Tax Column

Tax Column


Jayesh Dadia
Chartered Accountant

I am an individual. I owned watches which I had always used for my personal use. In view of the pandemic and slowdown in business and liquidity tightness, I sold some of the watches and received a total sale consideration of Rs20 lakhs through account payee cheques. Will this amount be taxable while computing income for the financial year 2020-21 relevant to assessment year 2021-22?
 

It seems that you have always held the watches for your personal use. Therefore, it falls within the definition of ‘personal effects’ under Section 2(14) of the Income Tax Act. Watches used for personal use are not considered as capital asset and therefore the sale of watches does not result in any taxable capital gain. As such, the entire Rs20 lakhs is not taxable. However, you have to establish that Rs20 lakhs received by you is on account of sale of watches by way of documentary evidence or confirmation of the purchaser that Rs20 lakhs paid by him is towards purchase of watches from you. You must also obtain the PAN details of the purchaser as the ITO may like to verify the correctness of the transaction.

I am managing a business both as LLP and a private limited company. At times in the past we used to claim certain expenses to reduce profit. The invoices were mainly of an accommodating nature. Sometimes these types of expenses have been allowed in full and sometimes disallowed but without attracting any penalty. Now I am told that the act has been amended to severely penalise all those persons claiming false expenses. Can you explain?

From the financial year 2019-20 relevant to assessment year 2020-21, a new Section 271AAD under the Income Tax Act has been inserted. Under this new provision, if it is found that in the books of accounts maintained by any person there is a false entry such as false invoice, false documentary evidence, false purchase invoice, false supplier invoice, then in addition to disallowance which attracts normal provision of the act, the ITO may direct such a person to pay penalty of sum equal to aggregate amount of such false or omitted entries.

In other words, if you claimed bogus expenses by raising false invoice to the tune of Rs50 lakhs, then in addition to normal tax payable on Rs50 lakhs, you will also be liable to pay penalty of an equivalent amount of the aggregate amount of such a bogus invoice i.e. in the given case, Rs50 lakhs. Hence, the act has been amended to discourage people from claiming bogus expenses through false invoices, etc. and penalise those found to have claimed false expenses.

As an individual I have some unaccounted cash in hand. I want to deposit the same in my bank account and pay normal tax at 30 per cent during the current financial year. Since the cash deposited would be offered as income, do you see any adverse action from the ITO?

Under the provision of the Income Tax Act, the assessee is required to explain the source of each and every credit in the books of accounts. Therefore, you may be asked to explain the source of cash deposited by you in the bank account even though you have offered the same for taxation.

Under Section 115BBE, if any income is taxed under Section 68 as undisclosed income, then the same income will be taxed at 60 per cent. In your case, you don’t know the source of cash earned by you. Therefore, the ITO shall invoke provision of Section 68 read with Section 115BBE of the Income Tax Act and tax your entire cash deposit at the special rate of 60 per cent. Moreover, in addition to 60 per cent tax, the ITO may levy penalty at 10 per cent of 60 per cent under Section 271AAC of the Income Tax Act.

Can you let me know what are the tax exemptions allowed to eligible start-ups under the Income Tax Act?

An eligible start-up, as defined under Section 80IAC of the Income Tax Act, enjoys following tax exemptions:

Three-year tax holiday in a block of seven years. An eligible start-up incorporated after April 1, 2016 is eligible for getting 100 per cent tax rebate on profit for a period of three consecutive years in a block of seven years provided that the annual turnover does not exceed Rs25 crore in any financial year.
Under Section 54EE, any long-term capital gain of an eligible start-up is exempted if invested to the extent of Rs50 lakhs in a fund, notified by the central government within a period of six months from the date of transfer of asset and if it is invested for three years.
The government has also exempted the tax being levied on investment above the fair market value in an eligible start-up. Such investments include those made by resident angel investor family or fund not registered as a venture capital fund.
Tax exemption to individual or HUF on investment of long-term capital gain in equity share of eligible start-up under Section 54GB.
Setting off the carried forward loss and capital gain allowed in case of change in shareholding pattern. In other words, restrictions of holding 51 per cent of voting rights in Section 79 have been relaxed in case of eligible start-ups.

 

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