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Reading the bare act version of any act or law requires a considerable level of skill and understanding of legal subject matter beforehand. Law is intentionally made vague with words that intend to deliver a broad meaning. Therefore, the creators of any law face a herculean task in constructing a law that:-
– Must respond to a variety of problems, yet does not jeopardize the rights of any people.
– Cannot be forceful.
– Must provide justice to the innocent ones, but punish the criminals.
Often, we’ve come across the word ‘deemed’ while reading a particular Act or law. Going by the dictionary meaning, a deeming provision is a section or clause of a statute, regulation or other legal instrument that states how something is to be treated or regarded. But generally, the concept of these deemed provisions always leads to a certain amount of speculation and uncertainty with regard to interpretation. There is a general sense of perplexion unless you are particularly familiar with and have a considerable hold over the use of legal jargon.
Mafatlal Gagalbhai & Co. Pvt. Ltd. vs CIT, on 19 February 1979, observed that- “The word ‘deemed’ is used a great deal in modern legislation. Sometimes it is used to impose for the purposes of a statute an artificial construction of a word or phrase that would not otherwise prevail. Sometimes it is used to put beyond doubt a particular construction that might otherwise be uncertain. Sometimes it is used to give a comprehensive description that includes what is obvious, what is uncertain and what is, in the ordinary sense, impossible.”
An article ‘Interpreting and Applying Deeming Provisions of the Income Tax Act’ by Michael N. Kandev and John J. Lennard provides insight into understanding deeming provisions in a better light. In the same, they have classified deeming provisions under Canadian tax laws into four main categories based on the object/purpose of fiction. The same has been placed side by side with the Income Tax Act, 1961, with reference to the relevant sections for better understanding.
A legal fiction, in simple words, is accepting something to be true for the sake of convenience. The idea is to give the same treatment to two transactions that are different in legal substance but similar in terms of the economic effect.
Sec 50C of the Income Act states that in an event involving the sale of a capital asset (building or land or both) if the transfer document specifies a value that is less than the valuation adopted by the stamp duty authorities, the valuation adopted by the stamp duty authorities will be considered in order to arrive at the amount of capital gain arising from such transfer.
For instance, in an agreement of sale, a 2bhk flat’s value stands at Rs. 85 lakh, but according to the Stamp Duty Authorities, the valuation of the flat is Rs. 91 lakh, then it will be considered that the flat has been sold for Rs. 91 lakhs and capital gains will be computed on the basis of Rs. 91 lakh.
This provision constitutes a legal fiction to adopt the value determined by the State Stamp Valuation Authority as the sale value where the sale value is less than the value determined by the Stamp Valuation Authority.
These deeming provisions are the ones that establish a conclusive presumption as to the meaning of a particular word or expression. They do not look to create a legal fiction. As earlier mentioned, the language of law tends to be vague and therein gives rise to ambiguity, thus leading to a difference in interpretation that could have varying outcomes.
In the case of The CIT vs Raja Benoy Kumar Sahas Roy on 23 May 1957, the question was whether “income from forests” would be agricultural income within the meaning of Section 4 (basis of charge) of the Income Tax Act.
As per section 2(1A), agricultural income generally means:
1. Any rent or revenue derived from land which is situated in India and is used for agricultural purposes.
2. Any income derived from such land by agriculture operations including processing of agricultural produce so as to render it fit for the market or sale of such produce.
3. Any income attributable to a farmhouse subject to the satisfaction of certain conditions specified in this regard in section 2(1A). Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income.”
4. It was held that income from the sale of forest trees of spontaneous growth growing on land which is assessed to land revenue is not agricultural income within the meaning of section 2(1)(a) of the Income Tax Act on the grounds that:
The expression “land used for agricultural purposes” in the Income Tax Act does not extend to forests of spontaneous growth, where nothing is done to prepare the soil for trees to be planted therein, and where the growth of the trees is not fostered by tillage.
Here, it means to say that certain facts are presumed to be already established, that there is no necessity of supporting evidence to be present with regard to the same. These facts could be either of a conclusive nature or could be rebuttable. The conclusive nature of certain established facts is in the same nature as that of setting precedence.
Section 297 (2) (Repeals and Savings) in the Income Tax Act, 1995
“(2) Notwithstanding the repeal of the Indian Income-tax Act, 1922, (hereinafter referred to as the repealed Act),—
(c) any proceeding pending on the commencement of this Act before any income-tax authority, the Appellate Tribunal or any court, by way of appeal, reference, or revision, shall be continued and disposed of as if this Act had not been passed.”
This means to say that in spite of the Indian Income-tax Act, 1922, being repealed, it is an established fact that any proceedings pending prior to the new Act will be continued after the commencement of the new Act.
The meaning of the word “discretion” as per a dictionary is “the freedom to decide what is to be done in a specific situation”. And that is exactly what these deeming provisions signify. This can be better understood with reference to the Act.
Section 133A (Power of Survey) in the Income Tax Act, 1995 “(2) An income-tax authority may enter any place of business or profession referred to in sub-section (1) only during the hours at which such place is open for the conduct of business or profession and, in the case of any other place, only after sunrise and before sunset.”
The word “may” signifies that the Income Tax Officer has the power of discretion as to whether to enter an assessee’s place of business subject to the conditions.
As per Section 119 (1) of the Income Tax Act 1995, the Central Board for Direct Taxes, may, on a timely basis, issue such instructions, orders, and directions to other income tax authorities as it may deem fit for the proper administration of this Act. “May” again signifies the power of discretion assigned to the Board.
Understanding the purpose behind introducing a deeming fiction goes a long way in interpreting these complex, legal provisions. Reading up on the relevant case laws and earlier judgements that set precedence helps one gain insight as to what the lawmaker intended to communicate. As the saying goes, “Practice makes perfect”, and in this case, it is no different.
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