Tax on accreted income.

352(1)

Every specified person shall, in addition to the income-tax chargeable in respect of his total income, be liable to pay additional income-tax on accreted income at the maximum marginal rate in any of the cases specified in column B of the Table in sub-section (5).

352(2)

The Assessing Officer shall compute the accreted income on the date, specified in column C of the Table in sub-section (5) and after affording a reasonable opportunity of being heard to the assessee, pass on order that such income shall be charged to tax under sub-section (1).

352(3)

The accreted income referred to in sub-section (1) shall be computed using the following formula:–– A = B-C where,–– A = Accreted income; B = Aggregate fair market value of the total assets of the specified person, as on the date specified, in column C of the Table in sub-section (5), computed in accordance with such method of valuation, as prescribed; C = Total liability of such specified person, as on the date specified in column C of the said Table, computed in accordance with such method of valuation, as prescribed.

352(4)

The accreted income, computed as per the provisions of sub-section (3) shall be reduced by such amount of accreted income as is attributable to specified assets, and liabilities, if any, related to such assets.

352(5)

The specified person and the principal officer or trustee of such specified person shall be liable to pay the tax on accreted income to the credit of the Central Government within fourteen days from the due date specified in column D of the Table below, or the date of order passed under sub-section (2). ---table---

352(6)

The payment of tax on the accreted income by the specified person under this section shall be deemed as the final payment of tax in respect of the said income and no further credit therefor shall be claimed by, or any deduction be allowed to, the specified person or any other person in respect of the amount of tax so paid under any other provision of this Act.

352(7)

Where the specified person, or the principal officer or trustee of such specified person, fails to pay the whole or any part of the tax on the accreted income within the time allowed under sub-section (5), such specified person, principal officer or trustee shall be liable to pay simple interest, computed as per the following formula:–– I = 1% of (T*P) where,–– I = interest; T = tax on accreted income; and P = number of months beginning on the date immediately after the last date on which such tax was payable and ending with the date on which the tax is actually paid including part thereof.

352(8)

All the provisions of this Act shall apply for the collection and recovery of income-tax in respect of the amount of tax payable by the specified person, principal officer or trustee and the following persons shall be deemed to be assessee in default:––

• (a) the specified person and principal officer or the trustee of such specified person;
• (b) the person to whom any asset forming part of the computation of accreted income under sub-section (3) has been transferred, where the tax on accreted income is payable under the cases specified in sub-section (5) (Table: Sl. No. 9).

352(9)

Subject to the provisions of sub-section (8), the liability of the person referred to in clause (b) of the said sub-section shall be limited to the extent to which the asset received by him is capable of meeting the liability.

Explanation

Section Summary:

Section 352 introduces a new provision for taxing accreted income of specified persons. Accreted income refers to the increase in the value of assets minus liabilities over a specified period. This section imposes an additional income-tax on such accreted income at the maximum marginal rate. The tax is computed based on the fair market value of assets and liabilities, and it applies in specific cases outlined in the section.

Key Changes:

1. New Concept of Accreted Income: This section introduces the concept of taxing the increase in the value of assets (net of liabilities) for specified persons, which was not explicitly covered under the prior income tax law.
2. Maximum Marginal Rate: The tax on accreted income is levied at the highest applicable tax rate, ensuring a significant tax burden on such income.
3. Specific Cases: The section applies only to cases listed in the Table under sub-section (5), making it targeted rather than general.
4. Interest on Late Payment: A new formula for calculating interest on delayed payment of tax on accreted income is introduced.

Practical Implications:

1. For Specified Persons: Entities or individuals falling under the definition of "specified persons" will need to calculate their accreted income and pay additional tax. This could include trusts, partnerships, or other entities as defined in the law.
2. Compliance Burden: The requirement to compute fair market value of assets and liabilities adds a layer of complexity to tax compliance.
3. Interest on Delay: Failure to pay the tax on time will result in interest at 1% per month, increasing the financial burden.
4. Finality of Tax Payment: Once the tax on accreted income is paid, no further deductions or credits can be claimed for this amount under any other provision of the Income Tax Act.

Critical Concepts:

1. Accreted Income: This is calculated as the difference between the aggregate fair market value of assets (B) and total liabilities (C) on a specified date. The formula is:
   A = B - C
   Where:

   • A = Accreted income
   • B = Fair market value of assets
   • C = Total liabilities

2. Specified Assets and Liabilities: Certain assets and related liabilities may be excluded from the computation of accreted income, as per sub-section (4).

3. Maximum Marginal Rate: This is the highest tax rate applicable under the Income Tax Act, ensuring that accreted income is taxed at the top rate.

4. Interest Calculation: If tax is not paid on time, interest is calculated as:
   I = 1% of (T * P)
   Where:

   • I = Interest
   • T = Tax on accreted income
   • P = Number of months of delay

Compliance Steps:

1. Identify Specified Persons: Determine if the entity or individual falls under the definition of "specified persons" as per the law.
2. Compute Accreted Income: Calculate the fair market value of assets and liabilities on the specified date using the prescribed valuation method.
3. File and Pay Tax: Pay the tax on accreted income within 14 days of the due date or the date of the Assessing Officer’s order.
4. Maintain Documentation: Keep records of asset valuations, liabilities, and tax computations for audit and compliance purposes.

Examples:

Scenario 1: A trust has assets worth ₹10 crore and liabilities of ₹2 crore on the specified date. The accreted income is calculated as:
A = ₹10 crore (B) - ₹2 crore (C) = ₹8 crore.
The trust must pay tax on ₹8 crore at the maximum marginal rate.

Scenario 2: If the trust fails to pay the tax on time and delays payment by 3 months, the interest will be:
I = 1% of (₹8 crore * 3) = ₹24 lakh.
This interest is in addition to the tax liability.

This section ensures that significant increases in asset values are taxed, particularly targeting entities or individuals who may otherwise avoid taxation on such gains.