Income Tax Caution 44AD and 44ADA

 

Before declaring your Income, Make sure it covers following

•  High-value car/property purchases

 • Credit card bills > reported income

• Large foreign travel spends

• Crypto, stock, or mutual fund investments

• Large unexplained cash deposits in Banks

• Gold/jewellery purchases

 

 

This data is complied by ITD from following

• AIS (Annual Info Statement)

 • TIS (Taxpayer Info Summary)

• SFT (High-value transaction reports)

• Property registration data

• PAN-linked spends (e.g., on LRS, insurance, FD, etc.)

Errors in Tax Audit Report

Tax Audit & Penalty of Rs. 10,000/- on chartered Accountants for error in the audit report

The Tax Audit due date is on peak. In an attempt to complete the audit to save client from penalty, CA’s make commit error.

All the Chartered Accountants are busy completing their works. Note carefully that any mistake by the Chartered Accountant in the Tax Audit Report will cost him Rs. 10,000/- as per Section 271J of the Income Tax Act, 1961. Needless to say, clients will not come forward to pay this penalty or share the burden of CA.

Section 271J of the Income Tax Act, 1961 reads as under:

271J. Without prejudice to the provisions of this Act, where the Assessing Officer or the Commissioner (Appeals), in the course of any proceedings under this Act, finds that an accountant or a merchant banker or a registered valuer has furnished incorrect information in any report or certificate furnished under any provision of this Act or the rules made thereunder, the Assessing Officer or the Commissioner (Appeals) may direct that such accountant or merchant banker or registered valuer, as the case may be, shall pay, by way of penalty, a sum of ten thousand rupees for each such report or certificate.

Explanation.—For the purposes of this section,—

(a)  “accountant” means an accountant referred to in the Explanation below sub-section (2) of section 288;

(b)  “merchant banker” means Category I merchant banker registered with the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);

(c)  “registered valuer” means a person defined in clause (oaa) of section 2 of the Wealth-tax Act, 1957 (27 of 1957).]

In this article we will discuss the most serious mistakes which Chartered Accountants may commit or may be held for professional negligence. One must take following observation, points, information while finalizing the tax audit report:

Interest, Late fees, Penalties under GST:
Since the Goods and Services Tax (GST) regime is a new one, tax payers have committed mistakes in the same. Either they have delayed their registrations or have uploaded the returns lately. The GST Act levies penalties/ fines on the contraventions to the provisions of the act. In few circumstances waiver have been given by the Government. But yes the contraventions are still chargeable in many cases. The Income Tax Act, 1961 does not permit the deduction of penalties, fees, fines from the turnover for calculation of Profit as per section 37. Section 37 disallows the expenditure incurred for any purpose that is an offence or which is prohibited by any law.

But many Chartered Accountants are permitting the Debit of Late Fees/ Interest to Profit and Loss and are not even reporting it in the Tax Audit Report.

Another mistake is ignoring Section 145A of the Income Tax Act, 1961 as substituted by Finance Act 2018 with retrospective effect. Clause (ii) of Section 145A reads as under:

145A. For the purpose of determining the income chargeable under the head “Profits and gains of business or profession”,

(ii)  the valuation of purchase and sale of goods or services and of inventory shall be adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition as on the date of valuation;

As per this clause, while doing stock valuation of inventory the value shall include the amount of any tax, duty, cess or fees. The amount of taxes on the goods shall be included in cost. Taxes included Goods and Service Tax. Also this is a retrospective amendment and shall be applicable from FY 2016-17. The amount of both opening and closing stock shall be including the amount of tax. The difference in the opening balances may be showed as tax difference.

Over and above this there may be various small mistakes that can be ruled off by applying full care and due diligence.

3.The receipts and TDS as shown in 26AS may be checked with the receipts and TDS in the books of accounts. The same should be shown in ITR. If there is any mismatch in details furnished in ITR and 26AS, then one may receive notice for such mismatch.

4.CA should not forget to take care of sec 14A of Income Tax Act, 1961 which provides for disallowance of expenses incurred for earning tax exempt income as read with Rule 6D.

5.In ITR form now, reporting of GST turnover is required and in case GST turnover and turnover as per books do not match, one may have to reply to notice. CA’s should keep the reconciliation of differences in turnover and may ascertain that there is explainable error and nothing like a sort of  professional negligence.

6.In ITR, there is a new reporting requirement. Trading and manufacturing account are required to be furnished separately. Verify with above perspective if there are vast variation.

7.Non compliance or non reporting of ICDS will tantamount to professional negligence and will be a fit case for levy of penalty u/s 271J

8.Payment of interest to NBFC also attracts TDS and is not exempt like payment of interest to Bank. Needless to say, just casualness in incorporate it in the TAR will result in adverse consequences. Similarly, acceptance & repayment of loan from NBFC will also form the part of section 269SS & 269T reporting.

9.While furnishing amount of other expenses in ITR, if substantial amount is reported in other expense, CA should check if anything is of personal or political nature and ensure to report it in Tax Audit Report.

Once penalty u/s 271J is imposed it also disqualifies the person to act as an registered valuer. 

Taxability of Perquisites

If the house is taken on rent by your employer, then cost is calculated as: Lease rent paid or payable by the employer or 15 percent of the salary, whichever is lower.

Interest that would have normally been payable on interest free or concessional loans of up to Rs  20,000 or loans made for medical treatment of specified diseases such as cancer, TB etc., are not chargeable to tax as a perquisite.

Expenses in relation to telephone or mobile phones, providing  laptop for work purposes are not treated as a perquisite, if used for official purposes.

Any gift or voucher received by an employee on ceremonial occasions or otherwise is regarded as a perquisite. These gifts are taxable fully if received in cash or exempt up to Rs 5,000 if received in kind such as gift cardsl. Therefore, if you have received a gift card of Rs 20,000 from your employer, then only Rs 5,000 will be exempt from tax. The balance of Rs 15,000 will be added to your salary and taxed accordingly.

Similarly, the cost of employees' stock options (ESOPs) or sweat equity shares issued will be calculated as: Fair market value of shares or securities on date of exercising option by the employee  minus amount paid by employee.

Deduction on entertainment allowance received by government employees only which is lower of:

i) Actual amount received

ii) One-fifth of the salary excluding any allowance, benefit or other perquisite

iii) Rs 5,000

Taxation angle in case of Joint Ownership

1)    Taxation Benefit for Joint Owners

A joint housing loan comes with the twin benefit of increasing the overall loan eligibility and the income tax rebate that can be claimed by both co-applicants individually under Section 80C and Section 24. The mandate in claiming the income tax rebate is that the co-applicants of the housing loan should also co-own the underlying residential property.

In case a person is just a co-borrower of a loan and not a co-owner in the property, he cannot claim the tax rebates. On the other hand, if the co-owners are equal owners of a property but if the share of the loan is 2:1, the tax benefits can also be availed in the same ratio.

The income tax benefits are applicable in proportion to the ownership structure. For example, if the ownership in a property is 60:40, a loan of say Rs 50 lakhs will be split as Rs 30 lakhs and Rs 20 lakhs respectively and this ratio will be applicable while calculating tax benefits on interest/principal repaid on this loan.

Therefore, it is advisable for joint owners to procure an ownership sharing agreement stating the ownership proportion on a stamp paper as legal proof of the ownership. The case for the housing loan gets stronger in case of joint applicants. Banks consider the earning potential of co-borrowers and decide on the eligibility of the loan. Therefore, the loan eligibility increases in case of joint loan account.

The joint account holders (owners of the property) can claim income tax benefits individually. The housing loan benefits that fall under Section 80C and Section 24 of Income Tax Act make each borrower eligible for a maximum deduction of Rs 1.5 lakh and Rs 2.00 lakhs associated to principal repayment and interest payable on the home loan respectively.

2)    In case the assessee has sold the residential property, it is advisable that new property should be brought in the name of assessee alone rather than joint name.

In CIT Vs Kamal Wahal and in CIT v. Ravinder Kumar Arora honorable Delhi High Court ruled where entire purchase consideration was paid only by the assessee, it would be treated as the property purchased by the assessee in his name and merely because he has included the name of his wife and the property was purchased in the joint names would not make any difference.

However on the same issue Parkash V/s ITO, Mumbai high Court has ruled in the favour of revenue. There is no Supreme Court ruling on the matter. 

3)    An assessee can receive rental income from any number of residential properties and housing loss (i.e excess of deduction over income) from one house property can be easily set off against income from other house property and even from salary income.

Deduction for Housing loans and Second House property

If an individual holds more than one property in his name, only one such property may be considered as self-occupied and the others are classified as ‘deemed rented out’.  The property to be classified as deemed rented out is at the individual’s discretion. From taxation angle deemed let out house increases your tax liability in case standard deduction and interest on 2^nd loan is lower than the annual rental value (I.e it will result in addition of income in your total income).

Deduction on account of principal repayments is capped at R 1.5 lakh under Section 80C provided that the house property is not sold within 5 years of obtaining the possession. However, AO’s have been denying deduction available for repayment towards the principal portion of housing loan under section 80C for second housing property. 

Interest Deduction on Housing Loan

 The deduction available on account of interest for a self-occupied property is limited to Rs 2 lakh per year.

The interest portion paid on ‘rented out’ properties is allowed without any cap (The cap of Rs 2 lakh u/s 24 is for interest paid on Self occupied house property).  However, if the property is not acquired/constructed within three years ( 5 years from 01^st Apr 15) from the end of the financial year in which the loan was taken, the interest benefit would be reduced to R 30,000 only. In case of let out property construction can be completed after 3 years also and there would be no cap of Rs 30000.

House doesn't have to necessarily be occupied by the taxpayer for it to be considered a self-occupied house. Members of the family - spouse, parents and children - may also be living there.  

Sec 24 (Interest) deductions in various scenarios

a)    One Own house but not self occupied (I.e living in rented accommodation).

In case a property has neither been self-occupied by the owner (or his family members) by reason of the fact owing to his employment, business or profession carried on at any other place (i.e he has to reside at that other place not belonging to him) nor the property is let out, then the same will be treated as self occupied and cap of Rs. 2 Lakh under Section 24 will be attracted. In case you receive HRA allowance in salary, you can claim deduction based on rent paid.

b)    Two houses of which one is self occupied

In case of deemed let out also the cap of Rs 2 lakh won’t be attracted.

c)    Second house is actually let out

In case the property has actually been let out than the cap of Rs 2 lakh won’t be attracted.

Other Points

In case you have paid EMI, you should obtain certificate from your borrower bifurcating the same between principal and interest. 

Tax benefits can be claimed for multiple home loans. However overall cap of Rs 1.5 lac and Rs 2 lac (in case of self occupied) will be seen in totality and not loan wise. 

Interest benefit once availed will not be reversed/added back even if the house property is transferred within 5 years. 

The Interest that has been paid before the completion of construction should be aggregated and the whole aggregated amount shall be allowed as tax deduction in 5 equal instalments for 5 successive Financial Years starting from the year in which the construction has been completed.

For any loan taken for repair, renewal and reconstruction, there is no tax benefit on principal repayment. The tax benefits on interest payment under Section 24 for such loan shall be limited to Rs 30,000 per financial year for Self occupied property and without any cap for let out property.

Loss under house property can be adjusted against salary and can be carried forward for 8 years.

Section 80DD, Section 80DDB, Section 80U

Tax deduction for disabled persons

Section 80DD, Section 80DDB & Section 80U are provisions in Income Tax Act which allows for income tax exemption for maintenance and benefit of disabled person.

	Deduction can be claimed by	For
80DD	Family member	Permanent physical disability or other specified diseases which can reduce such an individual's capacity for normal work
80DDB	Differently abled person himself or Family member	Treatment of specified diseases
80U	Differently abled person himself	Same as 80DD

Important thing to note here is that if an individual claims deduction u/s 80U, his relative/ family member cannot claim deduction under Section 80DD. However 80DDB is independent from 80DD and 80U.

 For getting the deduction under any of aforesaid sections, you have to satisfy following conditions:

·         You have to be a resident of India (deduction is not available to non-resident)

·         You are an individual or a Hindu undivided family (HUF)

·          Certificate in Form 10I (you can download the format here).  You don’t need to submit the medical certificate with income tax return at the time of claiming deduction But You will have to produce it to the Assessing Officer (AO) as and when required, at the time of assessment.

Section 80DD

·         You have made expenditure under any/ both of the two options: 

Option 1	Option 2
You have incurred expenditure for medical treatment, training and rehabilitation of a disabled dependent.	You have paid or deposited under any scheme framed LIC or any other insurer for maintenance of dependent

 For the above purpose, a “disabled dependent” is a person who satisfies the following conditions:

·         In case of Individual, dependent means the spouse, children, parents and brothers and sisters

·         in case of HUF, “dependent” means any member of HUF

·         Person suffers from any of the following disabilities: Disability should be not less than 40 percent.

o    Blindness

o    Low vision

o    Leprosy cured

o    Hearing impairment

o    Locomotor disability (related to bones, joints etc. leading to restriction in movement)

o    Mental retardation

o    Mental Illness (disorders other than retardation)

o    Autism

o    Cerebral Palsy

o    Multiple disabilities (i.e. combination of more than one disabilities below)

·         Such person should be wholly or mainly dependent upon such Individual or HUF for support and maintenance

·         Such person has not claimed any deduction under section 80U in computing his total income

How much deduction is allowed?

This section allows you to claim a “fixed” deduction at the time of filing the return irrespective of the actual amount incurred or deposited under Option 1/ Option 2.

Deduction depends upon the extent of disability (as certified by physician) as follows:

·         Disability is less than 40% – No deduction

·         Disability is more than 40% but upto 80% – Rs. 50,000 (fixed)

·         Disability is more than 80% – Rs. 1, 00,000 (fixed)

Let us understand with help of example:

Mr. Raj is a resident individual. He annually deposits a sum of Rs. 15,000 with LIC for the maintenance of his handicapped father who is wholly dependent upon him. For disability, a copy of certificate from medical authority is submitted.

As grandfather does not come within the definition of “dependent” in section 80DD, nothing shall be deducted under section 80DD.

As brother does come in the definition of “dependent”, Rs. 50,000 is deductible. If however, the dependent brother is a person with severe disability over 80%, then Rs. 1,00,000 is deductible.

What is the basis for claiming deduction?

For claiming the deduction, you shall have to procure a copy of the certificate issued by the medical authority. If the disability requires reassessment, you will have to obtain a fresh certificate after the expiry of the period mentioned on the original certificate in order to continue the claim the deduction every year.

Is there a prescribed format for certificate from medical authority? 

Yes,

I have to obtain the certificate from which authority?

Certificate has to be signed by one of the following, to help in claiming deduction:

·         A Neurologist having a degree of Doctor of Medicine (MD) in Neurology (or, in case of child, a Pediatric Neurologist having an equivalent degree),

·         A Civil Surgeon or Chief Medical Officer (CMO) of a government hospital

 Section 80DDB

Neurological Diseases where the disability level has been certified to be of 40% and above,—

        (a)   Dementia ;

        (b)   Dystonia Musculorum Deformans ;

        (c)   Motor Neuron Disease ;

        (d)   Ataxia ;

        (e)   Chorea ;

         (f)   Hemiballismus ;

        (g)   Aphasia ;

        (h)   Parkinsons Disease ;

             (ii)   Malignant Cancers ;

            (iii)   Full Blown Acquired Immuno-Deficiency Syndrome (AIDS) ;

             (iv)   Chronic Renal failure ;

              (v)   Hematological disorders :

         (i)   Hemophilia ;

        (ii)   Thalassaemia. 

·         The medical treatment is done for either you or your wholly / mainly dependent husband / wife, children, parents, brothers and sisters. If you are an HUF, expenditure may be done for any dependent member of the family.

What is the amount of deduction?

·         If person for whom expenditure is incurred is less than 65 years: Rs, 40,000 or the amount actually paid, whichever is lower.

·         If person for whom expenditure is incurred is greater than 65 years: Rs, 1,00,000 or the amount actually paid, whichever is lower.

Important note: Deduction eligible under this section shall be reduced by amount received, under insurance from an insurer, or reimbursed by an employer). .

Let us understand this with help of an example:

Manoj spends Rs. 2, 50,000 for medical treatment of his mother aged 70 years for a specified disease in April 2013. He had taken a mediclaim policy in name of mother and gets Rs. 1 lac as mediclaim reimbursement. How much deduction u/s 80DDB he can claim?

Answer: Since Manoj’s mother is senior citizen, Manoj is entitled for actual spent amount (Rs. 2.5 lacs) or Rs. 60,000 whichever is lower, i.e. Rs.  60,000. However, Section 80DDB says that amount received from insurance company/ employer is to be deducted. Now, since Rs. 1 lac has been received from insurance company, no deduction is available under this section.

However, had Manoj received Rs. 30,000 from insurance company, he could have claimed Rs. Rs. 30,000 (Rs. 60,000 – 30,000) as deduction u/s 80DDB.

From which authority is the certificate to be procured?

You have to submit a certificate of the prescribed format from neurologist/ oncologist/ a urologist/  haematologist/ immunologist or such other specialist, as may be prescribed, working in a Government hospital. 

 Who will give the certificate depends upon the type of disease, as per Rule 11DD of Income Tax Rules, following specialists can give the certificate: 

Neurological diseases	Neurologist having a Doctorate of Medicine (D.M.) degree in Neurology or any equivalent degree, which is recognised by the Medical Council of India;
Malignant cancers	Oncologist having a Doctorate of Medicine (D.M.) degree in Oncology or any equivalent degree which is recognised by the Medical Council of India
Chronic renal failure	Nephrologist having a Doctorate of Medicine (D.M.) degree in Nephrology or a Urologist having a Master of Chirurgiae (M.Ch.) degree in Urology or any equivalent degree, which is recognised by the Medical Council of India;
Hematological disorder	Specialist having a Doctorate of Medicine (D.M.) degree in Hematology or any equivalent degree, which is recognised by the Medical Council of India

 Note that the rule also provides that no such specialist is available in the Government hospital, such certificate, with prior approval of the Head of that hospital, may be issued by any other specialist working full-time in that hospital and having a post-graduate degree in General or Internal Medicine, which is recognised by the Medical Council of India.

 Section 80U

 Section 80U is very much similar to Section 80DD we discussed earlier, only difference is that where in Section 80DD the taxpayer’s family member is differently-abled person, and taxpayers spends for medical treatment for him, in Section 80U, the taxpayer can claim deduction if he/she himself is differently-abled. Definition of Disability mentioned in 80 U is same as 80DD. Please note that deduction under 80DD and 80U are mutually exclusive events.

 Note that since we are talking about an individual here, Section 80U applies only to individual. 

Aforesaid information has been compiled thanks to CA Abhinav Gulechha.