Breaking Down Section 281 Of The Income Tax Act
When an assessee in India gives away or creates a charge on their business assets, they need to obtain prior permission and a certificate from an Assessing Officer. This is a precedent set under Section 281 of the Income Tax Act. However, many assessees are unaware of the implication and significance of obtaining such a certificate. The Income Tax Department can deem any transaction by sale, gift, exchange or mortgage as void if one fails to get prior permission and certificate.
Read to know about the guidelines under Section 281 in detail.
What is Section 281 of the Income Tax Act?
As per Section 281 of the Income Tax Act, India, if an assessee creates a charge in favour of another individual and transfers an asset, including shares or other securities, without submitting an application form to an Assessing Officer, such charge or transfer shall be deemed void.
However, if assessees obtain permission from the AO before creating a charge or transferring assets, then the transaction can become successful. To obtain permission or a No-objection Certificate (NOC), one has to submit an application form following the guidelines mentioned below. Section 281 exists in order to restrict the chances of assessees transferring their assets to evade taxes.
One must note that Section 281 is only applicable when the tax amount or other surcharge is more than Rs. 5,000. On top of this, the value of assets charged or transferred should exceed Rs. 10,000.
Guidelines of Section 281 of the Income Tax Act
To ensure that creating a charge on business assets takes place successfully, one needs to follow certain guidelines. Through these guidelines, you will be able to obtain a certificate under Section 281 of the Income Tax Act.
- Assessees should send the application form in a prescribed format, titled ‘Application u/s 281 of the IT Act, 1961.’
- The filing of the form should take place at least 30 days before the proposed transaction date.
- An Assessing Officer can grant prior permission or a no-objection certificate under the following circumstances:
- In case of no outstanding demand and no likelihood of demand arising in the next six months
- If the outstanding demand is undisputed and there is no possibility of a demand arising in the next six months (the assessee must pay the dues before they obtain permission)
- If there is an outstanding demand, assessees need to indemnify it by obtaining a guarantee from a bank or by way of sufficient funds
- Meanwhile, if there is a possibility that a demand will arise in the next six months, the AO will take action based on Section 281B of the Income Tax Act.
- There can only be one intervention level. Authorities can intervene only while granting permission. An AO might require intervention if the value of assets getting transferred is more than Rs. 10 crores.
- Under Section 281, the timeline provided to an AO for granting permission is:
- In case of no outstanding demand and no likelihood of demand arising in the next six months: Within 10 working days of receiving the application
- If the outstanding demand is undisputed and there is no possibility of demand arising within six months: Within 10 working days of making payment
- In case of undisputed demand and the taxpayer obtains indemnification: Within 10 working days of indemnification
- When there is a chance of demand arising within six months and an AO considers the application based on Section 281B: Within 15 working days of receiving the application
- A taxpayer may be unable to pay the dues or indemnify the demand within the expiry period provided to them. Thus, their demand remains disputed. In this case, an AO can refuse to grant permission. However, to do so, they have to arrange a speaking order to convey refusal with the permission of the range head within 10 days of the expiry period.
- Permission letter granted by an AO to an assessee remains valid for 180 days from the approval date or service of order mentioned in the attachment under Section 281B, whichever is earlier.
- Once an assessee obtains permission and fulfils the transaction, the person has to submit these transfer documents with the AO.
Details of Section 281 Application Form
Section 281 of the Income Tax Act form contains four parts that one has to fill out diligently. The parts are:
Part A: General Particulars
Under this, assessees need to provide their some personal and residential details, such as the following:
- First, middle and last name
- Sex
- Date of Birth
- Designation of Assessing officer
- Full address with PIN code
- Email address
- Mobile number
- Residential status
- Taxpayer Status
Part B: Status of Outstanding Demand
Under this section, assessees need to provide all details regarding any outstanding demand(s) as of the application date. In a tabular format, one will have to mention:
- Assessment year
- Amount of outstanding demand in Rupees
- Particulars of stay of demand, if any
- Remarks, if any
Part C: Particulars of Assets
Assessees will have to furnish details regarding their assets that do not form part of the stock-in-trade of their business as of the application date. These assets can be land, building, securities, fixed deposits, machinery, plants and shares. In a tabular format, assessees need to provide:
- Description of the asset
- Particulars of the asset’s location
- Value of asset as per the books of accounts
- Whether there is an existing charge in full or part on this asset
- Remarks (mention value of existing charge, if applicable)
Part D: Particulars of Proposed Transaction
Probably the most vital part of this form is mentioning the transaction details for which one is submitting this form. Under this section, an assessee provides the following details regarding the transfer of assets or creation of charge:
- Name of party/parties involved in the transaction
- Address of party/parties
- PAN of party/parties
- Detailed particulars of assets
- Expected date of transfer
- Period for which creation of charge is taking place
- Nature of transaction
- Mode of payment of outstanding or indemnifying demand
- Whether CIBIL is available (if yes, attach a copy)
Final Word
Tax evasion is a sad reality in India. Many individuals make use of loopholes in the taxation system to avoid tax liability. Section 281 of the Income Tax Act tries to ensure that assessees do not evade taxes while creating a charge or transferring business assets.
FAQs on Section 281 of the Income Tax Act
Ans: Obtaining a No-objection Certificate from an Assessing Officer while transferring or creating a charge is mandatory under certain circumstances. If the value of the asset under the transaction is above Rs. 10,000 and tax implication is more than Rs. 5,000, you need to obtain permission.
Ans: No-objection Certificate is a legal document issued by an individual stating that they have no objection to the information in this document. An agency, organisation or institute, such as the Income Tax Department can issue this certificate.
Ans: Upon filing the income tax return, the Income Tax Department assesses one’s annual income and tax paid. However, if the IT department finds that the tax paid by an assessee is lower than the actual amount, they will issue a demand notice. In this case, you have an outstanding demand.
Ans: In India, the Central Board of Direct Taxes performs the role of administering income tax laws. It is also responsible for providing input on policies and planning direct taxes. Most importantly, they analyse assessments, tax evasions and collection of taxes.
Ans: Assessing Officers are responsible for assessing the income tax returns filed by taxpayers within their jurisdiction. They are appointed by the Income-tax Department and are crucial to the process of upholding taxation laws in India.
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