‘Satisfaction’ of Assessing Officer for assessment of other person may come after concluding assessment of searched person

CIT v. Calcutta Knitwears [2014] 43 taxmann.com 446 (Supreme Court)

The Assessing Officer could record his satisfaction for issuing notice under section 158BD in the case of person other than searched person even after the completion of assessment of searched person.

The issue that falls for consideration of Supreme Court is:

At what stage of proceedings under Chapter XIV-B the assessing authority is required to record his satisfaction for issuing a notice under section 158BD?

The Supreme Court held in favour of revenue as under:

• The section 158BD is a machinery provision and it is inserted in the statute book for the purpose of carrying out assessment of a person other than the searched person. Under Section 158BD, if an officer is satisfied that there exists any undisclosed income which may belong to a person other than the searched person, after recording such satisfaction, he may transmit the records/documents to the Assessing Officer having jurisdiction over such other person;
• After receipt of the aforesaid satisfaction and upon examination of the said other documents relating to such other person, the jurisdictional Assessing Officer may proceed to issue a notice for the purpose of completion of the assessments under Section 158BD;
• Section 158BD provides that the satisfaction note could be prepared by the Assessing Officer either at the time of initiating proceedings for completion of assessment of a searched person under Section 158BC or during the stage of the assessment proceedings.
• It didn't mean that after completion of the assessment, the Assessing Officer couldn't prepare the satisfaction note to the effect that there exists undisclosed income belonging to person other than the searched person;
• Thus, for the purpose of Section 158BD, a satisfaction note is sine qua non and must be prepared by the Assessing Officer before he transmits the records to the other Assessing Officer who has jurisdiction over such other person. The satisfaction note could be prepared at either of the following stages:
• At the time of or along with the initiation of proceedings against the searched person under Section 158BC;
• Along with the assessment proceedings under Section 158BC ; and
• Immediately after the assessment proceedings are completed under Section 158BC of the searched person.

Why is Long Term Investment Important?

Long Term Investments are those when you hold your stock, assets, bonds etc for a duration which is more than a year, may be ten years or something that you intend to hold for even much longer. If you are the one who is not running after quick returns then long term investments are your cup of tea. Long term investments grow substantially in good number of years and give you higher returns in the long run.

However, long term investments demand a high level of commitment, discipline, effort and time but the result is worth the wait. Experts advise you to make long term investments as they help you to remain focused and disciplined and provide you with higher profits as compared to short term investments.

You have heard the story of the tortoise and the rabbit and you know it well that slow and steady wins the race. Same applies to long term investments. You may click on short term growing funds in order to make steady cash but if you go for long term investments you let the compounding magic work for you.

Advantages of Long Term Investment

• It is not always possible to have high returns all the time. While you invest in short term funds it is not necessary that the fund in which you have invested will grow in the short span. On the other hand, if you go in for long term investment you will be able to sail through the highs and lows of the market and get substantial returns on your investments.
• Long term investments help you grow your money through the magic of compounding. The early you start the better for you. While playing in long term stocks, you do not get distracted by short term conditions.
• It is very difficult for you to predict the performance of market in short term whereas if you have a look at the performance of a stock over a period of time you will realize that the stock has showed upward movement.
• Long term investment helps you to build a diversified portfolio. It is important for you to accept that you are a human being and you cannot make right choices always and long term investment will help you run smoothly through the peaks and valleys of the market and also provide you with higher returns as you will have a good amount of varied options in your portfolio. If you keep updating your portfolio by getting rid of the non-performing chunk and catching hold of the performing stocks you will be able to yield good returns.
• Long term investments offer lower risk as compared to short term investments. One wrong move in your short term investment and you are gone whereas when it comes to long term investment you can slowly and steadily choose your investment options which will at least leave you well-off and it will surely not be strenuous for you.
• Long term investment seems more direct and easy than day trading. Day trading requires a lot of caution and time.
• In case of long term investments, investors need to be proactive and is less cumbersome. You do not have to sit at the edge of your chair. Even passive investments prove to be convenient.
• Even if you have made a mistake while making investment decisions, long term investment gives you a chance to mend them. You have time at your disposal to rectify where you have gone wrong. You can make up for the bad year of performance of your stock easily in coming years.
• When you opt for long term investment your portfolio turnover comes out to be less as compared to short term investments where whatever you sell becomes subject to taxes. With long term investments at your disposal you can grow money through compounding and delay tax liabilities.
• If we talk about the commission expenses then it goes without saying that such expenses are far less in long term investments. 

Experts do advise long term investments as they help you meet your long time financial goals. As you play in a diversified portfolio you are able to nullify the effect of a bad year of stocks with the coming years. However, while you plan to invest for long term you need to analyze the time that you have at your disposal. You need to plan well in advance the amount you can spare, the years for which you can stay invested and whether you will require that money in the next few years or not.

When you stay invested for long you do extend your risk to the following years but you indeed have a fair chance of rectifying your mistakes if you have landed yourself with a non-performing stock.

Long term investments pay off well in long durations like five years or ten years or above. If in any year during this period your stocks fall, you need not panic because if you sell off your stocks while the market is low you are bound to lose but remember that the market cannot remain the same, it will surely recover and you can easily make up for the loss.

Following are few of the options that are available for making long term investments: 

• Equity Shares
• Mutual Funds
• Post Office Saving Schemes
• Bonds and Debentures
• Public Provident Fund
• Life Insurance
• Real Estate
• Commodities
• National Saving Certificates
• Fixed Deposits

Will penalty be levied under section 271(1)(c) for disallowance made under section 14A and addition made on account of section 50C?

Section 14A mandates that no deduction shall be allowed in respect of expenditure incurred in relation to income which does not form part of the total income under the Act. Method for allocating expenditure has been prescribed. First duty is of the assessee to compute his income and in the light of section 14A. On failure without reasonable explanation, penalty would be attracted as it would amount to furnishing of in accurate particulars of income u/s. 271(1)(c) Explanation 1. 

In Mak Data P Ltd. v. CIT (2013) 358 ITR 593 (Supreme Court), it is stated “Explanation 1 to Section 271(1)(c) of the IT Act, 1961, raises a presumption of concealment, when a difference is noticed by the Assessing Officer, between the reported and assessed income. The burden is then on the assessee to show otherwise, by cogent and reliable evidence’. It applied Union of India v. Dharmendra Textile Processors (2008) 306 ITR 277 (Supreme Court) and CIT v. Atul Mohan Bindal (2009) 317 ITR 1 (Supreme Court).

Section 50C is special provision for full value of consideration in specified cases. It is a deeming provision whereby the stamp duty valuation is deemed as full consideration against real consideration received by the owner. Hence, no penalty would be exigible u/s. 271(1)(c), CIT v. Madan Theatres Ltd. (2013) 260 CTR 75 (Kolkata).

Investment and Portfolio Diversification

The famous phrase “Never put all your eggs in one basket” holds very true in case of your investments too. Portfolio diversification is a tool or a technique that helps you minimize your risk by investing in different schemes and plans.

It’s just like if you put all your eggs in one basket and if it drops, you may lose all of them. Similarly, if you invest all your savings in a particular plan or scheme and in case the market goes down you are bound to loose your precious money.

What works behind diversification of funds is the rational that those who diversify their investments earn, on an average, higher returns thereby reducing investment risks. Thus, it is always advisable to scatter your investments so as to avoid being hit adversely. 

Diversification helps you remain shock-proof - if one plan fails at least you have the other to save you from the blow.

Undiversifiable and Diversifiable Risks

Undiversifiable Risk – These are risks that cannot be eliminated through diversification as they are caused by factors like inflation, political instability, war etc. These are risks that an investor cannot overcome or reduce.

Diversifiable Risk – These risks can be reduced or eliminated by using the technique of diversification of funds. In order to avoid these risks it is important to choose different funds so that market lows and highs do not affect all of them in the same manner.

How to Diversify Your Portfolio 

1. Investment Plan – Before you go around for any kind of investment it is important for you to have an investment plan that includes the tenure for investment, the minimum amount, returns expected and the mode of payment and return i.e monthly, quarterly, half-yearly or yearly. 

2. Choose different Investments of low correlation - Correlation means the relationship between two schemes or plans. In simple words it means the interdependence of schemes in your portfolio. This means that you need to choose your investments that go up and come down at different times. This helps you to sail comfortably through the bulls and bears of the market. 

3. Monitoring – It is mandatory for you to keep a close watch over your assets and keep rebalancing and monitoring your portfolio. The work of portfolio diversification does not end by simply selecting different options. It extends to rebalancing your portfolio by selling and buying. 

4. Stay invested and watch out for new opportunities – It is important for you to keep yourself invested for a longer duration in order to reap good returns and also keep a close watch on the new opportunities coming your way. Search for new investments and get rid of the non-profitable chunk. 

5. Investment Principles Work – Invest by following the investment principles. Merely going by predictions may land you in deep waters as no one can accurately predict the future. Create a quality portfolio and avoid being solely carried away by predictions. 

Where To Invest 
As stated earlier, it is very important to ensure that your investments are spread across different schemes and plans. Correlation can particularly prove beneficial while you diversify your portfolio.

There are many such examples that can guide you through while you invest in different plans. One such example is that of equity and debt. It is worth noticing that equity and debt have a correlation. It is seen that whenever there is a rise in interest rates the earning from debt plans grow significantly whereas returns from equity investments drop. So while you see that the interest is on a hike it goes without saying that those who have more of debt in their portfolio will benefit more in comparison to those who have less debt and vice versa happens when interest rates go down. Here, if you have a diversified portfolio it will work well for you. Moreover, the high rated debt instruments come handy with almost zero risk.

It is always advisable to create a combination of defensive stocks and high beta stocks in your portfolio. High beta stocks are ones that will fetch you a good growth when the market is at a rise but may become a pain for you during market slumps. They reap good but come with a considerable high risk. Stocks like that of FMCG and Pharmaceuticals are defensive stocks and trends show that they have been consistent with their performance in the market even when stock market has not been at its best. So using a combination of defensive stocks with high beta stocks may work well for those who like playing in equity.

Those of you who have bought two mutual fund plans and feel you have diversified your portfolio; it is time for a reality check. This assumption does not hold well if you feel that selecting and investing in different schemes of mutual fund would lead to diversification of portfolio. What will you do if you opt for two different mutual fund plans that have number of common factors between them? Always look out for schemes which are well diversified in the same category.

Assets like gold work in the interest of diversification of portfolio. It goes without saying that gold yields good returns even in hours of crisis. It is advisable to hold gold in your portfolio. Moreover, it shares a negative relation with debt and equity thus acting as asset for you when debt and equity both suffer a hit.

It is important for you to understand that having a big portfolio will not help. It is important to balance it out with right choices. If you want to draw best from your portfolio make sure you follow the rule of correlation while creating your portfolio.

Save yourself from Over-DiversificationIt is very important to strike equilibrium in case of diversifying your portfolio. In order to create a diversified portfolio do not get so much carried away that you end up investing in too many assets, schemes and plans. You should not spread your money so thin that all the effort goes in vain. Over diversification may shield you from great losses but it would surely lead you to losing good gains. So while you create your diversified portfolio do keep in mind that you need to strike the right balance without over indulgence as too many cooks spoil the broth.

Agricultural land won't lose its privileges even if sold in violation of State laws; not taxable as capital asset

CIT v. Rajshibhai Meramanbhai Odedra [2014] 42 taxmann.com 497 (Gujarat High Court)

Merely because agricultural land was sold in favour of non-agriculturist in breach of law prevailing in State, said land would not lose its character as agricultural land and, hence, could not be treated as capital asset.

Facts:

• The assessee had filed return of income and disclosed income from sale of agricultural land in response to notice issued under section 153C. 
• The Assessing Officer made addition on account of capital gain by holding that the land, which was sold by assessee, was a capital asset as it was sold in violation of laws prevailing in the State. 
• On appeal, the CIT(A) deleted the addition. Further, the Tribunal confirmed order of the CIT(A). The aggrieved-revenue filed the instant appeal.

The High Court held in favour of assessee as under:

• It was not in dispute that what was sold by the assessee was an agricultural land which was situated beyond 8 Kms. of local limits of the Municipality and at the relevant time, the land was held by the assessee as agricultural land; 
• The character of land would not change merely because it was sold to a non-agriculturist in breach of law prevailing in the State and the land still would continue as an agricultural land; 
• Even though the sale in favour of non-agriculturist could be declared as illegal, yet the land would not lose its character as agricultural land; 
• When the land was an agricultural land, which was situated beyond 8 Kms. from the municipal limits, no error had been committed by the Tribunal in not considering the land as 'capital asset'; 
• Thus, the land was to be treated as agricultural land and it was outside the purview of capital asset.

Things to Know Before Investing in Mutual Funds

Mutual Funds are a pool of funds from a number of investors who wish to purchase securities. It is a professionally managed investment tool by way of which investors collectively invest mostly in open-ended funds. The professionals who manage these funds aim at turning the small deposits of earnings of investors into capital gains and incomes for the investors.

The year 1963 marked the onset of Mutual Funds in India with the joint effort of Reserve Bank of India and Government of India. With the penetration of Non-UTI players in this stream, the concept of mutual funds gained popularity.

By way of mutual funds, thousands of investors create a portfolio of real estates, bonds, equity etc and share the profits so reaped. Mutual funds growth has accelerated because they are affordable, provide tax-benefits, come with easy liquidity, are managed by professionals and prove to be an easy way to enter the financial market for even common man. Systematic Investment Plan (SIP) is one of the tools that prompt investors to enter the financial market by investing in debt and equity markets. It helps investors to invest in small proportions and simultaneously provide growth on their amount.

So if you plan to turn towards Mutual Fund investment schemes it is important for you to know a few important things before you head towards mutual funds which are – 

• Types of Mutual Funds Options – Before you opt for any mutual fund you should be well versed with the types of mutual fund schemes that are available in the market and choose the type of fund you would like to invest in. Mutual funds can be classified as Open-Ended, Close-Ended and Interval Schemes in terms of their structure. Equity, debt and balanced fund in terms of their nature and if we go by investment objective then you also have growth and dividend options. Let’s take an overview of all these types. 
• Open-Ended Mutual Funds – These are funds that raise money from shareholders and invest money in group of assets. They are open ended as you can enter and exit from these schemes at any point of time when you wish. 
• Closed-Ended Funds – These funds are those in which an investor can enter only during a specified period. This period is referred to as New Fund Offer (NFO) period. These funds can be purchased and sold only during a certain period as specified. 
• Interval Schemes – These are a blend of open-ended and close-ended schemes. 
• Equity Fund Schemes – These mutual fund schemes invest the major part of your money in equities. They offer higher returns but also come along with a comparatively higher risk. 
• Debt Fund Schemes – These mutual fund schemes invest the major part of your money in debt instruments and provide you with stable returns with low risk. 
• Balanced Fund Schemes – These funds are a combination of equity and debt funds. They combine stocks and bonds, thus, giving you balanced returns and come with moderate risk. 

• Analyze the Performance of Fund - It is advisable for you to have a detailed analysis of the performance of the scheme by your side. It is important to know the performance of the fund over a period of time. However, it is also important to note that past performance of the fund does not serve as a guarantee for the future performance but it can not be ignored completely.
• Experience of Fund Manager - The experience of the Fund Manager and analysis of the fund house is also an important parameter to be considered before opting for a fund. The performance of the fund might have been considerably good for past ten years but if the manager’s time at the fund which is referred to as “Manager’s Tenure” is only two years then you cannot commit the mistake of giving credit of the performance of the fund to the new manager.
• Study of Expense Ratio – It is important for you to have a clear view about the expense ratio of the fund. Expense ratio is the cost of the fund owned. It is made up of various costs that are incurred but there are times when few costs go unaccounted, thus not showing the true picture of expense ratio. Sales charges, trading commission and taxes are few expenses that are not taken into account while computing expense ratio and thus the true cost may vary drastically. It is important to have a clear idea about these underlying expenses.
• Calculate the Risk That You Can Afford- It is advisable to keep in view your risk taking capability and then choose the fund option. You should always know the amount of risk that you can take before you opt for any mutual fund scheme. There are funds that provide attractive returns but you can not ignore the risk attached with them.
• Monitoring – Any investment that you make needs monitoring. You can not just create a portfolio for yourself and then forget about it. Monitoring the performance of your funds is important so that you are able to chuck-off the non-performing funds and add on the performing funds in your kitty in order to make the most of your money.
• Create a Diversified Portfolio – Creating a diversified portfolio always works in favor of the investor. You are a human being and you are bound to make mistakes. You can not always end up buying funds that will churn out capital gains for you. Thus, go in for a combination of equities, bonds and stock funds so that if you go through a fall in one sector, the effect is minimized by the other performing fund. 

Have a clear Understanding of Entry and Exit Loads –

• Entry Loads – It is a one time charge applied while purchasing the fund and can reach up to 5 percent or more of the amount of the fund purchased. For example – If you purchase a fund of Rs 5000 and Entry Load is 2 percent then the amount that gets invested is Rs 4900. These charges are also referred to as Front Load charges. 
• Exit Loads – Exit Loads are charged when you sell off or opt out of the fund. These may range up to 5 percent but may also get reduced to zero percent over a period of time. These are also referred to as Back Load or Deferred Sales charges. 
• Waived Load – As the name goes, there are certain funds that bear waived load meaning that there is no entry or exit load attached to them. 
• Taxes – Do not get surprised if you find that certain tax liability is entrusted upon you. Investors have to bear the tax liability for dividends and for capital gains even if the fund is not performing well. If the fund involves dividend-paying stocks, each time the fund manager sells, it adds to your tax-liability as well. Those of you who do not want to get hit by the tax that gets triggered should opt for tax-sensitive or non-tax sensitive mutual funds in a tax-deferred account. Avoiding rapid trading of funds may also bring down the tax element.
• Do not get trapped by misleading advertisements. You may get stuck with a non performing fund labeled as growth fund while it is being advertised in the most attractive and fancy manner.
• While you begin your chase for the funds, make sure you add only funds with consistent performance in your kitty instead of falling for funds that have shown a sudden rise in recent years as these generally are not able to make there place in the top funds.
• Add index funds to your kitty. Index funds offer lower expenses and come along with less of tax burdens.
• Do not be in a haste to get rid of a fund that has had a bad year. All funds can not perform round the year and each fund goes through the bulls and bears of the market. Analyze carefully before you get rid of a fund and make sure that you do not cling to a non-performing fund for long. 

The above mentioned points will come handy while to begin your search for an apt mutual fund for yourself. Always invest when you yourself get completely sure and satisfied with what the fund offers. Do not get carried away by opinions or follow the rat race, its good to discuss but finally let the call be yours.

Income from House Property

If you are earning any income from the property that you own will be taxable under Section 22 and Section 27 of Income Tax Act. The income earned from housing property falls under the purview of the Income Tax Act when the following conditions come into being

• The property is owned by the assessee.
• The property is let out and the income generated through it is only in the form of rent. The property is not be used for business or profession purpose by the assessee.
• The property comprises of building or land adjacent thereto.

Note: It is important to note that if you are not the owner of the property and are still generating income from the same, that would not be taxable in the head of 'income from house property' but will fall under the purview of other income and other provisions of the Income Tax Act.

Deemed Owner

There may be cases wherein though you are not the owner of the property yet you will be considered to be the owner of the property and the income generated by you will fall under the purview of tax under the head of 'income from house property'. Following cases are the ones where you will be deemed to be the owner of the property -

• If you are the owner of an estate that is impartable then you would be considered to be the owner of the estate. For example - When an HUF jointly holds a property in its name on behalf of its memebers then joint HUF will be considered to be the owner, however, the property may be in name of an individual member of the family.
• If you have acquired the long term lease of property then you will be the deemed owner of the property and the income generated through the property will be taxable under the head of income from house property. A period of more than 12 years would be considered to be a long term period.
• If you, as an individual, transfer your property for inadequate considerations or give that property as gift to your minor child, other than a married daughter or your spouse then though legally the person to whom you have gifted the property is the owner yet the income generated would be considered to be taxable in your hands under the head from income from house property.
• If you are a member of a co-operative society, association of person or company where you have been allotted a building under the house building scheme of society then you will be considered the deemed owner of the building.
• If you have satisfactorily complied with the provisions of Section 53A of Transfer of Property Act then you will be considered as the deemed owner of the property. This section caters to a scenario wherein though the agreement of buying the property has not been registered yet the one who has purchased the property is considered to be the owner of the property.

Calculation of Income from House Property
The highest of the following three would be considered as the annual income from the property that has been let-out by you -

• Municipal Value of the property.
• Fair Rent - This is the rent of properties in your locality that are similar to the property that you own. The value of these properties is determined by the Income Tax Department.
• Actual Rent received by you.

Situations Where Property Becomes Taxable

Following situations are the ones wherein the property becomes subject to tax. These are as follows:-

• A long term lease of property held by you.
  If you have been holding the lease of a property for more than 12 years, then the income from that property will automatically fall in your taxable kitty.

• Your spouse has received a property from you as gift under Section 56(2) of the Income Tax Act 1962
  The property will not be taxable in the hands of your spouse. It is important to remember that if there is any income from this property then that would be taxable in your name.

• You have a number of properties in your name out of which few have been given on rent by you and few are still not let out.In such situations, you will have to choose a property that is being used by you for residential purpose throughout the year and thus the income generated through that would be zero. Your total income would surely reflect the income generated from all the other properties.

Permissible Deductions

• If you have borrowed money in order to renovate, build or buy a property that is not self-occupied then the interest paid or accrued on the amount borrowed in the relevant year would serve as deduction when you compute the net annual value for yourself.
• An amount up to 30 % of the annual value towards maintenance and repair will serve as deduction when you compute the net annual value.