Global Minimum Tax, Equlization Levy & Section 195, Section 9B & Section 45(4), New Judgements, Filing ITR & Tax Audit Report; Section 194Q & Section 206AB, New Registration of Trusts, Section 148 Notices & TDS/TCS Changes – vide Finance Act, 2021
Global Minimum Taxation
2 Pillar Approach – Pillar 1 Scope –
1. Multinational enterprises (MNEs)
2. Global turnover above 20 billion euros (INR 1.8 L Cr) and profitability above 10% (i.e. profit before tax/revenue – Facebook, Microsoft, Amazon, etc will come in here)
3. Extractives excluded (Aramco, etc)
4. Regulated Financial Services excluded (Banks, etc)
Nexus –
1. Nexus to market – Countries with GDP of 40 Bl Euro (2.8 L Cr) where where MNE derives atleast 1Ml Euro (INR 9Cr)
2.2 Nexus to market– Countries with GDP of below 40 Bl Euro (2.8L Cr) where where MNE derives at least 0.25 Ml Euro (INR 2 Cr) Quantum –
1. 20-30% of residual profit over 10% of revenue will be allocated to market jurisdictions with nexus using a revenue-based allocation key.
Source Rules & Tax Base Determination –
1. Source Rules Based on Country of Consumption will be laid down
2. Profit/Loss based on Uniform Accounting System
3. Loss to be carried forward
Safe harbour & Elimination of double taxation –
1. Marketing and distribution profits safe harbour – Where Certain Profits are already taxed in a market jurisdiction, safe harbour will cap the residual profits allocated to the market jurisdiction
2. Double taxation of profit allocated to market jurisdictions to be relieved using
exemption/credit method
Compliance & Dispute Resolution –
1. Fast Dispute Resolution
2. arm’s length principle (transfer pricing) Simplified and streamlined
3. Single Entity Compliance
4. Implementation of new international tax rules and removal of all Digital Service Taxes (No Equalization Levy)
The multilateral instrument through which Amount A is implemented will be developed and opened for signature in 2022, with Amount A coming into effect in 2023
2 Pillar Approach – Pillar 2
Scope –
1. Multinational enterprises (MNEs)
2. Global turnover above 750 ml euros (INR 6750 Cr)
3. Not Applicable to Government entities, international organisations, non-profit organisations, pension funds or investment funds
Pillar Two consists of:
1. Two interlocking domestic rules (together the Global anti-Base Erosion Rules (GloBE) rules) –
(i) Income Inclusion Rule (IIR), which imposes top-up tax on a parent entity in respect of the low taxed income of a constituent entity;
(ii) Undertaxed Payment Rule (UTPR), which denies deductions or requires an equivalent adjustment to the extent the low tax income of a constituent entity is not subject to tax under an IIR
(iii) The minimum tax rate used for purposes of the IIR and UTPR will be at least 15%.
(iv) Carve-out will exclude an amount of income that is at least 5% (in the transition period of 5 years, at least 7.5%) of the carrying value of tangible assets and payroll
(v) GloBE rules will also provide for a de minimis exclusion
(vi) exclusion for international shipping income
Implementation
2. Subject to Tax Rule (STTR)) – Allows source jurisdictions to impose limited source taxation on certain related party payments subject to tax below a minimum rate. The STTR will be creditable as a covered tax under the GloBE rules.
Minimum rate for the STTR will be from 7.5% to 9%.
3. Status of GloBE Rules – Optional, but incase applied, have to be done in TOTO
Implementation-
Pillar Two should be brought into law in 2022, to be effective in 2023.
An STTR model provision together with a multilateral instrument to facilitate its adoption.
Transitional rules, including the possibility of a deferred implementation of the UTPR.
Excluding MNEs in the initial phase of their international activity from the application of the global minimum tax will also be explored.
Equalization Levy & S 195
FA 2016 – Chapter VIII
S 163. (1) This Chapter extends to the whole of India except the State of Jammu and Kashmir.
(2) It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint.
(3) It shall apply to consideration received or receivable for specified services provided on or after the commencement of this 1[Chapter, and to consideration received or receivable for ecommerce supply or services made or provided or facilitated on or after the 1st day of April, 2020].
2[Provided that the consideration received or receivable for specified services and for ecommerce supply or services shall not include the consideration, which are taxable as royalty or fees for technical services in India under the Income-tax Act, read with the agreement notified by the Central Government under section 90 or section 90A of the said Act.]
Illustration
Practical Illustration on Levy of Equalisation Levy of 2% on Foreign e-Commerce Operator u/s 165A of the Finance Act, 2016
Amazon receives a consideration of Rs. 100 crores towards the e-commerce supply of goods and services in its Indian market place amazon.in, (which in our example is not to be considered as its PE in India), to Indian Residents during the previous year 2020- Thus, by virtue of the newly inserted section 165A of the Finance Act,2016 Amazon shall be required to deposit an equalisation levy @ 2% on its total turnover of Rs 100 crores from the e-commerce supply of goods and services to the Indian Residents, i.e Rs. 2 crores with the Exchequer in India.
M/s XYZ Pvt Ltd, an Indian Company, has availed the online advertisement services of Google for its business promotion and has made a payment of Rs. 5,00,000/- to Google towards these online advertisement services.
As per provisions of section 165, M/s XYZ Pvt Ltd shall be required to deduct an equalization levy @ 6% from the payment of Rs. 5,00,000/- to Google, i.e. Rs. 30,000/- shall be deducted and deposited by M/s XYZ Pvt Ltd as equalization levy and Google shall receive the payment of Rs. 4,70,000/-.
S 195 – Hardware/ Software Same Product?
2021 (6) TMI 845 – ITAT BANGALORE M/S AUTODESK ASIA PVT. LTD. VERSUS THE DY. COMMISSIONER OF INCOME-TAX (ITA NO. 294) & THE ASST. DIRECTOR OF INCOME TAX (IT (TP) A NO. 1758 (INTL. TAXATION) , CIRCLE-1 (1) , BENGALURU. AND M/S AUTODESK ASIA PVT. LTD. VERSUS THE INCOME-TAX OFFICER (INTL. TAXATION) , WARD-1 (1) , BENGALURU.
TDS u/s 195 – assessee received as consideration towards software licensed to Indian distributors/customer – Royalty u/s. 9(1)(vi) of the Act and Art 12 of India-Singapore DTAA – AO also proposed to tax the consideration received from Indian distributors/customers for sale of hardware as royalty on the basis that hardware and software are inseparable and that the software cannot function in the obscene of hardware – HELD THAT:- Respectfully following the above view in case of Engineering Analysis Centre of Excellence Pvt. Ltd. [2021 (3) TMI 138 – SUPREME COURT] we hold that purchase of software in the present facts does not amount to give rise to any taxable income in India as a result of which provisions of sec. 195 of the Act are not attracted. The assessee does not have any obligation to deduct tax at source. Therefore, provisions of sec. 9(1)(vi) along with Explanation 2 is not applicable to present assessee’s.
S 9(1)(vii)
S 9(1)(vii) Explanation 17[2].-For the purposes of this clause, “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technicalor consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries”.]
S 195 – Repair Work – FTS ? Business Connection
Income accruing or arising in India u/s 9(1)(i) – amount received by the assessee from Tata Communications Ltd. (“TCL”) as Standby Maintenance Charges – CIT(A) concluded that the entire amount of turnover (receipts) of Standby Maintenance Charges received by the assessee from TCL was to be treated as its turnover for the purpose of taxation in India – whether the CIT(A) had rightly observed that the Standby Maintenance Charges received by the assessee from TCL was not liable to be taxed as FTS and was to be brought to tax as its ‘business income’?
– HELD THAT:- As decided in own case [2019 (3) TMI 1893 – ITAT MUMBAI] we find that after exhaustive deliberations the Tribunal had concluded that the Standby Maintenance Charges received by the assessee from TCL could not be assessed as FTS and was its ‘business income’ that was taxable only to the extent of its reference to the “business connection” in India
Amounts received by the assessee towards Standby Maintenance Charges from TCL were not in the nature of FTS u/s 9(1)(vii) of the Act, and was to be assessed as its business income, and that too only to the extent of its reference to the “business connection” in India. At the same time, not finding favour with the view taken by the CIT(A) that the entire turnover (receipts from the Indian parties) of Standby Maintenance Charges was liable to be treated as turnover for the purpose of taxation in India, we vacate the same. – Decided in favour of assessee.
S 195 on Foreign Agent’s Commission?
2021 (6) TMI 703 – ITAT DELHI ACIT, CIRCLE-47 (1) VERSUS GURCHARAN SINGH TDS u/s 195 – Disallowance of commission expenditure paid to foreign agents for non-deduction of tax –
HELD THAT:- It is not the case of the revenue that export commission income of foreign agent for soliciting orders from outside India was earlier chargeable to tax and CBDT circulars exempted it. Withdrawal of those circulars does not have any impact on taxability of export commission and TDS there on. In the present case It is an established fact that agents are non-residents, operating their business activity outside India, commission payments is related to their service rendered outside India and Revenue could not show that those commission agents have any permanent establishment in India. Assessee has consistently denied that they do not have any permanent establishments in India. Further the commission was remitted to them directly outside India.
The issue is squarely covered in favor of the assessee that foreign commission paid to foreign agents no tax is required to be deducted u/s 195 of the Act and, therefore, disallowance u/s 40(a)(ia) has correctly been deleted. Thus, we confirm the order of the Id. CIT (Appeals) and dismiss ground Nos. 1 and 2 of the appeal of AO.
FA 2016 – Chapter VIII
S 164 [(ca) “e-commerce operator” means a non-resident who owns, operates or manages digital or electronic facility or platform for online sale of goods or online provision of services or both;
(cb) “e-commerce supply or services” means-
(i) online sale of goods owned by the e-commerce operator; or
(ii) online provision of services provided by the e-commerce operator; or
(iii) online sale of goods or provision of services or both, facilitated by the e-commerce operator; or
(iv) any combination of activities listed in clause (i), (ii) or clause (iii);]
3[Explanation.––For the purposes of this clause, “online sale of goods” and “online provision of services” shall include one or more of the following online activities, namely:––
(a) acceptance of offer for sale; or
(b) placing of purchase order; or
(c) acceptance of the purchase order; or
(d) payment of consideration; or
(e) supply of goods or provision of services, partly or wholly;]
(d) “equalisation levy” means the tax leviable on consideration received or receivable for any specified service 2[or e-commerce supply or services] under the provisions of this Chapter;
FA 2016 – Chapter VIII
165.(1) On and from the date of commencement of this Chapter, there shall be charged an equalisation levy at the rate of six per cent. of the amount of consideration for any specified service received or receivable by a person, being a non-resident from––
(i) a person resident in India and carrying on business or profession; or
(ii) a non-resident having a permanent establishment in India.
(2) The equalisation levy under sub-section (1) shall not be charged, where –
(a) the non-resident providing the specified service has a permanent establishment in India and the specified service is effectively connected with such permanent establishment;
(b) the aggregate amount of consideration for specified service received or receivable in a previous year by the non-resident from a person resident in India and carrying on business or profession, or from a non-resident having a permanent establishment in India, does not exceed one lakh rupees; or
(c) where the payment for the specified service by the person resident in India, or the permanent establishment in India is not for the purposes of carrying out business or profession.
1[Charge of equalization levy on e-commerce supply of services.
165A. (1) On and from the 1st day of April, 2020, there shall be charged an equalisation levy at the rate of two per cent. of the amount of consideration received or receivable by an e-commerce operator from e-commerce supply or services made or provided or facilitated by it-
(i) to a person resident in India; or
(ii) to a non-resident in the specified circumstances as referred to in sub-section (3); or
(iii) to a person who buys such goods or services or both using internet protocol address located in India.
1[Charge of equalization levy on e-commerce supply of services.
165A. (2) The equalisation levy under sub-section (1) shall not be charged-
(i) where the e-commerce operator making or providing or facilitating e-commerce supply or services has a permanent establishment in India and such e-commerce supply or services is effectively connected with such permanent establishment;
(ii) where the equalisation levy is leviable under section 165; or
(iii) sales, turnover or gross receipts, as the case may be, of the e-commerce operator from the e-commerce supply or services made or provided or facilitated as referred to in sub-section (1) is less than two crore rupees during the previous year.
165A. (3) For the purposes of this 2[section, –
(a) “specified circumstances” mean––]
(i) sale of advertisement, which targets a customer, who is resident in India or a customer who accesses the advertisement though internet protocol address located in India; and
(ii) sale of data, collected from a person who is resident in India or from a person who uses internet protocol address located in India.]
3[(b) consideration received or receivable from e-commerce supply or services shall include––
(i) consideration for sale of goods irrespective of whether the e-commerce operator owns the goods, so, however, that it shall not include consideration for sale of such goods which are owned by a person resident in India or by a permanent establishment in India of a person non-resident in India, if sale of such goods is effectively connected with such permanent establishment.
(ii) consideration for provision of services irrespective of whether service is provided or facilitated by the ecommerce operator, so, however, that it shall not include consideration for provision of services which are provided by a person resident in India or by permanent establishment in India of a person non-resident in India, if provision of such servicesis effectively connected with such permanent establishment.]
Consequent to this new Equalisation Levy, an amendment has been made under section 10(50) of the Income Tax Act. Accordingly, any income arising from ecommerce supply or services which will be covered by the Equalisation Levy will now be exempt from tax under section 10(50).
GLOBAL MINIMUM TAXATION
Premium on Prepayment of Loan – Is it deferred
2021 (7) TMI 259 – MADRAS HIGH COURT : COMMISSIONER OF INCOME TAX, CORPOORATE CIRCLE 3, CHENNAI. VERSUS M/S. THIRU AROORAN SUGAR LIMITED
Deferred expenditure – Whether Tribunal is right in holding that the expenditure was crystalized during the relevant previous year when the assessee hijmself has classified the expenses as “prior period expenditure”? – Tribunal held that one time payment made by the assessee towards prepayment premimum and interest compense is business expenditure in the nature of revenue Expenditure
– HELD THAT:- Having regard to the submissions made by the learned counsel on either side, following the ratio laid down in SUSHIL KUMAR GUPTA [2012 (9) TMI 621 – SC ORDER] the questions of law are decided against the Revenue and in favour of the assessee.
GST on Rent – Income? Local Taxes?
2021 (7) TMI 186 – ITAT CHANDIGARH : SH. ASHOK KUMAR VERSUS THE DCIT (CENTRALISED PROCESSING CENTRE) , INCOME TAX DEPARTMENT, BANGALURU.
Disallowance u/s 43B on account of GST remaining unpaid –
Facts relating to the issue need to be determined and verified in the first place, including amongst other things as to which component of income the GST relates to whether rental income or income from business and profession. If it found to relate to rental income then whether it has been included in the rental income returned by the assessee . If it has not been returned, there is no occasion for making any disallowance at all, but if it has been returned as rental income, then the issue needs to be determined in the light of section 23 of the Act which allows deduction of “local taxes” from rental income on payment basis and it needs to be decided whether the GST is covered under the same or not.
Disallowance of GST therefore restored back to the CIT(A) to be decided afresh after ascertaining all relevant facts and thereafter adjudicating the issue in accordance with law, giving due opportunity of hearing to the assessee. Appeal of the assessee is partly allowed for statistical purposes.
S 37 – Assets for Personal Use – Evidence?
2021 (7) TMI 3 – ITAT CHENNAI SHRI VENKATESH DAGGUBATI VERSUS THE ACIT, NON CORPORATE CIRCLE – 20 (1)
Disallowance of depreciation on car – AO has made ad hoc disallowance of 25% of depreciation on car, on the ground that use of car for personal purposes cannot be ruled out – HELD THAT:- AO has disallowed ad hoc depreciation on car without bringing on record any evidence to prove that the assessee has used car for personal purpose. No doubt, if an asset is used for personal purpose, expenses relatable to such personal use can be disallowed.
However, before doing so, it is for the AO to bring on record to suggest use of asset for personal purpose. In this case, nothing has been brought on record to prove the case of the AO that car was used for personal purpose. Therefore, we are of the considered view that the AO was erred in making ad hoc disallowance of depreciation on car and hence, we direct the AO to delete addition made towards ad hoc disallowance of depreciation on car.
Interplay of S 9B/45(4) /48
Sec 9B.
9B. (1) Where a specified person receives during the previous year any capital asset or stock in trade or both from a specified entity in connection with the dissolution or reconstitution of such specified entity, then the specified entity shall be deemed to have transferred such capital asset or stock in trade or both, as the case may be, to the specified person in the year in which such capital asset or stock in trade or both are received by the specified person.
(2) Any profits and gains arising from such deemed transfer of capital asset or stock in trade or both, as the case may be, by the specified entity shall be-
(i) deemed to be the income of such specified entity of the previous year in which such capital asset or stock in trade or both were received by the specified person; and
(ii) (ii) chargeable to income-tax as income of such specified entity under the head “Profits and gains of business or profession” or under the head “Capital gains“, in accordance with the provisions of this Act.
(3) For the purposes of this section, fair market value of the capital asset or stock in trade or both on the date of its receipt by the specified person shall be deemed to be the full value of the consideration received or accruing as a result of such deemed transfer of the capital asset or stock in trade or both by the specified entity.
Explanation.–– For the purposes of this section,-
(i) “reconstitution of the specified entity” means, where-
(a) one or more of its partners or members, as the case may be, of such specified entity ceases to be partners or members; or
(b) one or more new partners or members, as the case may be, are admitted in such specified entity in such circumstances that one or more of the persons who were partners or members, as the case may be, of the specified entity, before the change, continue as partner or partners or member or members after the change; or
(c) all the partners or members, as the case may be, of such specified entity continue with a change in their respective share or in the shares of some of them;
(ii) “specified entity” means a firm or other association of persons or body of individuals (not being a company or a co-operative society);
(iii) “specified person” means a person, who is a partner of a firm or member of other association of persons or body of individuals (not being a company or a co-operative society) in any previous year.]
Interplay of Sec 9B. 45(4) & 48
21[(4) Notwithstanding anything contained in sub-section (1), where a specified person receives during the previous year any money or capital asset or both from a specified entity in connection with the reconstitution of such specified entity, then any profits or gains arising from such receipt by the specified person shall be chargeable to income-tax as income of such specified entity under the head “Capital gains” and shall be deemed to be the income of such specified entity of the previous year in which such money or capital asset or both were received by the specified person, and not with standing any thing to the contrary contained in this Act, such profits or gains shall be determined in accordance with the following formula, namely:-
A = B+C-D
Where,
A = income chargeable to income-tax under this sub-section as income of the specified entity under the head “Capital gains”;
B = value of any money received by the specified person from the specified entity on the date of such receipt;
C = the amount of fair market value of the capital asset received by the specified person from the specified entity on the date of such receipt; and
D = the amount of balance in the capital account (represented in any manner) of the specified person in the books of account of the specified entity at the time of its reconstitution:
Provided that if the value of “A” in the above formula is negative, its value shall be deemed to be zero:
Provided further that the balance in the capital account of the specified person in the books of account of the specified entity is to be calculated without taking into account the increase in the capital account of the specified person due to revaluation of any asset or due to self-generated goodwill or any other self-generated asset.
Explanation 1.––For the purposes of this sub-section,-
(i) the expressions “reconstitution of the specified entity”, “specified entity” and “specified person” shall have the meanings respectively assigned to them in section 9B;
(ii) “self-generated goodwill” and “self-generated asset” mean goodwill or asset, as the case may be, which has been acquired without incurring any cost for purchase or which has been generated during the course of the business or profession.
Explanation 2.-For the removal of doubts, it is clarified that when a capital asset is received by a specified person from a specified entity in connection with the reconstitution of such specified entity, the provisions of this sub-section shall operate in addition to the provisions of section 9B and the taxation under the said provisions thereof shall be worked out independently.]]
Finance Act 2021, introduced a new section, section 9B under income tax act which specifies the provision related to transfer of Capital Assets or stock in trade on Reconstitution or Dissolution of Firm / AOP, etc.
Applicability.
If the All of the following conditions are satisfied;
- There should be a Specified entity
- There should be a Specified Person
- Transfer of Capital Assets / Stock in trade / both
- In connection with the dissolution / reconstitution.
If the above conditions are fulfilled;
- Such transfer is said to be Deemed Transfer
- Profit & Gain on such deemed transfer shall be deemed to be an income of such Specified entity.
- Deemed income shall be recognized in the previous year in which specified person received such capital assets or stock in trade or both. (i.e., Income in the year of receipt).
- Nature of income shall be determined as per the nature of assets ( Taxed either as Capital Gain or as PGBP Income).
- FULL VALUE OF CONSIDERATION = FMV OF CA / SIT on the date of receipt of such assets.
Salient Features
Reconstitution means:
1. One or more members ceases to be partners/members of such specified entities.
2. One or more person admitted as a partner in the already existing specified entity in which one or more partners of a specified entity before a change continue to be a partner of such specified entity.
3. All or either of the partners of the specified entity continues with the change of their respective share.
Section 9B is a deeming provision, which enables certain income will be taxable in the hand of a specified entity. “specified entity” means a firm or other association of persons or body of individuals (not being a company or a co-operative society);
(iii) “specified person” means a person, who is a partner of a firm or member of other association of persons or body of individuals (not being a company or a co-operative society) in any previous year.]
Sec 9B It is not a computation provision, for computation provision of PGBP or Capital gain will apply.
Dissolution : A dissolution brings partnership comes to an end.
What is Capital Asset?
An asset which is not an asset as per section 2(14), then the said asset is not a capital asset for the purpose of section 9B. it includes either movable, immovable, or actionable claims but does not include Stock in trade, Personal effects other than jewelry, Agricultural land, Gold Bond, and special bearer bond.
What is Deemed Transfer
Transfer of Capital asset or stock in trade by a specified entity to a specified person in the event of reconstitution or dissolution is treated as deemed transfer. It overruled various judgment which held that Distribution, division, or allotment of assets by partnership firm upon dissolution or reconstitution is nothing but mutual adjustment of rights between partners.
Year of Transfer and Taxation.
It is deemed to be transferred in the year, in which such capital asset or stock in trade is received by a specified person. And shall be taxed on the hand of specified entity in the year in which it is received by specified person.`
METHOD OF COMPUTATION
Profit & gain on transfer of capital assets is chargeable to capital Gain, & all the provisions from section 45 to section 55A shall apply accordingly, except to the extent provision is in conflict with section 9B, as 9B is a special provision.
- Compute the gain as per section 48.
- Cost of acquisition shall be taken FMV as of 1. 04. 2001 if it is purchased before said date.
- The benefit of indexation shall be taken.
Profit & gain on transfer of stock in trade shall be computed in the manner provided in sections 28 to 44DB.
Example 1
Example 1: There are 3 partners “A”, “B” and “C” in a firm “FR”, having one third share each. Each partner has a capital balance of Rs.10 Lakh in the firm. 3 pieces of lands “S”, “T” and “U” in that firm and there is no other capital asset in that firm. Book value of each of the land is Rs. 10 lakh. All these three lands were acquired by the firm more than two years ago.
Partner “A” wishes to exit. The firm revalues its lands based on valuation report from a registered valuer, as defined in rule 11U of the Rules, and as per that valuation report fair market value of lands “S” and “T” is Rs 70 lakh each, while fair market value of land “U” is Rs.50 lakh. On the exit of partner “A”, the firm decides to give him :11 lakh of money and land “U” to settle his capital balance.
In accordance with the provisions of section 9B of the Act, it would be deemed that the firm “FR” has transferred land “U” to the partner “A” at its fair market value of Rs.50 lakh. Let us assume that the indexed cost of acquisition of land “U” is Rs. 15 lakh.
Now on account of the deeming provisions of section 9B of the Act, it is deemed that the firm “FR” has transferred land “U” to partner “A”. Thus, an amount of Rs.50 lakh less Rs.15 lakh would be charged to tax in the hands of firm “FR” under the head “Capital gains”. For partner “A”, the cost of acquisition of this land would be Rs.50 lakh. Hence, the amount of Rs. 35 lakh is charged to long term capital gains and let us assume that the tax is Rs. 7 lakh(assume no surcharge or cess just for ease of calculation and illustration purposes).
Example 2
Example 2: There are three partners “A”, “B” and “C” in a firm “FR”, having one third share each. Each partner has a capital balance of Rs. 10 lakh in the firm. There are three pieces of lands “S”, “T” and “U” in that firm and there is no other capital asset in that firm. All these three lands were acquired by the firm more than two years ago.
Book value of each of the land is Rs. 10 lakh. Partner “A” wishes to exit. The firm sells land “U” for its fair market value of Rs. 50 lakh.
Example 3
There are three partners ‘‘A”, “B” and “C” in a firm “FR”, having one third share each. Each partner has a capital balance of ₹ 100 lakh in the firm. There is a piece of land “S” of book value of ₹ 30 lakh. There is patent “T” of written down value of ₹ 45 lakh. And there is cash of ₹ 225 lakh. The land was acquired by the firm more than two years ago. The patent was acquired/developed/registered one year back.
Partner “A” wishes to exit. The firm revalue its land and patent based on valuation report from a registered valuer, as defined in rule 11U of the Rules, and as per that valuation report fair market value of land “S” is ₹ 45 lakh and fair market value of patent “T” is ₹ 60 lakh.
As per the valuation report there is also self-generated goodwill of ₹ 30 lakh. On the exit of partner “A”, the firm decides to give him ₹ 75 lakh in money and land “S” to settle his capital balance.
In accordance with the provisions of section 9B of the Act, it would be deemed that the firm “FR” has transferred land “S” to the partner “A” at its fair market value of ₹ 45 lakh. Let us assume that the indexed cost of acquisition of land “S” is ₹ 45 lakh.
Now on account of the deeming provisions of section 9B of the Act, it is deemed that the firm “FR” has transferred land “S” to partner “A”. However, since the sale consideration is equal to indexed cost of acquisition, there will not be any capital gains tax. For partner “A”, the cost of acquisition of this land would be ₹ 45 lakh.
The net book profit of ₹ 15 lakh (capital gains of ₹ 15 lakh without indexation) is to be credited in the capital account of each of the three partners, i.e. ₹ 5 lakh each. Thus partner “A” capital account would increase to ₹ 105 lakh. This exercise is required to be carried out since section 9B of the Act mandates that it is to be deemed that the firm “FR” has transferred the land “S” to partner “A”. Thus, any gain in the books is to be apportioned to partners’ capital accounts.
As against capital balance of ₹ 105 lakh, partner “A” has received ₹ 120 lakh (money of ₹ 75 Lakh plus land “S” of fair market value of ₹ 45 lakh). Thus ₹ 15 Lakh is required to be charged to tax under sub-section (4) of section 45 of the Act.
On account of clause (iii) of section 48 of the Act, read with rule 8AB of the Rules and this guidance note, this ₹ 15 lakh is to be attributed to the remaining capital assets of the firm “FR” on the basis of increase in the value due to revaluation of existing capital assets, or due to recognition of the value of self-generated goodwill, based on the valuation report of registered valuer. In this case as per this report the value of patent “T” has increased by ₹ 15 lakh and the self-generated goodwill value has been recognised at ₹ 30 lakh. Thus one third of ₹ 15 lakh (i.e. ₹ 5 lakh) would be attributed to patent “T”, while two third of ₹ 15 lakh (i.e. ₹ 10 lakh) would be attributed to self-generated goodwill, ₹ 5 lakh attributed to patent “T” shall not be added to the block of the assets and no depreciation shall be available on the same. When patent “T” gets transferred subsequently, this ₹ 5 Lakh attributed shall be reduced from the full value of the consideration received or accruing as a result of transfer of patent “T” by the firm “FR”, and the net value shall be considered for reduction from the written down value of the intangible block under sub-clause (c) of clause (6) of section 43 of the Act or for calculation of capital gains, as the case may be, under section 50 of the Act. (Refer guidance in paragraph 5 of this circular). Let us say that Patent T is sold for ₹ 25 lakh. ₹ 5 lakh shall be reduced from ₹ 25 lakh and only net amount of ₹ 20 lakh shall be considered for reduction from the written down value of the intangible block under sub-clause (c) of clause (6) of section 43 of the Act or for calculation of capital gains, as the case may be, under section 50 of the Act. Similarly when goodwill gets sold subsequently, ₹ 10 lakh would be reduced from its sales consideration under clause (iii) of section 48.
The amount of ₹ 15 lakh which is charged to tax under sub-section (4) of section 45 of the Act shall be charged as short term capital gains, as ₹ 5 lakh is attributed to the Patent “T” which is part of block of assets and ₹ 10 lakh is attributed to self-generated goodwill. In accordance with sub-rule (5) of Rule 8AA of the Rules, both of these are to be characterised as short term capital gains.
Note: For the purpose of calculation of depreciation under section 32 of the Act, the written down value of the block of asset “intangible” of which Patent “T” is part, would remain ₹ 45 lakh and would not be increased to ₹ 60 lakh due to revaluation during the year. In this regard it may be highlighted that the following provisions are relevant in determining the amount on which depreciation is allowable under the Act:
- Explanation 2 of sub-section (1) of section 32 of the Act provides that the term “written down value of the block of assets” shall have the same meaning as in clause (c) of sub-section (6) of section 43 of the Act.
- Clause (c) of sub-section (6) of section 43 of the Act, with respect to block of assets, inter-alia, provides that the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year is to be increased by the actual cost of any asset falling within that block, acquired during the previous year. This clause does not allow any increase on account of revaluation.
- Sub-section (1) of section 43 of the Act which defines ‘’Actual cost” as actual cost of the assets to the assessee. In revaluation, there is no actual cost to the assessee Further, section 32 of the Act does not allow depreciation on goodwill. If in the given example “self-generated goodwill” is replaced by “self-generated asset”, even then the depreciation will not be admissible on the amount of ₹ 30 lakh recognised in valuation. In this regard it may be highlighted that the above mentioned provisions, in the immediate preceding paragraph, are also applicable to “self-generated asset” and since there is no actual cost to assessee in case of “selfgenerated asset”, depreciation is not allowable under section 32 of the Act on an asset whose actual cost is nil.
Key Changes in ITR
Changes wr.t. section 115BAC/115 BAD and tax rates
1. Option to avail benefit u/s 115BAC/115 BAD for Cooperative societies is provided in ITRs
2. Option of Filing ITR in response to notice u/s 153A and 153C is removed from ITR as requirement to file ITR under these sections is omitted.
3. Now, assessee needs to disclose surcharge before “Marginal Relief” and after “Marginal relief” in Schedule Part BTTI.
4. In case of domestic company, 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 2017 18 does not exceed four hundred crore rupees. For AY 2021 22 the previous year 2018 19 is changed to 2018 19
Changes wr.t. to dividend
1. Quarterly breakup of dividend is required, which will also have an impact on computation of interest u/s 234C
2. Dividend removed from Exempt Income
3. In schedule BP, breakup of income considered under other sources is required as follows:
a) Dividend Income
b) Other than Dividend Income
4. In Schedule other sources, dividend is required to be declared under 2 categories
a) Dividend u/s 2(22)(e)
b) Other Dividend
5. The existing drop down at Sl. No. 2d “115AD(1)(i)‐ Income received by an FII in respect of securities (other than units referred to in section115AB)” bifurcated into 2 drop downs as under:‐
a) 115AD(1)(i)‐Income being Dividend received by an FII in respect of securities (other than units referred to in section115AB) @20%
b) 115AD(1)(i)‐Income being other than dividend income received by an FII in respect of securities (other than units referred to in section115AB) @20%
6. Schedule for DDT has been removed
Changes in tax audit
1. The limit for tax audit has been increased from 5 crores to 10 crores provided cash sales and cash purchases are less than 5%
2. Annexure 2 is inserted in instructions w.r.t. ITR fields which should be tallied with corresponding amount mentioned in Tax Audit report i.e. Form 3CA 3CD/3CB 3CD, if applicable.
Changes w.r.t. Depreciation
1. In Schedule DPM, the column “3a.Amount as adjusted on account of opting for taxation section 115BAC” and “3b. Adjusted Written down value on the first day of previous year (3) + (3a)” has been added . Hence corresponding mapping changes are made in schedule DPM
2. CBDT vide notification dated 20th September 2019 increased depreciation to 45% on motor cars, motor buses etc w.r.t. assets purchased on or after the 23rd day of August, 2019 but before the 1st day of April, 2020 and is put to use before the 1st day of April, 2020. Therefore, no additions will be allowed in 45% block from the AY 2021 22 w.r.t to such assets
Changes w.r.t. Chapter VI and Section 80
1. Date of Donation made in cash has inserted to calculate eligible amount of donation u/s 80GGA
2. In schedule 80IB , the deductions claimed in following sections are removed due to sunset clause and corresponding mapping changes are made in schedule VI A
a) Deduction in respect of industrial undertaking located in industrially backward states specified in Eighth Schedule [Section 80 IB(4)]
b) Deduction in respect of industrial undertaking located in industrially backward districts [Section 80 IB(5)]
c) Deduction in the case of an undertaking operating a cold chain facility [Section 80 IB(11)]
3. In Schedule Part B TI “Sl. No.11b” Part C deductions claimed under chapter VI A , restriction of ii5 of BFLA is removed due to deduction claimed u/s 80P
4. In Schedule VI A, under part C new deduction is inserted “Section 80M(Intercorporate dividend) for Domestic Company
Changes w.r.t. Carry forward losses/ unabsorbed Depreciation
1. In Schedule CFL, the bifurcation of PTI loss and other than PTI loss has been removed from “HP loss”, “Short term capital loss” and “Long term capital Loss”
2. Loss (negative value) under “No books of account” at sl.no.65 in Sch P&L is restricted.
3. In Schedule CFL, the column “5b. Amount as adjusted on account of opting for taxation under section 115BAC” and “5c. Brought forward Business loss available for set off during the year” has been added . Hence corresponding mapping changes are made in schedule CFL
4. In Schedule UD, “Amount as adjusted on account of opting for taxation under section 115BAD” field has been added as an adjustment for 115BAC and so only balance loss can set off against income in Schedule BFLA.
Tax on Esop’s
Sl.No. 8 “Gross tax payable (higher of 1d and 7)” of Schedule Part B TTI has been bifurcated in below two fields
1. SI. No. 8a – “Tax on income without including income on perquisites referred in section 17(2)(vi) received from employer, being an eligible start up referred to in section 80 IAC (Schedule Salary)”
2. SI. No. 8b – “Tax deferred relatable to income on perquisites referred in section 17(2)(vi) received from employer, being an eligible start up referred to in section 80 IAC”
Other Amendments
1. Changes in Capital Gains – In Schedule CG, the allowable difference between full value of consideration u/s. 50 C and value of property as per stamp authority has been increased from 1.05 times to 1.10 times
2. Schedule DI (Details of Investment) has been removed as it was relevant only for AY 20 21
3. In Schedule TDS, earlier TDS credit is allowed only if corresponding income is being offered for tax this year , however exception is being added for TDS u/s 194N. Also the label is amended to include form 16D for the claim of TDS
Key Changes Tax Audit Report and critical aspects of tax audit
Key Amendments in form 3CD
1. Due to the differences in due dates for filing form 3CD and ITR, there arises a situation for payments specified under section 43B, whereby some payments may be made after uploading form 3CD. A new rule has been introduced to mitigate this whereby a revised report may be filed duly certified by an accountant for payments made with respect to 43B
2. In point number 17 to form 3CD, the auditor now has to state whether section 43CA or section 50C are applicable in case land or building or both are transferred during the previous year
3. In schedule for depreciation in clause 18, the auditor has to specify adjustments on account of section 115BAC/ 115BAD or adjustments to goodwill
4. In schedule for carry forward of losses in clause 32, the auditor has to specify adjustments on account of section 115BAC/ 115BAD
5. Clause 30C w.r.t. GAAR provisions kept in abeyance till 31st March 2021
6. Clause 44 w.r.t. reconciliation of GST records kept in abeyance till 31st March 2021
Critical aspects to be kept in mind for form 3CD and ITR filing
1. Reconciliation with GST records with respect to turnover
2. Reconciliation of GP Ratio and other ratio
3. Applicability of TCS under section 206(1H) and reporting there of in clause number 34 to form 3CD
4. If the assessee is filing ITR u/s 115 BAC/ 115BAD whether form 10F has been filed by the assessee
5. Now it is mandatory to reconcile the Tax audit with ITR in annexure 2 to ITR
6. Any delay in filing/ payment of ESI/ PF will be disallowed as per new laws
7. Quarterly dividend to also include TDS on dividend
8. Validation of bank accounts a must for refunds
9. New ITR portal- profile updating so that smooth communication can occur
Clarifications on 194Q/ 206AB
Clarifications w.r.t. 194Q
1. Section 194Q not to apply to transactions in securities and commodities traded through recognized stock exchange.
2. Transactions in electricity, renewable energy certificates and energy savings certificates traded through registered power exchanges.
3. Section 194Q only to apply where both credit to accounts for purchase and payment thereof has happened after 1st July. If either one of the events has happened prior to 1st July, the provisions of section 194Q not to apply.
4. For the purpose of computation of the threshold of Rs 50 Lakhs, all purchases from 1st April to be taken into consideration.
5. If TDS under section 194Q is deducted after credit in the books of account, TDS under section 194Q needs to be deducted on the purchase value excluding GST. However, if TDS under section 194Q is deducted on advance payment, then TDS has to be deducted on the entire advance payment made.
6. If money is refunded in-case of purchase return, TDS deducted under section 194Q may be adjusted against the next purchase. However, if the goods are replaced by the seller, TDS may be adjusted against the next invoice.
7. Provisions of Section 194Q to only apply to non-residents for purchases made by their PE in India.
8. Provisions of section 194Q and section 206C(1H) not to apply to buyers/ sellers who are exempt from tax.
9. The provisions of Section 194Q not to apply in the year of incorporation as the conditions of having a turnover of more than 10 crores is not satisfied in the year of incorporation.
10. The criteria for turnover of more than 10 crores means turnover from business carried out by him should be more than 10 crores.
11. Tax deducted by an e-commerce operator under section 194O, will not be subjected to tax under section 194Q or 206C(1H)
12. If tax has been collected u/s 206C(1H), before the buyer could deduct tax u/s 194Q, the buyer need not deduct tax u/s 194Q again.
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