provisions of this section, notwithstanding anything
(1) Notwithstanding anything to the contrary contained contained in the foregoing provisions, shall not apply
in sections 28 to 43C, in the case of an eligible assessee to—
engaged in an eligible business, a sum equal to eight per
cent of the total turnover or gross receipts of the assessee (i)  a person carrying on profession as referred to in
in the previous year on account of such business or, as the sub-section (1) of section 44AA;
case may be, a sum higher than the aforesaid sum claimed
to have been earned by the eligible assessee, shall be (ii) a person earning income in the nature of
deemed to be the profits and gains of such business commission or brokerage; or
chargeable to tax under the head “Profits and gains of
business or profession” : (iii) a person carrying on any agency business.

[Provided that this sub-section shall have effect as if for Explanation.—For the purposes of this section,—
the words “eight per cent”, the words “six per cent” had
been substituted, in respect of the amount of total turnover   (a) “eligible assessee” means,—
or gross receipts which is received by an account payee
cheque or an account payee bank draft or use of electronic   (i) an individual, Hindu undivided family or a
clearing system through a bank account during the previous partnership firm, who is a resident, but not a limited
year or before the due date specified in sub-section (1) liability partnership firm as defined under clause
of section 139 in respect of that previous year.] (n) of sub-section (1) of section 2 of the Limited
Liability Partnership Act, 2008 (6 of 2009); and
(2) Any deduction allowable under the provisions
of section 30 to 38 shall, for the purposes of sub-section (ii) who has not claimed deduction under any of the
(1), be deemed to have been already given full effect sections 10A, 10AA, 10B, 10BAor deduction under
to and no further deduction under those sections shall any provisions of Chapter VIA under the
be allowed. heading ”C. - Deductions in respect of certain
incomes” in the relevant assessment year;
(3) The written down value of any asset of an eligible
business shall be deemed to have been calculated as (b)  “eligible business” means,—
if the eligible assessee had claimed and had been
actually allowed the deduction in respect of the (i)  any business except the business of plying, hiring
depreciation for each of the relevant assessment years. or leasing goods carriages referred to in section
44AE; and
[(4) Where an eligible assessee declares profit for any
previous year in accordance with the provisions of this (ii) whose total turnover or gross receipts in the
section and he declares profit for any of the five previous year does not exceed an amount of [two
assessment years relevant to the previous year crore rupees].
succeeding such previous year not in accordance with
the provisions of sub-section (1), he shall not be eligible Prerequisites:
to claim the benefit of the provisions of this section for
five assessment years subsequent to the assessment An assessee can opt for beneficial provisions of section
44AD if following conditions are satisfied:
DERATION OF T
1. Eligible assessee - The assessee should be a resident
2018-2019 individual, Hindu undivided family or a partnership firm.
27th Year
29

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Tax Gurjari GUJARAT FEsection 44AD is required to pay advance tax during AX CONSULTA
L the financial year on or before 15th March. Such
The benefits of this section are not available to a limited assessee enjoys the benefit of not paying the advance
liability partnership firm. tax in instalments in June, September and December
but he can pay the entire amount of advance tax by
2. The assessee has not claimed any deduction under 15th March in single instalment. [Refer section
sections 10A, 10AA, 10B, 10BA or deductions from 211(1)(b)].
section 80HH to 80RRB.
6. Assessee opting this scheme under section 44AD is
3. Eligible business: The assessee should be engaged exempted from maintaining books of account as
in any business whether its wholesaler, retailer or prescribed u/s 44AA of the Act.
manufacturer. However following persons are not
eligible to avail any benefit of section 44AD: What if the income is less than the prescribed rate:

- A person who is in the business of plying, hiring or A tax payer can declare his income to be lower than the
leasing goods carriages. (Covered by section 44AE deemed profits and gains vis-a-vis the prescribed rates of
of the Act) estimated income. In such case, the assessee will have to
comply with the following:
- A person carrying on profession (Covered by section
44ADA) 1. Assessee will have to maintain the books of account
as per section 44AA, and
- A person earning income in the nature of
commission or brokerage 2. He will have to get his books of accounts audited under
section 44AB of the Income Tax Act if his total income
- A person carrying on any agency business exceeds the exemption limit. However, if the total
income of the assessee is less than the maximum
- The total turnover or gross receipts in the previous amount not chargeable to tax, Rs. 2,50,000 for AY
year should not exceed Rs. 2 crore. This limit of Rs. 2017-18, and net profits from business is less than 6%
2 crore is from the assessment year 2017-18. or 8% as the case may be, assessee is not required to
get his books of accounts audited.
Operation of section 44AD:
Effect in subsequent years:
If the above conditions are satisfied, the income from the
eligible business is estimated @ 8% of the gross receipts W.E.F. assessment year 2017-18, a new sub-section 4 has
or total turnover. However where the turnover or gross been provided under section 44AD whereby an eligible
receipts are received by an account payee cheque / draft assessee declares profit for any of the 5 consecutive
or use of electronic clearing system through a bank account, subsequent years at lower than the prescribed rate, he shall
from assessment year 2017-18, reduced rate of 6% will be not be eligible to claim the benefit of the provisions of section
the estimated income instead of 8%. For rate of 6% to apply 44AD for 5 subsequent years.
on the debts outstanding as on the year end, the receipt
from such debtors by account payee cheque / bank draft / For example, an eligible assessee claims to be taxed on
ecs should be within the time limit of due date of filing of presumptive basis of 8% of the turnover for the assessment
return u/s 139(1). While calculating the income at the rate year 2017-18. He offers income of Rs. 8 lacs. For the
of 8% or 6% as the case may be following should be noted: assessment year 2018-19 and assessment year 2019-20
also he offers income in accordance with the provisions of
1. The assessee has to declare higher income in his section 44AD. However, for the assessment year 2020-21,
return if he has earned more than the prescribed rate. he offers income of Rs. 5 lacs on turnover of Rs. 1 crore. In
this case since he has not offered income in accordance
2. All deductions under section 30 to 38, including with the provisions of section 44AD for 5 consecutive
depreciation, unabsorbed depreciation are deemed to assessment years, after assessment year 2017-18, he will
have been already allowed and no further deduction is not be eligible to claim the benefit of section 44AD for next
allowed. Even in case of partnership firm, deduction 5 assessment years, i.e. for assessment years 2021-22 to
of interest on partners’ capital and remuneration to 2025-26. Consequently, for the assessment years 2021-
partners is not allowed from assessment year 2017- 22 to 2025-26:
18. This deduction in case of partnership was however
available up to assessment year 2016-17. - He will have to maintain the books of account as per
section 44AA, and
3. The depreciation shall be deemed to have been
allowed and the WDV of the fixed assets to be - He will have to get his books of accounts audited under
calculated accordingly. section 44AB of the Income Tax Act if his total income
exceeds the exemption limit.
4. No disallowance can be made to the estimated income
under section 40, 40A and 43B. DERATION OF T

5. An assessee who opted section 44AD was exempted 2018-2019
from the provision payment of advance tax. However, 27th Year
from assessment year 2017-18 an assessee opting

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Tax Gurjari

The above consequences will be applicable even if for the
assessment years 2021-22 to 2025-26, he wants to declare
his income @ 8% or higher of turnover as his business
income.

Section 44AD Vs TDS provisions

In most of the TDS provisions, responsibility is cast on
Individuals and HUFs to deduct tax at source (except u/s
194C) whose total sales, gross receipts or turnover from
the business or profession carried on by him exceed the
monetary limits specified under clause (a) or clause (b) of
section 44AB during the preceding financial year. Section
44AB prescribes the limit of Rs. 1 crore of turnover in case
of business under clause (a), and receipts of Rs. 50 lacs
for profession in clause (b).

This has created an unwanted compliance burden upon
the small traders whose turnover is between Rs. 1 to 2
crore. Availing the benefit of section 44AD, such assessees
are not required to maintain books of account; however, as
the turnover is more than Rs. 1 crore they are required to
comply with the TDS provisions.

Conclusion

The provisions of section 44AD are brought in the statute
to ease out the compliance burden on the small businesses
having turnover of less than Rs. 2 crore. The advantage of
paying advance tax in single instalment and reduced rate
of 6% for transactions done through account payee /
banking channel has made things easier for small
assessees. However, if the TDS provisions are
synchronised for Individuals and HUFs with the turnover
limit of Rs. 2 crore vis-a-vis section 44AD, it will be a big
relief for assessees opting under section 44AD of the Act.

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GUJARAT FEDERATION OF TAX CONSULTA 31
L
2018-2019
27th Year
NTS AL

Tax Gurjari

32 GUJARAT FEDERATION OF TAX CONSULTA
L
2018-2019
27th Year
NTS AL