Preliminary
1. In a case where the assessee made persons renting the marriage hall as temporary members of the club and claimed that the entire income is not taxable on the principle of mutuality. The Kerala High court in CIT vs. Trivandrum Club (2006) 282 ITR 505 (Ker) held that the marriage hall was actually rented to non-members and by making them as temporary members the principle of mutuality could not be applied. Accordingly the rental income was subjected to tax.
2. The assessee was running commercially, a club with several members including four nationalized banks. The club deposited its surplus money with the four banks in fixed deposit and earned interest therefrom. The assessee claimed exemption of the interest earned by it by invoking the principle of mutuality. The court held that the relationship between the parties was that of a banker and customer. The principle of mutuality was not available to the club holding deposits with the nationalized banks as a customer - CIT vs. Bangalore Club (2006) 287 ITR 263 (Kar.).
Profits and Gains of Business or Profession
1. The Apex Court, in CIT vs. General Insurance Corporation (2006) 286 ITR 232, has held that in the case of issue of bonus shares, there is no fresh inflow of funds or increase in the capital employed. The reserves of the entity gets converted into share capital of the company. The total funds available with the entity remain the same, both before and after the issue of bonus shares. Accordingly, any expenditure incurred in connection with issue of bonus shares was held as revenue expenditure. This decision overrules the decision rendered in the case of Ahmedabad Manufacturing & Calico (P) Ltd vs. CIT (1986) 162 ITR 800 (Guj) and Vazir Sultan Tobacco Co Ltd vs. CIT (1990) 184 ITR 70 (AP). It applied the rationale of the decision rendered in the case of Empire Jute Co Ltd vs. CIT (1980) 124 ITR 1 (SC).
2. The Apex Court in Dr.T.A.Quereshi vs. CIT (2006) 287 ITR 547 (SC) dealt with a case of a doctor whose claim of deduction to the extent of the stocks seized was disallowed by the Madhya Pradesh High court (275 ITR 352). The apex court held that once it is found that the assessee is engaged in the manufacture and sale of any substance (including prohibited articles) the stocks seized is a business loss. It applied the precedent viz. CIT vs. Piara Singh (1980) 124 ITR 40 (SC). It was held that section 37 is applicable only for business expenditure and not to business losses. Business losses are allowable on ordinary commercial principles for computing profits. The loss of stock in trade, being a trading loss, is allowable while computing the profits of illegal business.
3. Interest on moneys borrowed for business is deductible under section 36(1)(iii). In a case where the assessee advances money to an allied concern without interest then the Revenue would naturally probe the nexus between borrowing and advancing of funds. In CIT vs. Prem Heavy Engineering Works (P) Ltd (2006) 285 ITR 554 (All) the Assessing Officer disallowed a portion of interest paid by the assessee on over draft facilities to the bank on the ground that the assessee had advanced interest free funds to its allied concern. The Court held that the assessee company’s share capital and free reserves were sufficient to advance interest free funds to its allied concern. Accordingly, the disallowance of interest was rejected. However, a contrary decision has been held in CIT vs. Abhishek Industries Ltd (2006) 286 ITR 1 (P&H). In this case, the assessee advanced money to its sister concern without charging interest. It was held that the onus is on the assessee to show that its borrowings were used for its own business. The court held that the Revenue need not establish the nexus between borrowings and interest free advances for the purpose of disallowing the interest on borrowings.
4. In CIT vs. Brittania Industries Ltd (2006) 280 ITR 525 (Cal) the assessee advanced money to concern from whom supplies were received. The advance was made immediately on the enhanced packing credit facility. The Assessing Officer disallowed interest on borrowing for the reason that the funds were given without interest to the concern in which the relatives of directors were interested. The Court held that the tribunal made a factual finding that the advances were made to the concern supplying raw material and was made in the regular course of business and further the advance was made out of the assessee’s own funds and accordingly the disallowance of interest was rejected.
5. In CIT vs. Southern Roadways Ltd (2006) 282 ITR 379 (Mad) the assessee paid postage, telegram and telephone charges in advance based on the demand raised by the telegraph department and claimed the payment as deduction. The court held that the payment by the assessee has been proved and it has been paid in pursuance of demands raised by postal, telephone and telegraph department and accordingly the amount paid is deductible upon payment notwithstanding the fact that the assessee follows mercantile system of accounting.
6. In CIT vs. Hari Vignesh Motors (P) Ltd (2006) 282 ITR 338 (Mad) the expenditure towards construction of additional building in leasehold premises was allowed as revenue expenditure as the lease deed did not provide any ownership of assets or consideration for transfer upon termination of lease.
7. Where a firm is dissolved and one of the partners takes over the business of the firm with an agreement to pay the erstwhile partners a certain sum of money every year, it was held that such payment flowed from business of the assessee and is an allowable expenditure. CIT vs. Mandovi Hotel (P) Ltd (2006) 284 ITR 129 (Bom).
8. In CIT vs. Arya Vaidhya Pharmacy (CBE) Ltd (2006) 284 ITR 335 (Mad) the assessee collected excess sales tax which was retained as a deposit. The Apex Court directed the assessee to refund the amount to the customers and the balance, which could not be refunded, was to be donated to a charitable trust for utilization for public charitable purposes. It was held that the direction of the Supreme Court is that such excess amount collected is not belonging to the assessee and hence, is not chargeable to tax as income.
9. The Karnataka High Court in CIT vs. Industrial Credit And Development Syndicate Ltd (2006) 285 ITR 310 (Karn) has held that any surplus arising in buy back of debentures would not constitute as income subject to tax liability. The Court held that such buyback is merely discharging the liability to the debenture holder by the company similar to repayment of loan.
10. In CIT vs. Sri Meenakshi Mills Ltd. (2007) 290 ITR 107 (Mad.), the assessee company had paid upfront fee to a financial institution for the purpose of availing a loan towards purchase of machinery. The court held that the upfront fee paid to the bank is mere bank charges and cannot be construed as capital expenditure. Hence, the same shall be deductible as revenue expenditure.
Capital Gains
1. In order to avail exemption u/s 54 assessee should have invested the amount of capital gain in another residential house. The Madras High Court in CIT vs. V.Natarajan (2006) 287 ITR 271 (Mad) has held that such exemption is allowed to an assessee even in a case where investment in a residential house is made in the name of a spouse.
2. In CIT vs. C.F.Thomas (2006) 284 ITR 557 (Ker) the assessee gave lease of commercial property for 20 years, which was a compulsorily registerable document under the Registration Act, 1908. The Court held any transaction by way of any agreement or arrangement which has the effect of transferring or enabling the enjoyment of any immovable property is a transfer and accordingly the transaction is liable for capital gains tax.
3. In CIT vs. Union Co (Motors) Ltd (2006) 283 ITR 445 (Mad) the assessee sold land with building with a condition that the purchaser would demolish the super structure. The court held that the consideration for transfer apparently relates to land and the building had no value and also got demolished by the vendee. The building though was subjected to depreciation earlier, the consideration received on transfer was held as attributable only to land and nothing towards building.
Clubbing & Aggregation of Income
1. In Suresh Chand Talera vs. Union of India (2006) 282 ITR 341 (MP) it was held that the agricultural income of minor has to be included with the income of the parent for the purpose of computing the rate of tax. This implies that irrespective of whether the minor has any income chargeable to tax or not or the parent has any agricultural income or not, the agricultural income of the minor has to be aggregated for computing tax in the hands of the parent.
2. Income Tax Act contains numerous penal provisions and one among them is penalty for accepting loan or deposit otherwise than by account payee crossed cheque or bank draft. In CIT vs. Standard Brands Ltd (2006) 285 ITR (Del) the assessee received cash loan, which was treated as undisclosed income in the assessment. Again penalty proceedings were initiated for acceptance of such cash loan for levy of penalty u/s 271 D. The Court held once the loan amount is treated as undisclosed income of the assessee, it could not be subjected to penal proceedings applicable for the loan transactions.
Procedure for Assessment
1. In Goetze (India) Ltd vs. CIT (2006) 284 ITR 323, the Apex court held that the assessee having filed a return cannot claim a deduction by way of addressing a letter to the Assessing Officer. There is no statutory provision for allowing an amendment in the return by means of a letter. The assessee cannot claim a deduction in respect of the return filed without filing a revised return.
2. Reassessment proceedings could be initiated only when the Assessing officer has reason to believe that the income chargeable to tax has escaped assessment. In Dass Friends Builders (P) Ltd vs. Dy.CIT (2006) 280 ITR 77 (All) the reassessment proceedings were initiated based on the defects in the books noticed in the subsequent assessment year. The Assessing Officer while estimating the income after rejecting books resorted to reassessment proceedings for the earlier year based on presumption and hence, the notice was held as not valid and was quashed.
3. Where an assessee is co-owner of a property, the Assessing Officer cannot solely pick out and enhance, the income in the hands of one of the co-owners without disturbing the income from the same property of the other co-owners - CIT vs. Muthukarupan (2007) 290 ITR 154 (Mad.).
Special provisions relating to firms
In CIT vs. Pramount Trading Corporation (2007) 288 ITR 21 (All.), the assessee firm’s partnership deed contained a clause that in the event of death of a partner, the firm shall be continued by other surviving partners. In this case, it will not be treated as succession of firm as provided u/s. 188. Therefore, assessment u/s.143 or u/s.144 shall be made as per sec. 187 since it is not treated as a change in constitution.
Assessment of Companies
Sec. 115JB introduced by Finance Act 2000 is a self-contained code by itself.
Sec. 115JB(5) specifies that all other provisions of the Income Tax Act shall apply to every assessee being a company mentioned in Sec. 115JB. Circular No. 13 of 2001 dated 9th November 2001 makes it clear that every company governed by Sec. 115JB shall be liable to pay advance tax under Income Tax Act. Consequently, the provisions of sections 234B and 234C for levying interest on defaults in payment of advance tax and deferment of advance tax respectively, would also be applicable to companies governed by Sec. 115JB – Jindal thermal Power Co. Ltd vs. DCIT and another (2006) 286 ITR 182 (Kar.). The Honorable Supreme Court has in CIT vs. Kwality Biscuits (2006) 284 ITR 434 held that interest under sections 234B and 234C shall not be applicable for companies paying tax under the erstwhile Sec.115J. This decision, however, is applicable only in the context of Sec.115J and not in the context of Sec.115JB. As referred above, Sec. 115J does not contain a restrictive clause of applicability of all the other Sections of the Income Tax Act unlike Sec. 115JB(5).
Collection, recovery of tax and Refunds
In BDA Ltd vs. ITO (TDS) (2006) 281 ITR 99 (Bom) the tax deduction towards payment for getting printed labels was discussed. The court held that the assessee gave an order for printing labels and it is a contract of sale and is not a ‘works contract’ and hence is not liable for tax deduction under section 194 C. Similar decision was rendered by Delhi High Court in CIT vs. Dabur India Ltd (2006) 283 ITR 197.
Penalty Imposable
1. Section 271(1)(c) provides for levy of concealment penalty if the assessee furnishes inaccurate particulars of his income or resorts to concealment of income. In New Sorathia Engineering Co vs. CIT (2006) 282 ITR 642 (Guj) it was held that the order of penalty must state whether it is levied for concealment of income or for furnishing inaccurate particulars by the assessee. In the absence of such clear cut finding the order of penalty could not be sustained and accordingly it was held as invalid.
2. In CIT vs. Idhayam Publications Ltd (2006) 285 ITR 221 (Mad) the assessee company received cash loans from a director. It was held that the term ‘deposit’ does not include any amount received from a director or a shareholder of a private limited company as per the Companies (Acceptance of Deposits) Rules, 1975. Hence, it was held that no penalty could be imposed on such transactions.
3. In CIT vs. Tam Tam Pedda Guruva Reddy (2006) 287 ITR 72 (Karn) it was held that the time limit for imposition of penalty must be reckoned from the date of initiation of penal proceedings and not the date of (re)assessment proceedings initiated by the Assessing Officer.
4. In CIT vs. Sri Ram Memorial Education Promotion Society (2006) 287 ITR 155 (All) the assessee was subjected to penalty under section 271 C for failure to deduct tax at source. Again proceedings were initiated for not filing the TDS return in time and for delay in issuing Form No.16 by the assessee. It was held that when the assessee has been subjected to penalty for not deducting tax at source, the penalty for further defaults such as non-filing or delayed filing of TDS return or issue of TDS certificate would not arise.
5. In CIT vs. Andhra Pradesh Yarn Combines (P) Ltd (2006) 282 ITR 490 (Kar) it was held that possession of demonetised high denomination notes is not money and accordingly seizure of the same is not liable for concealment penalty.
6. In Shri Bhagwant Finance Co Ltd vs. CIT (2006) 280 ITR 412 (Del), the Assessing Officer initiated penalty proceedings on the same date as a safeguard for recovery of tax arising due to completion of assessment. The court held that the Assessing Officer is not justified in invoking Sec.271 without recording satisfaction of the fact of concealment or furnishing of inaccurate particulars of income by the assessee.
7. In CIT vs. Valimkbhai H.Patel (2006) 280 ITR 487 (Guj) the assessee engaged in manufacture of salt had loss due to cyclone and rain. The Assessing Officer estimated loss which differed from the loss admitted by the assessee. The assessing officer treated the difference between his estimated loss and loss admitted by assessee as concealment of income. The court held that upon estimation difference, no concealment could be inferred for levy of penalty.
Offence and Prosecution
Where an assessee fails to deduct tax and deposit to the account of Central Government, the assessee can be prosecuted u/s. 276B. However, the apex court in Madhumilan Syntex Ltd. vs. Union of India (2007) 290 ITR 199, held that the assessee being a company is a juristic person and substantive sentence cannot be imposed on it. However, it was stated that other consequences like payment of fine etc., would ensue.
Circular on Section 194C
According to the Provisions of Section 194C, tax is required to be deducted in respect of payments made to any resident for carrying out any work in pursuance of a contract. Circular No.13/2006 dated 13.12.2006 has been issued by CBDT, clarifying that the provisions of Sec.194C would apply in respect of a contract for supply of any article or thing as per prescribed specifications, only if it is a contract for work and not a contract for sale. The CBDT has reiterated the principle laid out in its earlier Circular No: 681 dated 08.03.1994, where in it was clarified that where the contractor undertakes to supply any article or thing fabricated according to the specifications given by the customer and the property in such article or thing passes to such customer only after such article or thing is delivered, the contract will be a contract for sale. Hence, such contract shall be outside the purview of section 194C and accordingly ,no tax shall be deducted at source.
RECENT AMENDMENTS
Amendments made to the Income tax Act by the Taxation laws (Amendment) Act, 2005, Finance Act, 2006 and Taxation Laws (Amendment) Act, 2006 relevant for
May and November 2007 Examinations
Changes in Rates of tax
As compared to A.Y. 2006-07, there is no change in the rates of tax in respect of Individuals, HUF’s, AOP/BOI and every Artificial Juridical persons, firms, domestic companies, foreign companies, co-operative societies and Local authorities for A.Y. 2007-08. Also, there is no change in the rate of surcharge. Education cess @ 2% shall continue for A.Y. 2007-08. For ready reference and effective revision, the rates of taxes for various categories of assessees applicable for the A.Y.2007-08 are furnished herebelow :
Individuals
a) In respect of resident individuals, who is of the age of 65 years or more (senior citizens) at any time during the previous year;
Income Rate of Tax
up to Rs. 1,85,000/ Nil
above Rs. 1,85,000/ upto Rs.2,50,000/ 20%
above Rs. 2,50,000/ 30%
b) In respect of resident individuals, being a woman, aged below 65 years;
Income Rate of tax
upto Rs.1,35,000/- Nil
above Rs. 1,35,000/- upto 1,50,000/- 10%
above Rs.1,50,000/- upto 2,50,000/- 20%
above Rs.2,50,000/- 30%
c) other individuals.
Income Rate of tax
upto Rs.1,00,000/- Nil
above Rs. 1,00,000/- upto 1,50,000/- 10%
above Rs.1,50,000/- upto 2,50,000/- 20%
above Rs.2,50,000/- 30%
Surcharge
Surcharge is not leviable if the total income does not exceed Rs.10,00,000. In a case where the total income exceeds Rs.10,00,000 surcharge is leviable at the rate of 10% on the income-tax. Surcharge is leviable on the amount of income tax payable after claiming rebate u/s.88E, if any. Surcharge is also payable in respect of tax on long term capital gains u/s.112 and in respect of winnings from lotteries etc. u/s.115BB. Surcharge is payable even by non-resident assessees.
Education Cess
In addition to income tax and surcharge, an additional levy of 2% towards ‘Education Cess’ to be made on the aggregate of income tax and surcharge payable.
HUF / AOP / BOI / Artificial Juridical Person
The rates of tax for the above-mentioned assessees are as follows:
Income Rate of tax
upto Rs.1,00,000/- Nil
above Rs. 1,00,000/- upto 1,50,000/- 10%
above Rs.1,50,000/- upto 2,50,000/- 20%
above Rs.2,50,000/- 30%
The above-mentioned rates also apply to an Association of Persons (AOP) and a Body of Individuals (BOI) where none of the members have taxable income. These rates are applicable to private trusts, political parties and other artificial juridical persons except where maximum marginal rate is specifically made applicable by law.
The levy of surcharge on tax liability and education cess for HUF / AOP/ BOI are similar to individual assessee as discussed above. Surcharge @10% on Income-tax is leviable on Artificial Juridical Persons even where the income is less than Rs.10 lakhs.
Firms
Partnership firms shall be liable to tax at the rate of 30%. Surcharge at the rate of 10% is payable on the income tax calculated. Education Cess @ 2% shall be levied on Income Tax plus surcharge. Therefore, the effective rate of tax including surcharge and cess works out to 33.66%.
Companies
Domestic companies shall be liable to tax at the rate of 30%. Surcharge at the rate of 10% is payable on the income tax calculated. Education Cess @ 2% shall be levied on income tax plus surcharge. Therefore, the effective rate of tax including surcharge and cess works out to 33.66%.
Foreign Companies
The tax rate applicable to a Foreign Company is 40%. Foreign companies are liable to surcharge at 2.5% and education cess of 2%. Therefore, the effective rate of tax including surcharge and education cess is 41.82%. In respect of certain specified income such as royalty, fees for technical services etc., special rates of tax are prescribed at 10%. The ultimate tax liability of a foreign company or any other non resident will depend upon the applicability of Double Taxation Avoidance Agreement, if any, entered into between India and the respective country. The rates prescribed under the Double Taxation Avoidance Agreement or the normal rates prescribed under the Act, whichever is more beneficial to the assessee shall be made applicable.
Co operative Societies
The rates of tax applicable to Co operative societies are as follows:
Income Rate of tax
upto Rs.10,000 10%
Above Rs.10,000 upto 20,000 20%
Above Rs.20,000 30%
No Surcharge is leviable on the Income-tax calculated. However, education cess @ 2% shall be levied on the amount of Income-tax .
Local Authority
In the case of Local Authorities, the rate of income tax specified is 30% on the whole of the total income. No surcharge is leviable on the amount of Income-tax calculated. However, education cess @ 2% shall be levied on the amount of Income-tax.
Income deemed to be received
At present, any interest credited to Recognized Provident Fund inexcess of 9.5% shall be treated as income deemed to be received by the assessee. The percentage of interest has been reduced from 9.5% to 8.5%. Therefore, for the Financial Year 2006 - 07 any interest credited in excess of 8.5% shall be treated as income deemed to be received in the hands of the assessee.
Educational and medical institutions
Any voluntary contribution received by a trust or institution established either wholly or partly for charitable or religious purpose or institution referred to in section 10(21) or 10(23) would be treated as income – Sec. 2(24)(iia). Further, voluntary contribution received by the following institution/trust shall be treated as income in the hands of the respective institution/trust:
a. any university or other educational institution - section 10(23C)(vi);
b. any hospital or other institution - section 10(23C)(via).
Section 10(23C) provides for exemption in respect of educational and medical institutions. The type of institutions dealt with in this section can be classified into three broad categories as follows:
a. Institutions which are wholly or substantially financed by government;
b. Institutions whose annual gross receipts do not exceed Rupees One Crore; and
c. Institutions which are required to obtain approval from Central Government or to be notified by Central Government.
Out of the above three categories, income of the first two categories of the institutions are unconditionally and wholly exempt from tax. Accordingly, they are not required to file return of income. However, income of the institutions covered under third category is exempt from tax only upon compliance of certain conditions specified under relevant section.
Any institutions covered under second category as mentioned above viz., the institutions, whose annual gross receipts do not exceed Rupees One crore, are required to furnish the return of income – Section 139(4C).
Following amendments are made in the case of institutions covered by third category:
a) such institutions shall make an application seeking grant of approval or extension thereof. Such application shall be made at any time during the financial year from which the exemption is sought;
b) any application filed seeking approval for grant of exemption shall be disposed of within 12 months from the end of the month in which the application is received by the Central Government.
Earlier, the approval can be given to these institutions for a maximum period of three years only. With the amendment, these institutions are henceforth not required to renew their approval periodically and instead one time approval is to be granted.
Where the income of these institutions before giving exemption u/s. 10(23C) exceeds the basic non-taxable limit, these institutions are required to get its accounts audited by a chartered accountant and furnish the report along with the return of income.
Any anonymous donation referred to in section 115BBC received by these institutions shall be included in the total income of these institutions.
Charitable trusts
a. According to Section 12A, every trust or other charitable institution is required to get its accounts audited by a chartered accountant if the income of the said trust or institution before claiming exemption u/s. 11 or u/s. 12 exceeds Rs.50000/-. Consequent to increase in basic exemption limit from Rs.50,000/- to Rs.1,00,000/-, such trusts and other charitable institutions are required to get its accounts audited only in case their income exceeds Rs.1,00,000/-.
b. According to Section 13, exemption u/s. 11 and 12 shall not be available in certain cases. This section has been amended to include that no exemption shall be available in case such institutions receives any anonymous donation referred to in section 115BBC– Section 13(7).
c. “Anonymous donation” means any voluntary contribution, 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 and other prescribed particulars.
d. Voluntary contributions received in the following cases are not subject to tax as anonymous donations :
i. voluntary contributions received by any trust or institution created or established wholly for religious purposes; and
ii. voluntary contribution received by any trust or institution created or established wholly for religious and charitable purposes, where such contribution are meant for religious purposes.
e. Anonymous donation shall be subject to tax @ 30% plus surcharge and education cess as applicable. In case, the trust or institution is formed as an association of persons or body of individuals, surcharge of 10% shall be levied where the total income exceeds Rs.10 lakhs. In case the institution is formed as a company (Section 25 Company), surcharge @ 10% shall be levied without any limitations on the total income.
Co-operative banks
Any profits and gains of any business of banking carried on by a co-operative society with its members including providing credit facilities shall be treated as income - Section 2(24)(viia).
Section 80P provides for deduction in respect of income of co-operative societies. Deduction under this section shall not be apply in respect of income of co-operative banks except, where the assessee is a primary agricultural credit society or primary co-operative agricultural and rural development bank.
Definitions
Infrastructure Capital Company
According to sec.2(26A) “infrastructure capital company” means such a company which makes investments by way of acquiring shares or providing long term finance to any enterprise or undertaking wholly engaged in the business referred to in sub-section (4) of sec.80-IA or sub section (1) of sec.80-IAB or an undertaking developing and building a housing project referred to in sub-section (10) sec.80-IB or a project for constructing a hotel of not less than three star category as classified by the Central Government or a project for constructing a hospital with atleast 100 beds for patients.
Infrastructure Capital Fund
“Infrastructure capital fund” means such fund operating under a trust deed registered under the provisions of the Registration Act, 1908 (16 of 1908) established to raise monies by the trustees for investment by way of acquiring shares or providing long term finance to any enterprise or undertaking wholly engaged in the business referred to in sub-section (4) of Sec.80-IA or sub-section (1) of Sec.80-IAB or an undertaking developing and building housing project referred to in sub-section (10) of Sec.80-IB or a project for constructing a hotel of not less than three star category as classified by the Central Government or a project for constructing a hospital with atleast 100 beds for patients - Sec.2(26B).
Exempt Income
Sec.10(15)(viii) Any income by way of interest received by a Non-resident or a Not Ordinarily resident in India, on deposits with Off-shore banking units shall be exempt, if such off-shore banking units are formed in a SEZ.
According to Sec.10(15A), exemption is provided for lease payments received by the Government of a foreign state or a foreign enterprise from an Indian company engaged in the business of operation of aircraft towards lease of an aircraft or an aircraft engine. This exemption is available in respect of lease agreements entered upto 31.03.2006. By virtue of amendment, this date has been extended upto 31.03.2007. Accordingly, any lease agreement entered for the above referred purpose on or after 01.04.2007, the lease income shall be subject to tax.
Any tax paid by an Indian company in terms of the agreement entered into after 31.03.2006 in respect of the income derived by a foreign government or a foreign enterprise approved by the Central Government as a consideration for acquiring for an aircraft or an aircraft engine is exempt u/s.10(6BB). This date has been extended from 31.03.2006 to 31.03.2007.This amendment is consequent to amendment made to Sec.10(15A).
10(38) Any long term capital gains arising from equity oriented mutual funds are required to invest only 50% of the total fund proceeds into equity shares. This limit of 50% has been increased to 65%.
International Sporting Event
10(39) Any specified income, arising from any International Sporting Event held in India, to a person notified by the Central Government. This exemption is available only where such international sporting event –
a. is approved by the International Body regulating the international sport relating to such event;
b. has participation by more than two countries;
c. is notified by the Central Government.
For the purpose of this clause, “the specified income” means the income, of the nature and to the extent, arising from the international sporting event, as notified by the Central Government in this regard.
Establishment constituted under treaty
10(42) Any specified income arising to a body or authority which –
a. has been established or constituted or appointed under a treaty or an agreement entered into by the Central Government with two or more countries or a convention signed by the Central Government;
b. is established or constituted or appointed not for the purposes of profit;
c. is notified by the Central Government.
For the purpose of this clause, “the specified income” means the income, of the nature and to the extent, arising to the body or authority, as notified by the Central Government in this regard.
Members of State Legislature
Section 10(17) exempts the specified allowances received by the Members of State Assembly or Members of Parliament. In respect of Constituency Allowance received by MLAs & MLCs are exempt subject to a maximum of Rs.2,000 per month. Sec.10(17)(iii) has been amended to exempt the entire amount of constituency allowance received.
North Eastern Development Finance Corporation Ltd.
Section 10(23BBF) exempts any income of North Eastern Development Finance Corporation Ltd in a scaled manner. In computing the income of the said assessee the following percentage shall be included in the total income.
Assessment year Taxable Income(%) Exempt Income (%)
2007-08 40% 60%
2008-09 60% 40%
2009-10 80% 20%
For and from A.Y. 2010-11, it may be noted that the exemption is not available and therefore, the entire income shall be taxable.
Investors Protection Fund
Section 10(23EA) exempts income of investors protection fund set up by recognized stock exchanges either jointly or separately as the Central Government may specify by notification in the Official Gazette. Amendment is made to exempt income by way of contributions received from recognized stock exchanges and their members. Therefore, all other income of these funds shall be subject to Income-tax.
Section 10(23G) exempted the dividend, interest and long term capital gain earned by any infrastructure capital company and infrastructure capital fund or a cooperative bank on investment made by way of shares in or long term finance to an undertaking engaged in business of infrastructure facility (section 80IA(4))or housing project (section 80IB(10)) or approved hotel or hospital project. Section 10(23G) is omitted w.e.f. 1.4.2007. The specified income of the above referred persons would be taxable from assessment year 2007-08.
Filing of return by 100% EOU
Section 10B deals with deduction in respect of profits derived from the undertakings engaged in production or manufacture of articles or thing or computer software and registered as 100% EOU. Deduction u/s. 10B shall not be allowed unless the return of income is filed by the eligible undertaking within the due date allowed u/s. 139(1).
Expenses relating to exempt income
Section 14A prohibits any deduction for expenditure incurred in relation to income which does not form part of the total income. Where the assessing officer is not satisfied with the correctness of the claim in respect of such expenditure, he shall determine the amount of expenditure incurred in accordance with such method as may be prescribed. Even when the assessee claims that no expenditure is incurred in relation to the income which does not form part of total income, the Assessing officer has the power to determine the expenditure incurred in relation to the total income in accordance with the method prescribed.
Salary
Any insurance premium paid by the employer in relation to the employee to keep in force an insurance on the health of the employee or his family members under any scheme approved by the Central Government shall be treated as a non-taxable perquisite in the hands of the employee - Proviso to section 17(2)(vi). Insurance premium paid on any scheme approved by Insurance Regulatory and Development Authority shall also qualify for this purpose.
Profits and gains of business or profession
The following income shall be chargeable to tax under the head Profits & Gains of Business or Profession.
1) Any profit on the transfer of the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme, under the Export & Import Policy formulated under Foreign Trade (Development & Regulation Act), 1992 - Sec.28(iiid).
2) Any profit on the transfer of the Duty Replenishment Certificate, being the Duty Remission Scheme, under the Export & Import Policy formulated under Foreign Trade (Development & Regulation Act), 1992 - Sec.28(iiie).
Scientific Research Institution
Section 35 permits a weighted deduction of 125 % of the contributions made to the notified institutions, association, university or college carrying out scientific research or statistical research. The provisions relating to the notification of such institutions, association, university or college are amended as follows:
a) Earlier, the approval can be given to these institutions for a maximum period of three years only. Now, these institutions are not required to renew their approval periodically and instead one time approval is to be granted.
b) Application seeking approval shall be disposed of within twelve months from the end of the month in which the application is received by the Central government.
c) Institutions, association, University or College are required to file their return of income /loss within the due date. – Sec. 139(4D).
d) While framing the assessment, if the assessing officer notices that the institution, association, University or College has violated the conditions subject to which the approval was granted, he may recommend to the Central government to withdraw the approval. After making such inquiry, the Central Government may withdraw the approval and intimate the same to the assessing officer and the institution.
In respect of any sum paid by the assessee to the institutions referred above, deduction allowed u/s. 35 shall not be denied merely on the ground that the approval granted to the above mentioned institution, etc is subsequently withdrawn.
Eligible projects / schemes
Section 35AC allows deduction in respect of payments made by the assessee to eligible projects carried out by the Public Sector Company or local authority or association or institution. In respect of any sum paid by the assessee to the Public Sector Company or Local authority, institutions or association, deduction allowed u/s. 35AC shall not be denied merely on the ground that the approval granted to the abovementioned institution, etc or notification issued is subsequently withdrawn.
Rural Development
Section 35CCA allows deduction in respect of payments made by the assessee to association or institution undertaking any rural development programme. In respect of any sum paid by the assessee to the association or institution mentioned above, deduction allowed u/s. 35CCA shall not be denied merely on the ground that the approval granted to the abovementioned institution, etc is subsequently withdrawn.
Insurance
Section 36(1)(ib) permits deduction for any insurance premium paid by cheque as an employer to keep in force an insurance on the health of his employees under a scheme framed by General insurance corporation of India and should be approved by Central Government. Now, payment made by cheque for the above purpose to any other insurer approved by Insurance Regulatory Development Authority shall also qualify for deduction.
Non-deduction of tax at source
According to section 40(a)(ia), any payment made to a resident by way of interest, commission or brokerage, fees for professional services or fees for technical services or for a contract or sub-contract would be allowed as a deduction only when the tax is deducted and remitted in accordance with the provisions of chapter XVII-B. The scope of this section has been enlarged by amendment to cover any payment of rent and royalties.
“Rent” for this purpose of this clause shall mean the definition of rent as given in section 194I. According to Sec.194I, “rent” is defined to mean any payment, by whatever name called, under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of (either separately or together) any land or building (including factory building) or land appurtenant to the building (including factory building) or machinery or plant or equipment or furniture or fittings whether or not all or any of the above are owned by the payee.
“Royalties” for the purpose of this clause shall mean the definition royalties as given in the Explanation 2 to section 9(1)(vi).
Disallowance u/s. 40A(3)
According to section 40A(3), where an assessee incurs expenditure in respect of which payments were made exceeding Rs.20,000/- by any mode other than crossed cheque or crossed bank draft, 20% of such expenses shall be disallowed u/s. 40A(3). By virtue of amendment, the reference has been shifted to Account payee cheque or Account payee bank draft. Accordingly, in case where any payment for expenditure is made otherwise than by account payee cheque or account payee bank draft they shall be subject to disallowance @ 20%.
Deduction on actual payment
Section 43B allows certain expenses as deduction only in the year of its actual payment irrespective of the method of accounting followed by the assessee. Interest payable on term loans to specified financial institutions and interest payable on any loans and advances to scheduled banks are governed by the provisions of section 43B. There are instances where in case of default of payment of interest by the assessee, such unpaid interest was converted into loan by the financial institutions/scheduled banks. Such conversion of unpaid interest into loan shall not be deemed to be payment of interest for the purpose of Sec.43B and hence, they are disallowable. Accordingly, such interest shall be allowed as deduction only in the year in which it is actually paid.
Capital gains
Cost Inflation Index for the financial year 2006 – 2007 has been notified as 519 by the CBDT.
Section 54EC provides for exemption from capital gain arising from transfer of long term capital asset where the capital gain is invested in certain bonds within a period of six months from the date of transfer of the original asset. Earlier bonds issued by NABARD, National Highway Authority of India, Rural Electrification Corporation Limited and National Housing Bank would qualify for deduction. In respect of investments made on or after 1-4-2006, only bonds issued by National Highway Authority of India and Rural Electrification Corporation Limited alone would qualify for deduction.
Section 54ED provided for exemption from capital gain arising from transfer of long term listed securities or units where the capital gain is reinvested in acquiring equity shares forming part of an eligible issue of capital. This section is made not applicable for the transfer of long term listed securities or units made on or after 1-4-2006.
Other sources
1. Section 56(2)(v) taxes the gifts received exceeding Rs.25,000/- from unknown persons. Certain exceptions were given. To this list of exception, any amount received from the local authority, fund or institution or University or other educational institution or hospital or other medical institution referred to sub-section10(23C) or any trust or institution registered under section 12AA are also added. However, the provision shall apply only upto 31.03.2006.
2. A new clause namely, clause (vi) to Section 56(2) has been introduced to tax the entire gifts in cash received on or after 1-4-2006, where the aggregate value of such gifts received per annum exceeds Rs.50,000/-. Exceptions provided earlier would continue.
3. Any sum of money, the aggregate value of which exceeds Rs.50,000 received from any person without consideration by an individual or Hindu Undivided Family on or after 01.04.2006.
However, exemption is granted in respect of any sum of money received -
a) from any relative; or
b) on the occasion of marriage of the individual; or
c) under a Will or by way of inheritance; or
d) in contemplation of death of the payer; or
e) from a local authority; or
f) from any fund, foundation, university, other educational institution, hospital, medical institution, any trust or institution referred to in Sec 10(23C); or
g) from charitable institutions registered u/s 12 AA.
In respect of above gifts there is no ceiling limit and therefore, entire amount is exempt from chargeability.
The definition of the term “relative” for this purpose is as under:
a) husband or wife of individual;
b) brother or sister of the individual;
c) brother of husband of the individual;
d) brother of wife of the individual;
e) sister of husband of the individual;
f) sister of wife of the individual;
g) brother of father of the individual;
h) brother of mother of the individual;
i) sister of father of the individual;
j) sister of mother of the individual;
k) lineal ascendant of the individual (say, father, grandfather);
l) lineal descendant of the individual (say, son, daughter, grandson);
m) lineal ascendant of the husband of the individual;
n) lineal descendant of the husband of the individual;
o) lineal ascendant of the wife of the individual (say, wife’s father);
p) lineal descendant of the wife of the individual;
q) wife or husband of the relatives listed at serial numbers (b) to (p).
The objective of taxation of any sum received by an individual or HUF without consideration is basically to bring into tax net the bogus transactions in the name of gifts from unknown persons. Keeping this in mind, any gift received from non-relatives has been subjected to tax u/s. 56 (2)(vi). Accordingly, any sum of money received by an individual or HUF during the year, the aggregate of which is exceeding Rs.50,000/- shall be subject to tax in the hands of such individual or HUF.
It needs mention that the aggregate limit of Rs.50,000/- as provided in the section is not in the nature of basic exemption or a threshold limit. Accordingly, in case an individual or HUF receives any sum of money exceeding Rs.50,000/-, which are not covered by exemptions, the whole of such sum shall be subject to tax under the head ‘Income from Other Sources’. For example, in case where Mr. A receives gift of
Rs. 75,000/- from 3 of his friends, the entire amount of Rs.75,000/- shall be chargeable to tax. Assessee cannot claim exemption of Rs.50,000/- as the aggregate sum of money received has exceeded Rs.50,000/- and therefore, whole of such sum received as gift shall be brought to tax. On the other hand, incase the aggregate amount of gift received is Rs.45,000/-, the entire sum shall be exempted as such aggregate amount does not exceed the limit of Rs.50,000/- prescribed under the law.
Deductions under Chapter VIA
a) Section 80AC - Sec. 80IA, 80IAB, 80IB and 80IC deal with deduction in respect of profits derived from eligible undertakings engaged in the specified businesses. Sec. 80AC provides that the deductions under the respective sections shall not be allowed, unless the assessee furnishes the return of income within the due date specified u/s. 139(1).
b) Section 80C - Payments towards certain expenses and contribution to certain investments are eligible for deduction from gross total income u/s. 80C subject to a maximum of Rs.1,00,000/- To these specified investments, one more item is added namely, term deposit with scheduled bank for a period of not less than
5 years made in accordance with the scheme framed and notified by the Central Government in the Official Gazette.
c) Section 80CCC permits deduction of contribution to certain pension funds from the gross total income of an individual. At present an assessee, being an Individual, can claim a deduction of Rs.10,000/- per annum. This limit is increased to Rs.1,00,000/-. Students may note that the aggregate of deduction u/s. 80CCC and 80C shall be restricted to Rs.1,00,000 vide section 80CCE.
d) Section 80GGA permits deduction in respect of payments made to scientific research association or University, college or other institution approved u/s.35 or association or institution approved u/s.35CCA or Public Sector Company approved u/s.35AC. It is now provided that the deduction allowed u/s. 80GGA shall not be denied merely on the ground that the approval granted to the above mentioned association or institutions is subsequently withdrawn.
e) Section 80IA - Reconstruction, Revival of undertaking engaged in the business of Power Generation
The following amendments have been made by the Ordinance in connection with reconstruction or revival of the undertaking engaged in the business of generation, transmission or distribution of power:
i) A new sub clause (40) has been inserted to Sec. 10 to exempt any income of a subsidiary company by way of grant or otherwise received from an Indian holding company, engaged in the business of generation, transmission or distribution of power if such receipt is for settlement of dues in connection with reconstruction or revival of an existing business of power generation. However, the provisions of this clause shall apply only to reconstruction or revival of any existing business of power generation is by way of transfer of such business to the Indian company as notified u/s. 80-IA(4)(v)(a).
ii) Sec.10(41) provides for exemption of any income arising from transfer of capital asset, being an asset of an undertaking engaged in the business of generation, transmission of distribution of power, where such transfer is effected on or before 31-03-2006 to the Indian company notified u/s. 80-IA(4)(v)(a).
iii) Sec.80IA has been amended to provide deduction to an undertaking owned by an Indian company and set up for reconstruction or revival of power generating plant, where such –
A. Indian company is formed before 30-11-2005, with majority equity participation by public sector companies for the purposes of enforcing the security interest of the lenders to the company owning the power generation plant and such Indian company is notified before 31-12-2005 by the Central Government for the purpose of this clause;
B. Undertaking begins to generate or transmit or distribute power before 31.03.2007.
Fringe Benefits Tax
a) Sec. 115W(a) defines the term “employer” to mean –
(i) a company;
(ii) a firm;
(iii) an association of persons or body of individuals, whether incorporated or not, but excluding any fund or trust or institution eligible for exemption under clause(23C) of section 10 or registered under section 12AA;
(iv) a local authority; and
(v) every artificial juridical person.
As per the above definition, the term ‘employer’ includes non-profit companies registered u/s. 25 of the Companies Act, 1956, as the exclusion from the definition of employer is applicable only to a fund or trust or institution eligible for exemption u/s. 10(23C) or registered u/s. 12AA of Income- tax Act.
b. Section 115WB(2) deems certain payments as fringe benefits. One of the deemed fringe benefits is sales promotion including publicity. However, any expenditure on distribution of free samples of medicines or of medical equipments to doctors and any expenditure by way of payment to any person of repute for promoting the sale of goods or services of the business shall not be considered as expenditure on sales promotion including publicity. Another deemed fringe benefit is conveyance, tour and travel. This is split into two parts namely, conveyance (20% of which would be considered as deemed fringe benefit) and tour and travel including foreign travel (5% of which would be considered as deemed fringe benefits).
c. Section 115WB(3) spares perquisites on which tax is paid or payable by the employee from the levy of FBT in the hands of the employer. Benefit in the nature of free or subsidized transport facility or any allowance paid for journeys by the employees from their residence to the place of work and vice versa would also be not liable to FBT in the hands of the employer.
d. Earlier, entire contribution to superannuation fund by the employer would be liable for FBT. Now, the contribution to the superannuation fund in excess of Rs.1,00,000/- per employee alone would be liable for FBT.
e. In the case of assessee engaged in the business of carriage of goods or passengers by aircraft or by ship, only 5% of the expenses incurred in provision of hospitality of any kind and use of hotel, boarding and lodging facilities shall be deemed as fringe benefits provided as against the normal rate of 20%.
Power of authorities
Section 2(44) defines the term “Tax recovery officer”. Tax recovery officer may also exercise or perform such powers and functions, which are conferred on or assigned to an assessing officer under the Act which may be prescribed.
Section 120 - An income tax authority higher in rank may exercise the power and perform the functions of the income tax authority lower in rank, if so directed by the CBDT.
Return of Income
a. The requirement to file return of income for those who satisfy 1/6th economic criteria has been withdrawn. Accordingly, after this amendment, any person other than a company or a firm, whose income does not exceed the basic limit need not file return of income even if he falls under any one of the six economic criteria. Students may note that the amount of gross total income is the criteria for determining whether the assessee is required to file the return of income or not
u/s.139 (1).
b. Medical or educational institutions referred to in section 10(23C)(iiiad) or section 10(23C)(iiiae) whose annual gross receipts do not exceed Rupees One crore, are required to furnish the return of income – Section 139(4C).
c. Institutions, association, University or College approved u/s. 35 are required to file their return of income /loss and within the due date. – Sec.139(4D).
d. According to section 139(9) a return shall be regarded as defective if the proof of tax claimed to have been deducted at source before the first day of 1-4-2006 has not been attached along with the return of income. This time limit is extended upto 1-4-2008. Hence, the assessee is required to file the TDS certificates along with the return of income upto 31.03.2008.
e. Return of income shall not be regarded as defective, if the certificate for TDS was not filed along with the return of income and such certificate is produced within the period of 2 years from the end of the assessment year in which the income covered by the TDS is assessable. Section 155 enables the Assessing Officer to make necessary amendments in the intimation or deemed intimation or assessment order as the case may be, once the TDS certificate is so furnished. Abovementioned provisions dealing with TDS certificates would equally apply for TCS certificates also with effect from assessment year 2007-2008
Permanent Account Number
Section 139A deals with allotment of Permanent Account Number. So far, the assessing officer may allot PAN only for those assessees, who are liable to pay tax. The assessing officer is empowered to allot PAN to any person suo moto in accordance with the prescribed procedure, even if such person does not have any liability to pay tax.
It is mandatory for the deductor /collector of tax to quote PAN of deductee/ collectee in the TDS/TCS certificates. In addition, PAN is required to be quoted in all quarterly returns of TDS/TCS.
Tax Return Preparer
a. Section 139B is inserted with effect from 1-6-2006 enabling the Central Government to frame a scheme by which specified class of persons may file their return of income through a tax return preparer. Tax return preparer (TRP) shall assist the specified class of persons in preparing their return of income and affix his signature on such return.
b. For the purpose of this section :specified class of persons” shall mean any person who is required to furnish the return of income under the Income tax Act, 1961 other than a company or a person whose accounts are required to be audited under section 44AB or under any other law for the time being in force.
c. For the purpose of this section, TRP means an individual authorized to act as a TRP under the scheme, but cannot include a chartered accountant, lawyer entitled to practice in any civil court, an officer of a Scheduled Bank with which the assessee maintains a current account or other account.
d. The scheme framed by the Board may provide for the following:
i. Educational and other qualification to be possessed, training and other conditions to be fulfilled by the person to act as TRP;
ii. Code of conduct for the TRP;
iii. Duties and obligations of the TRP;
iv. The manner in which and the period for which the TRP shall be authorized;
v. Circumstances under which the authorizations given to the TRP may be withdrawn.
Computation of Interest
For the purpose of section 140A, 234A, 234B and 234C, interest shall be computed after considering the amount of advance tax paid and the amount of TDS/TCS. No provisions were available for taking credit of MAT, relief under DTAA, etc. Section 140A, 234A, 234B and 234C are amended to provide that the following shall be considered while computing the interest under the respective sections
a) Tax paid under the provisions of the Act;
b) Amount of TDS/TCS;
c) Relief from double taxation u/s. 90, 90A, 91;
d) Amount of tax credit available u/s. 115JAA.
Issue of Notice
Section 142(1)(i) enabled the assessing officer to issue notice to the assessee requiring him to furnish the return of income in case he had not filed the return within the time allowed u/s. 139(1). Assessing Officer may issue notice to the assessee requiring him to furnish the return of income in case the assessee had not made the return before the due date u/s. 139 (1) or before the end of the relevant assessment year.
Income escaping assessment
Section 148 is the enabling section to initiate the reassessment proceedings u/s. 147. This section enables the assessing officer to issue notice to the assessee requiring him to furnish return of income in case the assessing officer has reason to believe that income of the assessee escaped assessment within the meaning of section 147. Once the notice is issued u/s. 148, all other regular provisions of the Act, dealing with the assessment shall apply for the reassessment proceedings also. Section 143(2) is the enabling provision to make the regular assessment. Notice is required to be served
u/s. 143(2) to initiate assessment proceedings. According to the proviso to section 143(2) notice u/s. 143(2) is required to be served on the assessee within a period of twelve months from the end of the month in which return of income is furnished. In respect of returns furnished on or after 1-10-1991 but upto 30-9-2005 in pursuance of notice issued u/s. 148, any notice issued u/s. 143(2) after the expiry of twelve months from the end of the month in which the return is furnished shall be deemed to be a valid notice.
The time limits for completion of assessment and reassessment have been reduced by three months. Amendments are made in all applicable provisions w.e.f. 1-6-2006.The revised time limit is as under:
Type Existing time limit Revised time limit
Assessment u/s. 143(3) or 144 – applicable from the A.Y.2004-05 onwards Within two years from the end of the relevant assessment year Within 21 months from the end of the relevant assessment year
Reassessment u/s. 147 – notice served on or after 1-4-2005 Within one year from the end of the financial year in which the notice u/s. 148 is served Within 9 months from the end of the financial year in which notice u/s. 148 is served
Assessment in consequence of a finding or to give effect to the order of the CIT(A)/CIT or CCIT or ITAT – order received on or after 1-4-2005 Within one year from the end of the financial year in which the order is received by CCIT/CIT or passed by the CIT Within 9 months from the end of the financial year in which the order is received by CCIT/CIT or passed by CIT
Assessment of FBT u/s 115WE or 115WF Within two years from the end of the relevant assessment year Within 21 months from the end of the relevant assessment year
Reassessment of FBT escaping assessment Within one year from the end of the financial year in which the notice u/s. 11WH is served Within 9 months from the end of the financial year in which notice u/s. 115WH is served
Where search has been initiated or requisition is made u/s. 132A on or after 01-04-2004 With in two years from the end of the financial year in which last of the authorization was executed Within 21 months from the end of the financial year in which the last of the authorization was executed
Connected cases in consequence of search Within two years from the end of the financial year in which last of the authorization was executed or within one year from the end of the financial year in which books of account/ documents are handed over to the jurisdictional assessing officer. Within 21 months from the end of the financial year in which last of the authorization is executed or within 9 months from the end of the financial year in which books of account/documents are handed over to the jurisdictional assessing officer.
Rectifications
Incentive for export is provided in section 10A, 10B and 10BA. One of the conditions to claim deductions under these sections is that export proceeds are required to be brought into India in convertible foreign exchange within six months from the end of the financial year. Deduction is computed in the proportion of export turnover received to total turnover. If the assessee does not receive the export sale proceeds before after the expiry of the stipulated period, the deduction allowable under the respective sections shall be proportionately reduced. In case the assessee subsequently receives the export sale proceeds, the assessing officer shall amend the order of assessment to give effect to the proceeds received after the stipulated time. Such amendment may be made at any time within four years from the end of the financial year in which such income is received – Section 155(11A)
Section 90A – Adoption by Central Government of agreement between specified associations for double taxation relief
Under Section 90, the Central Government may enter into an agreement with any Foreign Government for granting relief in respect of -
(i) income on which tax has been paid both under the Indian Income-tax Act and Income-tax in that country; or
(ii) income tax in India and under the corresponding Law in force in that country to promote mutual economic relations, trade and investment.
The agreements may also provide for avoidance of double taxation, exchange of information for the prevention of evasion or avoidance of income tax or investigation of such cases or for recovery of taxes.
Similar to Section 90, a new Section 90A has been introduced to provide for grant of Double Taxation Relief in respect of an agreement entered in to between any specified associations in the specified territory outside India. However, in order to be accorded for Double Taxation Avoidance Relief, such agreement shall be notified by the Central Government by way of notification in Official Gazette.
However, the charge of tax in respect of company incorporated in the specified territory outside India at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such company
For the purpose of this section –
‘Specified association’ means any institution, association or body whether incorporated or not functioning under any law for the time being in force in India or the laws of the specified territory outside India, which may be notified as such by the Central Government.
‘Specified territory’ means any area outside India, which may be notified as such by the Central Government.
Section 40(a)(ii) disallows any sum paid on account of any rate or tax levied on profits or gains of any business or profession. It is clarified to include any sum eligible for relief of tax u/s. 90 or 90A or deduction of tax u/s. 91.
Tax on Book Profit (MAT)
Section 115JAA provides for carry forward of tax paid on book profit u/s. 115JA in excess of the tax payable under normal computation. This credit was known as MAT credit. The amount of MAT credit is eligible to be carried forward for immediately succeeding 7 assessment years instead of 5 assessment years allowed earlier.
Rate of tax on book profit prescribed u/s. 115JB has been hiked from 7.5 % to 10%. Further, any long term capital gain arising from transfer of listed securities or units otherwise claimed as exempt from tax u/s. 10(38) would not be eligible for reduction while computing book profit u/s. 115JB.
For computing book profit u/s. 115JB, certain adjustments are required to be made on net profit as per profit and loss account. By virtue of amendment, following further adjustments shall be made:
a) the amount of depreciation debited to profit and loss account shall be added back to the net profit;
b) amount of depreciation not attributable to revaluation shall be reduced;
c) amount of revaluation reserve credited to the profit and loss account not exceeding the amount of depreciation attributable to revaluation shall be reduced.
In view of the above amendment, that portion of depreciation on the revaluation of assets would not be eligible for deduction while computing book profit under section 115JB.
Mutual Funds
According to Section 115R, a Mutual fund would be liable to pay tax on the income distributed by it to its unit holders. Upto 31.05.2006, the tax on dividend distribution was applicable for any income distributed by “open ended” equity oriented funds. With effect from 01.06.2006, any income distributed by any equity-oriented, either open-ended or close-ended funds are exempted from the levy of dividend distribution tax under section 115R.
‘Equity oriented fund’ means, any fund where the investible funds are invested by way of equity shares in domestic companies to the extent of more than 65% of total proceeds of such fund.
Tax deduction at source
Section 194-I requires the assessee to deduct tax at source in case the amount payable by way of rent exceeds Rs.1,20,000 per annum. This section is applicable for the rent payable under any lease or sub-lease or tenancy or any other agreement or arrangement for the use of land or any building together with furniture, fittings whether or not such building is owned by the payee. The term “rent” is amended to mean any payment for use of (either separately or together) any land or building (including factory building) or land appurtenant to a building (including factory building) or machinery or plant or equipment or furniture or fittings whether or not any or all of the above are owned by the payee. As a result of this amendment, even lease rent payable for vehicle; machinery; etc., would also be attracting TDS.
Section 194-J requires the assessee to deduct tax at source in case of payment of fees for technical services or professional services. Consequent to amendment the following payments are covered by TDS provisions under section 194-J:
a) royalties – as defined under section 9(1)(vi); and
b) non-competing fees referred to in section 28(va)
“Royalties” for the purpose of this clause shall mean the definition royalties as given in the Explanation 2 to section 9(1)(vi). Explanation 2 to section 9(1)(vi) defines royalties as:
“royalty” means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head capital gains) for
i. the transfer of all or any rights (including the granting of a license) in respect of the patent, invention, model, design, secret formula or process or trade mark or similar property;
ii. the imparting of any information concerning the work of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property;
iii. the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;
iv. the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;
iva. the use or the right to use any industrial, commercial or scientific equipment but not including the amounts referred to in Sec.44BB;
v. the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including films or video tapes for using connection with television or tapes for using connection with radio broadcasting, but not including consideration for the sale, distribution or execution of cinematographic films; or
vi. the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v).
“Non- Compete fees” for the purpose of this clause shall mean the fee referred to under section 28(va).
Fee referred under section (va) means any sum received or receivable in cash or kind under an agreement for not -
i) carrying out any activity in relation to any business;
ii) sharing any know-how, patent, copyright, trade-mark, license, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services.
Person responsible for deduction or collection of tax at source is liable to issue Certificate for the taxes Deducted at Source. In order to get credit for payment of tax, such certificates are required to be attached with the return of income of the person from whom the tax is deducted or collected. These provisions were originally applicable for the tax deductions / collections made upto 31.03.2006. Now this time limit is extended upto 31-03-2008 – Section 199 (3) and Section 203 (3).
If any person responsible for deduction of tax at source does not deduct the whole or any part of the tax or after deducting, fails to pay the tax within the due date, he shall be liable to pay simple interest at the rate of twelve percent per annum on the amount of such tax from the date on which such tax was deductible to the date on which the tax was actually paid. Section 201(1A) has been amended to provide that such interest shall be paid by the assessee before furnishing the quarterly statement for each quarter.
Section 2(37A) defines the term ‘Rate of tax’. Clause (iii) of section 2(37A) is amended whereby, for the purpose of deduction of tax at source u/s. 195, rate of tax shall mean rate of tax specified in the Finance Act or rate of tax specified in an agreement u/s. 90 or u/s. 90A.
Tax collection at Source
Section Description
206C (4) The buyer or licensee or lessee is entitled to take credit of the tax collected at source and remitted to the account of the Central Government, on furnishing the certificate issued by the seller.
It may be noted that there is no need to furnish the certificate of tax collection in respect of tax colleted on or after 01.04.2008. The credit shall be available on the basis of the statement issued by the prescribed income-tax authority or person authorized by such authority.
206C (5) Every person collecting tax at source is required to furnish to the buyer or licensee or lessee, a certificate to the effect specifying the amount collected, the rate at which the tax has been collected and other prescribed particulars.
No certificate is required to be issued by the seller, in case where the tax has been collected on or after 01.04.2008. The prescribed income-tax authority or person authorized by such authority shall issue after the end of each financial year, beginning on or after 01.04.2008, a statement in the prescribed form, to the buyer or licensee or lessee, indicating the tax collected and other prescribed particulars.
206C (6A) The person responsible to collect tax at source shall be deemed to be an assessee in default, in case if he fails to collect the whole or any part of the tax or after collecting fails to pay the tax.
Penalty u/s. 221 shall not be levied in case the Assessing Officer is satisfied that there exists a good and sufficient reason for the failure to collect and pay tax.
206C (7) Any person responsible to collect the tax shall be liable to pay the tax to the credit of the Central Government even if he fails to collect the tax. If the seller does not collect the tax or does not remit the tax after collection, he shall be liable to pay interest at the rate of 1% per month or part of the month from the date on which such tax was collectible to the date on which the tax is actually paid.
Such interest is required to be paid by the seller before furnishing the quarterly statement for each quarter.
206C (8) Where the seller has failed to pay tax collected at source along with the interest, the same shall be a charge on the assets of the seller.
Calculation of interest u/s. 234A, 234B and 234C
For the purpose of section 234A, 234B and 234C, interest shall be computed after considering the amount of advance tax paid and the amount of TDS/TCS. Hitherto, relief was not available to the assessee for taking credit of MAT, relief provided under DTAA, etc. Section 234A, 234B and 234C have been amended to provide credit for the following taxes while computing the interest under the respective sections:
a) Relief from double taxation u/s. 90, 90A or deduction from double taxation u/s 91;
b) Amount of MAT credit allowed to be set off u/s. 115JAA.
Penalty
Section 206C envisages collection of tax at source in respect of transactions involving certain specific nature of goods or nature of contract. Section 271CA provides for imposition of penalty on any person who fails to collect tax at source. Such penalty shall be imposed by the Joint Commissioner equal to the amount of tax the assessee failed to collect at source. In case the assessee proves that there was a reasonable cause for such failure, which warranted the issue of show cause notice for levy of penalty under section 271CA, no penalty can be imposed by virtue of Section 273B.
Section 272A imposes penalty of Rs.100 per day in a case where the annual return of Tax deducted at source or Tax collected at source has not been furnished within the stipulated time limit. The amount of penalty leviable under this section is restricted to an amount equal to the sum of tax deducted or tax collected at source. The penalty under section 272A is now leviable in respect of defaults in filing quarterly statements of tax deduction at source in accordance with section 200(3) or quarterly statement tax collection at source contemplated under section 206C(3).
Where a person fails to obtain Tax Deduction Account Number or Tax Collection Account Number or Tax Deduction and Collection Account Number penalty is leviable under section 272BB equal to a sum of Rs.10,000/-. In case a person quotes a number-
a) which is false; or
b) which he either knows of believes to be false; or
c) which he does not believe to be true
such person shall be leviable with a penalty to the extent of Rs.10,000/- under section 272BB(1A). However, it needs mention that like other penalty provisions, the assessing officer shall give opportunity of being heard before passing the penalty order – Sec.272BB(2).
Section 275 fixes the time limit for levy of penalty orders. According to this section, penalty order can be passed within a period of 6 months from the end of the month in which the appeal or revision is made in the assessment order which gives rise to the penalty proceedings. This provision gave the benefit to the assessee to face penal consequences only if the appeal or revision is finally decided. Now a new sub-section (1A) is introduced in section 275 whereby the penalty orders passed can be modified to give effect to the Appellate Orders or Revision Orders against the assessment orders which gave rise to penalty orders. Time limit for modifying/amending the penalty order is fixed as 6 months from the end of the month in which Appellate Order is received by the Chief Commissioner or Commissioner of Income tax or Revision Order passed by the Commissioner of Income tax. Order passed under section 275(1A) is also an appealable order – Section 246A(1)(ja)
Appealable Orders
Section 246A(1) provides a list of orders against which an appeal may be filed by an aggrieved assessee to the Commissioner of Income Tax (Appeals). By virtue of amendment to Section 246A(1) appeal may be filed against any order imposing or enhancing penalty under section 275(1A) also
Round off of tax
Section 288B talks about rounding off amount payable or refund due. According to the amended section 288B, any amount payable and the amount of refund due shall be rounded off to the nearest multiples of ten rupees and for this purpose any part of the rupee consisting of paise shall be ignored and thereafter, if such amount is not multiples of ten, then, if the last figure in that amount is five or more, the amount shall be increased to the next higher amount which is multiple of ten and if the last figure is less than five, the amount shall be reduced to the next lower amount which is multiple of ten.
Special Economic Zone
Tax treatment contemplated in the case of Special Economic Zone may be classified as follows:
A) for the undertaking located in Special Economic Zone;
B) for the developer or person maintaining the Special Economic Zone; and
C) for the offshore banking unit and international financial services centre located in Special Economic Zone
A. For the undertaking located in Special Economic Zone:
1. Sec. 10AA - New undertakings in Special Economic Zones
Eligible Assessees
An entrepreneur who begins to manufacture or produce articles or things or provides services in SEZ as defined under Special Economic Zones Act, 2005 are eligible for exemption. This section is applicable effective from Assessment Year 2006-07.
Computation and period of deduction
i) Deduction is available in respect of profits and gains derived from the export of services, articles or things manufactured or produced.
ii) The deduction shall be computed in respect of the profits of the undertaking on the following basis:
Export Turnover of the undertaking x Total profits of the Undertaking
Total Turnover of by the undertaking
The profits and gains derived from on-site development of computer software including services for development of software outside India shall be deemed to be export profits eligible for deduction.
iii) the deduction in respect of profits and gains derived from export of articles or things or computer software, providing of services are as follows:
Period Deduction
First 5 consecutive Assessment years 100% of the profits
Next 5 consecutive Assessment years 50% of the Profits
Next 5 consecutive Assessment years Any amount transferred to “Special Economic Zone Re-investment Reserve Account” or 50% of the profits, whichever is lower
Conditions for utilizing the Special Economic Zone Re-investment Reserve Account
1. The reserve account shall be utilized only for the following purposes:
i) for acquiring machinery or plant which is first put to use before the expiry of a period of three years following the previous year in which the reserve was created; and
ii) until the acquisition of the machinery or plant as afore said, for the purposes of the business of the undertaking other than for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India
2. Assessee shall furnish the particulars of machinery along with the return of income during the assessment year in which it was first put to use.
Withdrawal of exemption
Incase of violation of the above conditions, the exemption under this section shall be withdrawn. The following shall be the consequences:
Violation of Condition Tax implications
1. In case special reserve is utilised for any purpose other than the specified purpose. The amount so utilised shall be chargeable to tax in the year of such utilization.
2. In case the reserve is not utilised before the expiry of 3 years from the end of the previous year in which reserve is created. The amount of unutilized reserve shall be deemed to be the profits in the year immediately following the period of 3 years.
Conversion of FTZ/EPZ to SEZ
1) Where a unit initially located in any free trade zone or export processing zone is subsequently located in a Special Economic Zone by reason of conversion of such free trade zone or export processing zone into a Special Economic Zone, the period of ten consecutive assessment years shall be reckoned from the assessment year relevant to the previous year in which the Unit began to manufacture, or produce or process such articles or things or services in such free trade zone or export processing zone
2) On the other hand, where a Unit initially located in any free trade zone or export processing zone and has completed the period of ten consecutive assessment years is subsequently located in a Special Economic Zone by reason of conversion of such free trade zone or export processing zone into a Special Economic Zone, it shall not be eligible for any further deduction under sec 10AA.
Carry forward of losses
Any business loss u/s 72(1) or loss under the head ‘Capital Gains’ u/s 74 of the undertaking shall be allowed to be carried forward and set off in subsequent assessment years.
Audit Report
The Assessee shall furnish a report of a Chartered Accountant certifying that the deduction claimed is correct along with the return of income.
Other Points
1) In case of transfer of any asset or goods from eligible unit to any other business which is carried on by the assessee or by any person closely connected with the assessee, the assessing officer, if he feels necessary, may adopt the fair market value of the goods.
2) No deduction shall be allowed u/s.80IA or 80IB in respect of the profits exempted under this section.
3) For the purposes of computing depreciation u/s.32 the written down value shall be considered as if the depreciation has been actually allowed during all the previous years.
4) Deductions and expenses as provided under sections 32 to 36 shall be deemed to have been allowed to the eligible undertaking.
Amalgamations / Demerger of units
Where any unit situated in a SEZ, which is claiming exemption, has been transferred to a new unit by way of Amalgamation or Demerger, then:
i) in case of amalgamation, the amalgamated unit shall be eligible for exemption. However, the amalgamating unit ceases to claim exemption.
ii) in case of demerger, the resulting unit shall be eligible for exemption. However, the Demerged unit shall not be eligible for exemption.
Definitions
1) ‘Export turnover’ means the consideration in respect of export by the undertaking, being the Unit of articles or things or services received in, or brought into, India by the assessee but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things outside India or expenses, if any, incurred in foreign exchange in rendering of services (including computer software) outside India.
2) ‘Export’ in relation to the ‘Special Economic Zones’ means taking goods or providing services out of India from a Special Economic Zone by land, sea, air, or by any other mode whether physical or otherwise
3) ‘Manufacture” shall have the same meaning as assigned to it in clause (r) of section 2 of the Special Economic Zones Act, 2005.
4) ‘Special Economic Zone’ and ‘Unit’ shall have the same meanings as assigned to them under clause (za) and (zc) of section 2 of the Special Economic Zones Act.
2. Sec. 54GA – Exemption of capital gains on transfer of assets
1. Sec. 54GA provides for exemption from capital gains in case of shifting of industrial undertaking to any Special Economic Zone. In order to avail the exemption, following conditions shall be fulfilled :
a) A capital asset in the nature of machinery, plant, building, land or any rights in building or land used for the purpose of industrial undertaking situated in an urban area is transferred in any Special Economic Zone;
b) Such transfer of capital asset is effected in the course of, or in consequence of the shifting of undertaking to any Special Economic Zone.
c) Within a period of one year before or three years after the date on which such transfer took place, the assessee –
i. purchased machinery or plant for the purposes of business of industrial undertaking in the Special Economic Zone to which the said undertaking is shifted;
ii. acquire building or land or construct building for the purposes of his business in the SEZ;
iii. shifted the original assets and transferred the establishment of such undertaking to the SEZ; and
iv. incurred expenses on such other purposes as may be specified in a scheme framed by the Central Government for the purposes of this section.
2. The amount of exemption under Sec. 54GA shall be restricted to the least of the following :
a) the amount of capital gains derived on account of transfer of capital assets; or
b) the amount of cost and expenses incurred in relation to all or any of the purposes mentioned above – clause (i) to (iv)
3. Where the amount of capital gain is not utilized for purchase of new asset as mentioned above till the due date for submission of return of income, the amount of capital gain shall be deposited in Capital Gains Account Scheme in any bank or institution. The proof of making deposit in Capital Gains Account Scheme shall be submitted along with the return of income in order to avail the exemption.
4. Where the new asset is transferred within a period of 3 years from the date of its acquisition, the cost of such asset shall be reduced by the amount of capital gain exempted earlier and the short term capital gains shall be computed after deducting such reduced cost of acquisition.
3. Section 92C deals with computation of arm’s length price in case of international transaction entered into by the assessee with its associated enterprises. In case where the total income of the assessee is enhanced after computation of income under section 92C, no deduction u/s. 10A or 10B or under chapter VI-A shall be allowed against such enhanced income. Amendment is made to provide that no deduction under section 10AA shall be allowed in case the income is enhanced due application of Section 92C.
4. Section 115JB imposes tax on book profit where the tax payable as per the normal computation of income is lesser than the tax on book profit. According to sub-section 6 the provisions of section 115JB shall not apply to the income accrued or arising from any business carried on or services rendered by an entrepreneur located in Special Economic Zone.
B. For the developer or person maintaining the Special Economic Zone:
1. Sec.80IAB - Deduction for Development of Special Economic Zones
Eligible Assessee
Any assessee being a Developer engaged in the business of developing a SEZ notified on or after 01.04.2005 is eligible for deduction under this section.
Period of Deduction
The deduction shall be for a period of 10 consecutive years out of 15 years beginning from the year in which the Special Economic Zone has been notified.
Quantum of Deduction
100% of the profits and gains derived from the business of developing a SEZ shall be exempt.
Other conditions
i) where the undertaking is already availing deduction u/s.80IA, the deduction under this section shall be restricted only for unexpired period of ten years.
ii) where the undertaking in SEZ has been transferred to another assessee, the deduction under this section can be continued to be claimed by the transferee.
iii) In case of amalgamations or demerger, the benefit of this section shall extend to the amalgamated or resulting company respectively.
2. Section 115JB imposes tax on book profit where the tax payable as per the normal computation of income is lesser than the tax on book profit. According to sub-section 6 the provisions of section 115JB shall not apply to the income accrued or arising from any business carried on or services rendered by a developer located in Special Economic Zone.
3. Section 115O provides for tax on distributed profits of domestic companies. However, this section shall not apply to undertakings or enterprises engaged in developing or developing and operating or developing, operating and maintaining a Special Economic Zone which distributes dividend from its current income. This shall be effective from the assessment year 2005-06 onwards.
C. For the offshore banking unit and international financial services centre located in Special Economic zone
1. Sec.80LA – Deduction for Offshore Banking Units
a) The deduction under this section is available to an assessee being
i) Schedule bank, or any bank incorporated outside India and which owns an off-shore banking unit in a Special Economic Zone; or
ii) a unit of a International Financial Services centre.
b) The deduction shall be allowed to such assessee in respect of their income received by way of convertible foreign exchange from off-shore banking unit situated in Special Economic Zone as detailed here below:\
i) 100% of such income for 5 consecutive assessment years in which permission to operate such unit has been obtained under Banking Regulation Act or SEBI Act or any other Statute; and thereafter.
ii) 50% of such income for next 5 consecutive assessment years.
c) The deduction shall be allowed only if the assessee furnishes along with the return of income -
i) report from a chartered accountant about the correctness of the claim of deduction in Form 10CCF; and
ii) a copy of the permission obtained from the Reserve Bank of India.
2. Section 115JB not applicable
Section 197A(1D) – no need to deduct tax at source in case of deposits or borrowing from non-resident or not ordinarily resident in India
Amendment to Fourth Schedule
Under the existing provisions contained in Rule 3 of Part A of the fourth Schedule, the chief Commissioner or the Commissioner may accord recognition to any provident fund which, in his option satisfies the conditions prescribed in rule 4 and rules made by the Board in this behalf, and may, at any time, withdraw such recognition if, the provident fund contravenes any of such conditions.
A proviso is inserted in sub-rule (1) of the rule 3 to provide that in a case where recognition has been accorded to any provident fund on or before 31st March ‘06 and such provident fund does not satisfy the condition set out in clause (ea) of rule 4, and any other conditions which the Board may, by rules specify in this behalf, the recognition to such fund shall be withdrawn, if such fund does not satisfy such conditions on or before 31st March ’07.
Under the existing provisions contained in rule 4 of Part A of the Fourth Schedule, relating to conditions to be satisfied by recognised provident funds, a provident fund may receive and retain recognition if it satisfies certain conditions specified in the said rule.
A new clause (ea) in the rule 4 is inserted to provide for one more condition that the fund of an establishment shall be such to which the provisions of sub-section (3) and (4) of sec.1 of the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 are applicable and such establishment has been exempted under section 17 of the said Act from the operation of all or any of the provision of any scheme referred to in that section.
Wealth Tax
The time limits for completion of assessment and reassessment have been reduced by three months. Amendments are made in all applicable provisions w.e.f. 1-6-2006.The revised time limit is as under:
Type Existing time limit Revised time limit
Assessment u/s. 17A(1) – applicable from the A.Y.2004-05 onwards Within two years from the end of the relevant assessment year Within 21 months from the end of the relevant assessment year
Reassessment u/s. 17A(2) –notice served on or after 1-4-2005 Within one year from the end of the financial year in which the notice u/s. 17(1) is served Within 9 months from the end of the financial year in which notice u/s. 17(1) is served
Assessment in consequence of a finding or to give effect to the order of the CIT(A)/CIT or CCIT or ITAT – order received on or after 1-4-2005 Within one year from the end of the financial year in which the order is received by CCIT/CIT or passed by the CIT Within 9 months from the end of the financial year in which the order is received by CCIT/CIT or passed by CIT
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