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Friends, as the final countdown to the Union Budget 2023 begins, without resorting to some abstract or wishful thinking, our Founder Shri Mayank Mohanka, FCA, has done a practical and ground level assessment of some critical grey areas and gaps in the direct tax domain, which require timely redressal by the Legislature in the upcoming Union Budget 2023. These are being discussed below, and we sincerely hope that you will relate to these real and ground-level problematic areas.

1. Allowing Deductions in respect of Standard Deduction & Interest on Home Loan in New Personal Taxation Regime in Section 115BAC

Currently, the individuals & HUFs opting for the new personal taxation regime u/s 115BAC of reduced personal tax slabs, are required to forgo a plethora of otherwise available specified deductions, including Standard Deduction of Rs. 50,000/- available to salaried individuals u/s 16 and the deduction in respect of Interest paid on home loan taken for self-occupied house property u/s 24(b).

The specified deductions under various sections like 80C/80CCC/80CCD/80D, involves a conscious decision of actual earmarking and blocking of funds in making the specified investments, by the individual taxpayers, and so, such individuals are still inclined to forego these deductions, and opt for the new regime of reduced taxes with a view to avoid blockage of their funds.

However, the deductions like Standard Deduction u/s 16 and the Interest paid on self-occupied house property u/s 24(b), per se, don’t involve any additional cash outflow or blockage of funds of the individual taxpayers and are naturally available, in the normal and routine course of their lives.

Thus, the restriction pertaining to the mandatory requirement of forgoing of standard deduction of Rs. 50,000 by the salaried individuals and the deduction u/s 24(b) in respect of interest paid on home loan taken for self-occupied property, for availing the benefit of reduced personal tax rates in section 115BAC, is acting as the main deterrent for such individual taxpayers, to switch to the new personal taxation regime.

The Government also wants more and more assessees to switch to the new regime, to reduce the complexities in return filing and assessments arising out of the plethora of deduction claims of the assessees applicable in the old regime.

Therefore, an appropriate amendment in section 115BAC is desirable to be considered by the Law Makers in the upcoming Union Budget 2023, so as to provide for the allowability of Standard Deduction u/s 16 and Interest paid u/s 24(b) for home loan taken in respect of self-occupied property, in the new personal taxation regime.   

2. Fixing Time Limit for Passing of Appeal Orders by CIT(Appeals):

Our hon’ble PM has announced the launching of the Scheme for Faceless Appeals, way back on 25.9.2020, and subsequently all the pending appeals before the jurisdictional CIT(Appeals) as well as the new appeals have been transferred to the National Faceless Appeal Centre, for adjudication and disposal.

However, even after the lapse of three long years, such appeals are still lying pending undisposed off by the National Faceless Appeal Centre. The appellants have even filed and uploaded their appeal submissions multiple times in the appeal response window of E-Proceedings, but with no response from the concerned appellate authorities. Even the link for mandatory virtual hearing has also not been made available yet in many such pending appeals, in the appeal response window. Though the communication window with the CIT(Appeals) in the National Faceless Appeal Centre has been enabled on 1.11.2022, and recently the Rectification Window u/s 154 has also been enabled, still the appellate orders are somehow not being passed by the appellate authorities in the National Faceless Appeal Centre. This is resulting in undue financial hardships to the appellants, because there are many cases of high-pitched assessments, wherein at least 20% of the demand has been coercively recovered, but the appellate relief is still not coming.

The existing subsection (6A) of section 250, provides the discretion to the CIT(Appeals) to hear and decide the appeal, within a period of one year from the end of the financial year in which such appeal has been filed by the appellant.

Thus, there is an urgent need to make suitable amendment in subsection (6A) of section 250 of the Income tax Act, and to replace the word ‘may’ with ‘shall’ so as to convert this discretionary requirement of adjudicating the appeal within a period of one year, into a mandatory requirement of Law.

3. Time to Revisit Summary Assessment Provision u/s 143(1) & Prevent its Mechanical Application: At present there are five operative subclauses in clause (a) of subsection (1) of section 143 of the Income Tax Act, which provide for the processing of return of income on summary assessment basis by making adjustments by way of disallowance or addition in the returned income of taxpayers on account of any arithmetical error or any incorrect claim, or disallowance of any loss/specified deductions in case of a belated return, or disallowance of any expenditure or increase in income, indicated in the audit report but not taken into account in computing the total income in the return.

In my humble experience, out of the five sub clauses in section 143(1)(a), sub clause (iv) in respect of disallowance indicated in Tax Audit Report, is being used more frequently by the CPC in raising demands, in the Intimation Orders.

Ironically, the Tax Audit Report is very seldom being relied upon by the assessing authorities in allowing a particular claim of the assessee in cases where assessee contends that no adverse reporting has been done by the Tax Auditor in respect of that claim but conversely in making any disallowance, the tax audit reports are considered as a sufficient and self-contained sacrosanct record of the assessee, by the assessing authorities.

The problem becomes more serious and vital when there is merely a presentational difference in reporting in the tax audit report and the computation of income of the assessee, with no actual difference in the returned income of the assessee, justifying any further disallowance or addition by the CPC.

Summary Assessment u/s 143(1) of the Income Tax Act, was being introduced as a tax-payer friendly provision to ensure smoother and better processing of ITRs and faster refunds in cases warranting only limited level of scrutiny and examination by the CPC.

However, presently in my humble view, summary assessment u/s 143(1) is turning out to be more burdensome and costly in terms of compliance vis-a-vis regular assessment u/s 143(3). In regular assessment, the assessee at least has an opportunity to explain and clarify the assessment query. But Intimation Orders u/s 143(1) are just one-sided mechanical instruments of raising incorrect demands, even in cases of a mere presentational difference in Tax Audit Report and ITR. All sorts of debatable issues are also being covered without giving taxpayer any opportunity to clarify its position or stand.

The repeated clarificatory responses of the taxpayers and the Rectification Application u/s 154 of the Act filed in response to such faulty intimation orders u/s 143(1)(a) are also usually rejected by the CPC and no reasons are being assigned for such rejection.

So, it's high time to make suitable amendments in section 143(1), or at least it's mechanical implementation by CPC and to take suitable measures to make the artificial intelligence, intelligent enough and the machine learning to learn not to raise such faulty and unlawful demands or in cases where such discrepancies are being flagged then to take due cognizance of the factual and lawful replies and submissions of the taxpayers.     

4. Resolve of Contradictory Share Valuation Rules for Investor & Investee: Currently, the prescribed valuation criteria in Rule 11UA(2) for the investee company in section 56(2)(viib) and in Rule 11UA(1)(c)(b) for the investor in section 56(2)(x)(c), are contradictory to each other.

While section 56(2)(x)(c) requires the Investors to acquire shares at a value equal to or higher than the Fair Market Value (FMV) of such shares, section 56(2)(viib) requires the Investee Company to ensure that the shares are not issued at a price higher than the FMV. Both sections provide for an opposite approach for investors and investee company respectively, and the valuation mechanism are also different.

For the purpose of section 56(2)(x), in the hands of investors, the shares are to be valued as per adjusted Net Assets Value (NAV) based on the circle rates of the underlying land & building, as per Rule 11UA(1)(c)(b) and for the purpose of section 56(2)(viib), in the hands of investee company issuing shares, there is a choice between absolute NAV based on historical acquisition costs of land & building and DCF method of valuation, as per Rule 11UA(2).

On account of the said different and contradictory prescribed valuation criteria for the investee company in section 56(2)(viib) and for the investor in section 56(2)(x)(c), practically, the investee company is left with no other option but to adopt DCF method of valuation, in order to ensure that the issue price of shares is higher than or equal to the FMV based on adjusted NAV (circle rate of land & building), computed as per Rule 11UA(1)(c)(b) to ensure simultaneous compliance with section 56(2)(x) of the Act, in the hands of investors.

And when the investee company adopts such DCF method of valuation, the revenue authorities tend to look upon such valuation with suspicion and doubt and more often than not, such cases are picked up for elaborate scrutiny and often end up in costly, time-consuming and cumbersome litigations.

Thus, there is an urgent need to make suitable amendments in the existing different and contradictory share valuation rules for the investor and investee. In the existing Rule 11UA(2) for the investee company issuing shares u/s 56(2)(viib), instead of stipulating the share valuation based on the historical costs of underlying land and building, the uniform rule of allowing valuation based on the circle rates of the underlying land and building in the NAV method should be prescribed.  

5. Suitable Clarification in respect of RBI Digital Currency:

The newly launched avatar of digital rupee in the retail segment on 1.12.2022, supposedly, carries with it, all the essential characteristic features of physical currency or cash. Like the physical currency or cash, the Central Bank- RBI will issue it, and it would be distributed through intermediaries, i.e., banks. It would be in the form of a digital token and not account based and as such it would be different from the electronic bank balance in current/saving bank accounts. It would be a fungible legal tender for which holders need not have a bank account.

It would be issued in the same denominations that paper currency and coins are currently issued. Users will be able to transact with e₹-R through a digital wallet offered by the participating banks and stored on mobile phones/devices, and a reasonable degree of anonymity will also be provided in the transactions involving such digital rupee. And unlike your saving bank account balance, it will not earn any interest income.

And so, the fact that this digital rupee, although nomenclatured as ‘digital’, but infact resembles or is akin to physical currency or cash, may bring the financial transactions involving the usage of such digital rupee, within the restricted/prohibited category of cash transactions, in the Income Tax Act, under quite a few ‘audit-popular’ sections like:

a) Section 40A(3) providing for 100% disallowance of any expenditure payment made in cash in excess of Rs 10,000/-.

b) Section 43 providing for 100% disallowance of depreciation on any capital expenditure in excess of Rs. 10,000/- for the purpose of its consideration as actual cost of such asset.

c) Section 269SS prohibiting a taxpayer from taking/accepting loans or deposits for a sum of more than Rs.20,000 in cash, and consequential penalty equivalent to such cash loan or deposit.

d) Section 269T prohibiting a taxpayer from repaying any loans or deposits for a sum of more than Rs.20,000 in cash, and consequential penalty equivalent to such cash loan or deposit.

d) Section 269ST stipulating that no person can receive an amount of INR 2 Lakhs or more in cash:

• in aggregate from a person in a day;

• in respect of a single transaction; or

• in respect of transactions relating to one event or occasion from a person. 

e) Section 271 DA providing for levy of penalty equivalent to the amount of such cash receipt in excess of Rs 2 lakhs.

f) Donations made in cash in excess of Rs. 2,000/- to a registered trust or a political party, are not allowed as deduction u/s 80G.

g) Any payment made in cash on account of premium on health insurance facilities is not allowable as deduction u/s 80D.

h) Deduction of TDS u/s 194N @ 2% on cash withdrawals ranging from Rs. 20 lakhs to one crore, in cases of non return filers for last three years and @ 5% on cash withdrawals in excess of Rs 1 crore in a year from bank account.

i) Non availability of Tax Audit relaxation of higher threshold turnover limit of Rs 10 crores, if total payments and receipts of a business are in excess of 5% of total payments and receipts.

And the irony would be that the users may not be knowing that the usage of digital rupee by them in undertaking such specified restricted financial transactions, may actually be treated and considered as cash transactions, in the Income Tax Act.

Thus, unless and until, the usage of the digital rupee in the above specified restricted categories of financial transactions, is categorically prescribed by the Legislature in the Income Tax Act, in the upcoming Union Budget 2023, as an acceptable digital mode of executing such transactions, like the electronic clearing system or UPI presently, there is a serious and eminent cause of worry and concern, that all the above discussed penal provisions in the Income Tax Act, pertaining to cash transactions, would be equally applicable to all such transactions involving the usage of digital rupee. Further, the capturing, identification and scrutiny of all such financial transactions will surely become more easier as the digital rupee will inevitably leave its digital footprints, whether or not, any degree of anonymity is being provided to it.

So, ironically, the well-intended measures of RBI, to make the digital rupee akin or similar to the physical currency or cash, may result in unintended consequences of attracting the above specified penal income tax provisions applicable in respect of the specified restricted/prohibited cash transactions, and as such the digital rupee may eventually turn out to be a costlier proposition from the taxation point of view.

This Article has also been published in Taxmann with the Citation [2023] 146 taxmann.com 527 (Article).

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