1. There is considerable confusion prevailing over Source of Funds used to make Sec 80C deposits and Sec 54E deposits which results in long exchanges of clarifications and/or disputes, issuance of demand notices and appellate proceedings.
2. The disputes are of the following kind : Income Tax Department asserts that
2.1 In case of Sec 80 C deposits, the deposit should be made out of income earned by the Assessee for that financial year and/or
2.2 In case of Sec 80 C deposits, the deposit should be made from the Bank Account of the Assessee ; deposit made by someone else (say, father) is not considered eligible for Sec 80C benefit.
2.3 In case of Sec 54 E deposits, the deposit should be made out of the specific Capital Gain amount and the onus of proving this lies on the Assessee.
Let me illustrate this point : If the assessee makes a capital gain of Rs.60 lakhs by selling property and then deposits these proceeds for a temporary period of 5 months in a Fixed Deposit to earn some money (on which he, of course pays applicable tax), then his subsequent deposit in Sec 54E Bonds before the expiry of the 6-month limit for doing so is not being accepted by many ITOs or is being questioned.
Their argument is that this is no longer the “Capital Gain” money since it has undergone change by having been "sullied” since it has been invested in FDs !
2.4 In case of Sec 54 E deposits, earlier, the Capital gains arising from sale of property could be invested in more than one property and the amounts so invested were eligible for capital gains tax exemption.
A change in rules has made this ineligible, with investment in only one property being allowed for claiming Capital Gains Tax exemption.
This is clearly counter-productive and reflects a vindictive attitude towards the assessee. It is well known that many times ancestral and long-held properties are sold to enable the assessee to buy multiple properties for distribution amongst multiple claimants like his children, or siblings etc.
In such a case, to deny him the benefit of the Capital Gains exemption would be clearly unfortunate and would tend to frustrate his purpose of selling his original property or encourage him to conceal the actual consideration to avoid tax.
To avoid all such disputes that arise from the above-enumerated situations, it is suggested that ample clarification be issued in the Act itself so that there is no scope for laboured interpretations in these matters. The proposed clarification may possibly be incorporated, and read, as under :
In case of Sec 80 C deposits, it is stated, for the sake of ample clarity, that the assessee will be eligible for availing tax benefits under this section so long as he/she makes the deposits in the specified instrument within the time period specified for a particular Assessment year and such deposits will not be called in question or investigated as to their source for the purpose of his availing the exemptions prevailing under law. To further clarify, there will be no denial of such tax exemptions on the ground that the deposit is not from his income for that year or that it is not from his bank account. The only caveat is that 2 persons should not claim benefit of a single deposit. Hence if a father makes Sec 80 C deposit in his daughter’s PPF Account either the father or the daughter can claim benefit of the same, not both.
In case of Sec 54E deposits, it is stated, for the sake of ample clarity,that so long as money equivalent to the capital gain has been deposited in the specified Sec 54 E instruments and within the permissible time limits, the assessee will be eligible for capital gains tax exemption and he/she is not required to prove any connection between the money so deposited in Sec 54E instruments and the money received by him as a result of the capital gains made.
It is further laid down that in case of Capital Gain from Property, investments in more than one property are eligible for capital gains exemption, and there is no restriction that investments made in only one property will be eligible for Capital Gains Tax exemption..
Rationale for the above 2 changes proposed in IT Act
What is the legislative intent of these exemptions, be it under Sec 80C or 54E ? It is primarily to reward the Tax payer for his denying himself the use of monies that he has earned (by way of regular income) or money he has gained (as a result of capital gain).
In such a case, so long as the tax payer fulfils the requirement of depositing the money in the specified instruments within the specified time limit and for the specified “denial period”, it should qualify him for earning the exemption provided in the laws and there should no other requirement to test or interpret his intent.
3. Next we have the question of incorrect submission of PAN Number. The current law lays down that if a wrong or incorrect PAN Number is given, the ITO can impose a penalty of Rs. 10,000/- This is absolutely unnecessary and uncalled for. This provision simply does not recognise that there can be a genuine error, a handwriting mix-up or some such innocent thing. Hence the better thing is, just like in case of incorrect entry of password on many internet sites, repeated entries are allowed, at the very minimum at least 3.
Similarly, it is proposed that only if the PAN Number is submitted wrongly 3 times, the 4th such infraction should be slapped a fine of Rs.10,000/- This is NOT to suggest that wrong/incorrect PAN Numbers should be accepted on 3 occasions ; the suggestion, merely, is that NO PENALTY should be levied for the first 3 mistakes and the PENALTY should only be levied from the 4th instance onwards.
4. There is a similar problem with Assessment year. If you enter the wrong Assessment Year whist making TDS payments or Advance Tax payments, then the same cannot be corrected !!! Unbelievable, but true. You are required to make another payment for the correct Assessment Year and then claim back the erroneous payment made by filing a claim for the same. This is absolutely ridiculous. The Rules and the IT payment Software must allow for a correction to be filed in the AY, as soon as such an error is detected by the Assessee.
5. In the light of the above, it is further proposed that the existence of 2 “different year classes” Financial Year (FY) and Assessment Year (FY) should be done away with and only FY should be used for all purposes. Since every FY is uniquely coupled with a corresponding AY, there is no sense in having two types of years. The average citizen are comfortable and familiar with FY and hence the proposal that there should only one type of year in IT dealings viz., FY.
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