Section 281 of the Income Tax Act, 1961 (India)
Neeraj Agarwal
I Neeraj Agarwal, am a Fellow Member of ICAI, practicing under the banner of M/s AAN & Associates LLP, a firm based out of Banglore Mumbai.
I am also registered under Insolvency and Bankruptcy Board of India as a Registered Valuer for valuation of Security or Financial Assets (Passed in Feb 2020)
I am also holding Bachelor of Commerce (B. Com) degree from Calcutta University (Passed in 2011).
I have corporate working experience in Wipro. After working in Wipro for a short period I started my practice in late 2013 and have been in practice so far for the last 10 years. I have also completed a Certificate Course by ICAI on IND-AS in 2020. I have also cleared Social Auditor Exam conducted by NISM.
I have been inducted as a Special Invitee to the Sustainability Reporting Standard Board, ICAI for the FY 2023-24.
Section 281 is designed to prevent taxpayers from evading their tax liabilities by transferring their assets. Below is a more detailed explanation:
Overview:
Section 281 addresses situations where taxpayers might try to avoid paying taxes by transferring or selling their assets. If there are unpaid taxes or potential tax liabilities, any transfer of assets made by the taxpayer could be considered invalid by the Income Tax Department.
Purpose:
The primary objective of Section 281 is to protect the government’s ability to collect taxes by ensuring that a taxpayer’s assets remain available to cover any unpaid tax debts.
Exceptions:
- If a transfer is made in good faith for fair value, and without knowledge of any pending or likely tax liability, it may not be void.
- If the taxpayer has received prior authorization from the Assessing Officer, the transfer is usually protected.
- If the asset is transferred to a bona fide purchaser who paid a fair price and had no knowledge of the pending tax liabilities, the transfer may be upheld.
Remedies:
- If a transfer is declared void, the affected parties can challenge the decision in higher authorities or courts, especially if they can prove that the transfer was made in good faith and without knowledge of any pending tax issues.
Certificate from Income Tax Officer
A seller intending to transfer his assets can get a certificate from their jurisdictional Assessing Officer, clarifying that there are no tax obligations on the seller and the assets being transferred are free of any lien from the Income Tax Department.
Practical Challenges in Procuring Certificate
Income tax officers are usually reluctant to issue such certificates. Even in cases where they do issue such certificates, the process is long and cumbersome, often resulting in delays as transactions for the transfer of assets are kept on hold.
Smart Solutions to Practical Challenges
It is now seen in many transactions that the seller or the buyer, instead of applying for the certificate with an Assessing Officer, appoints a Practicing Chartered Accountant (PCA) to conduct due diligence of all the tax filings done by the seller. The PCA then specifies in their certificate any pending tax obligations of the seller. While there may not be much legal value to such certificates—the IT Act clearly states that certificates are to be provided by the Income Tax Officer—such certificates usually provide the buyer with much-needed information and assurance.
Benefits for Foreign Citizens
This section is especially beneficial for foreign nationals who want to invest in the Indian market. Certification under this section provides foreign investors with essential information about the asset they are purchasing and whether they may face issues with the Income Tax Department in the future.
Overall
- Section 281 serves as a protective measure for the Income Tax Department, ensuring taxpayers cannot easily avoid paying taxes by transferring their assets. It emphasizes the responsibility of taxpayers to be aware of their tax obligations when dealing with their assets, thereby safeguarding the recoverability of tax dues.
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