Notification No. 42/2018 [F. No. 370142/05/2018-TPL] / SO 4213(E)

What this is

Notification No. 42/2018 [F. No. 370142/05/2018-TPL] / SO 4213(E) was published on 30 August 2018. Its subject is MINISTRY OF FINANCE (Department of Revenue) (CENTRAL BOARD OF DIRECT TAXES) NOTIFICATION New Delhi, the 30th August, 2018.

This amends the Income-tax Rules. What it changes is the Rules, not the Act — and a rule can never take away what the section gives.

What it does

Made under clause (via) of section 28 read with section 295 of the Income-tax Act, 1961, the Income-tax (9th Amendment) Rules, 2018 do two things. In rule 11U, clause (b), sub-clause (ii) is substituted so that the balance-sheet for valuation purposes is, for an Indian company, the balance-sheet including the notes annexed and forming part of the accounts as drawn up on the valuation date and audited by the auditor appointed under the company law in force, and for a company that is not an Indian company, the balance-sheet so drawn up and audited by the auditor, if any, appointed under the laws of the country of registration or incorporation. A new rule 11UAB is inserted after rule 11UAA prescribing the fair market value of inventory for the purposes of section 28(via): for immovable property being land or building or both, the value adopted, assessed or assessable by a Central or State Government authority for stamp duty on the date of conversion of the inventory into, or its treatment as, a capital asset; for jewellery, archaeological collections, drawings, paintings, sculptures, any work of art, and shares or securities referred to in rule 11UA, the value determined under sub-rule (1) of rule 11UA, the valuation date in rules 11U and 11UA being read as that date of conversion; and for any other property, the price it would ordinarily fetch on sale in the open market on that date.

Who it reaches

• persons converting stock-in-trade into a capital asset, who are charged under section 28(via)
• valuers and merchant bankers valuing shares, securities and works of art under rule 11UA
• auditors of Indian and foreign companies whose balance-sheets are used as the valuation base
• assessing officers computing business income on such a conversion

The provisions it speaks to

The instrument, as the Board published it

MINISTRY OF FINANCE (Department of Revenue) (CENTRAL BOARD OF DIRECT TAXES) NOTIFICATION New Delhi, the 30th August, 2018

INCOME-TAX

S.O. 4213(E).—In exercise of the powers conferred by clause (via) of section 28 read with section 295 of the Income-tax Act, 1961 (43 of 1961), hereinafter referred to as the Income-tax Act, the Central Government hereby makes the following rules further to amend the Income-tax Rules, 1962, namely:

1. (1) These rules may be called the Income-tax (9th Amendment), Rules, 2018.
(2) They shall come into force from the 1st day of April, 2019 and shall apply in relation to assessment year 2019-20 and subsequent years.

2. In the Income-tax Rules, 1962,
(a) in rule 11U, in clause (b), for sub-clause (ii), the following sub-clause shall be substituted, namely:—
"(ii) in any other case,—
(A) in relation to an Indian company, the balance-sheet of such company (including the notes annexed thereto and forming part of the accounts) as drawn up on the valuation date which has been audited by the auditor of the company appointed under the laws relating to companies in force; and
(B) in relation to a company, not being an Indian company, the balance-sheet of the company (including the notes annexed thereto and forming part of the accounts) as drawn up on the valuation date which has been audited by the auditor of the company, if any, appointed under the laws in force of the country in which the company is registered or incorporated;";

(b) after rule 11UAA, the following rule shall be inserted, namely:

"11UAB. Determination of fair market value for inventory.(1) For the purposes of clause (via) of section 28 of the Act, the fair market value of the inventory,—
(i) being an immovable property, being land or building or both, shall be the value adopted or assessed or assessable by any authority of the Central Government or a State Government for the purpose of payment of stamp duty in respect of such immovable property on the date on which the inventory is converted into, or treated, as a capital asset;
(ii) being jewellery, archaeological collections, drawings, paintings, sculptures, any work of art, shares or securities referred to in rule 11UA, shall be the value determined in the manner provided in sub-rule (1) of rule 11UA and for this purpose the reference to the valuation date in the rule 11U and rule 11UA shall be the date on which the inventory is converted into, or treated, as a capital asset;
(iii) being the property, other than those specified in clause (i) and clause (ii), the price that such property would ordinarily fetch on sale in the open market on the date on which the inventory is converted into, or treated, as a capital asset.".

[Notification No. 42/2018/F. No. 370142/05/2018-TPL]

PRAVIN RAWAL, Director (TPL-II)

Note : The principal rules were published in the Gazette of India vide notification No. S.O. 969(E), dated the 26th March, 1962, and was last amended by vide notification number G.S.R. 666(E), dated 20.07.2018.

Uploaded by Dte. of Printing at Government of India Press, Ring Road, Mayapuri, New Delhi-110064 and Published by the Controller of Publications, Delhi-110054.

What it changes

From when

1 April 2019, applying in relation to assessment year 2019-20 and subsequent years.

What to watch

• The rules come into force from 1 April 2019 and apply in relation to assessment year 2019-20 and subsequent years.
• The valuation date throughout rule 11UAB is the date on which the inventory is converted into, or treated as, a capital asset, and rules 11U and 11UA are to be read with that substituted date.
• For land or building, the stamp duty value governs — assessed or even merely assessable — so no separate valuation report settles the matter.
• The substituted sub-clause (ii) of rule 11U(b) recognises a foreign company's audited balance-sheet only where an auditor is appointed under the law of its country, the words "if any" acknowledging that there may be none.

Where you meet it

In the computation of business income in the year stock-in-trade is converted into a capital asset, in the valuation report supporting the fair market value adopted, and in any assessment testing that figure.

An example

A builder converts a plot held as stock-in-trade into a capital asset on a given date. For section 28(via) the fair market value to be brought to charge is the stamp duty value adopted or assessable for that plot on the date of conversion, not the price at which it was originally acquired or later sold.

What it names

Rules it names. Rule 11U, 11UA, 11UAA of the Income-tax Rules, 1962. The 1962 Rules were replaced by the Income-tax Rules, 2026, which renumbered nearly everything: a rule number quoted here almost never means the same rule today.

On the same provision

• Circular No. 12/2022 — Guidelines for removal of difficulties under sub section 2 of section 194R of the income tax act 1961 16 June 2022
• Notification No. 71/2017 [F.No. 187/13/2015(ITA.I)] / SO 2320(E) — 2 the Gazette of INDIA : Extraordinary [Part Ii—sec. 3(ii)] 25 July 2017
• Notification No. 40/2017 [F. No.173/429/2016-ITA-I ] / SO 1621(E) — Ministry of Finance 18 May 2017
• Notification No. 100/2016/ F. No. 173/429/2016-ITA-I] / SO 3290(E) — Ministry of Finance 25 October 2016
• Circular No. 8/2009 — Section 194J of the Income-tax Act, 1961 - Deduction of tax at source - Fees for professional or technical services - Ap 24 November 2009
• Notification No. 25 — Approval of an institution under section 28 of the Income-tax Act, 1961 12 February 2008

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