Login ID:
Password:

Forgot Password?
New user? Free SignUp
Enrolment Forms
Online Payment Polls
Library
My Library
Right to Information Clinic

The Journal of the BCAS-the BCAJ has an online Avatar.

One-Day Workshop On NBFC Regulations

Intensive Workshop on Internal Financial Control as required in Companies Act, 2013

Jhancar - ‘Togetherness & Networking Carnival’ for Chartered Accountants

Advanced Workshop on Professional Writing Skills

Half-day workshop on SEBI/Securities laws for Chartered Accountants - Introduction to basic concepts, important Regulations, penalties/ settlement and Clause 49

More Events...

Useful Links
Bulletin Board
WE CA
Chat Room
   

BCA Journal
August 2014 Journal Index
Aug 15

 
  Archives   Subscribe Now  
    Latest Publication
Taxation of Expatriates (Including Certain Non-Tax Aspects)
 
  By Mr. Sushil U. Lakhani
Mr. Nitin P. Shingala
Mr. Nandkishore C. Hegde and Ms. Niji A. Arora
Chartered Accountants
Price: Rs.100/-
Member Rs.100/-
Students Rs.100 /-
 
Other Publications

Amendments in the Income-tax Act

Subject : Income Tax Law
Month-Year : May 2006
Author/s : P. N. Shah
Chartered Accountant
Topic : Amendments in the Income-tax Act
Article Details :

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 situations.

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 date.

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 scrutiny.

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 A.Y. 2007-08.

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 :

Sr. No. Taxable Securities Transaction Rates Payable by
Existing Revised w.e.f. 1-6-2006
1) (2) (3) (4) (5)
i)

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

0.10% 0.125% Purchaser
(ii)

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.

0.10% 0.125% Seller
(iii)

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.

0.020% 0.025% Seller
(iv)

Sale of a derivative, where the transaction of such sale is entered into through a recognised stock exchange

0.0133% 0.017% Seller
(v)

Sale of unit of an equity oriented fund to the Mutual Fund

0.20% 0.25% Seller

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 profits.

(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 Region).

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 31-3-2007.

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. 2007-08.

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 purposes.

(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 area.

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 tax.

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 expenditure:

(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 :

Illustration :

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 :

Employee Contribution
A Rs. 50,000
B Rs. 90,000
C Rs.200,000

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 Central Government.

    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 investment.

    • 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 AO u/s.92C.

    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 effect.

    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 :

    (i)  Trading - Loss from exports                         Rs.10 lacs

    (ii)  Manufacturing - Profit from export                     7 lacs

          Loss                                                                3 lacs

    (iii)  90% of export incentives                                  5 lacs

          S. 80HHC deduction allowable                           2 lacs

    (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 Income-tax Act.

    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 transfer."

    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 u/s.139(1):

    (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 lines.

    (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 SEZ.

    (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 31-3-2008.

    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 w.e.f. 1-6-2006.

    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 and u/s.91.

    (iv) Tax credit available u/s.115JAA for tax paid on book profits.

    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 itself.

    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 Department.

    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 under :

    Particulars 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

    Reassessment u/s.147

    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 following :

    (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 be authorised;

    (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 of income.

    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 the failure.

    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.

    Add to My Library

    Back to Article Listings

    Resource Material  
    Articles and Features  
    More...
    Circulars  
      Modifications Applicable to Private Companies unde... 
    More...
    Drafts, Forms  
    Tribunal Board  
    Budget 2014  
    Vice-President Communique  
    Holidays for BCAS  
    E-Book  
    Annual Report  
    BCAS Brochure  
    Recent Case Laws  
    Representations  
    Supreme Court cases  
    Tribunal-Rept. Cases  
    Tribunal-Unrep.Cases  
    Advance ruling  
    High Court Cases  
    Tribunal - International Tax Decision  
    E-Newsletter  
    Events  
    Thought Mailer  
    BCAS Hall Booking  
         
    Disclaimer
    Privacy Policy
    Food for Thought