Thursday, February 22, 2018

2017 amendments of IT ACT - FY 2017-18



                
Every time we've cut the capital gains tax, the economy has grown. Whenever we raise the capital gains tax, it's been damaged. It's one of those taxes that most clearly damages economic growth and jobs. Grover Norquist
Read more at: https://www.brainyquote.com/topics/tax
           


                Computation of Capital Gains for FY 2017-18  
                              (AY 2018-19)                       
         Amendments Of Law         
                   A STUDY
                   
PROLOGUE
An insightful journey through the history of related legislation, and the volumes of case law generated, should enable anyone to get to know that the law governing taxation of, among others, ‘capital gains’ has been, -and still continues to be with no letup in sight, - subjected to several changes from to time; and many of those have far reaching but unpredictable repercussions/ consequences.  One such instance, among the long series of those changes made over the decades, of a comparatively recent origin pertains to what is known as ‘Base Year’.
BASE YEAR & COST INFLATION INDEX
2. The concepts of Base Year and of the closely related/connected ‘Cost Inflation Index’ (CII) came to be introduced in / with effect from the Financial Year (FY) 1981-82. That happened with a view to meeting the criticism from eminent legal circles that to so tax gains on transfer of a capital asset, strictly a ‘capital’- , not  an ‘income’- , receipt,  was fundamentally faulty and logically reprehensible ; hence smacks of  a ‘fraud’ enshrined in  the income-tax regime.
Attention may be drawn to such a view , shared widely, also aired in a published Article (available in public domain) by its author in which he goes on to elaborate, not without substance, as to “why I believe that Property Tax and Capital Gains tax are a scam”;
A Quote (to lend forceful support):
 "The tax on capital gains directly affects investment decisions, the mobility and flow of risk capital... the ease or difficulty experienced by new ventures in obtaining capital, and thereby the strength and potential for growth in the economy.”
John F. Kennedy

3. If cared to and mindfully waded through the material in the form of inter alia write-ups displayed on professional and other websites, none concerned could have failed to realize  that the referred change in law, in order to shifting the Base Year, has made no small contribution to further messing up the capital gains tax regime. In that has been responsible for the surrounding controversies; so much so one and all concerned, mainly the taxpayers have seemingly been miffed, with obtaining confusion worse confounded. The study herein is an attempt to consider, in detail, the causa causans of such a state of affairs.
4.  Why No Clarity?
The point of most concern is related to an asset acquired at any point in time, before the cut-off year FY 2001-02, transfer of which is made in FY 2017-18, or in a later year.  Primarily, that appears to be because in both the two published Tables containing the CII Data , the indexation for FYs 2001-02 to 2016-17 are included; but with no specific indication /clarity on the point of possible doubt namely,  which of the two to apply.

To Dilate:
4. 1.  Shift of Base Year from FY 1981-82 to FY 2001-02- 
Official Narration of the Changes in Law is as under:
The existing provisions of section 55 provide that for computation of capital gains, an assessee shall be allowed deduction for cost of acquisition of the asset and also cost of improvement, if any.  However, for computing capital gains in respect of an asset acquired before 01.04.1981, the assessee has been allowed an option of either to take the fair market value (FMV) of the asset as on 01.04.1981 or the Actual Cost of the asset as Cost of Acquisition. The assessee is  also  allowed to claim deduction  for cost  of improvement incurred  after 01.04.1981,  if any.
As the base year for computation of capital gains has become more than three decades old, assessees are facing genuine difficulties in computing the capital gains in respect of a capital asset, especially immovable property acquired before 01.04.1981 due to non-availability of relevant information for computation of fair market value of such asset as on 01.04.1981.
In order to revise the base year for computation of capital gains, section 55 of the Act is amended so as to provide that the COST OF ACQUISITION OF AN ASSET ACQUIRED BEFORE 01.04.2001 SHALL BE ALLOWED TO BE TAKEN AS FMV AS ON 1ST APRIL, 2001 AND THE COST OF IMPROVEMENT SHALL INCLUDE ONLY THOSE CAPITAL EXPENSES WHICH ARE INCURRED AFTER 01.04.2001.
Consequential amendment is also made in section 48 so as to align the provisions relating to cost inflation index to the proposed base year.
These  amendments  are to  take  effect  from  1st   April,  2018  and  will,  accordingly,  apply  in  relation  to  the  assessment  year 2018-19 and subsequent years.
 [Finance Bill 2017 – Notes On - Clauses 28 & 24]
(FONT supplied, to focus on area of controversy)
4.2. The CBDT has additionally issued Explanatory Notes to the Provisions of the Finance Act, 2017 vide Circular No. 02/2018 dated 15.02.2018 clarifying section -wise amendments which has been passed by Finance Act, 2017 and which are applicable for the Assessment Year 2018-19 (FY 2017-18). 
Albeit the Circular, lately issued,  purports to explain the ‘substance of’ the 2017 amendments,  it  has failed, miserably so, to, at least at this late stage, make any attempt and bring about any clarity, having regard to the controversies perpetrated and being perpetuated , in certain circles, in construing the intent and object of the referred amendments.

To be precise, as regards the FY 1981-82 and onwards, it was only for the very same stated reasons that the law was amended, in an attempt at simplification. And, having done so, it seems to make no sense why a further amendment has now been considered necessary or prudent and brought in. It is equally unclear as to why that necessitated a shift of Base Year to 2001-02.

Aside: Be that as it may, it appears that, the related points of doubt would inevitability prove a fertile ground for a ding-dong battle – disputes and litigation, – no knowing for how long in the future.

4.3. The controversial view, perpetrated and being perpetuated in limited circles, though really not warranted /justified, to say the least, deserve to be simply looked at but to be prudently ignored.  To give a ready glimpse of such instances, however, reproduced below, the view so shared (Identity of the sources has been withheld, just for the sake of decency/ethics and good order):

Specimen 1
“…..the cost of acquisition of an asset acquired before 01.04.2001 shall be allowed TO BE TAKEN AS FAIR MARKET VALUE AS ON 1ST APRIL, 2001 AND THE COST OF IMPROVEMENT SHALL INCLUDE ONLY THOSE CAPITAL EXPENSES WHICH ARE INCURRED AFTER 01.04.2001......

Specimen 2

“Fair market value of assets bought before 1st April 1981 was based on the valuation report of a registered valuer. THERE HAS BEEN A CONSIDERABLE HARDSHIP IN DETERMINING THIS FAIR VALUE since it depends on a period which is more than three decades old. Therefore the government has decided to shift the base year to 2001. So if an asset bought before 2001 is sold in FY 2017-18 or later, ITS COST WILL BE ITS FMV ON 1ST APRIL 2001.”
Specimen 3
Base year for capital gains computation shifted
Old rule: If the asset was acquired after 01-04-1981, the purchase price has to be indexed with cost inflation index computed with a base as 100 on above date.
If the asset was acquired before 01-04-1981, we could use the fair market value as on that date or the actual cost and claim a deduction for the cost of improvement incurred from above date.
New rule: If the asset was acquired after 01-04-2001, the purchase price has to be indexed with cost inflation index computed with a base as 100 on above date. (the current value is 426 and it is okay to use this too).
Fair market value estimation is often guesswork and if one uses an unrealistic value, the ITO may call for a scrutiny. “
Specimen 4

"Till 31 Mar 2017, capital gain was calculated with 1981 as the base year. This means that the purchase price of an asset bought before 1 April 1981 could be calculated on the basis of the fair market value of 1981. From 1 Apr 2017, the purchase price will be calculated based on the fair market value of 2001. Accordingly, capital gains on assets acquired before 1 April 2001 will also be calculated using fair market value as on 2001."

Own Observations /View Points

5. With a view to having own thoughts cleared, and independent viewpoints firmed up, the propositions requiring to be addressed and gone into may be briefly dealt with as under:

A)  On the concept of 'Fair', used as a prefix in the two contexts ("FMV' and 'FV', connoting different ideas), itself really signifies no real thing, at best being notional,  is just a fig leaf, so to say. For, that is admittedly dubious and inherently ‘subjective’, hence may not provide a truthful or indisputable and safe-proof guidance.  

B) On the point of fundamental doubt as to which of the two Indexation Tables to apply (that is, for computing capital gains in respect of an asset 'acquired' before the cut-off year- i.e. 2001-02, transfer of which is effected in FY 2017-18, or in a later year), it calls for a special mention, had transfer of the same asset been effected in the immediately preceding FY 2016-17, no such doubt could have arisen. 
The published CII Data are to be found in two Tables On a cursory glance, and, in comparison, one is likely to go with the impression, but wrongly so, that there is an overlapping in the Data (CII) for Indexation. So much so, presumably, that has given rise to the point of doubt in some quarters; that is, - as to which of the two Tables to apply for deriving the Indexed cost, of an asset acquired before FY 2001-02, transfer of which has been effected in FY 2017-18.

In this context, calls for a special focus:
The CII Data as published in the new Table, as applicable for FYs 2001-02 to 2016-17, are, in one’s firm view, indisputably, intended for use, only if the capital asset has been acquired in any of those years and transferred in FY 2018-19.
On an incisive comparison, the said Data in the new Table may be noted to have been so realigned / structured as to make no difference even if the corresponding Data included in the old Table were to be applied.

To illustrate (selectively):

Table        FY                Multiplying     Indexed
                                         Factor *           (%)
Old      2001-02            1125/426           264
            2009-10            1125/632           178
New   2001-02             264/100             264
           2009-10             264/148             178
          
(Figures 1125 and 264 used above, respectively denote the CII for FY 2016-17, the cut-off year taken as the year of transfer) 

6. Scheme Of Applicable Provisions
In an earnest personal quest for clarity, through an independent examination, the crucial features of the underlying scheme of things to be made a conscious note may be briefly set out thus:
1). In order to give effect to the enacted change of "Base Year", from the erstwhile 1981-82 to 2001-02, in all the related provisions, wherever required, in place of the term " the first day of April 1981",  the term "the first day of April 2001" has been substituted.
2). In Sec 55, being one such section so amended, - clause (b) of sub-section (2) thereof being of relevance herein - the alteration made is the same as said in 1. above.
The other crucial expression /words therein, being -  " the cost of acquisition...or the fair market value of the asset..., at the option of the assessee" has been left unchanged. Hence the above referred doubt.
3). As laid down in  sec 48 (prescribing the 'Mode of computation'), for arriving at the chargeable gains, apart from a couple of other items, the cost of acquisition of the asset has to be deducted. And,  in  the second Proviso thereto, later inserted by an amendment,  for the words "cost of acquisition",  the words "indexed cost of acquisition" are required to be taken as having been substituted.
The meaning of the so substituted term “Indexed cost of acquisition” has been specially set out in clause (iii) of the Explanation under Sec 48.
To be specially noted, these provisions of section 48, have been left untouched. As such, wherever the words "cost of acquisition" continue to be used, those might have to be construed same way as before; that is,  must be taken to refer to / mean only  the "Indexed cost of acquisition".
In short, the words "cost of acquisition" which continue to be used in Sec 55 (requiring to be read together with the other applicable provisions), may have to be, by virtue of the overriding provisions of Sec 48, taken to mean / construed only as the “indexed cost of acquisition" of the asset in a given case. 
According to a conjoint /harmonious reading of the provisions, as amended, therefore, for any asset acquired at any point in time before FY 2001-02, the controversial view, perpetrated and being perpetuated in limited circles, to say the least, deserve to be simply looked at but to be prudently ignored as unwarranted.

To Sum –up:

In one's independent perspective, founded on a conjoint and harmonious reading, -based on a mindful study and incisive understanding- of the amended (or related un- amended) provisions, taxpayer will have a good case to take the stand /strongly urge / seriously pursue if the AO were to hold an adverse view, hence contest, - that, the cost of acquisition of such asset should be taken into account at its 'indexed cost', reckoned as for FY 2016-17- also as its least 'FMV' - arrived at by applying the CII as laid down in the old Table (in force for and up to FY 2016-17). On that premise, the only adjustment (increase) left to be made to the so derived Indexed Cost, for the subsequent incremental value - say, for FY 2017/18 is that by applying the multiplying factor based on CII as available in the New Table (i.e. 272/264). Subject to the reservation as one has, as voiced herein later, in doing so.
In the event the AO were to take an adverse view, and refuses to accept but rejects taxpayer's stand as above, then, apart from merits, it could be contested also on the ground that would be tantamount to and result in an obviously unintended consequence of de-simplifying the extant simplified law, also be tantamount to giving retrospective effect to the amendments specifically made wef April 1, 2018, hence applicable only for FY 2017-18 (AY 2018-19), and onward.
The fact that the overriding provisions of Sec 48 remain untouched should help in construing the meaning / for a proper construction of the crucial words -" the cost of acquisition “of the asset in a given case, as used before/continue to be used even after, amendment- in Sec 55, besides elsewhere.

7.  FMV vs (X) COST (& Indexed cost)-
Any such prevailing view of a controversial nature as brought out herein before, in one’s conviction, based on a sound reasoning, does not seem to make any legal, or appeal to common, sense; but suffers from faulty logic.
To explain: According to the governing  scheme of things /applicable sections, taxpayer has been given the option to, for computing the chargeable capital gains, adopt and deduct the cost of acquisition (as indexed) or FMV. By necessary implication, that envisages even if the FMV, as determined by using any of the acceptable methods, is lower, taxpayer is entitled to have the gains reckoned by deducting the higher of the two. To be precise, it is a one-way option. In that, should the taxpayer choose to claim a deduction, as of FMV, in a case in which the cost of acquisition is known or ascertainable, the AO, having been duly empowered (see sec 50 C (2)), for obvious reason, might undoubtedly not  accept, but have it independently determined by the departmental valuer for his purpose /in the interests of the Revenue.
Simply put, the view that in the aftermath, and in consequence of the subject amendments, taxpayer is entitled / enabled to opt for FMV, - even if determined by any of the known or accepted methods, - and claim a deduction, instead of the actual cost of acquisition or as indexed, is palpably misconceived; deserves to be simply made a mention but straightaway dismissed.



Amendment of the Explanation (v) under section48
8. The other related amendment for consideration, without which the study herein may not be complete, is discussed below:
Upfront, to quote the view as given publicity in a limited circle:
“……..The revised index will be applicable for calculating indexed capital gains for any asset SOLD IN THE FINANCIAL YEAR 2017-18 and subsequently. “
(FONT supplied)
Such an inference is, in one’s firm conviction, too abrupt to be left unexplored, -rather misconceived, - for more than one reason:
The revised Index (CII) has been prescribed in pursuance of the amendment of the Explanation (v) under section 48.
The so amended provision, - READS:
"(v) "Cost Inflation Index", IN RELATION TO A PREVIOUS YEAR, means such Index as the Central Government may, HAVING REGARD TO seventy-five per cent of average rise in the Consumer Price Index (urban) FOR THE IMMEDIATELY PRECEDING PREVIOUS YEAR TO SUCH PREVIOUS YEAR, by notification in the Official Gazette, specify, in this behalf."
(FONT supplied, to highlight the confusing language)
On the first blush, the provision, in terms, is noted to make for a clumsy reading; in that, it is confusing, not having been made clear beyond any doubt as to whether the CII notified is to apply (be applied) for FY 2017-18 and for what purpose. The point of grave doubt arises because of the fact that the CII so notified has a dual purpose- not only to apply for the FY in which the transfer of the asset takes place , giving rise to chargeable gains, BUT ALSO FOR USE AS THE BASIS FOR RECKONING THE INDEXED COST OF AN ASSET ACQUIRED IN ANY FY.
For example, in case of an asset acquired say, in 2009-10 (CII for which is 632) transfer whereof is made in FY 2016-17 (CII for which is 1,125), indexed cost will have to derived by using the multiplying factor - 1,125 / 632.
Differently put, the point much wanting in clarity is why the revised Index of '272' (see the new Table) for FY 2017-18 should be taken as applicable/be applied to such an asset simply because its transfer has taken place in that year - FY 2017-18.
Incidentally, it needs to be specially noted that, both the amendments referred to namely, the shift in 'base year' and the published new Table (of revised CII Data) are so interconnected, as requiring to be necessarily considered and construed conjointly, - not each in isolation.
As regards the 'shift in base year', that itself has , as set out supra, given rise to controversies and inconclusive debates
More importantly, if critically viewed, correctness of the above referred inference is highly questionable; for, that will militate against the admitted/ irrefutable fact that both the amendments are to take effect only from 1st April, 2018, not retrospectively.
Subject to any further study, before firming up one's own conviction, presently but honestly feel, strongly so, that the intended implications of both the amendments of law, - that is, in the matter of shifting of Base Year from 1981-82 to 2001-02, so also the newly revised CII, call for clarity and plugging in the correctives, as considered necessary.
As regards the revised CII, perhaps, it might have to be made clear that it has application/to be applied only to any asset acquired in FY 2017-18, transfer of which may take place in any later FY so as to give rise to chargeable gains in that later year. On that premise, if convinced, the Revenue will be well advised to consider and notify afresh the CII to apply/be applied for a transfer of asset made in FY 2017-18; and, do so, by adopting the same norm (s) as used for prescribing the CII for immediately preceding years for up to 2016-17; not the new basis in pursuance of the amendment.
For, otherwise, any different view taken by the Revenue has the inevitable potentials to give rise to a war (of wits), disputes and inconclusive court litigation ON MORE THAN ONE LOGICALLY SOUND /LEGITIMATELY SUSTAINABLE GROUND.
Over to eminent Experts in field practice, to explore the stated proposition, and share any independent thoughts /views, if were at variance!
9. Retrospective Amendments:
As has been repeatedly emphasized by the Courts, one of the cardinal but basic and fundamental principles/rules of interpretation of law to be strictly followed is that, - (i) it is the ‘intention’ of the Legislature, which is the only predominant consideration to be kept in view, and (ii) such intention shall have to be, barring a few exceptional/extreme circumstances, clearly and unambiguously borne out by the language of the provision expressly, or by necessary implication. In other words, any provision of law should be self-evident of the intention behind it. That can be achieved only if it is ensured that the language in which the provision is couched is devoid of deficiencies like, ambiguity, loopholes, etc. It is a sad commentary that, all the concerned people, particularly the Government and the Legislature, have yet to woke up to the reality of the long lasting deplorable situation, and realize the crying need to resort to a suitable course of action.
On the topic of impropriety and impudence in making retrospective changes in law, without an insightful consideration, of any kind whatsoever, for a detailed discussion with reference to the plethora of governing case law, anyone interested may look up, say, -
(2005) 3 Comp. LJ, pg. 24; (2008) 169 TAXMAN, pg. 14.
(2014) 226 TAXMAN pg. 143 @ pg.147, 148,149

As then pinpointed, in the recent past, the present holder of the FM portfolio himself, has, on more than occasion, been reiterating his "government's decision not to resort to retrospective tax amendments to create a new liability". Even so, in disregard of such a commitment, in the instance on hand, what appears to have been not fully realized  that  any change in law,  if not properly construed, for whatever be the reason, may have the potential or possibility of being applied retroactively, to some extent.
A similar situation came to be noticed in regard to one of the amendments made in the year 2014. For a discussion thereof, one may look up the Article cited supra (2014) 226 TAXMANN 143 (Mag.)
EPILOGUE
It stands to be gathered from the foregoing brief discussion, the subject amendments of the law with a view to give effect to the idea of change in the Base Year, even granting that was considered and inevitable, to say the least, ought not to have been gone ahead with, without adequate homework and deep and incisive thoughts given.
 There is no knowing what view has been/ is being taken, by taxpayers and advising professionals, for paying Advance tax in the current year. And, so far as known, no firm view has been taken and shared in legal circles, or no clarity has been offered/ forthcoming from any quarters(either Revenue or the supposed to be knowledgeably  professional bodies- e.g. ICAI).

As such, in the absence of any clarity, there is the risk of mutually contradicting views being taken in the tax return, so also in the assessment, appeal and further proceedings, for the current FY 2017-18 (AY 2018-19). In the result, disputes and litigation might become inevitable; and issues would remain inconclusively resolved.

Keeping the foregoing in focus, in order to avert the indicated unsavory consequences, it is imperative that,-

(a) the professional bodies such as, ICAI should come out, and equip its members, with clear-cut proper guidance in the matter, on a timely basis; and  

(b) the CBDT, on its part, require to take the initiative, even now, and do likewise; sooner the better.  

To Conclude:
The scope for the prevailing confusion, as discussed, could have been easily and prudently avoided had it been at least made absolutely clear, at the outset, that the subject amendments were not intended to provide any new spate of controversies; in particular, certainly not a fresh opportunity to taxpayer to take any undue advantage by having the option to get the FMV re-determined, should that be higher and prove to be of an advantage. 


Every time we've cut the capital gains tax, the economy has grown. Whenever we raise the capital gains tax, it's been damaged. It's one of those taxes that most clearly damages economic growth and jobs. Grover Norquist
Read more at: https://www.brainyquote.com/topics/tax

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