CA Vinamar Gupta

CA Vinamar Gupta

In this article an attempt has been made to peep into scope of some important direct tax proposals contained in Budget 2017 as under

Changes in Tax Rates Vide Union Budget 2017 applicable for Financial Year 2017-18

1 Tax rate for AY 2018-19 for Individual, HUF, BOI, AOP ‘s first slab i.e. from 2.5 lacs to 5 lacs shall be 5% only

1. It was 10% till AY 2017-18. Hence tax on 2.5 lacs shall get reduced from 25000 to 12500. If we add cess @ 3% on Rs. 12500/- = Rs. 375, total saving per assesse comes to Rs. 12875.

2. Similarly for senior citizen (age above 60 years) enjoying exemption limit of 3 lacs, tax rate shall be 5% from 3 lacs to 5 lacs.

3. For super senior citizen (age above 80 years) rate is already NIL up to 5 lacs

2 U/s 87A, there is rebate of income tax for asessees having income up to Rs. 5,00,000. From AY 2018-19, this rebate shall be available only for individuals having income up to Rs. 3,50,000/-

Further up to AY 2016-17, rebate u/s 87A was restricted to Rs. 2000/- . Rebate was later increased to Rs. 5000/- w.e.f. AY 2017-18. Now, w.e.f. AY 2018-19, rebate has been deflated to Rs. 2500/-.

It means, having regard to exemption limit of Rs. 250000, tax could have bill NIL for Income up to Rs. 270000 up to AY 2016-17. For AY 2017-18, tax could be NIL on Income up to Rs. 300000. For AY 2018-19, tax again would be NIL up to 300000, because of tax rate being reduced to 5%.

Hence the reduction in tax rate by 5% has been compensated by reducing rebate u/s 87A

3 10% Surcharge for Individual, HUF etc on Income more than 50 lacs

1. At present surcharge on Individual, HUF,AOP, BOI for Income exceeding Rs. 1 crore is @ 15% for AY 2017-18. For firms, cooperative societies and local authorities it is @ 12%.In case of domestic company the surcharge is 7% for Income exceeding 1 crore and for Income more than 10 crores it is 12%. For foreign company surcharge is 2% from 1 crore to 10 crore and 5% on Income more than 10 crore

2. Now, wef AY 2018-19, the surcharge rate for Individual, HUF,AOP,BOI on Income exceeding Rs. 50 lacs up to Rs. 1 crore shall be 10%. Surcharge shall however be subject to marginal relief. On Income above Rs. 1 crore it shall continue to be 15%. For firms, cooperative societies,companies surcharge shall remain unchanged

4 General Corporate tax rate for SME reduced to 25%

1. For AY 2017-18, In case of domestic companies where its total turnover or the gross receipt in the previous year 2014-15 does not exceed five crore rupees tax was fixed at @ 29%.

2. Further section 115BA has been incorporated for domestic manufacturing companies set up and registered on or after 01-03-2016, where in income tax at the option of company [exercisable before due date u/s 139(1)]shall be computed @ 25% wef AY 2017-18 subject to foregoing of following incentives:

a) Deduction u/s 10AA i.e. Deduction for units in SEZ

b) Deduction u/s 32(1)(iia) i.e. Additonal Depreciation @ 20%

c) Deduction u/s 32AC for investment in new plant and machinery exceeding 100 crores/25 crores

d) Deduction u/s 32AD for Investement in Plant and Machinery in notified areas in Bihar, Telangana, West Bengal

e) Deduction u/s 33AB for Tea Development, Coffee Development etc

f) Deduction u/s 35AD for capital expenditure in specified businesses

g) Deduction u/s 35AC for expenditure on eligible projects

h) Deduction u/s 35(2AA) and (2AB) for research and development

i) Expenditure on agriculture extension projects u/s 35CCC

j) Expenditure on skill development project u/s 35CCD

k) Chapter VI-A Deductions other than deduction u/s 80JJAA for additional wages to employees

l) Loss of earlier years attributable to above sections is not set off .

3. Depreciation u/s 32 to be determined in prescribed manner

4. Now wef AY 2018-19, the rate of income-tax shall be twenty five per cent. of the total income if the total turnover or gross receipts of the previous year 2015-16 does not exceed fifty crore rupees and in all other cases the rate of Income-tax shall be thirty per cent. of the total income. Also no change in surcharge i.e. 7% on above Rs 1 crore and 12% above 10 crore

5. For foreign Companies rate is same as old i.e. 40%.

6. However in case of a company incorporated after 01-04-2016, it is doubtful whether the concessional tax treatment of 5% shall apply.

7. Suggestion: As per Para 156 of Budget Speech of Finance Minister, this change is being proposed In order to make MSME companies more viable and also to encourage firms to migrate to company format. Tax rate for new companies incorporated after 01-04-2016, should, there also be allowed at 25%.

Amendment in Dividend Income  Taxation provision vide union Budget 2017

5 Scope of tax on dividends on High End assesse expanded

[S.115BBDA amended w.e.f. AY 2018-19]

1. Finance Act 2016 introduced S. 115BBDA by which income by way of dividend in aggregate exceeding Rs. 10 lakh is chargeable to tax at the rate of 10% on gross basis in case of a resident individual, Hindu undivided family or firm.

2. Now wef AY 2018-19, 10% tax on dividend in excess of 10 lacs shall be applicable to other residents assesse also except domestic companies, trust u/s 12AA , and institutions covered by 10(23C)(iv),(v),(v), (via) i.e. all resident AOP/BOI, local authorities, artificial juridical persons shall now get taxed

3. Hence educational /medical institutions having gross receipts more than 1 crore shall be exempt but those having gross recipts below 1 crore or those substantially financed by the government i.e. those covered by 10(23C)(iiiab), (iiiac), (iiiad), (iiiae) shall be taxed on dividends exceeding Rs. 10 lacs.

4. Since only resident assesses are covered, foreign companies are not covered by this taxation.

5. This amendment shall severly affect family and ESOP trusts who had amassed large sharehldings of shares and were earning dividends running into several crores.

6 Dividend Income exceeding Rs. 10 lacs chargeable @ 10% has been exempted from Interest u/s 234C [ Inserting clause (d) in first proviso to S. 234C w.e.f. AY 2017-18

As per section 234C, tax is payable on 15th June,15th September, 15th December and 15th March @ 15%, 45%,75% and 100%. Since dividend is declared in the month of September and it is only when dividend is declared, distributed or paid , it becomes taxable in the hands of assesse. Hence Installments of 15th June and 15th September shall not entwine the tax component of dividend to be declared in later point of time..

Hence dividend in excess of 10,00,000 has been exempted from Interest u/s 234C . Apart from this, capital gain, lottery, horse race income and first time business income is already exempt u/s 234C. However exemption aforementioned is subject to condition that :

a) Whole of tax due in previous installments is deposited as part of remaining installments.

b) If no installments are pending, then whole of tax is deposited on or before 31st March.

Changes in Real Estate Taxation vide union Budget 2017

7 Annual Value of Unsold Building of developers [S. 23(5) inserted w.e.f AY 2018-19]

In case of unsold stock of building and land appartent, section 23(1)(a) applies and annual value is assessed at sum for which the property might reasonably be expected to let from year to year.

Also no vacancy allowance is available for such properties u/s 23(1)(c) because it applies only to the property which was let but was vacant during whole or part of the previous year.

As per Punjab and Haryana High Court in Sushma Singla [2016] 76 taxmann.com 349 (Punjab & Haryana) dated 23-12-2016 : Annual value of properties which are more than one, owned by assessee and which admittedly remained vacant throughout previous year would not be assessed under section 23(1)(c) but under section 23(1)(a) and annual value would be determined notionally

In case of builders having developed building for future sale and remaining unsold tax get attracted even though intent is to sell and not hold it for rent.

As per Delhi High Court in Ansal Housing and Construction Ltd. 72 taxmann.com 254 and Bombay High Court in Sane and Doshi Enterprises 77 taxmann.com 288, rental income received from unsold portion of property constructed by assessee, a real estate developer, is assessable as income from house property and not business income

Supreme Court has admitted SLP on the both High Court decisions.

Ø Hence section 23(5) inserted to provide that Where the property consisting of any building or land appurtenant thereto is held as stock-in-trade

Ø and the property or any part of the property is not let during the whole or any part of the previous year,

Ø the annual value of such property or part of the property,

Ø for the period up to one year from the end of the financial year in which the certificate of completion of construction of the property is obtained from the competent authority,

Ø shall be taken to be nil.”.

Comments : 1. However the above exemption is not available for property not held as stock in trade. However where land and building is not stock in trade there may be intention to let out the property, though there is no actual letting out. ITAT Pune in Vikas Kehshav Garud ITA 747/PN/2014 has held that u/s 23(1)(c), letting out includes “intention to let out”.

2. Further exemption available for limited period only. If property is not sold with in that period, tax on notional annual letting value shall be attracted.

3. In case property is complete but completion certificate is not obtained, in that case, whether tax shall get attracted. Perhaps yes, as per strictum.

4. In case of Chennai Properties (Supreme Court), there was no other income of the assessee except the income from letting out of properties. In such circumstances, it was held by SC that income can not be assessed under head “Income from House Property”. The above amendment does not appear to be disturbing the ratio of this decision, because here properties in question are not held as stock –in-trade but for business of letting them for rent.

8 Scope of TDS on Rental Income from Immovable Property Expanded [New Section 194-IB introduced w.e.f. 01-06-2017]

1. At present u/s 194-I, tds on rent of immovable property @ 10% is applicable where rent is more than 1,80,000/- . However as per 2nd Proviso to Section 194-I, tds on rent is not required to be deducted by Individual or HUF whose turnover/recipts from business/profession are lesser than 1 crores/50 lacs.

2. Even Individual/HUFs required to get accounts audited for not following presumptive taxation are not required to deduct tax.

3. However now new section 194-IB is proposed to be introduced for rent paid/payable by individual/HUF other than Individual/HUF whose turnover exceeded audit limits of 1 crore/ 50 lacs in preceeding year for use of land and/or building. This section is not applicable to rent on movables unlike S.194I.

4. Hence the TDS shall be applicable on following Individuals/HUF:

a) Individuals/HUF paying presumptive tax u/s 44AD/44ADA

b) Individual/HUF not following presumptive taxation and hence required to get their accounts audited.

c) Individual/HUFs whose turnover in current year exceeds 1 crore/50 lacs, hence not covered by 2nd proviso to S.194-I

5. This TDS is applicable where rent is more than Rs. 50,000 for month or part of month, while u/s 194-I monetary limit is Rs. 1.80 lacs for whole year.

6. Firms/Companies/AOP/BOI paying rent more than 50,000 per month but rent for full year is lesser than Rs. 180000, say e.g. building was occupied in last quarter of the financial year, shall not be required to pay TDS

7. TDS rate on rent u/s 194-IB has been pegged at 5% as against TDS @ 10% in case of 194-I.

8. As per 194-IB(2) TDS shall be deducted from rent of last month of the previous year, at the time of credit or payment of rent of last month. If last month of tenancy falls before last moth of previous year i,e rent agreement expiring before March, then tds shall be deducted from last month of tenancy.

9. As per 194-IB(3), TAN Number need not be obtained.

10. As per 194-IB(4), where payee does not have PAN and tax @ 20% is required to be deducted but TDS amount itself exceeds the rent amount, then tds shall be restricted to rent for last month of tenancy. It means TDS shall be 8.33% i.e. (1/12),if rent is evenly paid.

Comments:

1. In case, PAN is available and last month rent is lesser than 5% of annual rent, then the benefit of 194-IB(4) is not available. But then how shall tds be collected

2. Further if PAN is not available and rent for last month is knowingly kept at lower amount , still the revenue shall suffer.

3. Further, If rent for last moth is reduced below Rs. 50,000/- then section 194-IB itself shall become inapplicable to such payment, then whether tds provisions u/s 194-IB shall become infructuous ?

4. Audit Limit u/s 44AB(a) is still at 1 crore u/s 44AB(a), although it has been escalated to 2 crore where assesse pays tax u/s 44AD. So, for turnover above 1 crore but below 2 crore, where assesse does not follow presumptive taxation, 2nd Proviso to S.194-I shall apply and section 194-IB shall not apply,should also be clarified.

9 Holding period of Immovable Property reduced from 36 months to 24 months for computation of long term capital gain [Amended S. 2(42A) 3rd Proviso W.e.f AY 2018-19

1. Finance Act 2016 had earlier reduced holding period for unlisted shares from 36 months to 24 months w.e.f AY 2017-18 by inserting 3rd proviso to S. 2(42A). The same 3rd proviso now encompasses immovable property also

2. If land is purchased on 1st April 2015 and sold on 31st March 2017 , it shall suffer STCG @ 30% but if sold on 01-04-2017 shall enjoy tax rate of 20% under LTCG coupled with number of exemption options available

10 Profit Linked Deduction for Affordable Housing Projects u/s 80-IBA

100% Profit linked deduction was introduced by Finance Act 2016 in respect of affordable housing projects

1. Deduction is available for profits and gains derived from the business of developing and building housing projects. However 80-IBA deduction is not available to works contractor to whom the work is awarded by any person. [S.80-IBA(3)]

2. Housing project” means a project consisting predominantly of residential units with such other facilities and amenities as the competent authority may approve subject to the provisions of this section;

3. Conditions for Availaing Deduction [80-IBA(2)]

1. Approval :

a) Project is approved by competent authority i.e. authority empowered to approve the building plan by or under any law for the time being in force

b) Project is approved after the 1st day of June, 2016, but on or before the 31st day of March, 2019

c) Where project is approved more than once, the project shall be deemed to have been approved on the date on which the the building plan of such housing project was first approved by the competent authority

Finance Bill 2017 does not seek to bring any change in

these conditions

2. Completion

a) Project is completed with in 3 years 5 years from date of approval by competent authority

b) the project shall be deemed to have been completed when a certificate of completion of project as a whole is obtained in writing from the competent authority

c) If project is not completed in three five years, deduction already claimed shall be deemed to be PGBP income of the previous years in which period of completion expires i.e. 5 years from date of approval

Finance Bill 2017 has increased the period of project completion from 3 years to 5 years

3. Area

a) Built up area of shops and other commercial establishments does not exceed 3% of aggregate built up area Carpet area

Carpet Area as per section 2(k) of THE REAL ESTATE (REGULATION AND DEVELOPMENT )ACT 2016 means the net usable floor area of an apartment, excluding the area covered by the external walls, areas under services shafts, exclusive balcony or verandah area and exclusive open terrace area, but includes the area covered by the internal partition walls of the apartment.

Explanation.— For the purpose of this clause, the expression “exclusive balcony or verandah area” means the area of the balcony or verandah, as the case may be which is appurtenant to the net usable floor area of an apartment, meant for the exclusive use of the allottee; and “exclusive open terrace area” means the area of open terrace which is appurtenant to the net usable floor area of an apartment, meant for the exclusive use of the allottee;

b) Project on Land situated with in Chhenai, Delhi, KOlkatta, Mumbai or in 25Kms form municipal limits of these cities :(Deleted by Finance Bill 2017)

Min. plot area 1000 sq mts=10763 sq ft
Max built up carpet area of residential unit

(Changed by Finance Bill 2017)

30 sq mts i.e. 322.91 sq ft
Utilization of permissible Floor Area ratio Min. 90%

c) Project on land in other cities :

Min. plot area 2000 sq mts=21527 sq ft
Max built up carpet area of residential unit 60 sq mts i.e. 645 .83sq ft
Utilization of permissible Floor Area ratio Min. 80%

4. Where residential unit is allotted to an Individual then no other residential unit can be allotted to the Individual, spouse or minor child

“residential unit” means an independent housing unit with separate facilities for living, cooking and sanitary requirements, distinctly separated from other residential units within the building, which is directly accessible from an outer door or through an interior door in a shared hallway and not by walking through the living space of another household.

Comments : There is no bar to allotting the residential unit in HUF capacity

5. Separate Books of Accounts of Housing Project are maintained

Also no deduction for such profits under any other section

Note : For Affordable Housing Project there is also a deduction u/s 35AD for capital expenditure @ 150% which has been brought down to 100% wef AY 2018-19

Suggestion: Finance Bill 2017 replaces built area with carpet area in clause (f) of S.80-IBA(2) but there is no reference to built up area. The reference is there in clause (e) instead. The anomaly should be corrected.

Comments on difference in built up area and carpet area

Carpet Area : As its name suggests, Carpet Area is the area where we can spread a carpet, means area calculated from inner wall to wall distance inside the house. This would also include steps if any, inside the house. So essentially, Carpet area is nothing but the net usable area inside the house.

Built up Area : Built up area is Carpet Area + Area of walls and ducts+ 1/2 the Area of terrace. This is usually 10% more than the carpet area. A terrace is considered as half the actual area for calculating built up area

Hence by substituting built up area for carpet area, the builders have been allowed to make bigger houses in case of affordable housing projects also. This has been done to improve reality sector.

11 Capital Gain and TDS on Joint Development Agreements chargeable in the year of completion [S.45(5A) , 49(7) , 194-IC Introduced w.e.f. AY 2018-19]

1. Section 45(5A) overrides section 45(1), where in capital gain is chargeable to tax in the year of transfer which is the year of possession as per S.2(47)(v). Section 45(5A) intends to shift the situs of tax from the year of transfer to the year of issue of completion certificate for the project in respect of specified agreements.

2. Specified Agreement means a registered agreement in which a person owning land or building or both, agrees to allow another person to develop a real estate project on such land or building or both, in consideration of a share, being land or building or both in such project, whether with or without payment of part of the consideration in cash

3. Hence specified agreements covered by Section 45(5A) are only where owner “allows” another person to “develop”. The definition is silent as to whether allowing to develop is accompanied by possession or not. Since no such restrictions are in place, it can cover both type of agreements i.e. where possession is allowed and also where possession is not allowed]

4. Further S.45(5A) is applicable only to Individual or HUF. Firm or company or AOP/BOI/societies owning the land or building and allowing other person to develop are not covered.

5. Year for charging capital gain shall be the year of issue of completion certificate even if such certificate is issued for part of the project. It means even if the share of owner in land or building is even not complete ,still capital gain tax shall become taxable provided completion certificate is obtained for small complete part. In cases where property is allowed to be developed without handing over possession and hence not even section 45(1) is applicable, the section 45(5A) might result in pre poning the tax liability because neither share of owner is complete nor, possession has been handed over to developer.

6. Capital Gain is chargeable on Stamp duty value of share in project in the form of land or building, on the date of issue of completion certificate plus consideration received in cash.

7. Stamp duty value has been adopted as full value of consideration on the lines of S.50C without using the safeguards built in S.50C e.g. referring for valuation where owner objects to fair market value being lesser than stamp duty value.

8. Further consideration received in cash instead of consideration received in money has been taxed ,whether it means that non cash consideration [e.g. cheque etc.] or any kind consideration [e.g. gold etc.] or monetary value of any act or forebearance to act shall not be chargeable to tax.

9. Further TDS u/s 194-IC @ 10% shall be deducted on consideration not received in Kind, whether by way of cash, cheque, draft or any other mode at the time of payment or credit, whichever is earlier.

10. Further since 194-IC has not been specifically stated to be applicable from 01-06-2017, it shall be applicable from 01-04-2017, by virtue of section 1(2) of Finance Bill 2017

11. Hence there is no tds on stamp duty value of share in project. Further since 194-IC uses the terms “consideration , not being consideration in Kind” and “cash, cheque,draft or other mode”, the use of word “consideration in cash” can not be extended beyond its natural meaning to cover all transactions in money. Hence it spells doubts on calculation of consideration.

12. Exit Route by Owner before Issue of Certificate of Completion for whole or part of project by way of transfer of his share in project shall result in depriving him from the benefit of postponing the capital gain taxation till date of issue of completion certificate. In such a case:

a) Transaction shall be taxed in the year of transfer.

b) Stamp duty value shall not be adopted for ascertaining amount of capital gain

Comments : If say transfer as per 2(47)(v) takes place in year 1 and assesse transfers his share in Yr.5 while the completion took place in Year 6. In such case, it is not clarified whether transfer shall be taxed in Year 1 or Year 5. If taxable in Year 1, then corresponding amendment would have been made in S.155 to give effect to such arrangement ,so, impliedly transfer in Year 5 shall be taxable. But in such a case, it might work as tax planning tool and avoiding stamp duty value and adopting a market value lesser than stamp duty value in the year of exit.

Cost of Acquisiton for the purpose of subsequent Sale as per Section 49(7):

Ø Where the capital gain arises from the transfer of a capital asset, being share in the project,in the form of land or building or both, referred to in sub-section (5A) of section 45,

Ø not being the capital asset referred to in the proviso to the said sub-section,

Ø the cost of acquisition of such asset, shall be the amount which is deemed as full value of consideration in that sub-section.’

Comments :

1. Section 49(7) does not deal with determination of cost for the purpose of exit route adopted before completion certificate and hence only deals with property taxed u/s 45(5A) on the basis of issue of completion certificate.

2. As per 49(7), full value of consideration for share in project, being land or building, or both is as per section 45(5A). However such consideration u/s 45(5A) includes consideration in cash also, which needs to be excluded. However, S.49(7) is silent on any such exclusions. Whether therefore cash receipt shall also form part of cost

Less cash Economy Tax Proposals vide union Budget 2017

12 As per Para 141 of Budget Speech, Among the 3.7 crore individuals who filed the tax returns in 2015-16, 99 lakh show income below the exemption limit of 2.5 lakh p.a., 1.95 crore show income between 2.5 to ` 5 lakh, 52 lakh show income between 5 to 10 lakhs and only 24 lakh people show income above ` 10 lakhs. Of the 76 lakh individual assesses who declare income above 5 lakh, 56 lakh are in the salaried class. The number of people showing income more than ` 50 lakh in the entire country is only 1.72 lakh. We can contrast this with the fact that in the last five years, more than 1.25 crore

cars have been sold, and number of Indian citizens who flew abroad, either for business or tourism, is 2 crore in the year 2015. From all these figures we can conclude that we are largely a tax non-compliant society. The predominance of cash in the economy makes it possible for the people to evade their taxes.

Hence follow steps have been taken to place fetters around cash transactions

13 Limit of Cash donation for claiming 80-G lowered from 10,000 to Rs. 2000/-. No deduction u/s 80G shall be available on cash contribution exceeding Rs. 2000/- from AY 2018-19
14 Failure to receive donation above Rs. 2000/- in non cash mode by political party and failure to file return u/s 139(4B) shall invite withdrawl of exemption

• As per section 13A, only business income of political party is subject to tax.

• As per S.13A, Income from House Property, Capital Gain and Income from other Sources and Voluntary Contributions is exempt for political party.

• At present, however, Exemption however is conditional subject to furnishing detail of contributions exceeding Rs. 20,000 by treasurer to election commission by 31st March u/s 29C of The Representation of the People Act, 1951 and maintaining such record with name and address of contributor.

• Further exemption is subject to maintaining books of accounts and audit by Chartered Accountant.

• If the political party fails to submit information for a particular year, exemption of that very financial year shall alone be withdrawn and not albeit withdrawl of exemption

However, under existing provisions of the Act, there is no restriction of receipt of any amount of donation in cash by a political party.

Also non filing of return u/s 139(4B) only attracts penalty u/s 271F for not filing return up to end of assessment year.

There fore Finance Bill 2017 proposes that exemption of political party shall be subject to an additional condition that no donation exceeding two thousand rupees is received by such political party otherwise than by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account or through electoral bond.

Comments : Against electoral bonds payment is accepted through cheque and digital mode only [As per Para 165(c) of budget speech].

Further the exemption from Income Tax shall be subject to filing return u/s 139(4B) on or before due date under section 139

As per Punjab and Haryana High Court in Jagtar Singh Chawla due date u/s 139 includes date of filing belated return u/s 139(4),which is the end of assessment year

Comments : Hence not only filing of return is compulsory but also it is mandatorily required to be filed till 31st March to continue with Income Tax exemption u/s 13A.

Further name and addresses of contributors making contribution exceeding Rs. 20,000/- need not be revealed where political contribution is received through electoral bonds. This has been done in order to address the concern of anonymity of the donors.

Electoral Bonds are the bonds to be issued by RBI in accordance with a scheme that the Government of India would frame in this regard. Under this scheme, a donor could purchase bonds from authorised banks against cheque and digital payments only. They shall be redeemable only in the designated account of a registered political party. These bonds will be redeemable within the prescribed time limit from issuance of bond.

Contributions to political parties are also governed by S.182 of the Companies Act 2013, where in Non government company, in existence for least 3 years, can contribute up to 7.5% of average net profits of last three financial years.

Deduction under section 80GGB and 80GGC for contribution to political parties is available only for corporate and non corporate contributions made by cheque. No deduction is however, available for contributions made in cash. There is no threshold limit of Rs.2000/- like 80G and 13A

15 Cash expenditure exceeding Rs. 10000 for acquisition of asset to be ignored for actual cost [S.43 amended w.e.f AY 2018-19]

While section 40A(3) provides for disallowance of cash expenditure exceeding specified thresh hold, no disallowance is invited for cash expenditure for capital purposes.

Hence proviso has been added to the definition of actual cost u/s 43(1) as under :

Ø Provided further that where the assessee incurs any expenditure for acquisition of any asset or part thereof

Ø in respect of which a payment or aggregate of payments made to a person in a day,

Ø otherwise than by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account,

Ø exceeds ten thousand rupees,

Ø such expenditure shall be ignored for the purposes of determination of actual cost.

Memorandum explaining provisions of Finance Bill says “Disallowance of depreciation under section 32 and capital expenditure under section 35AD on cash payment”.

Hence the amendment is aimed at denying depreciation benefit on cash capital expenditure only.

Comments:

1. Proviso to S.43(1) applies to acquisition of asset only and not on construction of asset where in payment exceeding Rs. 10,000 is made in cash. Hence self constructed assets may be depreciation at full rate . It is evident from the wording used in various placed of statute that words “acquisition” and “ construction” can not be used interchangably. E.g. section 24(b) and S.35AD(7A).

2. Last leg of the above proviso says “such expenditure shall be ignored for the purposes of determination of actual cost” . It can lead to an unintentional interpretation of ignoring whole of such expenditure and not only expenditure exceeding Rs. 10,000/-.

3. Further where capital expenditure is incurred in cash but no depreciation benefit is taken, capital gain provisions do not curtail the cost of acquisition u/s 48 for cash expenditure and hence full cost is deductible for capital gain.

4. Where even where part expenditure is claimed for depreciaton say asset is purchased for Rs.50,000 in which 15000/- is paid in cash and balance Rs. 35000 is paid in cheque. Now section 50 provisions may not be applied on part of asset on which depreciation has not been claimed i.e. Rs. 15000 and has hence not entered WDV calculation, because section 50 is applicable only where depreciation is allowed. Further in such a case sale consideration may be apportioned to determine STCG covered by Section 50 and LTCG/STCG otherwise taxable. However the matter requires clarification.

16 Capital Expenditure deduction for specified business not to be allowed for cash expenditure exceeding Rs. 10,000[Amended S.35AD(8)(f) w.e.f AY 2018-19]

As per Section 35AD An assessee shall be allowed a deduction in respect of the whole of any expenditure of capital nature incurred, wholly and exclusively, for the purposes of any specified business carried on by him during the previous year in which such expenditure is incurred by him

As per proviso to Section 35AD the expenditure is incurred prior to the commencement of its operations and the amount is capitalised in the books of account of the assessee on the date of commencement of its operations shall also shall be allowed as deduction during the previous year in which he commences operations of his specified business

Section 35AD, interallia, includes deduction for expenditure on building and operating a new hotel of two-star or above category, building and operating a new hospital with at least one hundred beds for patients;

Further as per S.35AD(f), any expenditure of capital nature shall not include any expenditure incurred on the acquisition of any land or goodwill or financial instrument.

Now Finance Bill 2017 proposes that capital expenditure shall not include any expenditure in respect of which the payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or an account payee bank draft or use of electronic clearing system through a bank account, exceeds ten thousand rupees.

Comments:

Although amended provisions of S. 35AD are applicable from AY 2018-19, still it is not clear whether S.35AD amendment shall have retroactive application with reference to proviso to S.35AD, for cash expenditure exceeding Rs.10,000/- although incurred in past but claimed in AY 2018-19 or subsequently.

17 Cash Expenditure Limit lowered to Rs. 10,000/- for revenue expenditure and payment exceeding threshold made through digital/electronic modes also permitted [S.40A(3),(3A),(4) amended w.e.f. AY 2018-19]

40A(3)

Ø Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day,

Ø otherwise than by an account payee cheque drawn on a bank or account payee bank draft, [exceeds twenty thousand deleted] or use of electronic clearing system through a bank account,

Ø exceeds ten thousand rupees ,

Ø no deduction shall be allowed in respect of such expenditure.

40A (3A) Where an allowance has been made in the assessment for any year in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year (hereinafter referred to as subsequent year) the assessee makes payment in respect thereof, otherwise than by an account payee cheque drawn on a bank or account payee bank draft or use of electronic clearing system through a bank account, the payment so made shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-tax as income of the subsequent year if the payment or aggregate of payments made to a person in a day, exceeds twenty thousand ten thousands rupees:

Ø Provided that no disallowance shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3) and this sub-section where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees or use of electronic clearing system through a bank account, exceeds ten thousand rupees, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors :]

[Provided further that in the case of payment made for plying, hiring or leasing goods carriages, the provisions of sub-sections (3) and (3A) shall have effect as if for the words “twenty ten thousand rupees”, the words “thirty-five thousand rupees” had been substituted.]

40A(4) (4) Notwithstanding anything contained in any other law for the time being in force or in any contract, where any payment in respect of any expenditure has to be made by an account payee cheque drawn on a bank or account payee bank draft or use of electronic clearing system through a bank account in order that such expenditure may not be disallowed as a deduction under sub-section (3), then the payment may be made by such cheque or draft or electronic clearing system; and where the payment is so made or tendered, no person shall be allowed to raise, in any suit or other proceeding, a plea based on the ground that the payment was not made or tendered in cash or in any other manner.]

Comments:

1. Apart from account payee cheque or account payee bank draft payment through electronic clearing system through bank account has also been permitted e.g. ECS/NEFT/RTGS. Payment through electronic clearing or digital mode where in payment is not made through bank account, 40A(3) disallowance shall be attracted e.g. payment made through use of mobile phone where in payment is not routed through bank account like e-wallets.

2. Limit for gereral payments has been lowered from Rs. 20,000/- to Rs. 10,000 but payments for freight have been retained at Rs. 35000/-

3. For Construction Industry limit should be increased.

4. It should be clarified that 40A(3) disallowance shall not be invited where amount of bill is lesser than thresh hold but aggregate payment exceeds Rs. 10,000/- in conosance with ITAT Kolkatta decisions in Excel Engineers following another decision of ITAT in Raja & Co.

18 Cash Receipts of Rs. 3 lac and above prohibited by inserting section 269ST and Section 271DA w.e.f. 01-04-2017

As per Para 162 of Budget Speech, The Special Investigation Team (SIT) set up by the Government for black money has suggested that no transaction above 3 lakh should be permitted in cash.

Hence new section 269ST is being introduced as under:

No person shall receive an amount of three lakh rupees or more—

(a) in aggregate from a person in a day; or

(b) in respect of a single transaction; or

(c) in respect of transactions relating to one event or occasion from a person,

otherwise than by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account:

Provided that the provisions of this section shall not apply to—

(i) any receipt by—

(a) Government;

(b) any banking company, post office savings bank or co-operative bank;

(ii) transactions of the nature referred to in section 269SS;

(iii) such other persons or class of persons or receipts, which the Central Government may, by notification in the Official Gazette, specify

As per section 271 DA (1) If a person receives any sum in contravention of the provisions of section 269ST, he shall be liable to pay, by way of penalty, a sum equal to the amount of such receipt:

Provided that no penalty shall be imposable if such person proves that there were good and sufficient reasons for the contravention.

(2) Any penalty imposable under sub-section (1) shall be imposed by the Joint Commissioner

Comments:

1. Threshhold : Amount of Rs. 3 lacs and above shall invite S.269ST.Hence payments up to Rs. 2,99,999 can be taken

2. Illustrations on applicability of Section 269ST:

a) Cash Sale of Goods is covered by S.269ST

b) Cash Provision of Service is covered by S.269ST

c) If a bill is issued for Rs. 7,00,000, then multiple payments below Rs.10,000 if in aggregate exceed Rs. 3,00,000 , shall also invite penalty u/s 269ST read with Section 271DA.

d) Advance against sale of goods/provision of service [except advance against sale of immovable property, being covered by S.269 SS] is also hit by S. 269ST

e) Gifts are also with in ambit of S.269ST

f) Donation shall also get covered by rigors of S. 269ST

g) Capital Introduction/ Issue of Share Capital is also hit by S.269ST

h) Withdrawl from Partnership Firm are also coverered

i) Deposit into bank is exempt because receipt “by” banking company is specifically excluded

j) Withdrawl from the bank is not excluded because S. 269ST does not encompass receipt of amount “from” banking company, unlike S.269 SS which exempts

i) loan or deposit accepted “from” or

ii) loan or deposit taken or accepted by

any banking company, post office savings bank or co-operative bank.

Further repayment of deposit taken or accepted from banking company is excluded in operation of S.269T.

Repayment of deposit taken by banking company is not excluded from operation of S. 269T. Further the proviso to S.269SS only excludes transactions of the nature specified in S. 269SS and not S.269T.

k) Transactions of loan or deposit between agriculturists may be exempt u/s 269SS but other transactions between agriculturists are not exempt u/s 269ST

l) Receipt of money from government shall also attract S.269ST because receipt of amount by government only is exempt. Hence vendors registered with government shall have to either keep cash receipt below Rs. 3,00,000 or accept the amount through banking channels.

m) Further only receipt by post office saving bank has been excluded from operation of section 269ST. Deposit in Post office saving bank is excluded u/s 269SS. Other receipts and deposits by post office shall be hit by S.269SS and S.269ST.

3.

a) Whether S.269ST prohibits in kind and barter receipts also.

because words used are “an amount “ and not “sum of money”, unlike other sections in the law like 56(2)(x), where word “sum of money” is used.

Further “amount” as per law lexicon Page 104 means “total or aggregate sum”. It there fore can not beconfined to “sum of money”. However, word “sum” imports “sum of money” [page 1835 of law lexicon]

b) However If “an amount” is interpreted to mean “sum of money’ and not to cover in kind receipts, then S.269ST shall not apply to gold, other goods received for sale of goods. E.g. gold received for sale of Jewellery.

c) However if “amount” is interpreted beyond “sum of money” as above and therefore to encompass “in Kind “receipts, then say if both cash and in kind donations (e.g. foodgrains) are received by trust from a person in a day, then value of foodgrain shall also get covered by S. 269ST.

d) If not an interpretive bravado, every purchase shall also get covered apart from sale because in purchase one is receiving goods for money. In such a case, purchase of immovable property might also get covered because S.269SS covers only specified sum for sale of immovable property and not purchase of immovable property.

4. Further, another interpretive possibility can be application of section 13(2) of General Clauses Act , where by “words in the singular shall include the plural, and vice versa”. Hence A day , A person also includes multiple days and multiple persons

So, if cash or kind gifts are received from multiple persons for

one event or ocassions, still 269ST shall be attracted to invite

prohibition if amount is 3 lacs or more.[269ST(c)], because “a

person” includes plurality also.

This could bring in purview gifts received in functions and

also Golak recipts of Mandir.

5. Conversion of form or denomination of currency for 3 lacs or more also might attract this section unless notified as exempt from 269ST by government under clause (iii) of proviso.

Having regard to eclectic mix of transactions, in which section 269ST is going to operate, the above issues should be resolved instead of being left to Courts to add to ever burgeoning literature of tax

19 Limit for TCS in respect of cash receipt for sale of Jewellery has been reduced from 5 lacs to 2 lacs [Amended s.206C(1D) w.e.f. 01-04-2017]

Limit of TCS for Jewellery was at Rs. 5 lacs, while PAN requirement Under Rule 114B started at 2 lacs w.e.f. 01-01-2016. Further AIR Information for cash transaction for Jewellery was also at 2 lacs.

Further TCS, PAN,AIR Information for all other goods and services was pegged at Rs. 2 lacs and now Finance Bill 2017 proposes prohibition on cash transaction exceeding Rs 3 lacs.

Hence the limit for TCS in case of Jewellery has been reduced to 2 lacs and brought in line with bullion which already stood at Rs. 2 lacs

Further the definition of Jewellery with reference to S.2(14)(ii) has been dealigned. Section 2(14) provided expanded meaning to Jewellery thus including wearing apparels etc. also studded with jewellery. Since the limit of jewellery is now merged with other goods, special definition has been abolished.

20 Incentive for non cash transactions in presumptive business taxation by reducing deemed income rate from 8% to 6%[Proviso to S.44AD(1) inserted w.e.f AY 2017-18]

Following proviso has been added to S. 44AD(1)

Ø Provided that this sub-section shall have effect

Ø as if for the words “eight per cent.”, the words “six per cent.” had been substituted,

Ø in respect of the amount of total turnover or gross receipts which is received by an account payee cheque or an account payee bank draft or use of electronic clearing system through a bank account

Ø during the previous year or before the due date specified in subsection (1) of section 139 in respect of that previous year

Comments:

1. The benefit of 6% is available only if amount is realized till due date of filing of return which shall in most of the cases be 31st July, if presumptive taxation is followed and audit is not required.

2. Benefit of digital receipts after 31st March shall be available for assesses following merchantile system of accounting and not those following cash system of accounting

3. Even if presumptive taxation is not followed, cheque, draft, ECS receipts shall be evaluated at 6% threshold for audit purposes.

4. No corresponding benefit has been bestowed for specified professions u/s 44ADA.

5. The provisions have been applied retrospectively w.e.f. AY 2017-18 and hence applicable to FY 2016-17.

6. Against turnover of 2 crore, 4 lacs income can be reduced, there by entailing tax benefit of Rs.1,20,000 @ 30%.

21 To promote cash less transactions, BCD, Excise, CVD and SAD on miniaturized POS Card readers, Micro ATM standards , finger print readers, scanners and Iris scanners on import as well as manufacturing has been exempted

Charitable Trusts

22 Tax Exemption for Chief Minister, Lt. Governor’s Relief Fund retrospectively w.e.f AY 1998-99 [Amending S.10(23C)]

1. Donation to Chief Minister Relief Fund , Lt Governor’s Relief Fund is entitled to deduction u/s 80G(2)(a)(iiihf) referred as under as under:

the Chief Minister’s Relief Fund or the Lieutenant Governor’s Relief Fund in respect of any State or Union territory, as the case may be

Provided that such Fund is—

a) the only Fund of its kind established in the State or the Union territory, as the case may be

b) under the overall control of the Chief Secretary or the Department of Finance of the State or the Union territory, as the case may be

c) administered in such manner as may be specified by the State Government or the Lieutenant Governor, as the case may be;

However, while following funds are already exempt u/s 10(23C):

1. The Prime Minister’s National Relief Fund

2. The Prime Minister’s Fund (Promotion of Folk Art)

3. The Prime Minister’s Aid to Students Fund;

4. The National Foundation for Communal Harmony

5. The Swachh Bharat Kosh, set up by the Central Governmen

6. The Clean Ganga Fund, set up by the Central Government;

No exemption is available for CM & Lt. Governor’s relief fund

Hence section 10(23C) is being amended to provide that CM relief Fund and LT Governor’s Relief Fund shall also be entitled to exemption u/s 10(23C)s

23 Inter Trust Corpus Donations not to be treated as application of Income [Section 10(23C) inserting proviso and S.11(1) Explanation 2 Inserted w.e.f AY 2018-19]

The Concern of the legislature is that the trusts engage in giving corpus donation without actual application.

Law regarding Inter Trust Non Corpus Donations framed by Finance Act 2002 w.e.f. AY 2003-04:

a) As per 12th Proviso to section 10(23C) , any payment to trust u/s 12AA or fund/institution referred in 10(23C)(iv),(v),(vi),(via) in the year other than year of receipt of income out of accumulated income is not treated as application of Income to the objects for which fund/institution is established.

b) As per Explantion appended below Section 11(2) , amount of income derived from property held under trust which is not applied but accumulated or set apart to to trust u/s 12AA or fund/institution referred in 10(23C)(iv),(v),(vi),(via), shall not be treated as application of income for charitable or religious purposes, either during the period of accumulation or thereafter.

Comments : As per Delhi High Court in Bagri Foundation[02-07-2010] , income set apart to other trusts etc out of 15% accumulation or current income shall not invite the disallowance regarding application of income for charitable purpses.

The above under standing of the law now also get ratified by memorandum explaining provisions of Finance Bill 2017 which says that donations made by a trust to any other trust or institution except those made out of accumulated income, is considered as application of income for the purposes of its objects

Held by Calcutta ITAT in St. Joseph’s Convent Chandannagar Educational Society ITA 1695/2012 that donation given by one trust to another trust out of current year’s income is not only permitted in section 11 of the Act as an application of income, but at the same time cannot be curtailed by another provision of the Act (i.e section 13(1)(c ) (ii) read with section 13(3) of the Act) as it would defeat the very purpose of such provision.

Amendedment in Law regarding corpus donations w.e.f AY 2018-19

1. 12th Proviso being inserted to S.10(23C) providing that

Ø any amount credited or paid out of income of any fund or trust or institution or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via),

Ø to any trust or institution registered under section 12AA,

Ø being voluntary contribution made with a specific direction that they shall form part of the corpus of the trust or institution,

Ø shall not be treated as application of income to the objects for which such fund or trust or institution or university or educational institution or hospital or other medical institution, as the case may be, is established

2. Explanation 2 Inserted below Section 11(1) as under

Ø Any amount credited or paid, out of income referred to in clause (a) or clause (b) read with Explanation 1,

Ø to any other trust or institution registered under section 12AA,

Ø being contribution with a specific direction that they shall form part of the corpus of the trust or institution,

Ø shall not be treated as application of income for charitable or religious purposes

Comments:

1.The above provisions apply to payment made to trust u/s12AA only and not to any institution referred in S.10(23C), because for corpus donations there is already no exemption to such institutions unlike section 11(1)(d).

3. CBDT in Instruction No. 1132 issued in 1978 had once clarified with regard to inter trust charities that if donation is not applied by donee trust in the year of receipt, donor trust shall not lose exemption. Hence non use of inter trust charity by donee trustee out of non corpus donation remains unaffected.

24 Fresh Registration for Modification of the objects of the trust [Section 12A(1)(ab) Inserted, 12AA(1) and S.12AA(2) amended from AY 2018-19]

As per Section 115TD introduced by Finance Act 2016 w.e.f. 01-06-2016, Notwithstanding anything contained in this Act, where in any previous year, a trust or institution registered under section 12AA has, converted into any form which is not eligible for grant of registration under section 12AA, which interallia, includes adoption or undertaking modification of its objects which do not conform to the conditions of registration, and fresh registration is not applied with in said previous year. then tax at Maximum marginal rate is payable on aggregate market value of assets less liabilities.

In sequel to above amendment and to ensure that the trusts do not obliterate the stated objects duly registered with department, the law is being further amended to provide that In case of modification of the objects of the trust in a manner that they no longer confirm to the conditions of registration of the trust , trust has to mandatorily make an application in prescribed form with in 30 days from the modification of the objects to the Principal Commissioner or Commissioner .

Further such Application shall be made for re registration of the Trust under the Income Tax law

The above provisons have been made one of the conditions for exemption of the trust, other wise exemption shall cease.

If application is made with in 30 days, then again CIT shall resort to 12AA(1) and call for such documents or information from the trust or institution as he thinks necessary in order to satisfy himself about the genuineness of activities of the trust or institution and may also make such inquiries as he may deem necessary in this behalf and after satisfying himself about the objects of the trust or institution and the genuineness of its activities, he shall pass an order in writing registering the trust or institution; and shall, if he is not so satisfied, pass an order in writing refusing to register the trust or institution and a copy of such order shall be sent to the applicant. No order refusing registration shall be passed without giving opportunity of being heard

Every order granting or refusing registration shall be passed before the expiry of six months from the end of the month in which the application was received .

If Registration is not granted in 6 months, it shall be deemed to have been granted as per Supreme Court decision in Society for Promotion of Education, Adveture Sports etc.

One issue that arises is that whether fresh application with in 30 days need to be made where modification is in confirmation of the conditions of the registration of the trust.

It has been held by ITAT Mumbai in Bhansali Trust 63 taxmann.com 56 (Mumbai – Trib.) that mere non-intimation of amendments in trust deed to department cannot ipso facto lead to cancellation of registration because statutory requirement contained in section 12AA(3) prescribes that cancellation of registration cannot be effectuated unless a case is made out that new objects do not fit in with existing objects, i.e., new objects are ‘non-charitable’ in nature, or that activities are ingenuine

It appears that in time to come lot of litigation on whether the modification of objects complies conditions of registration or not shall crop up.

Another issue which arises is whether order of the CIT granting registration can at all attach any conditions for registration of the trust.

Further Section 12AA(3) and 12AA(4) providing grounds for revocation of registration can also constitute the conditions of registration, which interallia , includes not using or applying any part of the income or property for the benefit of trustees etc.

To add further fuel to the fire, the memorandum explaining provisions of Finance Bill says that amendment is clarificatory in nature, although in the same breadth it has been applied from AY 2018-19. Whether the law makers intend to make it curative and hence restrospective provision.

The issues has to be judged on the basis of guidelines issued by Supreme court on the matter in Vatika Township.

25 Time becomes the essence for retaining exemption of the Trust by incorporating timely filing of return a condition for retaining exemption

As per section 139(4A) return of the trust is required to be filed where income without giving effect to the provisions of the section 11 and 12 income exceeds maximum amount not chargeable to tax . Section 139(4A) also says that in respect of return filed u/s 139(4A) provisions of this Act shall apply as if it were return required to be filed u/s 139(1). It means due dates applicable u/s 139(1) shall apply to 139(4A) also and there fore due date is 30th September because audit report u/s 10B is also required under these cases.

Further non filing till 30th September invites penalty u/s 272A of Rs. 100/- per day.

However the Memorandum explaining the provisions of Finance Bill says that there is no clarity as to whether the said return of income is to be filed within time allowed u/s 139 of the Act or otherwise.

In order to provide clarity in this regard, it is proposed to further amend section 12A so as to provide for further condition that the person in receipt of the income chargeable to income-tax shall furnish the return of income within the time allowed under section 139 of the Act.

Hence non filing of return of trust with in time u/s 139 i.e. 31st March shall result in denial of exemption.

Thus legislature has advanced the argument of non clarity where no such ambiguity exists. In its ignorance the draconian provisions for withdtrawl of exemption have been placed in statute. If ignorance of law is no excuse for citizen whether ignorance of law can make out a case to stike down the law so framed.

Further, non timely filing shall invite withdrawl of exemption for trusts u/s 12A as well as political parties u/s 13A. However no matching provisions have been placed for 10(23C) institutions.

Interestingly, even the new provisions are do not solve any obscurity, if there was one .

Further the amendment has been stated to be clarificatory , so, whether trusts who have not filed returns timely in the past shall also lose exemption. This matter shall definitely need clarity at the doors of the Courts

To wrap up, although trust were not required to pay penalty u/s 271F, because of specific law laid down u/s 272A, but non timely filing shall invite the late fee as instituted by S.234F and as contrived by Finance Bill 2017 itself, because 234F is not a penal provision to compete for its applicability with S.272A.

Changes in Returns, Refunds, Interest, Assessment, Search

Survey Provisions

26 Late filing of Return to invite fee u/s 234F w.e.f. AY 2018-19:

1. Section 234F shall apply without prejudice to the provisions of this Act. It means S. 234 F shall not substitute any adverse consequences that the assesse may face under any other provision of the law.

2. S. 234F shall apply only where return is required to be filed u/s 139. It shall not apply where return is being filed voluntarily.

3. Fee u/s 234 F shall apply where return is not filed till due date specified u/s 139(1) i.e. 31st July or 30th September or 30th November.

4. If return is not filed till 31st July/30th Sep/30th Nov, fee of Rs. 5000/- becomes payable if return is however filed till 31st December.

5. In case return is filed after 31st December , then fee of Rs. 10,000/- shall become payable.

6. If total income does not exceed Rs. 5000, fee shall not be more than Rs. 1000/-. It means if there is corporate return of 100 crores of loss, still fee shall not exceed Rs. 1000/-

7. In case return is filed after 31st March, it shall be invalid return, hence no fee should be chargeable u/s 234F. If the still fee is chargeable, it can have impact of validating the return.

8. Penalty u/s 271F has been brought to end w.e.f. AY 2018-19

9. Along with self assessment tax and interest , fee u/s 234F has to be paid

10. If amount paid u/s 140A fall short of due amount, the amount paid shall first be adjusted towards fee, then towards interest and balance if any towards tax.

11. U/s 143(1) while processing returm, fee payable shall also be computed

12. No amendment made in S. 143(1)(d) regarding intimation of sum payable or refund due because now sum payable is not confined to tax and interest and it shall now include fee also, if payable

13. Intimation of loss shall be sent even if no tax or interest or fee is payable or no refund is due .

14. Fee u/s 234F is being charged without there being any quid pro quo, and hence constitutionality of S.234F can be challenged.

27 Revised Return also to be filed till end of assessment year w.e.f. AY 2018-19 [S.139(5) amended]

In Finance Act 2016 , w.e.f. AY 2017-18, period of belated filing of return was reduced by one year and it was restricted to the end of assessment year as compared to the earlier provisions allowing filing of return till one year from the end of assessment year.

Further Finance Act 2016 allowed filing of revised return in the case of belated filing also.

However in case of revised return filing time remained unchanged i.e. one year from the end of assessment year.

Hence for financial year ending 31-03-2017, belated return can be filed till 31-03-2018 but revised return can be filed till 31-03-2019.

Now finance bill2017, w.e.f. AY 2018-19, proposes to restrict the period of revised return also to the end of assessment year.

Hence for FY ending 31-03-2018, belated and revised return both have to be filed till 31-03-2019, which also happens to be last date for filing revised return for FY ending 31-03-2017

28 Scope of Return filing enhanced for Exempt Entities u/s 10. W.e.f. AY 2018-19 [Amended section 139(4C)]

Following exempt entities at present are required to file return:

Every—

(a) research association referred to in clause (21) of section 10;

(b) news agency referred to in clause (22B) of section 10;

(c) association or institution referred to in clause (23A) of section 10 ;[U/s 10(23A) income of association/institution for regulation of the professions of law, medicine, accountancy, engineering or architecture etc. is exempt]

(d) institution referred to in clause (23B) of section 10;[for development of Khadi and Village Industry]

(e) fund or institution referred to in sub-clause (iv) or trust or institution referred to in sub-clause (v) or any university or other educational institution referred to in sub-clause (iiiad) (Finance Act 2006) or sub-clause (vi) or any hospital or other medical institution referred to in sub-clause (iiiae)(Finance Act 2006) or sub-clause (via) of clause (23C) of section 10;

(ea)Mutual Fund referred to in clause (23D) of section 10;

(eb) securitisation trust referred to in clause (23DA) of section 10;

[After Introducing return provision for mutual funds/securitization trust w.e.f AY 2015-16, requirement to file statement of income paid/credited to Income tax authority u/s 115R/115TA has been dispensed with]

(ec) venture capital company or venture capital fund referred to in clause (23FB) of section 10;

(f) trade union referred to in sub-clause (a) or association referred to in sub-clause (b) of clause (24) of section 10;

(g) body or authority or Board or Trust or Commission (by whatever name called) referred to in clause (46) of section 10; [E.g. Shrine Boards]

(h) infrastructure debt fund referred to in clause (47) of section 10,]

Following 4 types of entities also added to the list

1. Person u/s 10(23AAA) i.e. Employee Welfare Funds

2. Investor Protection Fund u/s 10(23EC) or (23ED)

3. Core settlement Guarantee Fund u/s 10(23EE)

4. Board or Authorities u/s 10(29A) i.e. Coffee Board, Rubber Board, Tea Board, Tobacco Board, Marine Products Export Development Authority , Agricultural and Processed Food Products Export Development Authority, Spices Board and Coir Board.

29 Professionals paying Presumptive Income Taxation u/s 44ADA can deposit advance tax in last Installment of 15th March only w.e.f. AY 2017-18

In Finance Act 2016, assesses covered by presumptive taxation of business were required to pay 100% advance tax in last installments of 15th March. However no such provisions were laid for presumptive taxation of professions u/s 44ADA. Now section 211 has been amended to provide same treatment for professions covered by S. 44ADA also.

There is consequential amendment in Section 234C again applicable from AY 2017-18 to provide that in respect of an assessee referred to in section 44ADA, interest under the said section shall be levied, if the advance tax paid on or before the 15th March, is less than the tax due on the returned income.

Comments : Since advance tax date for AY 2017-18 shall fall on 15th March 2017, by which date Finance Bill 2017 can not be passed, then how shall this requirement be complied by professionals.

The professionals may however as precautionary measure pay 100% tax as per section 211, so that no interest is charged u/s 234C, when Finance Bill is passed.

30 Settling, Unsettling and Resettling law on withholding of refunds in scrutiny cases

As per section 143(1)(d) an intimation shall be prepared or generated and sent to the assessee specifying the amount of refund due to, the assesse.

As per S. 143(1), 2nd proviso, no intimation under this sub-section shall be sent after the expiry of one year from the end of the financial year in which the return is made.

Although refund can be granted even after expiry of one year from end of financial year in which return is filed but it binds department to determine the amount with in one year.

Finance Act 2012 Inserted Section 143(1D) w.e.f. 01-7-2012

Notwithstanding anything contained in sub-section (1), the processing of a return shall not be necessary before the expiry of the period specified in the second proviso to sub-section (1), where a notice has been issued to the assessee under sub-section (2)

There after a circular no. 1/2015 dated 13-01-2015 was issued to provide that processing of return can not compulsorily be done after issue of notice u/s 143(2)

Delhi High Court Tata Teleservices Limited promulgated on 11-05-2016 that Instruction No.1 of 2015 dated 13.01.2015 which curtails the discretion of the AO by ‘preventing’ him from processing the return and granting refund, where notice has been issued to the assessee u/s 143(2), is unsustainable in law and quashed

Bombay High Court in Group M. Media fortified with the view expressed by Delhi High Court and therefore also struck down Instruction no 1/2015

Finance Act 2016 added a proviso w.e.f. AY 2017-18 to section 143(ID) to provide that

Provided that such return shall be processed before the issuance of an order under sub-section (3).

In order to address the grievance of delay in issuance of refund in genuine cases which are routinely selected for scrutiny assessment, it is proposed that provisions of section 143(1D) shall cease to apply in respect of returns furnished for assessment year 2017-18 and onwards

Instead section 241A has been introduced w.e.f. AY 2017-18 as under :

Ø For every assessment year commencing on or after the 1st day of April, 2017,

Ø where refund of any amount becomes due to the assessee under the provisions of sub-section (1) of section 143

Ø and the Assessing Officer is of the opinion, having regard to the fact that a notice has been issued under sub-section (2) of section 143 in respect of such return,

Ø that the grant of the refund is likely to adversely affect the revenue,

Ø he may, for reasons to be recorded in writing

Ø and with the previous approval of the Principal Commissioner or Commissioner, as the case may be,

Ø withhold the refund up to the date on which the assessment is made

Comments:

1. The purpose is to grant refunds in cases which are assessed routinely and there are no recurring issues inviting addition

2. Even in other cases, where refund is withheld AO has to prove how grant of refund shall adversely affect the revenue in case of assesse with no previous dues.

3. Further ratification of action of AO is not possible, there should be previous approval to withhold the refund.

4. Previous cases subject matter of appeal where stay has been granted subject to payment of 15%, can also not be kept in category of adversely affecting the revenue.

31 Joint Director, the Deputy Director or the Assistant Director may exercise the powers in respect of inquiry u/s 133(6), without seeking prior approval of higher authorities

As per Supreme Court in Kathiroor Service Cooperative Bank Ltd. , section 133(6) can be used for making fishing and roving inquiries. However such notice can be issued only during pendency of proceedings. However, if no proceedings are pending, prior permission of Principal Director or Director or the Principal Commissioner or Commissioner is required.

So, usually Investigation wing used to hand over the result of its enquiries to AO, who would separately issue notice u/s 133(6) with prior approval.

However w.e.f. 01-04-2017, Joint Director, Deputy Director and Assistant Director have been empowered to initiate section 133(6) without prior approval

So, it is likely that in future AIR Information notices are issued by Investigation wing and not by AO who is still required to obtain prior approval.

Such disparity and divesting of special powers has been done in wake of demonitzation drive inquiries to expedite the matters of cash deposit and take them to their logical end.

32 Baord being empowered to frame a scheme for centralized issuance of notices, processing and making available outcome to AO [S.133C(3) inserted w.e.f. 01-04-2017]

Section 133C was inserted by Finance Act 2014 w.e.f. 01-10-2014 to provide that The prescribed income-tax authority [Principal Director General or Director General or Principal Director or Director], may for the purposes of verification of information in its possession relating to any person, issue a notice to such person requiring him, on or before a date to be specified therein, to furnish information or documents verified in the manner specified therein, which may be useful for, or relevant to, any inquiry or proceeding under this Act.

Section 133C was further expanded by Finance Act 2016 to include that Where any information or document has been received in response to a notice issued under sub-section (1), the prescribed income-tax authority may process such information or document and make available the outcome of such processing to the Assessing Officer.

Now to widen the scope of investigation, section 133C(3) has been inserted to provide that The Board may make a scheme for centralised issuance of notice and for processing of information or documents and making available the outcome of the processing to the Assessing Officer.

Comments : Compliance window for online verification of cash deposit is a step towards this amendment

33 Powers of survey being widened to enter the place where activity for charitable purpose is carried on [S. 133A Amended w.e.f. 01-04-2017]

At present S.133A empowers to enter any place where business or profession is carried o, whether or not such place is principal place of business or profession.

Now Section 133A is being further widened to provide that income tax authority may also enter a place where an activity for charitable purpose is carried on whether or not such place is principal place of such activity for charitable purpose.

Comments: Place of Activity of religious nature is still not covered by S.133A.

34 Reason to believe to conduct a search not to be disclosed

[Explanations added to S. 132 and S.132A w.e.f. 01-04-1962/01-4-1975]

For conducting search, seizure u/s 132 there must be reason to believe on the basis of information in possession that books of accounts shall not be produced or that money, bullion, jewellery or valuable article or thing shall not be disclosed.

On basis of above reason to believe office may enter place where he has reason to suspect that such books of account, other documents, money, bullion, jewellery or other valuable article or thing are kept;

As per settled judicial principles, such information must be in possession of the authorized official before the opinion is formed. Further, there must be application of mind to the material and the formation of opinion must be honest and bona fide. Consideration of any extraneous or irrelevant material will vitiate the belief/satisfaction. [Supreme Court in ITO v. Seth Bros. [1969] 74 ITR 836 and Pooran Mal v. Director of Inspection (Investigation), Income-tax [1974] 93 ITR 505]

Similarly Sub-section (1A) of section 132 provides that where an authority mentioned therein, based on the information in his possession, has reason to suspect that any books of accounts, other documents, money, bullion, jewellery or other valuable article or thing in respect of which an officer has been authorised to take action u/s 132(1) are or is kept in any building, place, vessel, vehicle or aircraft not mentioned in the authorisation under sub-section (1), he may authorise an authority specified therein to carry out search and seizure in respect of such building, place, vessel, vehicle or aircraft.

Controversy:

Whether the person against whom search warrant is issued is entitled to know the reasons recorded before issuing warrant of authorisation at that stage or at the stage of assessment/appellate proceedings?

Proposed amendment:

It is proposed to insert an Explanation after the fourth proviso to the sub-section (1) of s. 132 so as to provide that the reason to believe recorded by the income-tax authority specified therein under the said sub-section shall not be disclosed to any person or any authority or the Appellate Tribunal.

This amendment will take effect retrospectively from 1stApril, 1962, the date of commencement of the Income-tax Act, 1961.

Similarly, it is proposed to insert an Explanation in the sub-section(1A) of s. 132 so as to declare that reason to suspect recorded by the income-tax authority specified therein under the provisions of the said sub-section shall not be disclosed to any person or any authority, or the Appellate Tribunal.

There is consequential amendment proposed in section 132A relating to powers to requisition books of account, etc. on the similar lines by way of insertion of explanation to section 132A(1) so as to declare that the reason to believe for making the requisition as recorded by the income-tax authority shall not be disclosed to any person or any authority or the Appellate Tribunal.

These amendments will take effect retrospectively from 1st October, 1975, because section 132A was inserted w.e.f. 01-10-1975

Rationale behind amendment:

Confidentiality and sensitivity are the hallmarks of proceedings under section 132 and section 132A. However, certain judicial pronouncements have created ambiguity in respect of the disclosure of ‘reason to believe’ or ‘reason to suspect’ recorded by the income-tax authority to condkuct a search under section 132 or to make requisition under section 132A. Recently, Hon’ble Supreme Court in DGIT (Inv.) vs. Spacewood Furnishing (P) Ltd. [2015] 57 taxmann.com 292 (SC) clarified that, section 132 would not confer on assessee a right of inspection of documents or to a communication of reasons for belief at stage of issuing of authorization, however, at stage of commencement of assessment proceedings after completion of search and seizure, if any, that requisite material may have to be disclosed to assessee.

To nullify the effect of the above judgement, after the proposed amendment, no person, authority or even appellate tribunal shall be entitled to refer to the reasons to believe or reasons to suspect, as the case may be, during the course of assessment or appellate proceedings.

In past certain tribunals, after referring to the reasons to belive recorded by the competent authority u/s 132(1) had decided the appeals in favour of assessees’ by quashing the validity of said reasons alone.[ex: The authorization to conduct search based on reason to believe u/s 132(1) did not exist and search became invalid. Therefore, the assessment order based on the said search could not stand.Parma Ram Bhakar vs. DCIT [2013] 39 taxmann.com 119 (Jodh.),etc.]

Such reasons, however, may have to be placed before the Court in the event of a challenge to formation of the belief of the authorized official in which event the court (exercising jurisdiction under article 226) would be entitled to examine the relevance of the reasons for the formation of the belief though not the sufficiency or adequacy thereof.

35 Provisional Attachment and Valuation during search: [S. 132(9B),(9C),(9D) inserted w.e.f. 01-04-2017

It is proposed to insert sub-section (9B) in the said section, to provide that in a search case, where the authorized officer is satisfied that for the purpose of protecting the interest of revenue and for reasons to be recorded in writing it is necessary so to do he may, by order in writing, attach provisionally any property belonging to the assessee with the prior approval of Principal Director General or Director General or Principal Director or Director.

– It is also proposed to insert sub-section (9C) in the said section, so as to provide that such provisional attachment shall cease to have effect after the expiry of six months from the date of order of attachment.

– It is also proposed to insert sub-section (9D) in the said section, to provide that in a search case, the authorised officer for estimation of fair market value of a property, may make are ference to a Valuation Officer referred to in section 142A,for valuation in the manner provided under the said subsection.

– It is also proposed that the Valuation Officer shall furnish the valuation report within sixty days of receipt of such reference.

These amendments will take effect from 1st April, 2017.

36 Government restrains from reassessing cases beyond 6 years [except in searches after 01-04-2017 where cumulative income escaping assessment is more than 50 lacs for 7th,8th,9th and 10th assessment year] and hence withdraws section 197(c) of Income Declaration Scheme empowering to reopen older cases in normal circumstances also w.e.f 01-06-2016

In Income Declaration Scheme 2016, section 197(c) was inserted. It mentioned that for removal of doubts, it is declared that where any income has accrued, arisen or received or any asset has been acquired out of such income, prior to commencement of the scheme and no declaration is made in respect of such income under the scheme, then such income or such value of the assets is deemed to have been acquired in the year in which a notice under Section 142, 143, 148, 153A, 153C of the Income Tax Act issued by the Assessing Officer, and the provisions of the Income Tax Act shall apply accordingly.

Further to clarify the scheme, circular no.24 of 2016 was issued on 27.06.2016, which sought to reassess those assessment years, the assessment of which is specifically barred by time.

Another circular i.e. circular no.27/2016 dated 14.07.2016 was issued as a clarification on the Income Declaration Scheme 2016 wherein a question regarding the contravention of Section 197(c) with the substantive provisions of the Income Tax Act has been answered by observing that Chapter XI of the Finance Act 2016 being a later law in time shall prevail over the provisions of the earlier laws.

However section 150(ii) of the Finance Bill 2017 seeks to withdraw said section 197(c) which opened the doors of reassessment beyond 6 years in contravention of section 149 of Income Tax Act.

However in search cases initiated after 01-04-2017 , where

Ø books of accounts or

Ø other documents or

Ø evidence

Ø in possession of AO reveal that

Ø income, represented in the form of assets,

Ø whch has escaped assessment represented by assets is 50 lacs or more for 7th,8th,9th and 10th assessment year, then earlier assessment years up to 10th assessment year can also be assessed u/s 153A.

Asset shall include

Ø immovable property being land or building or both

Ø shares and securities

Ø Loans and advances

Ø Deposits in bank accounts

37 Limitation Period for Assessment Changed

1. S. 153(1)

Assessment Year Section and Nature of Assessment Period of Limitation from end of AY
2015-16 Regular Assessment u/s 143/144 21 months i.e. 31-12-17
2016-17 Regular Assessment u/s 143/144 21 months i.e. 31-12-18
2017-18 Regular Assessment u/s 143/144 21 months i.e. 31-12-19
2018-19 Regular Assessment u/s 143/144 18 months i.e. 30-09-2020
2019-20 and Onwards Regular Assessment u/s 143/144 12 Months i.e. 31-3-2021

2. S. 153(2)

Year of service of notice Nature of Assessment Period of limitation from the end of service of Notice u/s 148
2015-16 Assessment u/s 147 9 Months i.e. 31-12-16
2016-17 Assessment u/s 147 9 Months i.e. 31-12-17
2017-18 Assessment u/s 147 9 Months i.e. 31-12-18
2018-19 Assessment u/s 147 9 Months i.e. 31-12-19
2019-20 and Onwards Assessment u/s 147 12 Months i.e. 31-03-2021

3. 153(3)

FY in which Order is received Nature of Assessment Period of Limitation from the end of FY in which order is received
2015-16 ITAT Appeal Effect Order u/s 254 or Fresh Assessment after Revision u/s 263/264 9 Months i.e. 31-12-16
2016-17 ITAT Appeal Effect Order u/s 254 or Fresh Assessment after Revision u/s 263/264 9 Months i.e. 31-12-17
2017-18 ITAT Appeal Effect Order u/s 254 or Fresh Assessment after Revision u/s 263/264 9 Months i.e. 31-12-18
2018-19 ITAT Appeal Effect Order u/s 254 or Fresh Assessment after Revision u/s 263/264 9 Months i.e. 31-12-19
2019-20 and Onwards ITAT Appeal Effect Order u/s 254 or Fresh Assessment after Revision u/s 263/264 12 Months i.e. 31-03-2021

4. Change in Limitation Period u/s 153(5)

Where as a result of CIT order u/s 250, ITAT Order u/s 254, High Court , Supreme Court Orders u/s 260 or 262 or revisions by CIT u/s 263 or 264, assessment has not been annulled but

a) Opportunity of being heard is provided to assesse or

b) Verification of any issue by way of submission of any document by the assesse or any other person is required

The period of order by AO which was 3 months and extendable for 6 further months by approval of CIT has been substituted by same limitation periods as specified u/s 153(3) for consequential orders for

ITAT Appeal Effect Order u/s 254 or Fresh Assessment after Revision u/s 263/264

5. Limitation period for Search Assessment u/s 153A [Section 153B]

Financial Year in which last authorization u/s 132/132A was executed Nature of Assessment Period of Limitation from end of FY in which authorization executed
2015-16 Assessment u/s 153A on person searched 21 months i.e. 31-12-17
2016-17 Assessment u/s 153A on person searched 21 months i.e. 31-12-17
2017-18 Assessment u/s 153A on person searched 21 months i.e. 31-12-17
2018-19 Assessment u/s 153A on person searched 18 months i.e. 30-09-2020
2019-20 and Onwards Assessment u/s 153A on person searched 12 Months i.e. 31-3-2021

6. Limitation period for Search Assessment u/s 153C [Section 153B]

Financial Year in which last authorization u/s 132/132A was executed Nature of Assessment Period of Limitation from end of FY in which authorization executed
2015-16 Assessment u/s 153C on person other than searched 21 months i.e. 31-12-17
2016-17 Assessment u/s 153C on person other than searched 21 months i.e. 31-12-17
2017-18 Assessment u/s 153C on person other than searched 21 months i.e. 31-12-17
2018-19 Assessment u/s 153C on person other than searched 18 months i.e. 30-09-2020
2019-20 and Onwards Assessment u/s 153C on person other than searched 12 Months i.e. 31-3-2021
However if books of accounts or documents or assets seized or requisitioned are handed over to jurisdictional AO in later financial year then period of assessment in case of person other than searched shall be 12 months from the end of financial years in which books etc are handed over.

Taxation of Gifts

38 Taxation of Gifts widened [S.56(2)(x) introduced w.e.f. AY 2017-18]

After abolition of Gift Tax Act w.e.f. 01-10-1998

a) Finance Act 2004 brought section 56(2)(v) w.e.f. AY 2005-06, where by receipt of any sum of money by Individual or HUF for amount exceeding Rs. 25000/- without consideration , was charged to head “Income from other sources”

b) In the case CIT vs Mayawati, it was prounced by ITAT Delhi that 56(2)(v) limit of Rsd. 25000/- does not apply to aggregate of the financial year and hence Rs. 25000/- limit to be applied to each transaction separately and thus taxed only the transactions where amount exceeded Rs. 25000/-. In the said case AY 2006-06 and AY 2006-07 were in question.

c)Finance Act 2006 stopped the operations of 56(v) w.e.f. A.Y. 2007-08 and instead introduced 56(2)(vi) not only enhancing the limit to Rs. 50,000 but also aggregating all the sums of money received without consideration during financial yearand there by taxing the whole of aggregate where it exceeded Rs. 50,000. However the taxation continued on receipt of sum of money only

d) Finance Act 2009 w.e.f. 01-10-2009, stopped the operation of 56(2)(vi) also and instead introduced 56(2)(vii) w.e.f. 01-10-2009 where by not only sum of money but also immovable properties and other properties received without consideration or inadequate consideration exceeding Rs. 50,000/- were taxed. For immovable properties assessed or assessable stamp duty value was the threshold and in case of other properties, FMV calculated by prescribed method was taken.

e) Finance Act 2010, however retrospectively w.e.f. 01-10-2009 took out the cases of inadequate consideration in case of immovable properties to be reintroduced by Finance Act 2013 wef AY 2014-15. Finance Act 2013 also said that where agreement is ante dated to date of registration, the stamp duty value on date of agreement shall be taken provided the consideration has been paid in part or full in non cash mode on or before date of agreement. It may be pertinent to place on record that Under section 47 of Indian Registration Act, a registered document, operates from the date of its execution and not from the date of its registration.

f) Properties other than immovable properties covered by the taxation u/s 56(2)(vii) are shares and securities , jewellery , archeological collections , drawings, paintings, sculptures or any work of art, where in bullion was also added by Finance Act 2010 w.e.f. 01-06-2010.

g) Since the receipt of shares and securities without or for inadequate consideration exceeding Rs. 50,000 was taxable only in the hands of individual, HUF , people started accepting shares and securties throught firms and private companies, where by after pooling resources in private limited company instead of parting with assets , the shares in such private limited company are parted to hand over control to a firm or private company, which is again controlled by some individuals or HUFs. In order to check this area of tax planning , shares of private limited company were made taxable by Finance Act 2010, w.e.f. 01-06-2010 vide Section 56(2)(viia) in the hands of firms and privately controlled companies. Other forms of constitutions like AOP,BOI, Trusts, registered or unregistered, public listed companies were still at large from taxation for receipt of shares of private limited company.

h) Further receipt of any sum of money and immovable properties, and other properties like jewellery, bullion etc were not taxable in the hands of persons other than individuals and HUF.

i) Now Finance Bill 2017 seeks to cover all the shortcomings and lapses in 56(2)(vii) and 56(2)(viia) also and seeks to stop operation of S.56(2)(vii) and 56(2)(viia) w.e.f. AY 2017-18 and replace both 56(2)(vii) and 56(2)(viia) with new clause 56(2)(x) w.e.f. AY 2017-18

j) S.56(2)(x), seeks to tax receipt of money, immovable and other properties, in nature of shares and securities , jewellery , archeological collections , drawings, paintings, sculptures , any work of art or bullion in the hands of all the persons i.e. Individuals, HUF, privately controlled companies, public listed companies, Firm, AOP,BOI, local authority and artificial juridical persons, where the sum of money or property is received without consideration or with inadequate consideration for amount exceeding Rs. 50,000

k) However while u/s 56(2)(vii) exempted sum of money or any property received from

i) Spouse,

ii) brother or sister of Individual or his/her spouse or parent [and also the spouse of brother or sister of Individual or his/her spouse or parent]

iii) lineal ascendant or descendant of Individual or spouse [and also spouse of lineal ascendant or descendant of Individual or spouse]

iv) In case of HUF receipt from any member [However as per S.64(2), throwing property into family hotchpot without adequate consideration shall result income from property becoming taxable in the hands of individual only.]

v) Further receipt of sum form income of the HUF is exempt u/s 10(2). Further it has been held by ITAT Rajkot in Vineet Kumar Raghavji bhai that it is not expressely defined that “relative” represents single person. And it is not always that singular remains singular, it can mean more than one also as is the case with HUF which though separately assessed in Income Tax is a group of relatives. Further ITAT held in above case that assesse is entitled to exemption u/s 10(2) even if amount is not received out of income of relevant previous year but received out of income of earlier years.

vi) Further money or property received on the occasion of marriage was also exempt u/s 56(2)(vii).

vii) Further money or property received under will or inheritance or in contemplation of death of payer or donor was also exempt u/s 56(2)(vii)

As per Section 191 of Indian Succession Act 1925:

(1) A man may dispose, by gift made in contemplation of death, of any movable property which he could dispose of by will.

(2) A gift is said to be made in contemplation of death where a man, who is ill and expects to die shortly of his illness, delivers, to another the possession of any movable property to keep as a gift in case the donor shall die of that illness.

(3) Such a gift may be resumed by the giver, and shall not take effect if he recovers from the illness during which it was made; nor if he survives the person to whom it was made

viii) Further money or property received from local authority u/s 10(20) or fund or institution or hospital or educational institution u/s 10(23C) or trust or institution u/s 12AA was also exempted u/s 56(2)(vii)

ix) Further shares received in certain exempt transfers u/s 47 were also excluded from the purview of S.56(2)(vii)

The above exemptions have been continued in S.56(2)(x) also.

However while all the persons have been taxed , money or property received by following has been further exempted u/s 56(2)(x):

1. Trust or Institution registered u/s 12AA

2. Fund or Institution or hospital or educational institution u/s 10(23C)(iv),(v),(vi),(via)

Comments :

1. Trusts or medical or educational institutions are exempt u/s 11 and 12 and S.10(23C) and are Governed by provisions of Chapter III of Income Tax. Even if exemptions had not been given u/s 56(2)(x),still they can not be taxed under Chapter IV. Applying the same argument though 10(23C)(iiiab)(iiiac),(iiiad),(iiiae) educational and medical institutions having gross recipts below Rs.1 crore or substantially financed by government are not exempted u/s 56(2)(x),still they can not be taxed u/s 56(2)(x).

2. Unregistered Trusts, shall however, get taxed u/s 56(2)(x).

3. Rural agricultural land was and continues to be exempt u/s 56(2)(x) being excluded from capital asset u/s 2(14), mentioned in definition of “property” u/s 56(2)(vii)Explanation (d)

4. None of the provisions u/s 56(2)(vii) have been curtailed u/s 56(2)(x) but expanded.

5. Section 27 provides that for the purposes of sections 22 to 26, an individual who transfers otherwise than for adequate consideration any house property to his or her spouse, not being a transfer in connection with an agreement to live apart, or to a minor child not being a married daughter, shall be deemed to be the owner of the house property so transferred.

6. 56(2)(x) is limited in its application to capital asset and not stock in trade, for which S.43CA is applicable, which again is limited to immovable property.

Capital Gain

39 Impact of Change in base of Cost Inflation Index for Computing Cost of Acquisiton u/s 48 for the purpose of Capital Gain w.e.f. AY 2018-19

Cost of Acquisition in respect of assets acquired before 01-04-81 is taken at fair market value of asset on 01-04-81 and then mounted as per cost inflation index.

Now the cut off date shall instead be 01-04-2001. For assets acquired before 01-04-2001, FMV on 01-04-2001 can be taken and then mounted for cost inflation index.

Cost Inflation Index for 01-04-81 is taken as 100 and that for 01-04-2001 is 426 i.e. 4.26 times. Since the market value of most of capital assets has increased manifold the assesse shall stand to gain from this change in base year.

Rupee value visa vis dollar in 1981 was Rs. 9 which has plummeted to 48 Rs. in 2001. Specially in immovable there is spiraling rise more than 4.26 in most of the cases.

However at the same time gold price in 1981 was Rs. 1800 where as it was 4300 in 2001. Hence capital gain on gold shall cost dearer in new regime, because Cost Inflation Index at present counts the cost gold on 2001 at (1800 x 4.26=7668) which is more than its fair market value on 01-04-2001 i.e. Rs. 4300

40 Section 54EC provides exemption from capital gain arising from transfer of long term capital asset if invested in Rural Electrification Bonds or NHAI Bonds. W.e.f. AY 2018-19, more bonds shall be notified for the purpose.

This shall help in amassing resources for Infrastructure development.

41 Conversion of preference shares to equity shares exempted from capital gain tax ,calculation of holding period and cost for converted equity shares [S.47(xb) and S.2(42A) Explanation1 clause(hf) and S.49(2AE) inserted w.e.f . AY 2018-19]

Conversion of bond or debenture of a company to share or debenture of that company is provided under the section 47 as exempt transfer under clause (x) and (xa).

However conversion of preference shares into equity is not covered by S.47 and hence clause (xb) is being inserted to provide that S.45 shall not apply to any transfer by way of conversion of preference shares of a company into equity shares of that company.

Further in order to calculate holding period of converted equity shares clause (hf) has been inserted to Explanation 1 of S.2(42A) as under :

in the case of a capital asset, being equity shares in a company, which becomes the property of the assessee in consideration of a transfer referred to in clause (xb) of section 47, there shall be included the period for which the preference shares were held by the assesse.

Further in order to calculated the cost of converted equity shares section 49(2AE) has been inserted as under:

Where the capital asset, being equity share of a company, became the property of the assessee in consideration of a transfer referred to in clause (xb) of section 47, the cost of acquisition of the asset shall be deemed to be that part of the cost of the preference share in relation to which such asset is acquired by the assesse.

42 Holding Period and Cost for Consolidated Mutual Funds [S.2(42A)Explanation1clause (hg) and S.49(2AF) inserted w.e.f AY 2018-19]

Consolidation of Mutual Funds was exempted by Finance Act 2015 w.e.f. AY 2016-17 and Finance Act 2016 w.e.f. AY 2017-18 by insererting S.47(xviii) and S.47(xix)

However no corresponding amendment was made in S.2(42A) to define holding period and S.49 to define cost in such cases. Hence Finance Bill 2017 has proposed following :

For Calculation of holding period clause (hg) to Explanation 1 of S.2(42A) being inserted providing that in the case of a capital asset, being a unit or units, which becomes the property of the assessee in consideration of a transfer referred to in clause (xix) of section 47, there shall be included the period for which the unit or units in the consolidating plan of a mutual fund scheme were held by the assesse

For calculation of cost S. 49 (2AF) inserted providing that :

Where the capital asset, being a unit or units in a consolidated plan of a mutual fund scheme, became the property of the assessee in consideration of a transfer referred to in clause (xix) of section 47, the cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the unit or units in the consolidating plan of the scheme of the mutual fund

43 Cost of Indian Company Shares acquired by resulting foreign company from demerged foreign company [S.49(1)(iii)€ amended w.e.f. AY 2018-19

Transfer of shares in Indian company, in case of demerger from one to another foreign company is exempt u/s 47(vic) since AY 2000-01

However corresponding provisions for cost of such shares in S. 49 were missing. Section 49 (1)(iii)(e) has now been amended to provide that cost of acquisition of Indian company shares in the hands of demerged foreign company shall be treated as cost in the hands of resulting foreign company.

44 Rupee appreciation of Indian Company bonds and all trading of Rupee denominated Bonds of Indian Company, outside India in the hands of secondary non resident holder exempted

[S.49(1)(iii)(e)amended and S.47(viiaa)inserted]

As per 5th proviso to S.48 inserted by Finance Act 2016 w.e.f.AY 2017-18, in case of an assessee being a non-resident, any gains arising on account of appreciation of rupee against a foreign currency at the time of redemption of rupee denominated bond of an Indian company subscribed by him, shall be ignored for the purposes of computation of full value of consideration under this section

This provision was inserted for providing tax benefit against rupee appreciation of rupee denominated bonds of India company and so that Indian companies may raise funds from foreign markets more easily.

Since section 48 however, only exempts rupee appreciation in the hands of subscriber and not in case of secondary holders. Hence on the basis of representations received and to further provide relief in respect of gains arising on account of appreciation of rupee against a foreign currency at the time of redemption of rupee denominated bond of an Indian company to secondary holders as well

The word subscribed used in S.48 has been replaced with “held” w.e.f. AY 2018-19.

Further, with a view to facilitate transfer of Rupee Denominated Bonds from non-resident to non-resident, section 47 has inserted S.47(viiaa) to provide that S.45 shall not apply to any transfer, made outside India, of a capital asset being rupee denominated bond of an Indian company issued outside India, by a non-resident to another non-resident.

Comments : However final redemption, whether in the hands of subscriber or secondary holder has not been exempted.

45 Unquoted Shares transferred below FMV shall attract capital gain at FMV {New Section 50CA Introduced w.e.f. AY 2018-19]

Section 56(2)(vi) and 56(2)(viia) [now replaced by 56(2)(x)] tax the transfer of shares below fair market value in the hands of buyer only. There is no tax in the hands of seller.

S.56(viib) taxes privately or closely held companies for issue of shares at above FMV, where shares are issued at more than face Value. Further 56(2)(viib) taxes receipt of consideration money from resident only . Receipt of consideration from non resident is not taxable. Where issue price is more than FMV but lesser than face value, section 56(2)(viib) is not attracted, thus section gets attracted only where shares issued at premium,not otherwise.

However if shares are transferred, section 56(2)(viib) has no application.

Hence taxation has been introduced for transfer of unquoted shares below FMV as under by introducing section 50CA as under:

Where the consideration received or accruing as a result of the transfer by an assesse of a capital asset, being share of a company other than a quoted share, is less than the fair market value of such share determined in such manner as may be prescribed, the value so determined shall, for the purposes of section 48, be deemed to be the full value of consideration received or accruing as a result of such transfer.

Explanation.—For the purposes of this section, “quoted share” means the share quoted on any recognised stock exchange with regularity from time to time, where the quotation of such share is based on current transaction made in the ordinary course of business.’.

Comments:

1. Listed shares which are not quoted regularly on stock exchange shall get covered by the section 50CA

2. Transfer of shares by all the kinds of assesse is covered by S.50CA,whether resident or non resident

3. Although now both buyer and seller shall get taxed, buyer u/s 56(2)(x) and seller u/s 50CA. However buyer shall be taxed only if difference is more than Rs. 50,000 and not otherwise, but seller shall be taxed even if there is Re.1 difference.

46 Cost of Acquisition in case of asset on which accereted income computed in the hands of trust u/s 115TD(2) [S.49(8) Introduced w.e.f. 01-06-2016]

Finance Act 2016 introduced w.e.f. 01-06-2016, S.115TD where by trusts were made chargeable to MMR on Aggregate FMV-Liabilities in case of


a) converted into any form which is not eligible for grant of registration under
section 12AA

b)merged with any entity other than an entity which is a trust or institution having objects similar to it and registered under section 12AA; or

c) failed to transfer upon dissolution all its assets to any other trust or institution registered under section 12AA or to any fund or institution or trust or any university or other educational institution or any hospital or other medical institution referred to in sub-clause (iv) or sub-clause (v) or sub-clause (vi) or sub-clause (via) of clause (23C) of section 10, within a period of twelve months from the end of the month in which the dissolution takes place,

However no consequential provisions for taxation of trust on subsequent disposal of assets were laid specially ,with reference to cost of acquisition to be taken into account in the hands of trust or merged entity

Hence section 49(8) is being introduced to provide that :

Where the capital gain arises from the transfer of an asset, being the asset held by a trust

or an institution in respect of which accreted income has been computed and the tax has been

paid thereon in accordance with the provisions of Chapter XII-EB, the cost of acquisition of such

asset shall be deemed to be the fair market value of the asset which has been taken into account for computation of accreted income as on the specified date referred to in sub-section (2) of section 115TD

47 Capital Gain exemption for long term transfer of equity shares only where STT has been paid at the time of acquisition [Proviso to S.10(38) Inserted w.e.f. AY 2018-19

Section10(38) exempts long term capital gain on equity shares where at the time of transfer STT has been paid

Now proviso has been added to provide condition that exemption on transfer of long term equity shares shall be available only where securities transaction tax has been paid on purhases after 01-10-2004

Comments: The amendment has been brought to check penny stock. However in genuine cases also the assesses shall find it difficult to prove that STT has been paid on very old acquisitions of shares.

Carbon Credits

48 Taxation of Carbon Credits being Introduced [By Inserting Section 115BBF w.e.f. AY 2018-19]

As per Memorandum explaining the provisions of Finance Bill:

Carbon credits is an incentive given to an industrial undertaking for reduction of the emission of GHGs (Green House gases),

including carbon dioxide which is done through several ways such as by switching over to wind and solar energy, forest

regeneration, installation of energy-efficient machinery, landfill methane capture, etc.

The Kyoto Protocol commits certain developed countries to reduce their GHG emissions and for this, they will be given carbon credits.

A reduction in emissions entitles the entity to a credit in the form of a Certified Emission Reduction (CER) certificate. The CER is tradable and its holder can transfer it to an entity which needs Carbon Credits to overcome an unfavourable position on carbon credits.

Income arising from transfer of Carbon Credits is being subject to tax by introducing S.115BBG as under :

(1) Where the total income of an assessee includes any income by way of transfer of carbon credits, the income-tax payable shall be the aggregate of––

(a) the amount of income-tax calculated on the income by way of transfer of carbon credits, at the rate of ten per cent.; and

(b) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (a).

(2) Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provision of this Act in computing his income referred to in clause (a) of sub-section (1).

Explanation.––For the purposes of this section “carbon credit” in respect of one unit shall mean reduction of one tonne of carbon dioxide emissions or emissions of its equivalent gases which is

validated by the United Nations Framework on Climate Change and which can be traded in market at its prevailing market price.

Comments:

1. As per ITAT decisions in M/s. Shree Cement Ltd. [ITA 504/12]

Where company had received carbon credits worth 16 crores for reducing emmissions at its thermal power plant and were claimed capital recipts, the action was confirmed by ITAT. ITAT held that there was no element of profit and gain from carbon credits and hence can not be subjected under any head of Income.

Further quoting Vodafone InterNational 341 ITR 1, it was held that since direct tax code specifically make these receipts taxable as business receipts, they can not be taxed under Income Tax law, which misses any such taxation.

2. Andhra Pradesh High Court has held the carbon credit receipt to be capital receipt in My Home Power Ltd. . Supreme Court has admitted an SLP to examine the issue.

3. Further as per proviso to section 28(va), any sum received as compensation, from the multilateral fund of the Montreal Protocol on Substances that Deplete the Ozone layer under the United Nations Environment Programme, in accordance with the terms of agreement entered into with the Government of India, are not taxable.

4. Further there is no change in definition of Income u/s 2(24).

5. Also carbon credits can be held to be non taxable on the basis of supreme court decisions in Maheshwari Devi Jute Mills [57 ITR 36], where in sale of loom hours was held capital receipt.

6. Also since cost of acquisition is not determinable, principles laid down by Supreme Court in BC Sriniwas Setty can be applied in favour of non taxability of carbon credits.

From the discussion here in above, it can be concluded that what at most be taxed with advent of S. 115BBG is trading of carbon credits. The taxability of carbon credits who has earned them for the first time still appears to be at large from taxation provisions.

49 Penalty on professionals for furnishing incorrect information in statutory report or certificate [Section 271 J inserted w.e.f. 01-04-2017]

Ø Without prejudice to the provisions of this Act,

Ø where the Assessing Officer or the Commissioner (Appeals),

Ø in the course of any proceedings under this Act,

Ø finds that an accountant or a merchant banker or a registered valuer

Ø has furnished incorrect information in any report or certificate

Ø furnished under any provision of this Act or the rules made thereunder,

Ø the Assessing Officer or the Commissioner (Appeals) may direct

Ø that such accountant or merchant banker or registered valuer, as the case may be, shall pay,

Ø by way of penalty, a sum of ten thousand rupees for each such report or certificate.

However penalty u/s 271J can be kept at distance by pleading reasonable cause u/s273B

Comments:

1. Report or certificate may be Audit report or Form 15CB

2. The penalty is restricted to chartered accountant, registered valuer and merchant banker. Authorized Representative, Tax return preparer or banker are not subject to any penalty u/s 271J. There is however prosecution u/s 278 for abetting of false return.

3. In case of assesse there is prosecution u/s 277 and 278 for false statement in verification and for falsification of books of accounts

4. Hence every one else department is accountable

50 PAN provisions in case of TCS [Inserted Section 206CC w.e.f. 04-04-2017]

(1) Notwithstanding anything contained in any other provisions of this Act, any person paying any sum or amount, on which tax is collectible at source under Chapter XVII-BB (herein

referred to as collectee) shall furnish his Permanent Account Number to the person responsible for collecting such tax (herein referred to as collector), failing which tax shall be collected at the higher of the following rates, namely:—

(i) at twice the rate specified in the relevant provision of this Act; or

(ii) at the rate of five per cent.

(2) No declaration under sub-section (1A) of section 206C shall be valid unless the person furnishes his Permanent Account Number in such declaration. [U/s 206C(1A), declaration is filed by resident buyer in Form 27C to the effect that the goods are to be utilised for the purposes of manufacturing, processing or producing articles or things or for the purposes of generation of power and not for trading purposes]

(3) In case any declaration becomes invalid under sub-section (2), the collector shall collect the tax at source in accordance with the provisions of sub-section (1).

(4) No certificate under sub-section (9) of section 206C shall be granted unless the application made under that section contains the Permanent Account Number of the applicant. [For Lower TCS certificate may be issued by AO u/s 206C(9)]

(5) The collectee shall furnish his Permanent Account Number to the collector and both shall indicate the same in all the correspondence, bills, vouchers and other documents which are sent to each other.

(6) Where the Permanent Account Number provided to the collector is invalid or does not belong to the collectee, it shall be deemed that the collectee has not furnished his Permanent Account

Number to the collector and the provisions of sub-section (1) shall apply accordingly.

(7) The provisions of this section shall not apply to a non-resident who does not have permanent establishment in India.

Explanation.For the purposes of this sub-section, the expression “permanent establishment” includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.’.

51 Para 128 of Budget Speech of Finance Minister :“Over the years, the number of tribunals have multiplied with overlapping functions. We propose to rationalize the number of tribunals and merge tribunals wherever appropriate.”
52 Profit Linked Deduction for Startups:

a) Businesses involving :

i) Technology or Intellectual property driven processes or services or

ii) Innovation, Development, Deployment or commercialization of new products

b) Incorporated as company from 01-04-16 to 31-03-2019

c) Turnover not exceeding Rs. 25 crores in any previous year from 01-04-2016 to 31-03-2021

d) Holding certificate of eligible business from Inter Ministerial Board

are eligible for 100% deduction of profits and gains under section 80IAC wef AY 2017-18 for any three consecutive assessment years out of five years beginning from the year in which the eligible start-up is incorporated.

Finance Bill 2017 has allowed 100% profit linked deduction for 3 out of 7 years beginning from the year in which the eligible start-up is incorporated.

Other conditions of not formed by splitting up or reconstruction of existing business; transfer of old machinery and applicability of 80IA (7) to 80IA(11) are also applicable

53 The existing provisions of section 79 of the Act, provides that where a change in shareholding has taken place in a previous year in the case of a company, not being a company in which the public are substantially interested, no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year unless on the last day of the previous year the shares of the company carrying not less than fifty-one per cent of the voting power were beneficially held by person who beneficially held shares of the company carrying not less than fifty-one per cent of the voting power on the last day of the year or years in which the loss was incurred.

However for startups enjoying benefit of profit linked deduction u/s 80-IAC, for the purpose of carry forward of losses, the condition of continuous holding of 51% of voting rights has been relaxed subject to the condition that the holding of the original promoter/promoters continues.

As per section 79(b) loss of start up incurred during the period of seven years beginning from the year in which such company is incorporated can be carried forward and set off against the income of the previous year if, all the shareholders of such company who held shares carrying voting power on the last day of the year or years in which the loss was incurred continue to hold those shares on the last day of such previous year.

Comments : Hence if the start up company increases its issue of share capital and instead of existing shareholders transferring their shares to new shareholders. New share holders are allotted new shares to the extent that voting power of existing shareholders(promoter) gets diluted below 51%, still carry forward and set off of loss shall be allowed, provided the promoters also stay in the company.

Promoter can however walk out in case of death or gift of their shareholding to their relative. In such case there is no condition to such extent for shareholders staying with company or their shareholding not getting reduced below 51%

Further In case of Indian Company as aforesaid (i.e. Private Limited Company) is subsidiary of foreign company and foreign company is amalagamated or demerged (not Indian subsidiary,whose loss is being carried forward) but 51% shareholders of amalgamating or demerged company continue to be shareholders of amalgamated or resulting foreign company,still loss can be carried forward by Indian private company, even if their shareholding in new amalgamated or resulting foreign company drops below 51%.

Comments: Difference between continuation of existing shareholders and maintaining 51% voting powers can be observed in different provisions of the section 79.

54 Interest Income on NPAs can be suspended by Co-operative Banks also [S.43D amended w.e.f AY 2018-19]

As per section 43D Interest Income against non performing assets shall be chargeable to tax in the year of actual receipt or credit to profit and loss account, which ever is earlier, in case of following :

a) Public Financial Institution

b) Scheduled Bank

c) State Financial Corporation

d) State Industrial Investment Corporation

e) Public company providing long term finance for construction or purchase of houses in India for residential purposes and registered with NHB.

Now, co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank shall also enjoy the same benefit of postponing tax till receipt of Income wef AY 2018-19

Comments: Section 43D is applicable to only Interest Income and not other Income like processing fee, legal charges etc.

Further 19 co-operative banks including Punjab State Co-operative Bank Ltd. already fall in the category of scheduled banks. Hence in respect of such banks section 43D was already available

55 Interest Expenditure on Loan or Borrowings from Co-operative Banks to be allowed as expenditure in the year of payment only u/s 43B

As per section 43B(d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a State financial corporation or a State industrial investment corporation], shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him except where sum is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139.

Now, Interest on loan and borrowings from co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank shall also be subject to same disallowance for non payment u/s 43B wef AY 2018-19

Note: S.43B(d) applies to “loan or borrowings” in contradiction to 43B(e) which is applicable to “loan or advance”. Hence advances are outside purview of 43B(d). Whether therefore cash credit limit with co-operative banks shall not be subject to disallowance u/s 43B.

Further 19 co-operative banks including Punjab State Co-operative Bank Ltd. already fall in the category of scheduled banks. Hence in respect of such banks section 43B(e) was already applicable.

56 Depth for claiming deduction for provision for bad and doubtful debts in case of banks enhanced from 7.5% of Income to 8.5% of Income w.e.f AY 2018-19 by amending Section 36(1)(viia)

The existing provisions of sub-clause (a) of section 36(1)(viia) of the Act, inter-alia provides that a scheduled bank (not being

a bank incorporated by or under the laws of a country outside India) or a non-scheduled bank or a co-operative bank other than

a primary agricultural credit society or a primary co-operative agricultural and rural development bank, can claim deduction in

respect of provision for bad and doubtful debts.

The amount of such deduction is limited to 7.5%. of the total income (computed before making any deduction under that clause and Chapter VIA) and an amount not exceeding 10%

of the aggregate average advances made by the rural branches of such bank computed in the prescribed manner at the end

of the previous year.

Now, it is proposed to amend the said sub-clause to enhance the present limit from 7.5% . to 8.5% of the amount of the total income (computed before making any deduction under that clause and Chapter VIA).

57 Income and turnover threshold for books of accounts increased in case of Individual and HUF to 2.5L/25 Lacs [By Inserting First and 2nd Proviso to S.44AA(2) w.e.f AY 2018-19]

Assessees following presumptive taxation u/s 44AD are exempted from maintenance of books of accounts. However, if presumptive taxation is not followed, then books of accounts are required to be prepared as per requirements of section 44AA(2) .

Section 44AA(2) also requires business and non specified professions to maintain books of accounts if income exceeds Rs. 1.20 lacs or turnover exceeds Rs. 10 lacs in any one of the three years immediately preceding the previous year or in case of newly set up business in a previous year , the income/turnover exceeds 1.20/10 lacs in that previous year

Income Threshhold of 1.20 lacs has been increased to 2.50 lacs and turnover threshold of 10 lacs has been increased to 25 lacs .
The Increase is applicable only to individual and HUF. Firm,AOP,BOI shall maintain books as per old limits of 1.20 lacs/10 lacs

58 Tax Audit Limit increased to 2 crore where income is shown as per presumptive income taxation provisions [Amended section 44AB w.e.f. AY 2017-18]

In the Finance Act 2016, presumptive business taxation was taken to 2 crore but audit limit u/s 44AB(a) remained static at 1 crore. Thus business assesses having turnover more than 1 crore though lesser than 2 crore and reflecting 8% or higher income were still required to get accounts audited.

Now as per proviso it is Provided that 44AB shall not apply to the person, who declares profits and gains for the previous year in accordance with the provisions of sub-section (1) of section 44AD and his total sales, turnover or gross receipts, as the case may be, in business does not exceed two crore rupees in such previous year.

Thus audit requirement where 8% income is shown has been abolished. However if lesser income is shown then if turnover is more than 1 crore, then again audit shall be done u/s 44AB(a).

59 Government Sector Buyer not to pay TCS on purchase of motor vehicle exceeding Rs. 10 lacs [By Introducing sub clause(iii) in clause (aa) in Explanation appended to S.206C]

As per Section 206C (1F) Every person, being a seller, who receives any amount as consideration for sale of a motor vehicle of the value exceeding ten lakh rupees, shall, at the time of receipt of such amount, collect from the buyer, a sum equal to one per cent of the sale consideration as income-tax.

The term buyer is defined in clause (aa) of Explanation to S.206C

Now with reference to TCS on sale of motor vehicle for value exceeding Rs. 10 lacs, clause (iii) has been added to provide that:

“(iii) sub-section (1F) means a person who obtains in any sale, goods of the nature specified in the said sub-section, but does not include,—

(A) the Central Government, a State Government and an embassy, a High Commission, legation, commission, consulate and the trade representation of a foreign State; or

(B) a local authority as defined in Explanation to clause (20) of section 10; or

(C) a public sector company which is engaged in the business of carrying passengers

60 Transfer Pricing Audit for domestic expenditure arising from transactions with sister concerns abolished w.e.f. 01-04-2017 [Amending Section 40A(2)(a) Proviso and Section 92BA]

Section 40A(2)(a) empowers AO to disallow expenditure for payments made to sister concerns and considered excessive or unreasonable

However proviso to S.40A(2)(a) exempts above transactions from clutches of 40A(2)(a) if they are proved to be done at arm’s length price.

U/s 92E read with S.139, audit report in Form 3CEB is required to be furnished till 30th November where quantum of specified domestic transactions including 40A(2)(a) transactions exceeds Rs. 20 crores [As per limit stipulated in S.92BA]

However Finance bill has stopped the operation of proviso to 40A(2)(a) till AY 2016-17 and also taken 40A(2)(a) transactions outside the purview of specified domestic transactions.

Comments:

1. No transfer pricing audits shall be conducted on account of transactions with domestic sister concerns from AY 2017-18

2. However domestic transfer pricing provisions shall continue to apply sale to sister concerns where profit linked deductions like 80-IA etc are applicable.

3. The step has been taken to reduce compliance burden of the assesses

4. However doing away transfer pricing audits might result in greater scrutiny at the end of the department

61 Calculation of cost of old asset was used in specified business [ Proviso added to section 43(1) w.e.f. AY 2018-19]

As per section 35AD(7A) Any asset in respect of which a deduction is claimed and allowed under this section shall be used only for the specified business, for a period of eight years beginning with the previous year in which such asset is acquired or constructed

[Comments: It means restriction for use is with reference to year of acquisition and not first year from which deduction is claimed by virtue of proviso to S.35AD, in case of expenditure incurred in earlier years]

As per Section S.35AD(7B) Where any asset, in respect of which a deduction is claimed and allowed under this section, is used for a purpose other than the specified business during the period specified in sub-section (7A), otherwise than by way of a mode referred to in clause (vii) of section 28, the total amount of deduction so claimed and allowed in one or more previous years, as reduced by the amount of depreciation allowable in accordance with the provisions of section 32, as if no deduction under this section was allowed, shall be deemed to be the income of the assessee chargeable under the head “Profits and gains of business or profession” of the previous year in which the asset is so used.

As per S.28(vii) any sum, whether received or receivable, in cash or kind, on account of any capital asset (other than land or goodwill or financial instrument) being demolished, destroyed, discarded or transferred, if the whole of the expenditure on such capital asset has been allowed as a deduction under section 35AD shall be chargeable to income-tax under the head “Profits and gains of business or profession

Hence modes u/s 28(vii) are “demolished, destroyed, discarded or transferred”

Hence use of asset for some other business can invite reversal of expenditure already allowed u/s 35AD by virtue of S.35AD(7B), reduced by depreciation that would have been allowable .

However, if the asset is subsequently sold, the definition of actual cost does not reduce the amount of depreciation which was not treated as Income of the assesse and hence assesse can claim escalated cost for the purpose of deduction.

Hence proviso has been inserted to S.43(1) with respect to definition of actual cost providing that

Ø where any capital asset in respect of which deduction or part of deduction allowed under section 35AD is deemed to be the income of the assessee in accordance with the provisions of sub-section (7B) of the said section,

Ø the actual cost of the asset to the assesse shall be the actual cost to the assessee,

Ø as reduced by an amount equal to the amount of depreciation calculated at the rate in force that would have been allowable had the asset been used for the purposes of business since the date of its acquisition.

Disallowance u/s 40(a)(ia) has been extended to the head Income from Other Sources also by amending Section 58(1A) w.e.f. AY 2018-19.

Whether it shall have any implication for Trusts ? As per ITAT Mumbai in Mahatma Gandhi Seva Mandir and plethora of decisions there after , 40(a)(ia) is applicable only for the purpose of PGBP Income u/s 28 and not trusts.

Under the format of Income Tax Return since there is no column for providing Income derived from property under Trust, assesse may be empted to show it under head “Income from other Sources”. Hence the department may try to cover the assesse under newly amended section 58(1A) read with S.40(a)(ia).

However, the answer still should be in favour of assesse because trust income is computable under Chapter III of Income tax law, while S.58(1A) is for computing Income from other sources falling under Chapter IV.

Set off of Loss under Income from House Property Limited to two lacs [S.71(3A) Introduced w.e.f. AY 2018-19]

As per section 24(b), deduction of interest payable on borrowed capital is allowable as under:

a) Acquisition or Construction of Self occupied Property : Max. Interest deduction allowable is Rs. 2 lacs

b) Repair or Renewal of Self occupied property: max interest deduction is Rs.30,000/-

c) Let out property or unoccupied property- There is no limit to interest deduction

Provisions for Intra Head Set off are there in Section 70, where by there are no restrictions except in case of loss from long term capital asset which can be set off only against long term capital gain

Regarding Inter head loss u/s 71

a) Loss from Income from house property can be set off against any other head of income

b) Business Loss can be set off against any other head except Salaries

c) Capital Assets’ Loss can not be set off against any other head of Income

Finance Bill 2017 proposes to Introduce S.71(3A) w.e.f. AY 2018-19 to provide that Notwithstanding anything contained in sub-section (1) or sub-section (2), where in respect of any assessment year, the net result of the computation under the head “Income from house property” is a loss and the assessee has income assessable under any other head of income, the assessee shall not be entitled to set off such loss, to the extent the amount of the loss exceeds two lakh rupees, against income under the other head

As per section 71B House Property loss which can not be or is not carried forward and set off can be carried forward to next 8 assessment years and can only be set off against House property Income

It means that amount of loss not set off due to application of S.71(3A) can be carried forward u/s 71B but in subsequent years set off against others heads is again not allowed.

 

Read Union Budget Circular here

Conclusion: The above list of amendments is not exhaustive. The author seeks feedback from the readers on the discussions here in above so that creases in text of budget may be ironed out.

(Author :CA Vinamar Gupta, 53-E, DayaNand Nagar-II, Lawrence Road, Amritsar, Mob: 9356048001, ca.skumargupta@gmail.com)

More Under Income Tax

Posted Under

Category : Income Tax (24694)
Type : Articles (13299) Featured (4136)
Tags : Budget (1472) Budget 2017 (351)

2 responses to “Comprehensive Analysis of Direct Tax Proposals in Budget 2017”

  1. vswami says:

    Apropos of Comments on Previous write-ups :

    The write-up says:

    Q
    Impact of Change in base of Cost Inflation Index for Computing Cost of Acquisiton u/s 48 for the purpose of Capital Gain w.e.f. AY 2018-19

    Cost of Acquisition in respect of assets acquired before 01-04-81 is taken at fair market value of asset on 01-04-81 and then mounted as per cost inflation index.

    Now the cut off date shall instead be 01-04-2001. For assets acquired before 01-04-2001, FMV on 01-04-2001 can be taken and then mounted for cost inflation index.

    UQ

    To say the least, the referred change of the law seems to have been misconceived.

    So far as personally read and understood, the proposed amendment, in terms, is only to shift the present base year 1981-82 to 2001-02 – with effect from the assessment year 2018-19 (fiscal 2017-18), and onward ; nothing more. Further, the fact remains that , unlike earlier, effective from 1981-82, the cost of inflation, as having been annually prescribed since then, has to be necessarily factored in for taxing capital gains.

    If so, on enactment of the proposed change, in respect of any property acquired anytime before and held as on 1st April 2001, but sold after 1st April 2018, either the actual cost of acquisition or the ‘indexed cost’ , whichever is higher, might have to be taken into account.

    Cross refer previous Posts.

  2. Riddhisiddhi says:

    nice article

Leave a Reply

Your email address will not be published. Required fields are marked *

Search Posts by Date

June 2017
M T W T F S S
« May    
 1234
567891011
12131415161718
19202122232425
2627282930