Circular No. 29/2016

Clarifications on the income declaration scheme 2016

What this is

Circular No. 29/2016 was issued by the Central Board of Direct Taxes on 18 August 2016. Its subject is Clarifications on the income declaration scheme 2016.

This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.

What it does

A further set of answers on the Income Declaration Scheme, 2016, after the three earlier sets in Circular Nos. 17, 24, 25 and 27 of 2016. Fictitious liabilities shown in an audited balance sheet — loans, creditors, advances, share capital, payables — may be declared as such where they cannot be linked to the acquisition of a particular asset; where there is a direct link between the fictitious liability and an asset, what is declared is the fair market value of that asset as on 1 June 2016. Section 189 of the Finance Act, 2016 keeps completed assessments final, but income declared for an earlier year may be used to explain transactions in an assessment for a later year, provided there is a nexus between the two. A registered valuer's report on a declared asset will not be questioned by the department, though action lies against the valuer for misrepresentation. Most importantly, the Board reconsiders and supersedes its earlier answer in Circular No. 17 dated 20 May 2016 on holding period: the period of holding of an asset declared under the Scheme is now to be taken from the actual date of acquisition, while indexation on the amount declared runs only from 1 June 2016.

Why it was issued

Further queries kept coming from the public after the Scheme took effect on 1 June 2016, and on the holding period point stakeholders had represented that the earlier answer would complicate the capital gains computation where an asset was only partly funded from declared income.

Who it reaches

Declarants under the Income Declaration Scheme, 2016
Businesses carrying fictitious creditors, loans or share capital in audited accounts
Declarants who will later sell an asset covered by a declaration
Registered valuers giving valuations for declarations

The provisions it speaks to

Left, the provision of the Income-tax Act, 1961 as the instrument itself names it. Right, the section of the Income-tax Act, 2025 that the department’s own concordance maps it to — which is where the same ground is now covered.

Under the 1961 Act	Now
s.189	s.330

The instrument, as the Board published it

The department publishes this one only as a PDF, so the words below were read out of that PDF by machine. That reading can carry its own mistakes — a misread number, a broken line. Check the signed document before you rely on a figure in it. The reading also stopped short of the end of the document: what is below is the opening, not the whole of it.

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Circular No.29 of 2016
F.No.142/8/2016-TPL
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
(TPL Division)
***
Dated 18th day of August, 2016
Clarifications on the Income Declaration Scheme, 2016
The Income Declaration Scheme, 2016 (hereinafter referred to as 'the Scheme') came
into effect on 1st June, 2016. To address doubts and concerns raised by the stakeholders,
the Board has issued three sets of FAQs vide Circular Nos. 17, 24, 25 & 27 of 2016. In order
to address further queries received from the public relating to the Scheme, following
clarifications are issued.-
Question No.1: In certain cases, the undisclosed income might be reflected in
creditors or other liability which may be fictitious. Whether in such
cases, the assessee can disclose only such fictitious liability as it may
not be possible to link it to any specific asset or investment?
Answer: In a situation where loans, creditors, advances received, share capital,
payables etc. are disclosed in the audited balance sheet but are
fictitious in nature, and such liabilities cannot be directly linked to
acquisition of a particular asset in the balance sheet, then such
fictitious liabilities can be disclosed under the Scheme as such without
linking the same with the investment in any specific asset. However,
in cases where there is a direct link between the fictitious liability and
the asset acquired then the amount to be declared shall be the fair
market value of the acquired asset as on 01.06.2016.
Question No.2: Whether the amount declared under the Scheme for an earlier
assessment year can be taken into account to explain the
transaction(s) in the assessment proceedings for subsequent
assessment year(s)?
Answer: As per section 189 of the Finance Act, 2016, any declaration made
under the Scheme shall not affect finality of completed assessments.
However, in an assessment proceeding before the Assessing Officer
for an assessment year subsequent to the year for which the income is
declared under the Scheme, the income declared for an earlier
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assessment year can be taken into account to explain the transactions
provided there is a nexus between the income declared and the
transactions of the subsequent assessment year.
Question No.3: Whether the valuation report of assets declared under the Scheme
shall be called for by the department for any enquiry at any time?
Answer: The valuation report from a registered valuer shall not be questioned
by the department. However, the valuer is expected to furnish a true
and correct valuation report in accordance with the accepted
principles of valuation. In case of any misrepresentation, appropriate
action as per law shall be taken against the registered valuer.
Question No.4: Though the fair market value as on 1st June, 2016 is taxed under IDS,
and such amount will be treated as cost of acquisition at the time of
future sale of concerned asset, whether such treatment shall affect the
character of the asset as long term or short term?
Answer: The issue was earlier considered and it was clarified vide Circular
No.17 dated 20.05.2016 that in such cases period of holding shall be
deemed to begin from 01.06.2016 as the asset has been revalued on
such date. However, considering the representation received from
various stakeholders and the fact that this may lead to complications
in calculation of capital gain at the time of sale of asset which was
partly funded from undisclosed income now declared under the
Scheme, the matter has been reconsidered. Accordingly, in
supersession to the earlier clarification as referred above, it is clarified
that the period of holding of asset declared under the Scheme shall be
based on the actual date of acquisition of such asset. However, the
indexation benefit in respect of the amount declared under the
Scheme shall be available from 01.06.2016 only.

What to watch

The change on holding period supersedes the answer in Circular No. 17 dated 20 May 2016 — reading that circular alone on this point gives the wrong answer.
Holding period and indexation now part company: the period runs from actual acquisition, but indexation on the declared amount only from 1 June 2016.
A fictitious liability may be declared on its own only where it cannot be linked to a particular asset; where the link exists, the fair market value of the asset as on 1 June 2016 is what goes into the declaration, which is usually the larger figure.
Section 189 preserves the finality of completed assessments, so a declaration cannot be used to reopen a year already closed in the declarant's favour; it works forward, and only where there is a nexus.

Where you meet it

In an assessment for a year after the declaration where the source of a transaction is questioned, and in the capital gains computation when a declared asset is eventually sold.

What it names

It mentions. Circular No. 29/2016

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.