Section 91 of the Income Tax Act is an important provision that deals with the liability of a person for payment of tax, interest and penalty in case of transfer of capital assets. In this blog, we will discuss the provisions of Section 91 of the Income Tax Act, including its applicability, scope, and implications.
Introduction to Section 91
Section 91 of the Income Tax Act states that when a person transfers a capital asset to another person for a consideration that is less than the fair market value of the asset, the transferor is liable to pay tax on the difference between the fair market value and the consideration received. This is applicable in cases where the transferor has not disclosed the transaction or undervalued the asset in the books of account.
Applicability of Section 91
Section 91 applies to all types of capital assets, including land, buildings, securities, and other movable or immovable property. The provision is applicable to all taxpayers, whether individuals, HUFs, companies, firms, or any other entity that is subject to the provisions of the Income Tax Act.
Scope of Section 91
Section 91 is applicable when a person transfers a capital asset to another person for a consideration that is less than the fair market value of the asset. The fair market value is the price that the asset would fetch if sold in the open market. The provision applies when the difference between the fair market value and the consideration received is more than the prescribed limit.
The prescribed limit for the application of Section 91 is 5% of the consideration received, subject to a minimum of Rs. 50,000. This means that if the difference between the fair market value and the consideration received is more than 5% of the consideration or Rs. 50,000, whichever is higher, the provision will be applicable.
Implications of Section 91
When Section 91 is applicable, the transferor is liable to pay tax on the difference between the fair market value and the consideration received. The tax is calculated at the rate applicable to the transferor’s income and is payable in the year in which the transfer takes place.
In addition to the tax, the transferor is also liable to pay interest under Section 234B and penalty under Section 271C of the Income Tax Act. The interest is calculated at the rate of 1% per month or part of a month for the period of delay in paying tax, while the penalty is equal to the tax amount payable.
Exceptions to Section 91
There are certain exceptions to Section 91 of the Income Tax Act, which include cases where the transfer of the capital asset is:
- Made under a gift, will, or an irrevocable trust
- Between a holding company and its subsidiary or between two subsidiaries of the same holding company
- Made to the Central or State Government, a local authority, or any other specified entity
Importance of compliance with Section 91
Compliance with Section 91 is important for taxpayers as failure to comply can result in penalties and interest. In addition, non-compliance can also result in scrutiny by the tax authorities, which can lead to further investigation and penalties.
It is important for taxpayers to accurately determine the fair market value of the asset and ensure that the consideration received is not undervalued. This can be done by obtaining a valuation report from a qualified valuer or by using any other reliable method for determining the fair market value.
Challenges in implementing Section 91
One of the main challenges in implementing Section 91 is determining the fair market value of the capital asset. The fair market value can be affected by various factors such as location, condition, demand, and supply. It can be difficult to accurately determine the fair market value, especially for unique assets or assets that have no comparable sales data.
Another challenge is the lack of awareness about this provision among taxpayers. Many taxpayers may not be aware of the provision and may undervalue their assets while transferring them, which can lead to non-compliance and penalties.
Impact of Section 91 on the real estate sector
Section 91 has a significant impact on the real estate sector as it affects the sale and purchase of property. Many buyers and sellers in the real estate sector undervalue the property to reduce the stamp duty and registration charges. However, this can lead to non-compliance with Section 91 and result in penalties and interest.
The provision also affects developers and builders who sell their properties at a lower price than the fair market value. This can lead to non-compliance with Section 91 and result in penalties and interest.
Conclusion
Section 91 of the Income Tax Act is a provision that is aimed at preventing tax evasion by taxing the transferor of a capital asset when the consideration received is less than the fair market value. The provision applies when the difference between the fair market value and the consideration received is more than the prescribed limit of 5% or Rs. 50,000, whichever is higher. The transferor is liable to pay tax, interest, and penalty under this provision, making it important for taxpayers to ensure that they comply with the provisions of the Income Tax Act when transferring capital assets.
Read more useful content:
- section 145 of income tax act
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Frequently Asked Questions (FAQs)
- What is Section 91 of the Income Tax Act?
Section 91 is a provision in the Income Tax Act that aims to prevent tax evasion by taxing the transferor of a capital asset when the consideration received is less than the fair market value.
2. Who does Section 91 apply to?
Section 91 applies to all taxpayers who transfer capital assets.
3. What types of capital assets does Section 91 apply to?
Section 91 applies to all types of capital assets, including land, buildings, securities, and any other asset that is considered a capital asset.
4. What is the fair market value of a capital asset?
The fair market value of a capital asset is the price that the asset would fetch in the open market in a transaction between a willing buyer and a willing seller, with no compulsion to buy or sell.
5. How is the fair market value of a capital asset determined?
The fair market value can be determined by obtaining a valuation report from a qualified valuer or by using any other reliable method for determining the fair market value.
6. What happens if the consideration received for a capital asset is less than the fair market value?
If the consideration received is less than the fair market value, the transferor is deemed to have received the fair market value as consideration, and the difference between the fair market value and the consideration received is taxed as capital gains.
7. What are the exceptions to Section 91?
There are exceptions to Section 91, which include cases where the transfer of the capital asset is made under a gift, will, or an irrevocable trust, between a holding company and its subsidiary, or to the Central or State Government, a local authority, or any other specified entity.
8. What are the penalties for non-compliance with Section 91?
Non-compliance with Section 91 can result in penalties and interest. The penalty can be up to 200% of the tax payable.
9. How does Section 91 affect the real estate sector?
Section 91 has a significant impact on the real estate sector as it affects the sale and purchase of property. Many buyers and sellers undervalue the property to reduce stamp duty and registration charges, which can lead to non-compliance and penalties.
10. How can taxpayers ensure compliance with Section 91?
Taxpayers can ensure compliance with Section 91 by accurately determining the fair market value of the asset and ensuring that the consideration received is not undervalued. This can be done by obtaining a valuation report from a qualified valuer or by using any other reliable method for determining the fair market value.
