“Income Tax” — even the name suggests that tax should be payable only when there is income. But is that always true?
Not necessarily! Under the Income-tax law, the amount subjected to tax may sometimes differ from what the taxpayer actually earned. The law may substitute a deemed value, fair market value, stamp duty value or disallowed expenditure for the actual amount. In other words, the tax law may say: “You may not have earned it in the ordinary sense, but for tax purposes, we will treat it as income.
These provisions seek to prevent tax avoidance and bring certain transactions within the tax net. The Income-tax Act, 2025 continues this legislative approach, though the numbering and language of several provisions have changed. Let us look at some interesting situations where taxable income may arise without corresponding actual income in the ordinary sense.
1.Own More than Two Houses — But No Rent? Think Again!
The old rule that “one person can have only one self-occupied house” is no longer correct. From AY 2020-21, an individual can generally treat up to two houses as self-occupied, subject to the prescribed conditions. However, where the taxpayer owns more than two such houses, the additional houses may be treated as deemed let-out properties and taxed on the basis of notional annual value, even if they are not actually let out. Thus, absence of actual rent does not automatically mean absence of taxable income. This is a classic example of the difference between real income and income computed according to a statutory formula.
For builders too, the notional-rent issue can arise in respect of completed properties held as stock-in-trade. The annual value is generally taken as nil for the prescribed period of up to two years from the end of the financial year in which the certificate of completion is obtained. Thereafter, the builder may be liable to tax on notional rent even if the property remains unsold and vacant.
2.Sell or Buy Property Below Stamp Duty Value — The Taxman May find Income:
Suppose a property having a stamp duty value of ₹90 lakh is sold for ₹80 lakh. Has the seller actually received ₹90 lakh? Obviously not. Yet, where the prescribed conditions are satisfied, the Income-tax law may calculate the tax by assuming it as sale consideration. In short, seller would be required to pay the tax on Rs. 10 Lakh also even though the same is not received. An important 10% safe harbour is available if the stamp duty value does not exceed 110% of the actual consideration, where this notional taxation provision would not be applicable. Thus, if the property is sold for ₹80 lakh and its stamp duty value is less than ₹88 lakh, the actual consideration of ₹80 lakh may generally be adopted. However, if the stamp duty value is ₹90 lakh, the deeming provision may apply.
It has similar tax consequences for the buyer as well. In the same case, the buyer would also be required to pay the tax on Rs. 10 Lakh though the same is not the actual income.
Thus, in the same transaction, the seller & buyer would be subject to tax on income which is not real income in practical sense. One may note that the law also contains provisions permitting the stamp duty value as on the date of agreement to be considered in appropriate cases where the agreement and registration dates differ and the prescribed payment conditions are satisfied.
The lesson is simple: Before buying or selling immovable property, do not look only at the negotiated price. Check the stamp duty value and its tax consequences as well.
3.Receive Money from Your Own Company — Yet It May Be Taxable as a Dividend!
Section 2(40)(e) of the Income-tax Act, 2025 — corresponding to section 2(22)(e) of the Income-tax Act, 1961 — contains an important deeming provision relating to certain loans or advances made by a closely held company to specified shareholders or concerns.
Let us understand it with an example. Suppose Mr. A is a substantial shareholder in a closely held company having accumulated profits of ₹50 lakh & the company gives him a loan of ₹20 lakh. If the conditions of section 2(40)(e) are satisfied, the ₹20 lakh may be treated as deemed dividend and become taxable in Mr. A’s hands, even though he has not received any amount as a formally declared dividend. Not an actual income, yet tax would be payable by Mr. A.
4.Businessman Earns ₹10,000 Profit — But Taxable Profit Can Be Much Higher:
Here is another interesting situation. Suppose a businessman purchases goods for ₹1 lakh and sells them for ₹1.05 lakh. His commercial profit is ₹5,000. If the purchase payment is made in cash in violation of the prescribed conditions, the expenditure may not be allowable as a deduction. Consequently, the taxable business profit could become ₹1.05 lakh instead of the actual commercial profit of ₹5,000. Reason: Income tax law provides that no deduction would be admissible for the businessmen if the payment or aggregate of payments made to a person in a day exceeds ₹10,000/-.
Interestingly, the tax liability may sometimes exceed the actual commercial profit. Thus, an avoidable mistake in the mode of payment can convert a genuine business expense into a tax liability.
5.A similar increase in taxable profit can also arise where expenditure is disallowed for failure to comply with applicable TDS provisions. Thus, tax consequences can sometimes arise not because the expenditure was fictitious, but because the taxpayer failed to comply with the prescribed manner of making or reporting the payment.
The Real Income May Not Be the Taxable Income
These examples are just a few illustrations to demonstrate that commercial income and taxable income are not always identical. The tax law contains several deeming provisions designed to determine income according to statutory rules. Therefore, the taxpayer should never look at a transaction merely from the perspective of: “How much money did I actually receive?” The more relevant question is: “What value does the Income-tax law attribute to this transaction?” The Income-tax Act, 2025 may have changed the numbering and structure of the law, but the underlying message remains the same: The taxman does not always tax what you think is your income. Sometimes, the law decides what your income is. And that is precisely why understanding the deeming provisions of the Income-tax law is not merely a matter of academic interest—it is an essential part of tax planning.
[Views expressed are the personal views of the author. Readers are advised to seek professional advice before taking any decisions. Readers may forward their feedback & queries at nareshjakhotia@gmail.com. Other articles & response to queries are available at www.theTAXtalk.com]
