1. Background :
1.1 The Finance Bill, 2006, presented before the Parliament
has been passed in a record time by both houses of Parliament within three weeks
without any discussion. This is one of the records established by the UPA
Government. The Finance Minister introduced only two amendments to the Finance
Bill originally presented on 28th February 2006, ignoring all the suggestions
made by several trade and professional bodies. The amendments made in the
Income-tax Act by the Finance Act will invite litigation, as some of the
amendments are made without giving due consideration to the practical
1.2 During the month of December, 2005, the Parliament passed
the Taxation Laws (Amendment) Act, 2005. Some of the Sections of the Income-tax
Act were amended by this enactment. In particular, the provisions relating to
deduction for income from exports u/s.80HHC have been amended with retrospective
1.3 Last year, the Special Economic Zones Act, 2005, (SEZ
Act) was passed by the Parliament. This Act has come into force from 10-2-2006.
This Act provides for the establishment, development and management of the
Special Economic Zones (SEZ) for promotion of exports. S. 2 of the Act defines
the terms Developer, Entrepreneur, Offshore Banking Unit, Special Economic Zone,
Unit, etc. S. 27, read with the Second Schedule, grants certain tax concessions
to the developer, entrepreneur, offshore banking unit, and units in SEZ by
amendment of the Income-tax Act. These tax concessions are available for
accounting year 2005-06 (A.Y. 2006-07).
1.4 It is significant to note that the Direct Tax Laws
(Amendment) Bill, 2005, introduced in the Lok Sabha on 12-5-2005 has not so far
been enacted. This Bill was referred to the Standing Committee for Finance. Its
report has been submitted to the Lok Sabha. This Bill included some relaxations
relating to taxation of gifts from third parties w.e.f. 1-9-2004. There were
proposals for amendment of the provisions relating to Charitable Trusts, TDS, S.
40A(3), etc. There is no indication as to when this Bill will be taken up for
consideration by the Parliament.
1.5 Last year, the Income-tax Act was amended by inserting
Chapter XIIH providing for levy of Fringe Benefit Tax (FBT). Trade and
professional bodies had made several suggestions, including suggestion for
abolition of such obnoxious tax. Instead of accepting these suggestions, the
CBDT has issued a Circular No. 8/2005 on 29-8-2005, which goes against the
assurances given by the Finance Minister on the floor of the Parliament. In the
Finance Act, certain amendments are made to mitigate some hardship in the
implementation of these provisions. These amendments do not meet with the
objections raised by the trade and professional bodies.
1.6 The Finance Act, 2006, has made certain amendments which
will have retrospective operation. Some of these amendments try to regularise
some of the procedural lapses on the part of officers of the Income-tax
Department. This shows that, instead of taking action against the officers
responsible for such lapses, the Government has tried to bail out such officers
and regularise the assessments which would not have stood the test of judicial
1.7 In this article, the important amendments made in
Income-tax Act by the Taxation Laws (Amendment) Act, 2005, Special Economic
Zones Act, 2005, and the Finance Act, 2006, have been discussed.
2. Rates of taxes, surcharge and education cess :
2.1 It is significant to note that there is no change in the
rates of taxes, surcharge and education cess. Therefore, the rates of taxes
which were specified for the income in the last year by the Finance Act, 2005,
will be applicable to the income for the year ending 31-3-2007 (A.Y. 2007-08).
2.2 The rate of income tax to be charged u/s.115 JB on Book
Profits of corporate assessees has been increased from 7.5 to 10.00%. Therefore,
the effective rate, including surcharge and education cess will be 11.22% for
3. Securities Transaction Tax (STT) :
3.1 Chapter VII of the Finance (No. 2) Act, 2004, provides
for levy of STT. Under the existing provisions of S. 98 of the said Act, sale or
purchase of units of an equity-oriented fund is liable to STT. For this,
equity-oriented fund means a fund whose investible funds are invested in equity
shares of domestic companies to the extent of more than 50%. This limit is
increased to 65% of total proceeds of such fund w.e.f. 1-6-2006.
3.2 The rates of STT are now revised upwards by 25% w.e.f.
1-6-2006 as under :
||Revised w.e.f. 1-6-2006
Purchase of an equity share in a company or a unit of an
equity-oriented fund, where — (a) a transaction of such purchase is entered
into through a recognised stock exchange; and (b) the contract for the
purchase of such shares or units is settled by the actual delivery or
transfer of such share or unit
Sale of an equity share in a company or a unit of an
equity-oriented fund, where the transaction is entered into through a
recognised stock exchange and delivery is given as stated in (i) above.
Sale of an equity share in a company or unit of an
equity-oriented fund, where (a) the transaction of such sale is entered into
through a recognised stock exchange, and (b) the contract for the sale of
such share or unit is settled otherwise than by the actual delivery or
transfer of such share or unit.
Sale of a derivative, where the transaction of such sale
is entered into through a recognised stock exchange
Sale of unit of an equity oriented fund to the Mutual
4. Exemptions :
4.1 U/s.10(6BB), the tax payable by an Indian company on
payment made to a foreign government or a foreign enterprise engaged in the
business of operation of aircraft, for acquiring on lease an aircraft or an
aircraft engine is not liable to tax if the lease agreement is entered into
between 1-4-1997 and 31-3-1999 or after 30-9-2005 and approved by the Central
Government. This date was extended to 31-3-2006 by the Taxation Laws (Amendment)
Act, 2005. This date is further extended to 31-3-2007 by the Finance Act, 2006.
4.2 S. 10(15A) provides for exemption of lease rent in the
hands of the foreign state or foreign enterprise under the circumstances
mentioned u/s.10(6BB). In this also the date was extended from 30-9-2005 to
31-3-2006 and now it is extended to 31-3-2007, as stated in para 4.1 above.
Therefore, this exemption can be claimed if the lease agreement is entered into
prior to 31-3-2007 and approved by the Central Government.
4.3 S. 10(15)(viii) enacted by the SEZ Act, 2005, now grants
exemption in respect of interest received by a non-resident or resident but not
ordinarily resident, on a deposit made on or after 1-4-2005 in an offshore
banking unit as defined in S. 2(u) of SEZ Act, 2005.
4.4 U/s.10(17), daily allowance received by an M.P. or M.L.A.
as well as any allowance received by an M.P. is exempt from tax. So far as an
M.L.A. is concerned, any allowance, other than daily allowance, was hitherto
exempt up to the limit of Rs.2000 per month. This provision is now amended
effective from A.Y. 2007-08 and any constituency allowance received by an M.L.A.
will be exempt from tax without any limit.
4.5 U/s.10(23EA), any income of any specified investor
protection fund set up by a recognised stock exchange is exempt from tax. This
section is now amended from A.Y. 2007-08 to provide that only income by way of
contributions received from a recognised stock exchange or its members will be
exempt. Therefore, other income by way of interest or other sources received by
such fund will now be taxable.
4.6 S. 10(23G) provided for exemption of income from
dividend, interest and long-term capital gain of an infrastructure capital fund
or an infrastructure capital company or a co-operative bank from investments
made on or after 1-6-1998 in specified investments. This exemption is now
withdrawn effective from A.Y. 2007-08. In Para 165 of his Budget speech, the
Finance Minister has stated, "I have revisited the exemptions in the Income-tax
Act. As a result, I propose to remove the exemption u/s.10(23G), which is not
relevant when interest rates are moderate".
4.7 S. 10(38) provides for exemption of long-term capital
gain on sale of units of an equity-oriented mutual fund on which STT is paid.
For this purpose, the mutual fund was required to invest more than 50% of the
total proceeds of its funds. It is now provided that such investment should be
more than 65% from 1-6-2006 for claiming this exemption.
4.8 The Taxation Laws (Amendment) Act, 2005, has provided for
the following exemptions effective from A.Y. 2006-07 :
(i) S. 10(39) : Any specified income, which the
Central Government may notify, arising from any international sporting event
held in India to the persons notified by Central Government. Such international
event should be approved by the international regulating body and has
participation by more than two countries and is notified by the Central
Government for this purpose.
(ii) S. 10(40) : Any income of any subsidiary company
by way of grant or otherwise received from the Indian holding company engaged in
the business of generation or transmission or distribution of power, if receipt
of such income is for settlement of dues in connection with reconstruction or
revival of any existing business of power generation. The above exemption can be
claimed if such reconstruction or revival is by way of transfer of such business
to the Indian company notified u/s.80IA(4)(a).
(iii) S. 10(41) : Any income specified by the Central
Government arising to a body or authority which :
(a) has been established under a treaty or arrangement
signed by the Central Government,
(b) is established not for profit, and
(c) is notified by the Central Government.
4.9 The SEZ Act, 2005 has inserted a new S. 10AA w.e.f.
10-2-2006. S. 10A(7B) now provides that the provisions of S. 10A will not apply
to an undertaking which claims deduction u/s.10AA from A.Y. 2006-07. New S. 10AA
grants deduction in respect of income of an entrepreneur from his unit in SEZ,
which begins to manufacture or produce articles or things or provides any
services during the accounting year 2005-06 (A.Y. 2006-07). It may be noted that
units in SEZ are basically for export of goods or services. It is also clarified
that income from on-site development of computer software (including services
for development of software) outside India shall be deemed to be income derived
from the export of computer software outside India. The various conditions in S.
10AA for allowing deduction are more or less the same as in S. 10A. Some of the
special benefits u/s.10AA are as under :
(i) The deduction for profits and gains derived from
exports is allowable at 100% for the first five consecutive assessment years.
For the next five consecutive years, the deduction is allowable at 50% of such
(ii) For the next five years, after completion of first ten
years, deduction is allowable for five more consecutive assessment years up to
50% of such profits, restricted to the amount transferred to Special Economic
Zone Re-investment Reserve Account. The amount of this Reserve A/c. is to be
utilised within three years for acquiring plant and machinery. Until such
utilisation, this amount cannot be used for declaration of dividend or for
remittance outside India.
(iii) If such unit was set up in a Free Trade Zone or
Export Processing Zone which is converted into SEZ, and benefit was claimed
u/s.10A in earlier years, it will be possible for such unit to claim benefit
u/s.10AA for the remaining period.
4.10 S. 10B grants deduction of specified income of a 100%
EOU. It is now provided that this deduction cannot be claimed if the return of
income in the prescribed from is not filed before the due date for filing such
return, as provided in S. 139(1). It may be noted that there is no such
restriction for claiming deduction u/s.10A (unit in FTZ), 10 AA (unit in SEZ),
10BA (units exporting specified goods) or 1OC (undertaking in North-Eastern
5. Charitable Trusts :
5.1 Any university, educational institution, hospital or
other institution referred to in S. 10(23C) (iv), (v), (vi) and (via) is
required to make an application to the prescribed authority for grant of
exemption. There is no time limit for making such application. It is now
provided that any application made on or after 1-6-2006 shall be made in the
financial year preceding the assessment year for which exemption is claimed. In
other words, if exemption is sought for A.Y. 2007-08, the application for
exemption in the prescribed form should be made during the year ending
5.2 S. 2(24)(iia) defining income has been amended as under :
(i) Voluntary contributions received by any university or
other educational institution or hospital, etc., referred to in S. 10 (23c),
(vi) and (via), shall be treated as income of the trust/institution. This
amendment is made retrospectively from A.Y. 1999-2000 to nullify the effect of
certain judicial pronouncements.
(ii) Further, it is now provided that voluntary
contributions received by any university, other educational institution,
hospital, etc., with annual receipts exceeding Rs.1 crore, referred to in S.
10(23c), (iii ad) and (iii ae), should be treated as income of the
trust/institution. Hitherto, such receipts were treated as income only in the
case of a trust recognised u/s.12A. This amendment is effective from A.Y.
5.3 Anonymous donations :
(i) A new S. 115BBC has been inserted w.e.f. A.Y. 2007-08 to
levy tax at 30%, plus surcharge at 10% and education cess at 2% (Total 33.66%)
on anonymous donation received by any university, educational institution,
hospital, etc., with annual receipts exceeding Rs.1 crore and other
trusts/institutions to which S. 10(23c)(iii ad), (iii ae) (iv), (v), (vi) and
(via) and S. 11 apply. This tax is payable irrespective of the quantum of
donation received from any party. The provision will apply whether the donation
is in cash or kind.
(ii) Anonymous donation for this purpose means any voluntary
contribution referred to in S. 2(24)(ii a), where a person receiving such
contribution does not maintain a record of the identity indicating the name and
address of the person making such contribution. The donee has to maintain such
other particulars of the donations as may be prescribed.
(iii) It is, however, provided that this provision will not
apply to the following trusts or institutions :
(a) Any trust/institution established wholly for religious
(b) Any trust/institution established for religious and
charitable purposes, other than the anonymous donation made with a specific
direction that the donation is only for the university, educational
institution, hospital or medical institution run by such trust/institution.
(iv) From the above wording, it is evident that the above
provisions will not apply to any university, educational institution, hospital,
etc. with annual receipts of less than Rs.1 crore to which S. 10(23c) (iiiab)
and (iiiac) applies. It also appears that these provisions are not applicable to
anonymous donations received by a trust which is a composite trust for religious
and charitable purposes to which S. 11 is applicable and is registered u/s.12A.
Further, it may be noted that the above provisions do not apply to a political
party which enjoys exemption u/s.13A.
(v) The Finance Minister has justified this levy in Para 168
of his Budget speech in the following words :
"168. The Standing Committee on Finance has expressed
concern that many charitable institutions misuse the provisions of the
Income-tax Act. I propose to focus on one misuse, namely, receiving anonymous
or pseudonymous donations. Accordingly, I propose that anonymous or
pseudonymous donations to wholly charitable institutions will be taxed at the
highest marginal rate. Such donations to partly religious and partly
charitable institutions/trusts will be taxed only if the donation is
specifically for an educational or medical purpose. However, I make it clear
that such donations to wholly religious institutions and religious trusts will
not be covered by the new provision."
(vi) Several suggestions were made raising doubts about the
advisability of levying such tax. BCA Society, in its post-budget memorandum,
had pointed out that several trusts/institutions raise funds through public
appeals or organise fund-raising programmes or organise road processions where
general public contribute funds for relief of victims by earthquake, floods,
storms, etc. Institutions like ‘Charities for Destitute Children’ raise funds
through tie-ups with airlines for collection of funds and passengers drop small
amounts in the collection box. In some hospitals, collection boxes are placed
where people put in small amounts to help needy patients. Even charities for
assistance of needy members of the Armed Forces raise funds on certain specified
days from a large number of persons by passing around collection boxes. In all
such cases, tax @ 33.66% will be payable by charitable trusts as they will not
be able to keep records about identity of donors. This may not be the intention
of the Government. It was, therefore, suggested that in all such cases if the
funds collected are spent in the same or next financial year, for the purpose
for which the collection is made, tax u/s.115BBC should not be levied. Since the
Finance Bill has not been discussed in the Parliament, this and similar other
suggestions have not received any consideration.
6. Computation of total income :
6.1 S. 14A : This section provides that for computing
total income under Chapter IV of the Income-tax Act, no deduction shall be
allowed in respect of expenditure incurred by the assessee in relation to income
which does not form part of the total income under the Act. This provision was
made in 2001 with retrospective effect from 1-4-1962. Issues have arisen as to
how the expenditure to be disallowed under this section should be worked out. To
meet with this requirement, this section has been amended effective from A.Y.
2007-08 as under :
(i) If the assessing officer is not satisfied with the
working of the amount to be disallowed under this section as made by the
assessee, he will have to follow the method which will be prescribed by the
Central Government by Rules. This Rule will now provide for the method of
working for such disallowance.
(ii) If the assessee claims that no expenditure is
disallowable u/s.14A, the officer will have to work out the amount of
disallowance according to the above Rule.
6.2 S. 17(2) and S. 36(1)(ib) — Health insurance premium and
mediclaim premium paid by an employer on a policy, on behalf of the employee, is
not treated as a perquisite u/s.17(2). Similarly, premium paid by the employer
is allowed as business expenditure to the employer u/s.36(1) (ib). At present,
the insurance schemes are those framed by GIC and approved by the Central
Government. These Sections are now amended, effective from A.Y. 2007-08, to
provide that an insurance policy under a scheme framed by other insurance
companies and approved by the Insurance Regulatory and Development Authority
will also be eligible for the above benefit.
6.3 S. 40(a)(ii) : This Section provides that any sum
paid on account of rate or tax levied on the profits or gains of business or
profession will not be allowed as a deduction in the computation of income.
There is a conflict in judicial opinion as to whether tax paid in a foreign
country is allowable as deduction. [Refer 228 ITR 676 (Kar.) and 88 TTJ (Bang.)
778]. In order to end the judicial conflict, Explanations 1 and 2 have been
inserted in S. 40(a)(ii) to clarify that any sum, paid outside India and
eligible for relief of tax u/s.90 or u/s.90A or deduction from the income tax
payable u/s.91, will not be allowed as deduction in computing income. However,
the tax credit in respect of income tax paid outside India in accordance with
provisions of S. 90 and S. 91 will continue to be available. It may be noted
that Explanation 1 is inserted w.e.f. 1-4-2006 and Explanation 2 has been
inserted w.e.f. 1-6-2006.
6.4 S. 43B(d) and (e) : Interest payable on any loan,
advance or borrowing from any public financial institution, State Financial
Corporation, State Industrial Investment Corporation or a scheduled bank is
allowable u/s.43B only when actual payment is made. The provisions of S. 43B(d)
dealing with loans, etc. from financial institutions were introduced from A.Y.
1989-90, whereas provisions of S. 43B(e) dealing with loans, etc. from scheduled
bank were introduced from A.Y. 1997-98. Explanations 3C is now inserted with
retrospective effect from A.Y. 1989-90 and Explanation 3D is now inserted with
retrospective effect from A.Y. 1997-98. Both these explanations provide that if
such interest payable to financial institutions, scheduled banks, etc. has been
converted into a loan, the same will not be considered as actual payment. In
other words, if interest of Rs.50 lacs due to a financial institution on term
loan was converted into interest-free loan in March, 2003 and such loan was
payable in 5 equal half-yearly instalments, the deduction of Rs.50 lacs, if
allowed in A.Y. 2003-04 by the AO in the assessment order passed in January,
2006, will be treated as not properly allowed. The AO may rectify this order and
disallow this amount. He will have to allow deduction of Rs.50 lacs in A.Y.
2004-05 (Rs.20 lacs), A.Y. 2005-06 (Rs.20 lacs) and A.Y. 2006-07 (Rs.10 lacs) if
the interest-free loan of Rs.50 lacs is actually repaid by the assessee on due
dates in five half-yearly instalments of Rs.10 lacs each in the above years. It
may be noted that there is no specific provision for waiving the interest
payable u/s.234A/234B/234C when such disallowance is made due to retrospective
amendment of Law. This will create hardship to the assessee who has made claim
on the basis of Law existing before such retrospective amendment.
6.5 Recognised Provident Fund — Rule 4 of Part A of Schedule
IV to the Income-tax Act provides for conditions which are required to be
satisfied by a provident fund for receiving and retaining recognition under the
Act. With a view to provide legislative synergy between the Income-tax Act and
Employee’s Provident Fund & Miscellaneous Provisions Act, 1952, (P.F. Act) to
tackle the problems being faced by small investors in such funds, a new clause
(ea) has been added in this Rule to provide that the fund shall comply with the
provisions of S. 1(3) and (4) of the P.F. Act and the assessee (establishment)
is exempted u/s.17 of the P.F. Act. Rule 3 of the above schedule is also amended
to provide that where the provident fund has been recognised by the Chief
Commissioner/Commissioner before 31-3-2006, the recognition of the Fund can be
withdrawn if the conditions of Rule 4(ea), as stated above, and any other
conditions as the CBDT may specify, are not complied with before 31-3-2007. In
such event, the tax benefits available to employer/employee for contribution to
such PF will not be available after 31-3-2007.
7. Capital gains :
7.1 Exemption from long-term capital gains is available
u/s.54EC in respect of reinvestment in certain long-term specified assets. The
definition of ‘long-term specified assets’ is amended w.e.f. 1-4-2006 to provide
that such reinvestment can now be made only in notified bonds redeemable after
three years, which are issued by (a) Rural Electrification Corporation Limited (REC)
or (b) National Highways Authority of India (NHAI). The effect of this amendment
will be that reinvestment in bonds, as hitherto permitted in bonds issued by
NABARD, NHB and SIDBI, will no longer be eligible for exemption. It appears that
this amendment is made effective from A.Y. 2006-2007, but in actual practice
this can operate only in respect of reinvestment made on or after 1-4-2006.
However, if long-term capital gain is made on or after 1-10-2005 and is taxable
in A.Y. 2006-07, the reinvestment can be made within six months u/s.54EC. If the
last date for reinvestment falls on or after 1-4-2006 and such reinvestment is
made on or after 1-4-2006, it can be made in bonds of REC or NHAI only.
7.2 Exemption from long-term capital gain arising on transfer
of listed securities, or units granted u/s.54ED upon reinvestment in specified
equity shares, has been withdrawn from A.Y. 2007-08.
7.3 New S. 54GA has been added by the SEZ Act, 2005, to
provide for exemption of capital gains arising from transfer of a land,
building, plant or machinery used for business of an industrial undertaking
situated in an urban area with a view to shift the undertaking in an SEZ. The
conditions for grant of such exemption are that the capital gain should be used
for purchase of land, building, plant or machinery for establishing the
industrial undertaking in the SEZ in urban or any other area within one year
before or three years after the date of transfer. It is also possible to
transfer the assets from the old undertaking to the undertaking in SEZ or incur
expenditure for such purposes as may be specified in the scheme to be framed by
the Central Government. If the entire amount of capital gain is not used for
specified purpose, exemption is allowed on proportionate amount to the extent of
such utilisation during the specified period. If the amount cannot be so
utilised before the due date for filing the return of income, the same will have
to be deposited in a bank account or other account as the Central Government may
specify in the scheme to be notified. The conditions in S. 54GA are more or less
the same as contained in S. 54G dealing with exemption of capital gains in case
of shifting of industrial undertaking from urban area to any other non-urban
8. Taxation of book profits — S. 115JB :
8.1 Long-Term Capital Gains — S. 10(38) grants exemption in
respect of Long-Term Capital Gain on sale of equity shares in a company or units
of an equity-oriented mutual fund on which STT is paid. Accordingly, under
explanation (ii) of S. 115JB, such capital gain was required to be deducted
while computing the book profits u/s.115 JB. This provision is now amended
effective from A.Y. 2007-08 and it is provided that such capital gain will not
be excluded from the computation of book profits u/s.115JB. In other words, such
long-term capital gain will be subject to payment of STT as well as income tax
u/s.115JB. However, STT paid will be allowed in the computation of book profits
by virtue of corresponding amendment in explanation (f) of S. 115JB.
8.2 Depreciation : Hitherto, depreciation debited in
the Profit & Loss A/c., including depreciation on account of revaluation of
fixed assets, was allowable as deduction in computing book profits. It is now
provided, w.e.f. A.Y. 2007-08, that depreciation provided in respect of
revaluation of fixed assets will not be allowed in the computation of book
profits u/s.115JB. Consequently, if any amount is withdrawn from revaluation
reserve and credited to Profit and Loss A/c., it will be reduced in the
computation of book profit to the extent it does not exceed the amount of
depreciation on account of revaluation of fixed assets. For this purpose, the
date of revaluation of fixed assets is not material.
8.3 As stated earlier, the rate of income tax on the book
profits u/s.115JB has been increased from 7.5 % to 10% from A.Y. 2007-08.
8.4 The Finance Act, 2005, amended S. 115JAA to grant tax
credit in respect of tax paid on book profits u/s.115JB effective from A.Y.
2006-07. This credit is allowed to be carried forward and set-off for five
assessment years. By an amendment of S. 115JAA this period for carry forward and
set off is extended to seven assessment years subsequent to the assessment year
for which tax credit becomes allowable.
8.5 It may be noted that u/s.115JB(6), as enacted by the SEZ
Act, 2005, the provisions for taxation of book profits u/s.115JB do not apply to
any income accrued or arising on or after 1-4-2005 from any business carried on,
or service rendered, by an entrepreneur or a developer, in a unit or Special
Economic Zone. The SEZ Act, 2005 has come into force from 10-2-2006 and the
above exemption will be available from A.Y. 2006-07.
9. Dividend Distribution Tax :
9.1 S. 115-O(6) : This subsection was inserted by the
SEZ Act, 2005 w.e.f. 10-2-2006. It provides that no tax on distributed profits
shall be chargeable in respect of total income of an undertaking or enterprise
engaged in developing or developing and operating and/or maintaining an SEZ on
any dividend declared on or after 1-4-2005 out of its current income. To this
extent, this provision will have retrospective operation.
9.2 At present, no dividend distribution tax is payable on
dividend distributed on units of open-ended equity-oriented fund. Effective from
1-6-2006, it is provided that this exemption from dividend distribution tax will
be available in respect of dividends declared by all equity- oriented funds
(open-ended or closed-ended). Also to accord with SEBI norms, it is provided
that an equity-oriented fund will be one whose investment in equity shares of
domestic companies is more than 65% of the total proceeds of such fund. All
other funds, including debt funds, will continue to pay dividend distribution
10. Fringe Benefit Tax (FBT) :
10.1 By Taxation Laws (Amendment) Act, 2005, S. 115W has been
amended effective from A.Y. 2006-07 to provide that a political party registered
u/s.29A of the Representative of the People Act, 1951, will not be required to
pay FBT. Hence, this provision has retrospective effect and FBT will not be
payable by a political party in respect of its expenditure from 1-4-2005.
10.2 FBT was a new tax introduced last year by the Finance
Act, 2005. There is lot of controversy about this tax. Some relaxations are made
by amendment of S. 115WB effective from A.Y. 2007-08 and it is provided that FBT
is not payable in respect of the following :
(i) Expenditure on distribution of free samples of
medicines or of medical equipments to doctors. This will mean that expenditure
on such free samples given to dealers, hospitals, nursing homes, etc. will be
liable to FBT.
(ii) Payment to any person of repute (e.g., brand
ambassador and celebrity endorsement) for promoting the sale of goods or
services of the business of the employer.
(iii) Any benefit or amenity in the nature of free or
subsidised transport or any such allowance provided by the employer to his
employees for journeys from their residence to the place of work and back.
10.3 S. 115WC provides for valuation of fringe benefits. Some
relaxation is made effective from A.Y. 2007-08 in respect of following
(i) In A.Y. 2006-07, the entire contribution to recognised
superannuation fund was considered as Fringe Benefit and FBT was payable. From
A.Y. 2007-08, it is provided that the amount of such contribution which exceeds
Rs.1 lac in respect of each employee will only be considered as Fringe Benefit.
This concession will benefit a number of assessees. In the memorandum explaining
the provisions of the Finance Bill, 2006, the following example explaining this
concession is given :
The employer has three employees — A, B and C and he makes
contribution to their account in the approved superannuation fund in the
following manner :
In the case of employees ‘A’ and ‘B’, the value of fringe
benefits shall be taken to be ‘Nil’, since contribution by the employer in
respect of these employees does not exceed Rs.1 lac in each case. However, in
the case of employee ‘C’, the value of fringe benefit shall be Rs.1 lac (Rs.2
lacs — 1 lac) for the purposes of levy of fringe benefit tax.
(ii) Earlier, 20% of expenditure on tour and travel
(including foreign travel) was considered as Fringe Benefit. Now, w.e.f. A.Y.
2007-08, only 5% of such expenditure will be considered as Fringe Benefit. It
may be noted that 20% of conveyance expenses will continue to be liable to FBT.
(iii) In the case an assessee engaged in the business of
carriage of passengers or goods by aircraft or ship, 20% of the following
expenditure covered by clauses (B) and (G) of S. 115WB(2) was considered as
Fringe Benefit. Now, w.e.f. A.Y. 2007-08, only 5% of such expenditure will be
considered as Fringe Benefit.
(a) Provision of hospitality of every kind by the employer
to any person
(b) Use of hotel, boarding and lodging facilities.
10.4 The Finance Minister has justified the above amendments
in Para 172 of his Budget speech in the following words :
"172. Fringe Benefit Tax (FBT) was introduced as a
revenue-raising measure. FBT can be justified on the principles of horizontal
equity and vertical equity. Nevertheless, I have reviewed it with an open
mind. I have also taken on board the views expressed by the apex chambers of
commerce. I propose to make the following changes in Chapter XII-H of the
Income-tax Act :
Value the benefit in the form of ‘tour and
travel’ at 5% instead of 20%;
Value the benefit in the form of ‘hospitality;
and ‘use of hotel, boarding and lodging facilities’ in the case of airline
companies and shipping industry, at 5% instead of 20%;
Exclude the expenses on free samples of medicines
and of medical equipment distributed to doctors;
Exclude the expenses incurred on brand ambassador
and celebrity endorsement; and
Prescribe a threshold of Rs.100,000 u/s.115
WB(1)(c), so that only a contribution by an employer to an approved
superannuation fund in excess of Rs.100,000 per year per employee will attract
FBT. U/s.80C, there is already an exemption up to Rs.100,000 for contribution
by an employee to an approved superannuation fund. Honourable Members will
note that, under these two provisions, there can now be a tax-exempt
contribution up to Rs.200,000 per year for the benefit of an employee. This
allowance, I believe, is generous enough in the case of an overwhelming
majority of employees.
With these changes, I am confident that the debate on FBT
will draw to a close. Let me remind everyone concerned once again that FBT is
justified on the principle of equity."
11. DIT relief and transfer pricing :
11.1 U/s.90, the Central Government is authorised to enter
into agreement with foreign governments for avoidance of double taxation. A new
S. 90A is inserted w.e.f. 1-6-2006, under which, limited territorial agreements
may be entered into between organisations of two countries. Under this section,
an institution, association or body functioning under any law in India, which is
notified by the Central Government for this purpose, can enter into an agreement
with similar institution, association, etc. outside India as notified by the
Such agreement may provide for :
Granting relief in respect of income on which tax
is paid in India as well as in the territory outside India.
Granting relief in respect of income tax payable
in India or outside India for promoting mutual economic relations, trade and
Avoidance of double taxation.
Exchange of information for prevention of evasion
or avoidance of tax or for investigation of such cases.
Recovery of tax.
Such agreement will have to be accepted and notified by the
Central Government. When such agreement is notified, the provisions of income
tax or such agreement, as may be beneficial, will be applicable to the assessee.
However, this will not affect the right of India to tax the foreign enterprise
at a rate higher than the rate at which domestic enterprises are taxed.
This Section contains powers similar to S. 90. However, the
scope of the Section is wider in the sense that it does not require the
agreement to cover the whole of the country. The scope of the agreement can be
confined to only a part of the country, such as a Special Economic Zone, a Free
Trade Zone, etc.
11.2 As stated earlier, the SEZ Act, 2005, has added S. 10AA
in the Income-tax Act. At present, no deduction u/s.10A or 10B is allowed in
respect of the income of an assessee, which has been enhanced by the Assessing
Officer by applying transfer pricing provisions u/s.92C. It is now provided,
w.e.f. A.Y. 2007-08, that deduction u/s.10 AA, as available to units set up in
SEZ, will not be available in respect of income which has been enhanced by the
12. Export incentives (S. 80HHC) :
12.1 S. 80HHC of the Income-tax Act granting incentive to
export profits has been on the statute for more than two decades. The Section
has been amended from time to time. The intention of the Government from the
beginning has been to encourage export of goods out of India, so that the
country can earn the much-needed foreign exchange. Prior to insertion of S.
80HHC, similar incentive was given under the Income-tax Act by giving rebate on
the basis of foreign exchange brought into India by export of goods. Our
exporters have responded well and tried to increase much-needed foreign exchange
earnings for our country. Instead of rewarding them for their efforts by
simplifying the tax-incentive provisions, the tax department has always tried to
interpret the incentive provisions in such a manner that the benefit is denied
to exporters. There has been unending tax litigation on this issue and in the
last two decades, there have been conflicting judicial pronouncements which have
further complicated the matter.
12.2 The formula for computation of export profits appeared
to be very simple, but the tax department, in its efforts to deny deduction for
export profits, has been interpreting the provisions in a very narrow manner.
This has resulted in long-drawn litigation on issues such as what is
manufacture, what is direct or indirect cost, which items of income should be
excluded for determining ‘income from business’, what is export of goods, how to
compute export incentives, what is total turnover, what is export turnover, etc.
Two issues on which there was no unanimity in the views of various Benches of
the Income-tax Tribunal and various High Courts were (a) treatment of loss from
trading and manufacturing activity when there is positive figure of export
incentives and (b) whether Duty Entitlement Pass Book Scheme (DEPB) receipts and
Duty Free Replenishment Certificate (DFRC) received is to be considered as
export incentive for calculating deduction u/s.80HHC.
12.3 The issue relating to treatment of loss went up to the
Supreme Court in the case of IPCA Laboratories Ltd. (266 ITR 521). It was held
by the Supreme Court that if there is a loss on the basis of above computation,
deduction u/s.80 HHC is not allowable. Earlier, Special Bench of Income-tax
Tribunal in the case of Lalsons Enterprises (89ITD 25) held that if there is a
loss in trading activity and profit in manufacturing, such loss should be
ignored and deduction with reference to profit of manufacturing activity and
export incentives should be allowed. After the above Supreme Court decision, a
Special Bench of 5 members of the Income-tax Tribunal was constituted in the
case of B. Sorabji (95 ITD 540) to reconsider this issue and it was held that
loss in trading activity should be set off against the profit of manufacturing
activity and if the resultant figure is a loss, no deduction u/s.80HHC should be
allowed with reference to the export incentives.
12.4 Various trade associations and professional bodies made
representations to the Government on these two issues. The Hon’ble Prime
Minister and Finance Minister appreciated the difficulties caused by the above
judicial pronouncements and assured the exporters that suitable amendments will
be made in the Income-tax Act. Consequently, the Taxation Laws (Amendment) Act,
2005 was passed by the Parliament in December, 2005. S. 28 and S. 80HHC were
amended with retrospective effect. The amendments made in these two sections do
not fully resolve these two issues. So far as large exporters whose exports
exceed Rs.10 crores, are concerned, benefit of deduction with reference to DEPB
and DFRC receipts will not be available even after this amendment. It may be
noted that the benefit of deduction u/s.80HHC is not available from the A.Y.
2005-06. Therefore, both these sections have been amended with retrospective
12.5 DEPB — DFRC export incentives :
(i) S. 28 has been amended with effect from 1-4-1998 and it
is now provided that profit on transfer of DEPB credit will be treated as
business income, and accordingly, it will be considered as export incentive.
Similarly, there is an amendment in this Section with effect from 1-4-2001 and
it is now provided that profit on transfer of DFRC certificate will be treated
as business income, and accordingly, it will be considered as export incentive.
(ii) S. 80HHC has been amended with effect from 1-4-1998, so
far as profit from transfer of DEPB credit is concerned and with effect from
1-4-2001, so far as profit from transfer of DFRC certificate is concerned. It is
now provided that in the case of an assessee whose export turnover does not
exceed Rs.10 crores, 90% of profit from transfer of DEPB credit or DFRC
certificate will be eligible for deduction u/s.80HHC in the same manner as other
export incentives. This will mean that small exporters whose exports were below
Rs.10 crores will get full advantage of S. 80HHC and will be better placed as
compared to exporters having exports exceeding Rs.10 crores.
(iii) As regards exporters having exports exceeding Rs.10
crores in any year, the above benefit of deduction u/s.80HHC with reference to
90% of profit from transfer of DEPB credit or DFRC certificate will be granted
with retrospective effect if it is shown (a) that the assessee had option to
select between DEPB credit/DFRC certificate or Duty Drawback and (b) that the
rate of Duty Drawback was higher than rate of DEPB credit/DFRC certificate. If
Duty Drawback rate was lower in any year, the benefit of deduction with
reference to profit on transfer of DEPB credit or DFRC certificate will not be
allowed. This particular amendment will deny benefit of S. 80HHC deduction to a
large number of exporters whose exports exceed Rs.10 crores in any year.
(iv) The above amendment refers to ‘profit from transfer of
DEPB credit or DFRC certificate’. Now, the question will arise as to what is
meant by the words ‘Profits on the transfer’ of DEPB credit/DFRC certificate.
One view can be that if the DEPB credit is Rs.1000 and this is transferred for
Rs.1500, only Rs.500 will be covered by amendment of S. 28. Balance of Rs.1000
will be part of export profit, since it represents recoupment of export price.
This is because exports are made at competitive prices in the hope of getting
incentive from the Government. If this view is accepted, large exporters can
claim that deduction u/s.80HHC is available to them as the DEPB credit/DFRC
certificate received from the Government is part of the business income, as the
above amendment denies deduction under that section in respect of profit on
transfer of DEPB credit/DFRC certificate only. Therefore in such cases, the
benefit of deduction u/s.80HHC can be denied only in respect of profit from
transfer of DEPB/DFRC certificates.
12.6 Treatment of loss :
(i) S. 80HHC has also been amended in order to resolve the
issue about treatment of loss. The amendment is retrospective from 1-4-1992. It
is now provided that if there is a loss in trading activity and profit from
manufacturing activity, such loss should be set off against the profit. If there
is a loss even after this adjustment, such loss should be set off against 90% of
export incentives and deduction u/s.80HHC should be allowed in respect of the
net surplus. This can be explained by the following example :
- Loss from exports
(ii) Manufacturing - Profit from export
(iii) 90% of export incentives
S. 80HHC deduction allowable
(ii) The provision for determination of ‘income from
business’ in S. 80HHC is also amended with retrospective effect from
1-4-1998/1-4-2001 to provide that 90% of profit from transfer of DEPB credit or
DFRC certificate will be excluded from the business income computed under the
12.7 From the above amendments, only small exporters with
export turnover of less than Rs.10 crores will benefit. Most of the other large
exporters will not get any benefit. Huge tax liability will be created with
retrospective effect for the years for which assessments can be reopened or for
which assessments or appeals are pending. There is one solace for the exporters
who will be required to pay taxes for earlier years as a result of the above
amendments. CBDT has issued a Circular No. 2/2006, dated 17-1-2006 stating that
no interest or penalty will be charged and that the tax will be payable in 5
equal yearly instalments. Paras 2 and 3 of this Circular read as under :
"2. The amendments relating to Duty Entitlement Pass Book
Scheme and Duty Replenishment Certificate have been brought into the statute
with retrospective effect. Therefore, it has been decided that no penalty
shall be levied or interest shall be charged in respect of any fresh demand
raised consequent to the enactment of Taxation Laws (Amendment) Act, 2005, on
account of variation in the returned/assessed income attributable to profits
on sale of DEPB credits or DFRC. Further, in such cases where assessments have
already been completed and, —
(i) interest has been charged, the Chief Commissioner of
Income tax shall waive the interest relating to claim of profit on sale of
DEPB credits or DFRC for deduction u/s.80HHC;
(ii) penalty has been levied, the Chief Commissioner of
Income-tax shall waive the penalty relating to claim of profit on sale of
DEPB credits or DFRC for deduction u/s.80 HHC; or
(iii) penalty relating to claim of profit on sale of DEPB
credits or DFRC for deduction u/s.80HHC, has been initiated but not levied,
the penalty proceedings shall be dropped.
3. Further, it is also directed that such demand shall be
recovered over a period of 5 years. For this purpose, every Assessing Officer
raising such a demand will maintain the details of such demand in a separate
register, so that the information can be furnished to the Board as and when
required. These registers shall be kept in the custody of the Assessing
Officers who will hand it over to their successors at the time of their
12.8 It may be noted that the classification of assesses
entitled to tax relief u/s.80HHC based on the quantum of exports made with
retrospective effect may be treated as unreasonable. This part of the amendment
has been challenged in various High Courts and we will have to await the
judicial pronouncements on the issue.
13. Deductions under Chapter VIA :
13.1 New S. 80AC : As stated earlier in Para 4.10, S.
10B has now been amended to provide that deduction under that Section will not
be allowable if the return of income is not filed before the due date. In line
with this provision, a new S. 80AC has been added in Chapter VIA to provide that
exemption/deduction provided in the following Sections will not be allowed if
the return of income is not filed on or before the due date prescribed
(i) S. 80IA : Industrial undertakings or
enterprises engaged in infrastructure development, etc.
(ii) S. 80IAB : Undertaking or enterprise engaged
in development of SEZ
(iii) S. 80IB : Industrial undertakings other than
infrastructure development undertakings.
(iv) S. 80IC : Undertakings or enterprises in
certain specified states (e.g., Sikkim, Himachal Pradesh,
Uttaranchal, North-Eastern States, etc.)
This new provision will apply effective from accounting year
2005-06 (A.Y. 2006-07).
13.2 S. 80C : This Section was inserted by the Finance
Act, 2005 to provide for deduction in the case of an individual or HUF in
respect of LIP, Deferred Annuity, Contribution to PF and certain investments in
specified instruments from A.Y. 2006-07. The deduction is limited to Rs.1 lac in
any year. The scope of this investment is now extended, within the overall limit
of Rs.1 lac, to include specified term deposits with any scheduled bank. The
conditions imposed for such deposit are, (i) the fixed deposit must be for a
period not less than five years and (ii) it should be in accordance with a
scheme framed and notified by the Central Government for this purpose. This
benefit of investment will be available effective from A.Y. 2007-08.
13.3 S. 80CCC : This Section has been amended w.e.f.
A.Y. 2007-08. The limit for investment in respect of contribution to Annuity
Plan of LIC or other insurance companies for receiving pension from the fund has
been increased from Rs.10000 to Rs.1 lac. However, the aggregate limit of
deduction u/s.80C, u/s.80CC and u/s.80CCD will be Rs.1 lac only.
13.4 S. 80IA : This Section provides for
exemption/deduction in respect of business income of industrial undertakings or
enterprises engaged in infrastructure development, etc. The following amendments
are made in this Section :
(i) In the case of an undertaking which develops, operates,
and/or maintains an industrial park, the sun-set date of 31-3-2006 has been
extended to 31-3-2009 for claiming the benefit of this Section.
(ii) In the following cases, the sun-set date of 31-3-2006
has been extended to 31-3-2010 for claiming the benefit of this Section :
(a) Undertaking set up in India for the generation or
generation and distribution of power.
(b) Undertaking which starts transmission or distribution
by laying network of new transmission or distribution lines.
(c) Undertaking which undertakes substantial renovation
and modernisation of the existing network of transmission or distribution
(iii) Taxation Laws (Amendment) Act, 2005, has granted
benefit of this Section to an undertaking owned by an Indian company and set
up for reconstruction or revival of a power- generating plant if such company
is formed before 30-11-2005 and begins to generate or transmit or distribute
power before 31-3-2007. There are certain conditions for holding equity shares
in the company. This provision comes into force from A.Y. 2006-07. It is
evident that this provision is introduced to give tax benefit to the company
formed for revival of Dabhol Power Project.
(iv) The provisions of S. 80IA will not apply to any SEZ
notified on or after 1-4-2005. This is because a new S. 80IAB has been added
by the SEZ Act, 2005.
13.5 New S. 80IAB : This Section is added by SEZ Act,
2005 w.e.f. 10-2-2006. This Section provides that in the case of any SEZ
notified on or after 1-4-2005, 100% of the income derived by an undertaking or
an enterprise owned by a Developer from the business of developing the SEZ,
shall be allowed as a deduction for 10 consecutive assessment years. The
assessee will have the option to choose 10 consecutive assessment years out of
15 years beginning from the year in which SEZ is notified. If the SEZ has
claimed the tax benefit u/s.80IA in earlier years, the benefit under this
Section can be claimed for balance of the period of 10 assessment years. In the
event of transfer of the undertaking or enterprise by the Developer to another
Developer, the benefit of the Section will be available to the successor for
balance period of 10 consecutive assessment years. The relevant provisions for
computation of amount deductible and other procedural provisions of S. 80 IA are
made applicable to this Section.
13.6 S. 80LA : This Section was added by the Finance
Act, 2003, from A.Y. 2004-05. It provides for granting deduction of 100% income
derived by Offshore Banking Unit (OBU) for the first 3 assessment years and 50%
of such income for balance of 2 assessment years. For this purpose, the income
of such OBU should have arisen in the undertaking located in an SEZ. The SEZ
Act, 2005, has substituted this Section by a new S. 80 LA w.e.f. 10-2-2006. The
significant changes made by this new Section are as under :
(i) In the old Section the benefit of this Section was
available to scheduled Indian bank having the OBU in an SEZ. After the
amendment, this benefit can be claimed by any foreign bank having an OBU in an
(ii) Now the benefit of the Section can be claimed by a
unit of an International Financial Services Centre (IFSC). For this purpose,
the IFSC should have taken approval of prescribed authority for setting up the
Centre in an SEZ.
(iii) The deduction of 100% of income derived from OBU or
IFSC can be claimed for first five assessment years. Further, deduction of 50%
of such income can be claimed for the next five assessment years.
(iv) The condition for filing Audit report in the
prescribed form as contained in the old S. 80 LA will continue.
(v) It may be noted that by amendment made in S. 197A(ID),
it is now provided that OBU will not be required to deduct tax at source from
interest paid to Non-Resident or R but not OR on deposit made on or after
1-4-2005. Similarly, there will be no TDS from interest on borrowing by OBU on
after 1-4-2005 from a non-resident or R but not OR.
13.7 S. 80P : Business income of co-operative
societies carrying on the business of banking or providing credit facilities to
its members was eligible for deduction from total income u/s.80 P. Effective
from A.Y. 2007-08, this deduction will not be available to co-operative banks,
other than primary agricultural societies or primary co-operative agricultural
rural co-operative banks. Consequently, the definition of ‘Income’ has been
amended in S. 2(24)(viia) to include profits of the business of banking
(including primary credit facilities) carried on by co-operative societies with
its members. Therefore, the benefit of exemption on the basis of mutuality
principle cannot be claimed by such society.
14. Tax Deduction and Collection at Source (TDS/TCS) :
14.1 By the Finance (No. 2) Act, 2004, a new S. 203AA was
inserted, whereby the obligation of tax deductor to file TDS/TCS returns and of
issuing TDS/TCS certificates was proposed to be discontinued w.e.f. 1-4-2005.
For this purpose, consequential amendments, were made in S. 199, S. 203 and S.
206C. By these amendments the Central Government had decided to appoint a
centralised agency for collecting information about TDS/TCS and for issuing a
comprehensive statement of TDS/TCS to assessees. Since the Government was not
able to set up the required system, the above date was extended to 1-4-2006 by
the Finance Act, 2005. This date is now extended to 1-4-2008 by amendment of S.
199, S. 203, S. 203AA and S. 206C. Therefore, the existing system of filing TDS/TCS
returns and issuing TDS/TCS certificates by the tax deductor will continue up to
14.2 If a person liable to deduct tax has delayed payment of
the tax deducted at source, the interest payable u/s.201(1A) will now be
required to be paid by him on quarterly basis before furnishing the quarterly
TDS return. This provision is made in S. 201(IA) w.e.f. 1-6-2006.
14.3 In the quarterly TDS/TCS returns filed by the tax
deductor, PAN and TAN/TDCN shall be quoted. This provision comes into force
14.4 Since quarterly returns of TDS/TCS are now required to
be filed, the yearly returns of TDS/TCS are not required to be filed. This has
been provided by amendment of S. 206 w.e.f. 1-6-2006.
14.5 S. 206C(6A) has been inserted to provide that, effective
from A.Y. 2007-08, if the person responsible for collecting tax makes a default
in collecting or after collecting the tax in making payment to the Government,
either whole or part of the tax, he shall be liable to pay penalty as provided
in S. 221. It is also now provided in S. 206C(7), effective from 1-6-2006, that
the person responsible for collecting tax shall pay, before filing the quarterly
return of TCS, interest due thereon for the delay in depositing the TCS.
15. Interest payable by the assessee :
15.1 At present, the provisions of S. 140A, S. 234A, S. 234B
and S. 234C for payment of interest on shortfall in payment of tax are
interpreted to mean that only advance tax paid and amount of TDS/TCS is to be
allowed from the tax payable as per return or on assessment. Amount of tax
credit u/s.115JAA or relief due u/s.90 or amount to be deducted from tax u/s.91
is not to be deducted from tax payable. In a number of cases pending before
judicial authorities, this dispute is pending in litigation. This interpretation
causes avoidable hardship to taxpayers.
15.2 S. 140A, S. 234A, S. 234B and S. 234C have now been
amended w.e.f. A.Y. 2007-08 to provide that for the purposes of calculating
interest under these Sections, the tax payable as per return of income or on
assessment or for the purpose of determining ‘assessed tax’ u/s.140A, the
following amounts shall be deducted :
(i) Tax already paid under the provisions of the Act (i.e.,
advance tax, self-assessment tax, tax paid on the basis of assessment, etc.)
(ii) Amount of TDS/TCS.
(iii) Relief from double taxation available u/s.90, u/s.90A
(iv) Tax credit available u/s.115JAA for tax paid on book
15.3 Though the above amendment is stated to be effective
from A.Y. 2007-08, considering the nature of amendment, it is possible to take
the view that this is a clarificatory amendment. Therefore, this procedure for
calculating interest can be followed in earlier years also where
assessments/appeals are pending.
16. Assessment procedure :
16.1 Return of
income (S. 139) :
(i) The first proviso to this S. 139(I) provides that a
person, other than a company or a firm whose income is not chargeable to
income tax, should file the return of income if his expenditure on consumption
of electricity is Rs.50000 or more or if he fulfils any one of the six
criteria. This requirement is now discontinued from the A.Y. 2006-07 and such
person need not file his return from this year.
(ii) S. 139(9) provides that the assessing officer can
treat the return of income as defective if the return is not accompanied by
the proof of payment of taxes, TDS/TCS certificates, tax audit report, etc.
This Section is now amended w.e.f. 1-6-2006 to authorise CBDT to dispense with
any of the conditions of S. 139(9) for a class of persons. CBDT can now frame
rules to introduce any of the specified conditions as a part of the return
16.2 S. 142 :
(i) This Section is amended w.e.f. 1-4-2006 to provide that
where a person has not filed his return of income before the end of the
relevant assessment year, the AO may serve a notice u/s.142(1)(i) after the
end of assessment year requiring him to furnish his return of income.
(ii) A proviso is added to the above Section w.e.f.
1-4-1990 to provide that notices served after this date u/s.142(1) after the
relevant assessment year to a person who has not furnished his return of
income shall be deemed to be valid. This provision appears to have been made
with retrospective effect in order to regularise certain lapses of officers of
the tax department.
16.3 S. 148 : A proviso is inserted in this Section
with retrospective effect from 1-10-1991. It is now provided that in a case
where return is furnished in response to notice u/s.148 between 1-10-1991 and
30-9-2005, and a notice u/s.143(2) or u/s. 143(2)(ii) has been issued after the
expiry of 12 months from the end of that month but before making the assessment,
such notice shall be deemed to be a valid notice. This provision appears to have
been made to regularise certain lapses on the part of officers of the Income-tax
16.4 S. 153/S. 153 B : The time limits for completion
of assessment and reassessment have been revised w.e.f. 1-6-2006. The existing
period has been reduced by 3 months. The intention of reducing the time limit
appears to be to collect tax demand before the end of the relevant financial
year. However, this will put lot of pressure of work on the assessees and their
representatives, particularly in the months of October to December when they are
busy with finalisation of tax audit, VAT audit, etc. as well as festivals like
Diwali and Christmas. The revised limit for completion of assessments will be as
||Existing time limit
||New time limit
Assessment u/s.143 or u/s.144
Two years from the end of the
relevant assessment year
21 months from the end of the
relevant assessment year
Assessment of Fringe Benefits Tax
u/s.115WE or u/s.115WF
Two years from the end of the
relevant assessment year
21 months from the end of the
relevant assessment year
One year from the end of the
financial year in which the notice was served u/s.148.
Nine months from the end of the
financial year in which the notice was served u/s.148
Reassessment of Fringe Benefit
Tax escaping assessment u/s.115WG
One year from the end of the
financial year in which the notice u/s.115WH was served
Nine months from the end of the
financial year in which the notice u/s.115WH was served
Assessments in cases where search
has been initiated u/s.132 after 1-4-2004 or in cases where books of
account, documents or assets have been seized or requisi
One year from the end of the
financial year in which the last of the authorisations for search was
executed or the books of account, documents or assets seized or
requisitioned are handed over to the AO
Nine months from the end of the
financial year in which the last of authorisations for search was executed
or the books of account, documents or assets seized or requisitioned are
handed over to the AO
It is also provided that a fresh assessment in pursuance of
an order of the Tribunal u/s.254 or an order of the Commissioner u/s.263 or 264
will have to be done within nine months instead of one year from the end of the
financial year in which the order u/s.254 is received by the Commissioner or
Chief Commissioner or the order u/s.263 or u/s.264 is passed by the
Commissioner, respectively. These amendments will apply to orders of the
Tribunal received by the Commissioner or Chief Commissioner after 1st April 2005
and orders passed by the Commissioner u/s.263 or 264 after this date. Therefore,
under the above amended provisions, the regular assessments for A.Y. 2004-05
u/s.143/144 will have to be made by the AO on or before 31-12-2006. Similarly,
where notice u/s.147 is issued on or after 1-4-2005, the reassessment will have
to be completed by the AO on or before 31-12-2006.
Similar amendments have been made in respect of time limit
for assessment and reassessment under the Wealth-tax Act.
17. Tax Return Preparer (S. 139B) :
A new S. 139B has been added w.e.f. 1-6-2006 under which CBDT
can notify a scheme enabling specified class or classes of persons to prepare
and furnish returns of income through a tax return preparer (TRP) authorised in
this regard. TRP can assist the person furnishing the return and affix his
signature on such return. The scheme framed by the CBDT shall provide for the
(i) The manner in which the TRP shall assist the persons
furnishing the returns;
(ii) The manner in which and the period for which TRP shall
(iii) The education and other qualifications and the
training and other conditions required to be fulfilled by the TRP;
(iv) Code of conduct and duties and obligations of the TRP;
(v) Circumstances under which the authorisation given to a
TRP may be withdrawn.
A ‘tax return preparer’ is defined to mean an individual
authorised to act as a tax return preparer under the scheme, but cannot include
a Chartered Accountant or a legal practitioner entitled to practise in any Civil
Court or an officer of a scheduled bank with which the assessee has a current
account or dealings.
‘Specified class or classes of persons’ have been defined to
mean any person other than a company or a person whose accounts are required to
be audited u/s.44AB or under any other law, who is required to furnish a return
18. Other procedural provisions :
18.1 A clarificatory amendment is made in S. 120 to provide
that any income-tax authority, if directed by CBDT, even if of higher rank, may
exercise powers and perform the functions of an income-tax authority below it.
This provision is inserted retrospectively with effect from 1-4-1988.
18.2 Permanent Account Number (PAN) : S. 139A(1) and
(1A) provide for circumstances under which a person or class of persons is
required to obtain a PAN. The Central Government is authorised to notify any
class or classes of persons who will be liable to apply for allotment of PAN
within the time as is mentioned in the Notification.
At present, the AO has the authority to allot a PAN to any
other person who is liable to pay tax. It is now provided that the AO may,
having regard to the nature of transactions as may be specified by CBDT, allot a
PAN to any other person, suo moto, in accordance with the rules, even if such
person is not liable to pay tax.
The above amendments are effective from 1-6-2006.
19. Penalties :
(i) New S. 271CA has been added w.e.f. A.Y. 2007-08. Under
this Section, failure to collect the whole or part of TCS will be liable to
penalty equivalent to the tax not so collected. Such penalty can be levied by a
Joint Commissioner only and will be appealable to the appellate authorities.
(ii) U/s.272A, it is now provided, w.e.f. 1-6-2006, that the
penalty for failure to furnish quarterly statements of TDS and TCS will be
limited to the amount of TDS/TCS, as in the case of other TDS/TCS defaults.
(iii) S. 272BB is also amended w.e.f. 1-6-2006. It is now
provided that deliberate furnishing of an incorrect TDS, TCS, TDCN Number in TDS/TCS
challans, certificates, returns or prescribed documents, as provided in S.
203A(2), will invite penalty of Rs.10,000.
(iv) In all the above cases, it is provided u/s.273B that no
penalty can be levied if the assessee proves that there was reasonable cause for
20. To sum up :
20.1 During the financial year 2005-06, the Income-tax Act
has been amended three times. There are many retrospective amendments. There is
no provision for waiver of interest chargeable in the event of additional tax
liability being created due to retrospective amendment of the law (except in
cases covered u/s.80 HHC). Further, all these amendments have further
complicated the already complicated law. Last year, the Finance Minister had
announced that a new simplified Income-tax Act will be enacted within 12 months.
It is surprising that there is no mention about the progress in this direction
in his Budget speech this year. With the amendments made in the last financial
year, the number of amendments in the Income-tax Act since its enactment in 1962
may now cross the 7000 mark in last 45 years. Therefore, there is an urgent need
to now enact a new simplified Income-tax Act.
20.2 This year’s budget brings 15 more services within the
scope of Service Tax. The rate of Service Tax has been increased from 10.2 to
12.24%. It is stated that the contribution of services sector is about 54% of
the GDP. The Finance Minister has proposed to introduce in his Budget Speech
Goods and Service Tax (GST) from 1st April, 2010. In Para 155 of the Budget
speech, he has stated, "World over, goods and services attract the same rate of
tax. That is the foundation of a GST. People must get used to the idea of a GST.
Hence, we must progressively converge the Service Tax rate and the CENVAT rate."
One disturbing feature in the Service Tax regime is the withdrawal of a
Notification issued in 1998, granting exemption to Chartered Accountants from
Service Tax in respect of services other than audit and statutory certification
services. This has disturbed the level playing field with other professionals
who render tax consultation and similar legal services. This Notification is
withdrawn, without consultation with ICAI, effective from 1-3-2006. This is a
serious matter and the same is being challenged in various High Courts. We have
to await the judicial pronouncements in the matter.
20.3 The controversy generated about Fringe Benefit Tax last
year has been further complicated by the CBDT Circular No. 8/2005 of 29-8-2005.
The Government has, so far, not issued any Rules prescribing the Form of Audit
Report or the Form of Return of FBT. There is no clarity about the items of
expenses on which FBT will be payable. The levy has been challenged in law
courts and we have to await the judicial pronouncements.
20.4 The retrospective amendment made by the Taxation Laws
(Amendment) Act, 2005, in December, 2005 giving relief in respect of export
profits u/s.80HHC is also a classic example of how the legitimate relief due to
exporters is being given in a halfhearted manner. This piece of legislation will
invite unending litigation.
20.5 While concluding his Budget speech, the Finance Minister
has observed as under in Para 179:
"179. Over a hundred years ago, a restless young man in his
quest for the core of all spirituality, admonished his fellow men in the
following words : "We reap what we sow. We are the makers of our own fate. The
wind is blowing; those vessels whose sails are unfurled catch it, and go
forward on their way, but those which have their sails furled, do not catch
the wind. Is that the fault of the wind ? . . . . . . . We make our own
destiny". Those are the immortal words of Swami Vivekananda. Let us believe in
our destiny, let us make our future."
Let us hope the Finance Minister realises that by making tax laws more
complicated, we are only sowing seeds for future litigation.