CA Vivek Newatia

Direct Tax Proposals in Finance Bill 2012

TABLE OF CONTENTS  OF ARTICLE

A. TAX INCENTIVES AND RELIEFS 

1.      Deduction in respect of capital expenditure on specified business [Amendment of Section 35AD]

2.      Tax incentive for funding of certain Infrastructure Sectors

3.      Extending benefit of initial depreciation to the power sector [Amendment of Section 32(1)(iia)]

4.      Extension of sunset date for tax holiday for power sector [Amendment of Section 80-IA(4)(iv)]

5.      Weighted deduction for scientific research and development [Amendment of Section 35(2AB)]

6.      Weighted deduction for expenditure on agricultural extension and skill development project [Sections 35CCC and 35CCD]

7.      Turnover for audit of accounts & presumptive taxation [Amendment of Sec 44AB & 44AD]

8.      Provisions relating to Venture Capital Fund (VCF) or Venture Capital Company (VCC)

9.      Exemption in respect of income received by certain foreign companies [Insertion of Section 10(48)]

10.    Lower rate of tax on dividends received from foreign companies [Section 115BBD]

11.    Removal of the cascading effect of Dividend Distribution Tax (DDT) [Amendment of Section 115-O]

12.    Wealth Tax – Exemption of residential house allotted to employee etc. of a company

13.    Reduction in the rate of Securities Transaction Tax (STT)

14.    Relief from LTCG tax on transfer of residential property if invested in a manufacturing SME

15.    Benefit of Section 54B extended to HUF

16.    Exemption for Senior Citizens from payment of advance tax

17.    Deduction for expenditure of preventive health check-up

18.    Deduction for interest on savings account

19.    Exemption of any sum or property received by an HUF from its member

20.    Assessment of charitable organisation where commercial receipts exceed Rs. 25 Lakhs

21.    Amendment in Tax Slabs

B.            WIDENING OF TAX BASE 

1.      Alternate Minimum Tax on all assessees

2.      Minimum Alternate Tax to apply to banking, insurance, electricity companies

3.      Tonnage Tax Scheme for Shipping Companies

4.      Consideration on transfer of capital asset will be the fair market value if not determinable

C.    MAJOR CHANGES IN TDS AND TCS PROVISIONS 

1.      Deductor not an assessee in default where payee has paid tax on the related income

2.      Be punctual and diligent in filing of TDS / TCS returns or face penalties

3.      Scope of payments covered under TDS / TCS provisions widened

4.      Assessee liable to pay advance tax on income received without deduction / collection of tax at source

5.      Other amendments rationalising TDS / TCS provisions

D. MEASURES TO PREVENT CIRCULATION OF UNACCOUNTED MONEY 

1.      Share Premium in excess of Fair Market Value.

2.      Onus on the Company to explain source of shareholders’ funds

3.      Unexplained income, investments, etc. to be taxed at maximum marginal rate

4.      Compulsory Penalty on undisclosed income in course of search and seizure [Insertion of Sec 271AAB]

5.      Compulsory filing of return for residents having assets abroad [Amendment of Section 139]

6.      Time limit for reopen of assessment increased to 16 years where any asset is located outside India

E.  OTHER AMENDMENTS 

1.      Cost of acquisition in case of certain transfers

2.      Reference to Valuation Officer

3.      Capital Gains in case of amalgamation and demerger

4.      Prohibition for cash donation in excess of ten thousand

5.      Eligibility conditions for exempt LIP / deduction in respect of premium for LIP

6.      Due date for furnishing audit report under Section 44AB

7.      Clarification in Section 234D – Interest payable on excess refunds granted

8.      Processing of return not necessary when a notice is issued for scrutiny  24

9.      Extension of time for completion of assessments an reassessments

10.    Search Proceedings may apply only for the year in which requisition made in certain cases

11.    Authorisation or requisition and subsequent assessment in search cases to apply individually to all persons mentioned in the warrant

12.    Related person for the purpose of making an application before Settlement Commission

F. GENERAL ANTI AVOIDANCE RULES (GAAR)

G. TRANSFER PRICING AMENDMENTS 

1.      Nationalization of Transfer Pricing Provisions

2.      Advance Pricing Arrangements

3.      Definition of international taxation

4.      Tolerance Range for international transaction

5.      Non-Reporting of international transactions by assessee in report u/s 92E

6.      Filing of return of income:

7.      Amendments related to Dispute Resolution Panel (DRP)

H. Amendments in International Tax Provisions

Contents

1.      Meaning assigned to a term used in DTAA

2.      Extension of time limit for completion of proceedings where information is sought under a DTAA

3.      Tax Residency Certificate necessary

4.      Taxation of a non-resident entertainer, sportsperson, etc.

5.      Income arising on sale of shares of offshore company – Reversal of Vodafone Case

6.      Definition of Royalty further clarified

7.      Time limit for issue of notice to agent of non-resident extended

A.    TAX INCENTIVES AND RELIEFS

1.       Deduction in respect of capital expenditure on specified business [Amendment of Section 35AD]

Three new businesses specified

It is proposed to include three new businesses as “specified business” for the purposes of the investment-linked deduction under section 35AD, namely:-

a)      setting up and operating an inland container depot or a container freight station notified or approved under the Customs Act, 1962 (52 of 1962);

b)      bee-keeping and production of honey and beeswax; and

c)       setting up and operating a warehousing facility for storage of sugar.

The date of commencement of operations for availing investment linked deduction in respect of the three new specified businesses shall be on or after 1st April, 2012.

150% deduction in certain sectors

It is also proposed that the following specified businesses commencing operations on or after the 1st of April, 2012 shall be allowed a deduction of 150% of the capital expenditure under section 35AD of the Income-tax Act, namely:-

(i)   setting up and operating a cold chain facility;

(ii)  setting up and operating a warehousing facility for storage of agricultural produce;

(iii)  building and operating, anywhere in India, a hospital with at least one hundred beds for patients;

(iv)  developing and building a housing project under a scheme for affordable housing framed by the Central Government or a State Government, as the case may be, and notified by the Board in this behalf in accordance with the guidelines as may be prescribed; and

(v)  production of fertilizer in India.

Clarification for hotel industry

A clarification is proposed to be inserted to make clear that a hotel owner will continue to be eligible for the investment linked deduction under section 35AD if he, while continuing to own the hotel, transfers the operation of such hotel to another person.

Accordingly, a new sub-section (1A) is proposed to be inserted in section 35AD to provide that where the assessee builds a hotel of two-star or above category as classified by the Central Government and subsequently, while continuing to own the hotel, transfers the operation thereof to another person, the assessee shall be deemed to be carrying on the specified business of building and operating hotel.

It is important to note that Assessees other than companies shall not be liable to pay Alternate Minimum Tax (AMT) u/s 115JC if they claim investment linked deduction u/s 35AD or similar such provisions.

2. Tax incentive for funding of certain Infrastructure Sectors

In order to augment long-term low cost funds (ECBs) for the infrastructure sector, the Finance Bill 2012 has proposed to amend Section 115A to provide that interest income received by a non-resident for extending foreign currency loan to an Indian company engaged in specified infrastructure sector shall be taxable @ 5% instead of hitherto 20%. To avail this benefit, the following conditions are satisfied:

–          The borrowing should take place between 1st July 2012 and 20th June 2015 in foreign currency from a source outside India.

–          The loan agreement should be approved by the Central Government.

–          This incentive will apply only to the extent to which interest does not exceed the amount calculated at the rate approved by the Central Government. The excess interest, if any, will be chargeable at the normal rate of 20%.

Consequently a new Section 194LB is proposed to be inserted to provide a reduced withholding tax rate of 5% in respect of interest payment of the nature described above.

Specified infrastructure sector:

–          Generation or distribution or transmission of power

–          Operation of aircraft

–          Manufacture or production of fertilisers.

–          Construction of roads including toll road or bridge

–          Construction of port including inland port

–          Construction of ships in a shipyard

–          Construction of dam

–          Developing and building a housing project referred to in 35AD(vii)(c).

Presently, ECBs are not allowed in some of the sectors named above. The FM in his budget speech has proposed to allow ECBs for such sectors. The same is yet to be notified.

3. Extending benefit of initial depreciation to the power sector [Amendment of Section 32(1)(iia)]

In order to encourage new investment by the assessees engaged in the business of generation or generation and distribution of power, it is proposed that an assessee engaged in the business of generation or generation and distribution of power shall also be allowed initial depreciation at the rate of 20% of actual cost of new machinery or plant (other than ships and aircraft) acquired and installed in a previous year.

4. Extension of sunset date for tax holiday for power sector [Amendment of Section 80-IA(4)(iv)]

Hitherto, Power Sector was allowed profit linked deduction under section 80-IA(4)(iv) of the Income-tax Act  if the operations commence on or before 31st March 2012.

It is proposed to amend the above provision to extend the terminal date for a further period of one year, i.e., up to 31st March, 2013.

5. Weighted deduction for scientific research and development [Amendment of Section 35(2AB)]

In order to incentivise the corporate sector to continue to spend on in-house research, it is proposed to amend this section to extend the benefit of the weighted deduction of 200% of expenditure on approved in-house R&D facility for a further period of five years i.e. up to 31st March, 2017.

6. Weighted deduction for expenditure on agricultural extension and skill development project [Sections 35CCC and 35CCD]

Agricultural extension services play a critical role in enhancing the productivity in the agricultural sector. In order to incentivize the business entities to provide better and effective agriculture extensive services, it is proposed that weighted deduction of 150% of the expenditure incurred on agricultural extension project.

On similar lines, in order to encourage companies to invest in skill development projects in the manufacturing sector, a weighted deduction of 150% of expenses (not being expenditure in the nature of cost of any land or building) incurred on skill development project is proposed to be allowed. The proposed amendment is in accordance with National Manufacturing Policy announced on 4th November 2011.

The agricultural extension project and skill development project eligible for this weighted deduction shall be notified by the Board in accordance with the prescribed guidelines.

7.Turnover for audit of accounts & presumptive taxation [Amendment of Sec 44AB & 44AD]

In order to reduce the compliance burden on small businesses and on professionals, it is proposed to increase the threshold limit of total sales, turnover or gross receipts, specified under section 44AB for getting accounts audited, from Rs. 60 Lakhs to 100 Lakhs in the case of persons carrying on business and from Rs. 15 Lakhs to Rs. 25 Lakhs in the case of persons carrying on profession.

It is also proposed that for the purposes of presumptive taxation under section 44AD, the threshold limit of total turnover or gross receipts would be increased from Rs. 60 Lakhs to Rs. 100 Lakhs.

However, Section 44AD has also been amended to clarify that the presumptive scheme shall not be applicable to:

–          Persons carrying on profession referred to in Section 44AA(1);

–          Persons earning income in the nature of commission or brokerage; and

–          Persons carrying on agency business.

8. Provisions relating to Venture Capital Fund (VCF) or Venture Capital Company (VCC)

Venture Capital Undertaking (VCU) is defined under Section 10(23FB) of the Income Tax Act to cover unlisted companies engaged only in nine specific sectors. These sectoral restrictions are proposed to be removed in the Finance Bill 2012 and the new definition of VCU aligns itself with that of SEBI Regulations. [“means a VCU referred to in SEBI (Venture Capital Funds) Regulations, 1996”].

As per SEBI regulations, a VCU means a domestic unlisted company which is engaged in the business for providing services, production or manufacture of article or things. The company must not belong to such  sectors which are specified in the negative list by the Board with the approval of the Central Government by notification in the Official Gazette in this behalf (i.e. NBFCs, Gold Financing, etc.)

VCF / VCC possess a tax pass through status under the Income Tax Act. Section 10(23FB) grants exemption to the VCF / VCC in respect of income from investment in VCU. Section 115U ensures that such income is taxed in the hands of the investor in such VCF / VCC as if the investment was made directly by the investor.

The present Section 115U taxes income in the hands of the investor on receipt basis, thus allowing indefinite deferral of taxation in the hands of investor. It is now proposed to introduce accrual based taxation for investors in VCF/VCC.

Further, the VCF / VCC will no longer be exempt from provisions relating to dividend distribution tax (DDT) and withholding tax.

The amendments will take effect from 1st April 2013 and accordingly apply from AY 2013-14.

Comments:

The amendment does not provide clarity on treatment of income which has not been taxed in the hands of investors up to the end of current previous year 2011-12 (AY 2012-13). Whether the same will be taxed in the hands of investors immediately in the previous year 2012-13 (AY 2013-14) or only on actual receipt in subsequent years?

Since VCC will no longer be exempt from provisions relating to DDT, this levy of DDT on VCC may possibly lead to double taxation on income – in the hands of investors on accrual basis and then as DDT on VCC on distribution of income as dividend to investors.  This will make investment through VCC unattractive.

9. Exemption in respect of income received by certain foreign companies [Insertion of Section 10(48)]

In national interest, it is proposed to exempt any income of a foreign company received in India in Indian currency on account of sale of crude oil to any person in India subject to the following conditions:

(i)   The receipt of money is under an agreement or an arrangement which is either entered into by the Central Government or approved by it.

(ii) The foreign company, and the arrangement or agreement has been notified by the Central Government in this behalf.

(iii)  The receipt of the money is the only activity carried out by the foreign company in India.

These amendments will take effect retrospectively from 1st April, 2012.

10. Lower rate of tax on dividends received from foreign companies [Section 115BBD]

Dividends received by an Indian company from a foreign company (in which it has equity shareholding of 26% or more) shall continue to be taxed @ 15% in the previous year 2011-12 if such dividend is included in the total income for that year.

The above provision was introduced as an incentive for attracting repatriation of income earned by residents from investments made abroad with certain conditions to check the misuse of the incentive. The same is being amended to extend its applicability by one year.

11. Removal of the cascading effect of Dividend Distribution Tax (DDT) [Amendment of Section 115-O]

With a view to remove the cascading effect of DDT in multi-tier corporate structure, it is proposed to amend Section 115-O of the Act to provide that in case any company receives, during the year, any dividend from any subsidiary on which DDT has been paid, then, dividend distributed by the holding company in the same year, to that extent, shall not be subject to Dividend Distribution Tax.

12. Wealth Tax – Exemption of residential house allotted to employee etc. of a company

Under the existing provisions of section 2 of the Wealth-tax Act, the specified assets for the purpose of levy of wealth tax do not include a residential house allotted by a company to an employee or an officer or a whole time director if the gross annual salary of such employee or officer, etc. is less than Rs. 500,000.

Considering general increase in salary and inflation since revision of this limit, it is proposed to increase the existing threshold of gross salary from Rs. 500,000 to Rs. 1,000,000 for the purpose of levying wealth-tax on residential house allotted by a company to an employee or an officer or a whole time director.

13. Reduction in the rate of Securities Transaction Tax (STT)

It is proposed to reduce STT in Cash Delivery segment by 20% from the existing 0.125% to 0.10%.

14. Relief from LTCG tax on transfer of residential property if invested in a manufacturing SME

It is proposed to insert a new section 54GB so as to provide relief from long term capital gains tax to an individual or an HUF on sale of a residential property (house or plot of land) in case of re-investment of net sale consideration in the equity of a new start-up SME company in the manufacturing sector. The net consideration should be utilized by the company for the purchase of new plant and machinery.

This relief would be subject to the conditions that –

(i) The amount of net consideration is used by the individual or HUF before the due date of filing return for subscription in equity shares in the SME company in which he holds more than 50% share capital or more than 50% voting rights.

(ii) The amount of subscription as share capital is to be utilized for the purchase of new plant and machinery within a period of one year from the date of subscription in the equity shares.

(iii) If the amount of net consideration subscribed as equity shares in the SME company is not utilized by the SME company for the purchase of plant and machinery before the due date of filing of return by the individual or HUF, the unutilized amount shall be deposited under a deposit scheme to be prescribed in this behalf.

(iv) The transfer of the shares of the company, and of the plant and machinery for a period of 5 years will be restricted. Capital gains would be subject to taxation in case any of the conditions are violated.

(v)  The relief would be available in case of any transfer of residential property made on or before 31st March, 2017.

15.  Benefit of Section 54B extended to HUF

Capital gains on transfer of land used for agricultural purposes for the last 2 years is exempt from tax if the whole of the capital gains was reinvested for purchase of agricultural land in the next 2 years. This exemption was granted if the land was used by individual or his parent.

It is proposed to amend Section 54B to provide relief if the land is used for agricultural purposes by HUF.

16.  Exemption for Senior Citizens from payment of advance tax

In order to reduce the compliance burden of senior citizens, it is proposed that a resident senior citizen, not having any income chargeable under the head “Profits and gains of business or profession”, shall not be liable to pay advance tax and such senior citizen shall be allowed to discharge his tax liability (other than TDS) by payment of self-assessment tax.

17.  Deduction for expenditure of preventive health check-up

The existing provisions allow deduction u/s 80D in respect of payment made for health insurance premium for upto Rs. 15,000 for insurance of self, spouse and dependent children and an additional Rs. 15,000 for insurance of parents.

The Finance Bill 2012 proposed to amend Section 80D to allow as deduction any expenditure incurred on preventive health check-up on himself or his family upto a maximum of Rs. 5,000. This deduction will however be within overall limit of Rs. 15,000 specified u/s 80D. Such payment will qualify for deduction even if paid in cash.

It is also proposed that the payment for health insurance premium has to be made by any mode other than cash.

18.  Deduction for interest on savings account

Section 80TTA is proposed to be inserted to provide for a deduction of up to Rs. 10,000 in respect of interest earned by an individual or HUF from savings bank account held with a bank or post office.

19.  Exemption of any sum or property received by an HUF from its member

Section 56(2)(vii) is proposed to be amended to include “members of HUF” under the definition of  relative. Accordingly any sum or property received by an HUF from its members without consideration or for inadequate consideration shall be exempt from tax. It is to be noted that the provisions of Section 64 – clubbing provisions – shall continue to apply in respect of income derived from the sum or property given for inadequate or without consideration.

The exemption will apply retrospectively from 1st October 2009.

20.  Assessment of charitable organisation where commercial receipts exceed Rs. 25 Lakhs

Section 2(15) gives definition of charitable purpose which includes advancement of any other object of general public utility provided that the same does not involve carrying on any activity in the nature of trade, commerce or business. If, however, the turnover from such commercial activity does not exceed Rs. 25 Lakhs, the benefit of exemption will not be denied.

An amendment is proposed in the definition to provide that the threshold of Rs. 25 Lakhs will be looked into every previous year, and if the threshold is breached in a particular year, the exemption will be denied only for that previous year. This temporary excess in one year will not alter the nature of the trust or institution and will not lead to cancellation of registration or withdrawal of approval to the entity.

The amendment will be applicable retrospectively from 1st April 2009 (apply from AY 2009-10).

21.  Amendment in Tax Slabs

The tax slabs for individuals (other than senior citizens), HUF, AOP, BOI, Artificial Juridical Person is proposed to be amended for AY 2013-14 as follows:

Upto Rs. 200,000                                     Nil   [Increased from 180,000 / 190,000]

Rs. 200,001 to Rs. 500,000                    10%

Rs. 500,001 to Rs. 1,000,000                20% [Upper Ceiling increased from Rs. 800,000]

Above Rs. 1,000,000                              30%

For senior citizens (between 60 and 80 years) basic exemption limit has been raised from Rs. 240,000 to Rs. 250,000. Income slabs for 20% and 30% are amended as above.

Individuals above the age of 80 years will continue to avail an exemption limit of up to Rs. 500,000. Income slabs for 20% and 30% are amended as above.

Tax rates for other assessees and surcharge / educational cess remain unchanged.

B.    WIDENING OF TAX BASE

1.  Alternate Minimum Tax on all assessees

The concept of Minimum Alternate Tax was introduced long back and was applicable only to companies. The objective was to ensure that companies which were not contributing to the Revenue by way of corporate tax by taking advantage of the various incentives and exemptions under the Income-tax Act, pay a fixed percentage of book profit as minimum alternate tax.

The same concept was extended to Limited Liability Partnerships (LLP) as Alternate Minimum Tax (AMT) in the Finance Bill 2011 by introducing Section 115JC. The Finance Bill 2012 now proposes to extend the scope of AMT to all other assessees. However, in case of individuals, HUF, AOP, body of individuals or artificial juridical person, the provisions relating to AMT will be applicable only if adjusted total income is more than 20 Lakhs.

Adjusted total income means the total income before giving effect to deductions under Section 10AA (deduction to SEZ units) and Chapter VI-A Section C (Sections 80HH to 80RRB except Section 80P).

This amendment is proposed to ensure that all assessees claiming profit linked deductions are liable to pay a minimum tax to the Government irrespective of their status.

Accordingly, such assessees will be required to pay AMT @ 18.5% on adjusted total income or the tax as per the normal computation, whichever is higher. Tax credit of excess AMT over regular Income Tax will be allowed to be carried forward up to 10 years.

A question normally asked is whether Long Term Capital Gains (LTCG) subject to Securities Transaction Tax (STT), which is exempt under Section 10(38), will be included in the calculation of income chargeable to AMT. Under Section 115JC, AMT is calculated on adjusted total income which is total income without deduction of Chapter VI-A Section C and 10AA. Total income refers to taxable income under the normal computation and is calculated after giving effect to exemption of LTCG with STT u/s 10(38). The proposed amendment does not seek to add back exempt LTCG for calculation of adjusted total income. The emphasis of 115JC is on taxable income and not book profit as is the case with 115JB applicable to companies. Accordingly, LTCG with STT will continue to be exempt under AMT (Section 115JC).

2. Minimum Alternate Tax to apply to banking, insurance, electricity companies

The provisions of Section 115JB are proposed to be amended to include within its scope companies which are governed by special Acts. These companies (banking, electricity and insurance) are not required to prepare the financial statements as per Schedule VI and were thus outside the purview of MAT as the present Section 115JB considered profit as per P/L a/c drawn as per Schedule VI to be the “book profit”.

Section 115JB is being amended to provide that the P/L A/c prepared in accordance with the provisions of the regulatory Acts shall be taken as basis for computing book profit u/s 115JB.

Another amendment is being proposed in Section 115JB to provide that book profit for the purpose shall be increased by an amount standing in revaluation reserve relating to revalued assets which have been sold or disposed, if the same is not credited to the P/L A/c.

3. Tonnage Tax Scheme for Shipping Companies

Under the Tonnage Tax Scheme for Shipping Companies, the operating profit is determined on the basis of tonnage capacity of ships. The rates of daily tonnage income deemed to be the operating profit have been increased by approximately 52%, w.e.f. 1st April, 2013.

4. Consideration on transfer of capital asset will be the fair market value if not determinable

Section 50D is proposed to be inserted to provide that in cases where the consideration on transfer of capital asset is not attributable or determinable, the fair market value of the capital asset shall be deemed to be the full value of the consideration and capital gains tax will be calculated accordingly.

This Section can only be applied on transfer [u/s 2(47)] of a capital asset [as defined in the Act].

This new Section will safeguard the Revenue where the assessees, in cases where consideration is not determinable, take shelter of the judgement of SC in CIT v B C Srinivasa Setty 128 ITR 294 (SC) – “If on the facts of a particular case, computation u/s 48 is not possible, the charge under Section 45 fails because it cannot be effectuated.” A recent such ruling following the ratio of SC has been passed by ITAT (Mumbai) in Avaya Global Connect v. ACIT 26 SOT 397.


C. MAJOR CHANGES IN TDS AND TCS PROVISIONS

1. Deductor not an assessee in default where payee has paid tax on the related income

This proposed amendment is a very welcome move by the Finance Minister in this Budget. The amendment is probably an outcome of judgement by Supreme Court in Hindustan Coca Cola Beverage P. Ltd. v CIT [2007] 293 ITR 226 which held that the Payer is not liable to pay the amount of short / non-deduction of tax u/s 201(1) in cases where the Payee has already included the relevant income in his total income and paid the tax. This amendment is in stark contrast with other amendments wherein judgements decided in favour of the assessee by the Supreme Court have been reversed with retrospective effect by changing the law.

The Bill proposes to amend Section 201 of the Act to provide that the payer who has failed to deduct the whole or any part of the tax on the payment made to a resident payee shall not be considered to be in default in respect of the tax not deducted if the resident payee:

–          Furnishes his return of income u/s 139

–          Has considered such income in his return of income

–          Has paid the tax due on the income declared by him in such return.

The payer also needs to furnish a certificate from a chartered accountant to substantiate his claim.

The following observations are noteworthy:

–          The payer is still liable for payment of interest u/s 201(1A) @ 1% from the date on which tax was deductible to the date of furnishing of return by the payee. The interest so paid is not a deductible expense.

–          The payee needs to pay tax due on the income declared in the return. Thus where no tax has arisen in the hands of the payee because of certain deductions and /or exemptions, the deductor will still not be deemed in default if the payee has included the income in question in the return filed. The amount of tax due in such return may be nil.

Similar provisions are proposed to be inserted in Section 206C in respect of tax collection at source.

Consequent amendment to Section 40(a)(ia)

Section 40(a)(ia) of the Act disallows certain expenditure on non-deduction of tax. Where an expenditure on which tax is required to be deducted at source and is not so deducted, the assessee will be entitled to claim deduction of such expenditure only in the year in which the deduction is made and the tax so deducted is paid.

An amendment is proposed in the Section to provide that where the assessee is not deemed to be in default u/s 201(1) on account of payment of taxes by the payee (as discussed above), it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return by the resident payee.

2. Be punctual and diligent in filing of TDS / TCS returns or face penalties

To ensure furnishing of TDS / TCS returns within the due date and to ensure accurate filing, the Finance Bill has proposed fees and penalties for delays in filing / inaccurate filing of TDS / TCS Returns.

Nature of default Penalties / Fees
Delay in furnishing of TDS / TCS returns – Delay does not exceed 1 year Fees of Rs. 200 per day from the due date of filing to the actual date of filing subject to a maximum of tax deductible during the period
Delay in furnishing of TDS / TCS returns – Delay exceeding 1 year Fees of Rs. 200 per day from the due date of filing to the actual date of filing subject to a maximum of tax deductible during the period

Penalty ranging from Rs. 10,000 to Rs. 100,000Furnishing inaccurate particulars in the returnsPenalty ranging from Rs. 10,000 to Rs. 100,000

The Income Tax Act as is today only levy a penalty of Rs. 100 per day for delay in filing of TDS / TDS returns. There is no penalty for furnishing incorrect information in the TDS statement. Furthermore, the penalty so levied is normally waived if the assessee demonstrated that the delay occurred due to a reasonable cause.

The proposals contained in Finance Bill 2012 seek to introduce a new Section 234E making the deductor liable to pay a fee of Rs. 200 per day (subject to maximum of Tax deductible) in case of late filing to be paid before furnishing of the relevant TDS / TCS statement. There is no provision in proposed Section 234E for waiver of fees in case the delay is due to genuine hardship faced by the deductor.

In case of delay beyond a period of one year, a penalty ranging from Rs. 10,000 to Rs. 100,000 may be levied. If inaccurate particulars are furnished, an additional penalty ranging from Rs. 10,000 to Rs. 100,000 may also be levied. Such penalties will, however, not be levied if the assessee proves that there was a reasonable cause for failure.

3.  Scope of payments covered under TDS / TCS provisions widened

(a)       TDS in case of purchase of immoveable property (except agricultural land)

The Finance Bill 2012 has proposed to insert a new Section 194LAA in the Act requiring tax to be deducted at source @ 1% on transfer of immovable property (other than agricultural land) by a resident to any person. The responsibility of tax deduction lies on the transferee.

The tax is required to be deducted only when the consideration paid or payable for the transfer of said immovable property exceeds Rs. 50 lakhs in specified areas (13 districts) and Rs. 20 Lakhs in other areas.

Specified areas – Greater Mumbai, Delhi, Kolkata, Chennai, Hyderabad, Bengaluru, Ahmedabad, Faridabad, Gurgaon, Gautam Budh Nagar, Ghaziabad, Gandhinagar, and Secunderabad.

It is also proposed that where actual consideration paid or payable is less than the value adopted by the Registrar for stamp duty purposes, the value as assessable by the Registrar will be deemed to be the consideration for transfer of the immovable property.

To ensure compliance, it is provided that the registration of the property will not take place unless the transferee furnishes proof of deduction of income tax to the Registrar.

Requirement of obtaining TAN has been dispensed with for the purposes of depositing tax under this Section as these are generally one off transactions and a separate form containing basic details (such as PAN of the transferor and transferee, details of property transferred) will be prescribed for the purpose.

It is important to note that in cases where the seller does not have a PAN, the provisions as contained in Section 206AA will be invoked and the transferee will then be liable to deduct tax @ 20% of the consideration paid or payable.

(b)      TDS on Director’s remuneration

Hitherto, there was no specific provision for deduction of tax at source on directors’ remuneration which in not in the nature of salary.

Section 194J is proposed to be amended to include Director’s remuneration (not in the nature of salary) under its purview. Tax will be deducted on such remuneration to directors @ 10%.

(c)       TCS for cash sales of jewellery and bullion

To curb the flow of unaccounted money in the system, 1% tax collection at source has been proposed to be introduced on cash sales of bullion and jewellery above Rs. 200,000.  The tax will collected by the seller and deposited with the Government on behalf of the buyer. It is immaterial whether the buyer is a manufacturer, trader or consumer.

(d)      TCS for mining sector

To regulate the mining sector, 1% tax will be collected by the seller in case of sales of coal, lignite and iron ore. However, the amendment will not apply if the buyer declares that the same will be utilised for manufacturing, producing or processing of other articles.

4. Assessee liable to pay advance tax on income received without deduction / collection of tax at source

Section 209 is proposed to be amended to provide that the assessee will be liable for payment of advance tax in respect of income received or paid without deduction or collection of tax at source. The amendment will apply in relation to advance tax payable for financial year 2012-13 and onwards.

5. Other amendments rationalising TDS / TCS provisions

(a)       Intimation after processing of TDS Statement

Vide finance (No.2) Act, 2009, section 200A was inserted in the Income-tax Act to provide for processing of TDS statement. After processing of TDS statement, intimation is generated specifying the amount payable or refundable.

To rationalise the provisions of processing of TDS statement, it is proposed to provide that the intimation generated after processing of TDS statement shall be

(i) subject to rectification under section 154;

(ii) appealable under section 246A; and

(iii) deemed as notice of demand under section 156.

These amendments will reduce the compliance burden on the deductor and rationalise the provisions relating to processing of TDS statement.

(b)      Extension of time for passing an order under section 201 in certain cases

Under the existing provisions, Section 201 of the Income-tax Act provides that a person can be deemed to be an assessee in default, by an order, in respect of non-deduction/short deduction of tax if such order is passed within 4 years.

It is now proposed in the Finance Bill 2012 that the time limit for passing of such order be extended from four years to six years.

This amendment will take effect retrospectively from 1st April, 2010.

(c)       Change in threshold for TDS on compensation or consideration for compulsory acquisition

The threshold given in Section 194LA for TDS on payment of any compensation or consideration for compulsory acquisition of immovable property (other than agricultural land) has been increased from Rs. 100,000 to Rs. 200,000.

(d)      Change in threshold for TDS on payment of interest on debentures

The threshold given in Section 193 for TDS on payment of interest on debentures has been increased from Rs. 2,500 to Rs. 5,000 if paid through account payee cheque by a company, in which the public are substantially interested, to a resident individual or Hindu Undivided Family. Unlisted debentures are also proposed to be included by the Finance Bill 2012.

(e)       “Person responsible for paying” in case of payment by Central Government or Government of a State

In order to provide clarity to the meaning of “person responsible for paying” in case of payment by Central Government or a State Government, it is proposed to provide that in the case of payment by Central Government or a State Government, the Drawing and Disbursing Officer or any other person (by whatever name called) responsible for making payment shall be the “person responsible for paying” within the meaning of section 204.

 

D.    MEASURES TO PREVENT CIRCULATION OF UNACCOUNTED MONEY

1. Share Premium in excess of Fair Market Value.

Section 56(2) provides for the specific category of incomes that shall be chargeable to income-tax under the head “Income from other sources”. Historically this section has been a favourite with the Hon’ble Finance Minister if we look at the number of amendments introduced. This year was also not different and another deeming provision – Section 56(2)(viib) – is being proposed to be inserted in the Act.

The new clause provides that where a company in which the public are not substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares and such consideration received exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be chargeable to income tax under the head “Income from other sources”.

In simple terms:

–          The new clause is applicable to a company in which the public are not substantially interested.

–          Consideration is received by the said company for issue of shares.

–          Consideration is received from any resident person.

–          Consideration received exceeds the face value of the shares.

If the above conditions are satisfied:

–          Aggregate consideration received (-) Fair market value of the shares shall be chargeable to tax in the hands of the Company as “Income from other sources”.

Fair Market Value has been defined to mean higher of the following:

a)    As may be determined in accordance with such method as may be prescribed;

b)    As may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value of its assets, including intangible assets, being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature.

The proposed amendment shall not apply where the consideration for issue of shares is received by a venture capital undertaking from a venture capital company or a venture capital fund.

Comments:

1. The method mentioned in (a) above is not yet prescribed. The method as prescribed under Rule 11U and Rule 11UA i.e. book value of the shares may be referred to or an altogether different method may be given. An option is also given to the Company to adopt another valuation based on the value of its assets but the same should pass the test of “to the satisfaction of the Assessing Officer”.

The emphasis on “satisfaction of the Assessing Officer” (in this provision and many other provisions in this year’s Budget), where the prescribed method for computing the fair market value of the shares is not followed, could result in a state of uncertainty regarding the valuation of shares done by the Company. This is because the Company will not be able to determine till the assessment stage whether it’s computation of Fair Market Value of the shares, on which the taxability of the excess consideration depends, is correct and acceptable to the Assessing Officer.

2. The proposed amendment’s objective of preventing generation and circulation of unaccounted money may undoubtedly be a very noble idea. However, this is also causing trouble to start-up companies and angel investors. Angel investors typically include corporate bosses, high net worth individuals who invest their own capital in start-up companies who have nothing more than business ideas. They essentially bridge the gap between friends and family.

The fair market value in the start-ups cannot under any circumstance be determined by any valuer or a tax authority and essentially depends on the negotiation between the entrepreneur and the investor. The start-up company has nothing more than a business idea which the Assessing Officer may perceive as having a zero value whereas the investor may find that extremely valuable for him to invest at a high premium. This proposed amendment may kill entrepreneurship in the country.

The Finance Minister may say that the amendment does not apply if the investors are Venture Capital Company / fund (VCC/VCF) from its purview. However, the VCC / VCF generally invest a much higher amount and in companies having established business ideas which are into 2-3 years of operations.

3. The proposed amendment shall not apply when consideration for issue of shares is received from non-residents.  An important point to mention here is that in case of allotment of shares to non-residents, FEMA regulations relating to FDI come into play which prescribe a Discounted Free Cash Flow method (DCF) for valuation of equity shares. The price at which the shares will be allotted to non-residents must not be less than price as per DCF method as per the extant FEMA regulations for unlisted companies. It is generally observed that price as per DCF method is much higher than the face value of the equity shares and the non-residents are required to pay a high premium.

If the shares are issued at the same price (at a premium similar to non-residents) to the resident investors, the Company will have to shell out tax on the difference between the consideration received and fair market value in respect of shares allotted to the residents. If the shares are say issued at fair market value to the residents and at a price as per DCF method to the non-residents, will it not result in a paradoxical situation? Does this amendment still prevent generation and circulation of unaccounted money?

4. The amendment apparently does not apply when consideration is received against issue of fully or partially convertible debentures. The year of taxability is the year in which consideration for shares is received and not the year in which shares are allotted.

5. This amendment will make Limited Liability Partnership form of organisation more attractive to the business community. This will save them from the onerous deeming provisions of Section 56(2)(vii), 56(2)(viia) and proposed 56(2)(viib).

6. Section 56(2)(vii) and Section 56(2)(viia) already present in the Statute provides for taxability, in the hands of recipient, on receipt of shares of a closely held company without consideration or inadequate consideration. For the purpose, the book value of the shares is deemed to be the fair market value (FMV) of the shares.

A strict view may be taken by the Assessing Officer that the said clauses (vii) and (viia) [the way these provisions are worded] also applies to receipt of shares pursuant to fresh issue at a price less than Fair Market Value (i.e. book value as per Rule 11UA).

If this view of AO is taken as correct, let us now examine the position post insertion of Section 56(2)(viib).

a)      Issue of shares by a closely held company to individual / HUF / Partnership / LLP / closely held company

If the shares are issued at less than FMV u/s 56(2)(vii) or 56(2)(viia), the difference between FMV and issue price may be taxable in the hands of the recipient.

If the shares are issued at higher than FMV u/s 56(2)(viib), the difference between issue price and FMV will be taxable in the hands of the issuer.

b)      Issue of shares by a closely held company to a company in which public are substantially interested

Section 56(2)(viia) will not apply as the recipient is a company in which public are substantially interested.

If the shares are issued at higher than FMV u/s 56(2)(viib), the difference between issue price and FMV will be taxable in the hands of the issuer.

c)       Issue of shares by a company in which public are substantially interested to an individual / HUF

If the shares are issued at less than FMV u/s 56(2)(vii), the difference between FMV and issue price may be taxable in the hands of the recipient.

Section 56(2)(viib) will not apply as the issuer is a company in which public are substantially interested.

d)      Issue of shares by a company in which public are substantially interested to Partnership / LLP / company

Both Sections 56(2)(viia) and 56(2)(viib) will not apply as the shares are of a company in which public are substantially interested.

2. Onus on the Company to explain source of shareholders’ funds

The Finance Bill 2012 has proposed to amend Section 68 of the Act to provide that the nature and source of any sum credited as share capital or premium or share application money shall be treated as explained only if the resident shareholder also offers an explanation about the nature and source of sum so credited. An additional onus is put on the company of satisfactorily explaining the source of funds in the hands of the resident shareholders.

This amendment will, however, only apply to closely held companies.  This additional onus will also not apply if the resident shareholder is a Venture Capital Fund or a Venture Capital Company registered with SEBI.

It is important to note that the proposed amendment is silent in case of investments made by non-resident shareholders.

This amendment is proposed to curb practice of converting unaccounted money through investment in share capital of the company.

However, the Companies were still required to explain the source of funds in the hands of shareholders in the course of scrutiny proceedings. The amendments only provide a legal sanctity to the proceedings and gives power to the Assessing Officer to consider the same as income in case the explanation is not proper.

3. Unexplained income, investments, etc. to be taxed at maximum marginal rate

A new section 115BBE is proposed to be inserted whereby unexplained amounts deemed as income u/s 68 (cash credits), 69 (unexplained investments), 69A (unexplained money etc.), 69B (investments not fully disclosed in the books of accounts), 69C (Unexplained expenditure) and 69D (Amt borrowed or repaid on hundi) shall be taxed at the maximum marginal rate i.e. 30% and no deduction in respect of any expenditure or allowance hall be allowed against that income.

This amendment has a very far reaching impact as any income disclosed in the return, source of which is not verifiable will now be taxed at maximum marginal rate i.e. 30% instead of being taxed under normal tax rate slabs.

4. Compulsory Penalty on undisclosed income in course of search and seizure [Insertion of Sec 271AAB]  

Under the present Section 271AAA of the Act, no penalty is levied if undisclosed income is admitted by the assessee in a statement recorded u/s 132(4) in the course of search and seizure and tax together with interest is paid in respect of such income.

A new Section 271AAB is proposed to be inserted to be applicable in cases of search and seizure initiated on or after 1st July 2012. The new Section provides as follows:

i)      If undisclosed income is admitted during the course of search penalty will be charged at 10%.

ii)    If undisclosed income is not admitted during the course of search but disclosed in return of such income penalty will be charged at 20%.

iii)   In cases other from (i) and (ii) penalty will be charged ranging between 30% to 90% of undisclosed income.

5. Compulsory filing of return for residents having assets abroad [Amendment of Section 139]

Every resident having any asset (including financial interest in any entity) located outside India or signing authority in any account outside India is mandatorily required to furnish a return u/s 139 in India whether or not the resident tax payer has taxable income or not.

6. Time limit for reopen of assessment increased to 16 years where any asset is located outside India

The Finance Bill 2012 proposes to amend Section 147 to provide that income shall be deemed to have escaped assessment where a person is found to have any asset (including financial interest in any entity) located outside India.

Further, where assessment u/s 143(3) or 147 is already completed:

For the purposes of reassessments where income from a foreign asset has escaped assessment, it shall not be necessary for the AO to demonstrate that such escapement has occurred due to failure on the part of the assessee

Provisions of Section 149 are also sought to be amended to increase the time limit for issue of notice to 16 years where income in relation to asset located outside India, chargeable to tax, has escaped assessment. Grounds for increasing the notice period is that the gathering of information regarding such assets takes much more time on account of additional procedures and foreign laws.

Amendment will be effective from 1st July 2012. It is also clarified that this provision can be applied for assessment years beginning on or before 1st April 2012.

Similar provisions are being introduced in Wealth Tax Act.

E. OTHER AMENDMENTS

1. Cost of acquisition in case of certain transfers

Where a sole proprietorship or a firm is converted into a company and the same is not regarded as transfer, the cost of acquisition of asset in the hands of the company will be the same as that in the hands of sole proprietorship or firm, as the case may be. Earlier there was no reference in Section 49 for computing cost of acquisition in such circumstances.

The amendment shall take effect retrospectively from 1st April 1999 and will apply from the AY 1999-2000.

2. Reference to Valuation Officer

The present Section 55A allows the AO to refer the valuation of an asset to the Valuation Officer if, in his opinion, the value of asset as claimed by the assessee is less that its market value.

Where the capital asset becomes property before 01-04-1981, assessee has the option of substituting the fair market value of the asset as on 01-04-1981 as the cost of the asset. In case the value claimed by the assessee was higher than fair market value, the AO was unable to refer the case to the Valuation Officer because of the way present Section 55A is worded.

Accordingly Sec 55A is proposed to be amended to provide that the AO may refer the valuation to the Valuation Officer under the Section if the value as claimed by assessee is at variance with the fair market value.

3. Capital Gains in case of amalgamation and demerger

In a corporate restructuring involving amalgamation or demerger, an impossible situation arises in the following cases:

–          Shares of the amalgamating company are held by the amalgamated company. The amalgamated company is therefore unable to issue shares to itself in exchange for shares held in the amalgamated company.

–          Shares of the demerged company are held by the resulting Company. A similar situation described above will arise.

In order to rationalise the provisions, Sections 47(vii) and 2(19AA) are proposed to be amended to exempt the amalgamated company and resulting company from such impossible requirement.

4. Prohibition for cash donation in excess of ten thousand

Section 80G and 80GGA relating to donations are proposed to be amended to provide that if the amount of donation exceeds Rs. 10,000, the deduction will be allowed only if the same is paid by any mode other than cash.

5. Eligibility conditions for exempt LIP / deduction in respect of premium for LIP

The definition of eligible Life Insurance Policies under Sections 10(10D) and Section 80C are proposed to be amended to reduce the threshold of premium payable from 20% to 10% of the actual capital sum assured.

Actual capital sum assured = Minimum amount assured under the policy on happening of the insured event at any time during the policy without taking into account guaranteed premiums to be returned and bonus or other benefit over the sum assured.

This amendment will apply for policies issued on or after 1st April 2012.

6. Due date for furnishing audit report under Section 44AB

Presently, audit report u/s 44AB was required to be furnished before 30th September. The same is proposed to be amended to provide that the same shall be furnished before the due date of filing return u/s 139(1).

The same will apply retrospectively from 1st April 2012 (AY 2012-13).

Accordingly, this will ease compliance burden on assessees required to furnish a report u/s 92E [in respect of international transactions (and specified domestic transactions from AY 2013-14)] as the due date for filing returns u/s 139(1) in respect of these assessees is 30th November.

7. Clarification in Section 234D – Interest payable on excess refunds granted

Section 234D was inserted w.e.f. 1st June 2003 to provide that where a refund granted to the assessee is later determined to be not due or at a lesser amount, the assessee shall be liable to pay interest @ 0.5% for every month on the excess amount refunded for the period from the date of refund to the date of regular assessment.

Delhi High Court in Director of Income-tax v. Jacabs Civil Incorporated/Mitsubishi Corporation  [194 Taxman 495] had held that the Section 234D is applicable only for AY 2004-05 and onwards. As per the Memorandum on the Finance Bill 2012 this was not the intent of the provisions.

Accordingly, the Section is proposed to be amended retrospectively from 1st June 2003 to clarify that the provisions shall apply to any proceeding completed on or after 1st June 2003, irrespective of the assessment year to which it pertains.

8. Processing of return not necessary when a notice is issued for scrutiny

Processing of return u/s 143(1) will not be necessary where a notice u/s 143(2) has already been issued for scrutiny of return.

9. Extension of time for completion of assessments an reassessments

Sections 153 and 153B are proposed to be amended to extend the time limits for assessments / reassessment under various Sections.

Proceeding under section Current time allowed Proposed period
143 21 months fron the end of the A.Y. 24 Months
143 and 92CA 21 months fron the end of the A.Y. 36 Months
148 9 months from the end of the F.Y. in which the notice issued 12 Months
148 and 92CA 21 months from the end of the F.Y. in which the notice issued 24 Months
250/254/263 21 months from the end of the F.Y. in which the notice issued 12 Months
250/254/263 and 92CA 21 months from the end of the F.Y. in which the notice issued 24 Months

Consequent amendments are also proposed to be made in sec 17A of the Wealth tax Act.

10. Search Proceedings may apply only for the year in which requisition made in certain cases

The Central Government may notify cases or classes of cases in which the AO will not be mandatorily required to issue notice u/s 153A [in respect of search u/s 132 or requisition u/s 132A] for initiation of proceedings for preceding 6 assessment years. This will result in initiating assessment proceedings only for the assessment year relevant to the previous year in which search or requisition was made.

11. Authorisation or requisition and subsequent assessment in search cases to apply individually to all persons mentioned in the warrant

An authorisation is to be issued u/s 132 or requisition to be made u/s 132A to carry out search and seizure operations in the premises of the assessee.

It was held by the Allahabad High Court in the case of CIT vs Smt Vandana Varma that warrant of authorization must be issued individually, and if not so issued, the assessment cannot be made in an individual capacity. If the warrant of authorization was issued jointly, the assessment will have to be made collectively in the name of all the individuals in the status of association of persons / body of individuals.

This according to the Finance Bill 2012 was not the intent of the provision. Accordingly, Section 292CC is proposed to be inserted to provide that:

  1. Authorisation u/s 132 or requisition u/s 132A is not required to be separately issued / made in the name of each person.
  2. Naming of more than one person in the authorisation / requisition will not imply that the same was issued in the name of AOP / BOI of such persons.
  3. The assessment or reassessment shall be made separately in the name of each of the persons mentioned in such authorization / requisition.

The amendment will take effect retrospectively from 1st April 1976 i.e. will apply from the assessment year 1976-77and subsequent assessment year.

12. Related person for the purpose of making an application before Settlement Commission

The definition of related person for the purpose of making an application before Settlement Commission is proposed to be amended to provide that the substantial interest should exist “at the date of search” instead of “at any time during the previous year”.

The reason for this amendment is that the proceedings before the Settlement Commission are filed for many previous years.

F.     GENERAL ANTI AVOIDANCE RULES (GAAR)

The Finance Bill 2012 has proposed the introduction of General Anti Avoidance Rules in the Income Tax Act to deal with aggressive tax planning. Introduction of GAAR may possibly lead to tax planning being equated with tax evasion.

Essentially, the GAAR is based on the principle of “substance over form” and seeks to assure that where a transaction or series of transactions achieves a reduction, avoidance or deferral of tax and are not primarily for bona fide purposes other than to obtain a tax benefit, the tax consequences of the transactions may be invalidated.

An arrangement whose main purpose or one of the main purposes is to obtain a tax benefit and which also satisfies at least one of the four tests, can be declared as an “impermissible avoidance arrangements”.

The four tests are–

a)      The arrangement creates rights and obligations, which are not normally created between parties dealing at arm’s length.

b)      It results in misuse or abuse of provisions of tax laws.

c)       It lacks commercial substance or deems to lack commercial substance.

d)      Is not carried out in a manner, not normally applied for a bona fide purpose.

These provisions of GAAR can be used in addition to or in conjunction with other anti avoidance provisions or provisions for determination of tax liability, which are provided in the taxation law.

The procedure to invoke GAAR as per the proposal is as follows:

The principle of “substance over form” has been introduced in the provisions of GAAR. The implication of this is that the Income-tax department will have powers to deny tax benefit if a transaction was carried out exclusively for the purpose of avoiding tax.

It is the general practice in India that the business groups do aggressive tax planning with the use of sophisticated structures. Numerous companies are formed to distribute the profit of the business and as consequence to reduce/avoid tax. Hence GAAR has been introduced to codify the principle of substance over form. This gives the power to the revenue department to search the real intention of the parties and effect of transactions. Purpose of an arrangement is taken into account for determining the tax consequences, irrespective of the legal structure that has been superimposed to hide the real intent and purpose.

Invoking GAAR could lead to the following consequences:

a)      any equity may be treated as debt or vice versa;

b)      any accrual, or receipt, of a capital nature may be treated as of revenue nature or vice versa; or

c)       any expenditure, deduction, relief or rebate may be recharacterised.

The Assessing Officer after introduction of GAAR will not just be looking at a transaction; rather he’ll be looking through the transaction. Following are some instances where may be invoke by GAAR:

i. A company with a very thin equity capital base may be running on a lot of unsecured loans taken from relatives of directors and shareholders. Interest paid on such loans is a tax deductible expense. The lenders may be paying tax on the interest received on the loans but they are taxed as per the slab rate whereas Company is enjoying benefit of 30% on the interest paid.

This may be seen as a tax avoidance arrangement by the A.O. and the transaction could be declared as an impermissible avoidance agreement. The A.O. could invoke GAAR and characterise such loans as equity on the basis that a company in the concerned industry cannot be run on such a thin capital base.

ii. Companies transferring properties through transfer of shares instead of direct sale of property may lead the A.O. to invoking GAAR for the particular transactions. The real intention is sale of property and not transfer of shares.

iii. In India, amalgamation /restructuring / reorganisation / de-mergers are a popular option taken up by a lot of companies in order to reduce the taxes payable by them. However, after introduction of GAAR, the restructuring may come under scanner.

The above stated instances are a few of the many transactions which could be declared as impermissible avoidance agreements by the A.O. GAAR may have a draconian impact on the industry and companies will now have to take a relook at the tax planning measures.

G.    TRANSFER PRICING AMENDMENTS

1. Nationalization of Transfer Pricing Provisions

The Honourable Finance Minister has been very prompt in incorporating the judgement of Supreme Court in CIT Vs. Glaxo Smith Kline Asia (P) Ltd. in the Finance Bill 2012 which suggested that Transfer Pricing Provisions should be made applicable to domestic transactions between related parties.

The existing Transfer Pricing provisions are only for the International Transactions incurred into with associated parties.

The Finance Bill now proposes to enhance the scope of Transfer pricing provisions to also cover specified domestic transactions. Specified domestic transaction is defined to cover the following categories of transactions:

a)      Any expenditure for which payment is made or to be made to any person referred to in Section 40A(2)(b)

Scope of Section 40A(2)(b) has been widened to cover companies which are under common control (holding greater than 20%). In the example below C Ltd will now be covered u/s 40A(2)(b) from the view-point of B Ltd.

b)      Any transaction referred to in Section 80A

Section 80A(6) provides that the transfer price of goods and services between the undertaking or unit or enterprise or eligible business and any other undertaking or unit or enterprise or business of the assessee shall be determined at the market value of such goods.

c)       Any transfer of goods or services referred to in Section 80-IA(8)

The provision is almost similar to the one contained in Section 80A(6) described in (b) above.

d)      Any business transacted between the assessee and other person referred to in Section 80IA(10)

Transactions by an eligible undertaking with any other person with whom the assessee has close connection. What is close connection has not been defined in the Act. The law only explains that owing to close connection, business is arranged in such a manner by the assessee that it results in higher than ordinary profits to the assessee.

e)      Any transaction referred to in Chapter VI-A or Section 10AA to which Section 80-IA(8)or Section 80-IA(10) is applicable  

f)       Any other transaction as may be prescribed

The provisions of domestic transfer pricing shall apply only when the aggregate of aforesaid transactions exceed Rs. 5 crores during the year.

The arm’s length price in respect of specified domestic transaction shall be determined in accordance with one of the methods specified in Section 92C(1) i.e. Comparable Uncontrolled Price (CUP), Resale Price Method (RPM), Transactional Net Margin Method (TNMM), Profit Split Method (PSM) or other method as may be prescribed.

Requirements relating to documentation u/s 92D and furnishing of audit report u/s 92E are similar to international transactions. Penal provisions are also similar. This increases the opportunities for professional work for chartered accountants.

If domestic transfer pricing is applicable to an assessee, due date for filing return u/s 139(1) will be 30th November.

2. Advance Pricing Arrangements

The concept of Advance Pricing Agreements (APA) is proposed to be introduced in the Indian scenario w.e.f. 1st July, 2012.

APA is an agreement between the assessee and the taxing authority on an appropriate transfer pricing methodology for a set of transactions over a fixed period of time in future.

These agreements help the assessee to mitigate the subjectivity involved during Transfer Pricing Assessment by agreeing on the Transfer Pricing method and / or arm’s length price which will be applicable to international transactions with associated enterprises. The APA will normally be entered into before the transaction.

The APA so entered shall be binding only on the assessee and the Commissioner (including his subordinates) and shall be valid for the period mentioned therein. The period of the APA cannot however exceed 5 years.

The manner and form for obtaining APA will be prescribed by the Govt. in due course.

Amendments are also proposed in the assessment procedure for taking effect of the APA and for computing the period of limitation for assessments / reassessments.

3. Definition of international taxation

The present definition of international taxation under Section 92B of the Act provides an exclusive definition.

The definition has been clarified further by inserting an Explanation with retrospective effect from 1st April 2002 (AY 2002-03). Scope of intangible property appearing in the definition has been clarified and a broad inclusive definition covering almost all kinds of intangibles is given.

Further, international taxation now includes any transaction of business restructuring or reorganization which has a bearing on the profits/income/losses/assets of the company whether in the current or future years.

4. Tolerance Range for international transaction

Amendments over the years Proviso to Section 92C(2)
Position prior to the Finance Act, 2009 Where more than one price is determined by the most appropriate method, the arm’s length price  = arithmetical mean of such prices, or,

at the option of the assessee, a price which may vary from the arithmetical mean by upto 5% of such arithmetical meanAmendment by Finance Act 2009Clarified that 5% is a tolerance range and not a standard deduction

Base for calculating 5% changed to transaction price.Amendment by Finance Act 2011The 5% specified in the Section was removed and it was provided that a Tolerance Range % shall be notified by the Government.Amendment proposed by Finance Bill 2012The Tolerance range % as may be notified by the Government shall not exceed an upper ceiling of 3%. (applicable from AY 2013-14)

Retrospective amendment from 1st April 2002 to clarify that prior to Finance Act, 2009, the 5% specified was not a standard deduction but a tolerance range.

Retrospective amendment from 1st October 2009 to clarify that legislative intent of Finance Act, 2009 was to apply the amended provision to all proceedings pending as on 1stOctober 2009 and not to proceedings for AY 2010-11 and onwards.

5. Non-Reporting of international transactions by assessee in report u/s 92E

TPO may examine a transaction not reported u/s 92E

Section 92CA of the Act empowers the AO to refer the matter of determination of ALP (Arm’s Length Price) for an international transaction to a TPO (Transfer Pricing Officer). On such reference being made, the TPO will have the all rights of the AO u/s 92C(3) and make such adjustments he may think fit. In the course of such assessment he may also examine international transaction not reported by the assessee in the transfer pricing report filed by the assessee u/s 92E.

Under existing laws, the powers of the TPO come into play only when a reference is made by the AO.

Proposed amendment in Section 92CA: Even if no reference is made by the AO, the TPO will be empowered to examine an international transaction not reported by assessee in audit report u/s 92E where the transaction came to his notice in course of proceedings before him.

This amendment is proposed to take effect retrospectively from 1st June 2002. However, no reopening of any assessment will be done on account of this amendment.

Non-reporting deemed to be a case of escapement of income

An explanation is proposed to be inserted w.e.f. from 1st July 2012 in Section 147 – income escaping assessment – to provide that in cases where an international transaction has not been reported by the assessee either by non-filing of report or by not including the transaction in the report filed, such non-reporting will be deemed to be case of escapement of income and can be reopened u/s 147 of the Act.

Penalties imposed for not reporting any international transaction

Under the existing provisions, following penalties are levied for non-compliance with Transfer Pricing provisions:

Section 271BA – Failure to furnish a report from an accountant as required by Section 92E

Section 271AA – Failure to keep and maintain information and document in respect of International Transaction.

Section 271G – Failure to furnish information or document under Section 92D

For effective deterrence, it is proposed to include the following defaults for attracting penalty under Section 271AA:

(i) Failure to report any international transaction which is required to be reported, or;

(ii) Maintaining or furnishing any incorrect information or documents.

6. Filing of return of income:

Under the existing provisions, the due date for filing of return of income for companies required furnish Transfer Pricing Report is 30th November of the assessment year.

It is proposed to provide that the extended due date of 30th November will be applicable to all assesses who required to obtain and file Transfer Pricing report.

This amendment will apply retrospectively from AY 2012-13.

7. Amendments related to Dispute Resolution Panel (DRP)

a)      The Assessing Officer may also file an appeal before the ITAT against an order passed in pursuance of directions of the DRP.

b)      In a recent judgement, it was held that the power of DRP is restricted only to the issues raised in the draft assessment order and therefore it cannot enhance the variation proposed in the order as a result of any new issue which comes to the notice of the panel during the course of proceedings before it.

It is accordingly proposed that the power of the DRP to enhance the variation shall include and shall always be deemed to have included the power to consider any matter arising out of the assessment proceedings relating to the draft assessment order.  This power to consider any issue would be irrespective of the fact whether such matter was raised by the eligible assessee or not.

This amendment will be effective retrospectively from the 1st day of April, 2009.

c)       It is proposed that where assessments are framed as a result of search and seizure, and are referred to DRP, time limit as specified in section 144C [provisions relating to DRP] will apply. It is also proposed to provide for filing of appeals directly to ITAT against such orders.

These amendments in the provisions of the Income-tax Act will take effect retrospectively from the 1st day of October, 2009.

 

H.   Amendments in International Tax Provisions

1. Meaning assigned to a term used in DTAA

The Central Government was empowered to assign a meaning, through notification, to any term used in the Agreement, which was neither defined in the Act nor in the agreement.

It is proposed that any meaning assigned through notification to a term shall be effective from the date of coming into force of the agreement. It is also proposed to make similar amendment in Section 90A of the Act.

The amendment in section 90 will take effect retrospectively from 1st October, 2009 and the amendment in section 90A shall take effect retrospectively from 1st June, 2006.

2. Extension of time limit for completion of proceedings where information is sought under a DTAA

The time limit for completion of an assessment or reassessment has been provided in the provisions of section 153 and 153B of the Income-tax Act. These provisions exclude the time taken in obtaining information (from foreign tax authorities) from the foreign tax authorities.

A period of 6 months has been specified under the existing provisions. As foreign inquiries take longer time for obtaining information, the time limit of six months is proposed to be extended to one year.

3. Tax Residency Certificate necessary

Sections 90 and 90A are proposed to be amended to provide submission of Tax Residency Certificate (TRC) compulsory for availing benefits under a particular DTAA. A TRC is essentially a certificate confirming the country which the non-resident payee is a resident of. This is necessary before benefits under DTAA can be claimed as beneficial provisions given therein are applicable only to residents of the country with which DTAA is entered.

Professionals before issuance of certificate in Form 15CB need to factor in this amendment and insist for a copy of TRC from the non-resident payee.

It is also clarified that TRC is a necessary but not sufficient condition for claiming benefits under DTAA. Other provisions of the Act and DTAA need to be looked into.

4. Taxation of a non-resident entertainer, sportsperson, etc.

It is proposed to amend Section 115A to provide that:

–          Income of a non-citizen, non-resident entertainer (such as theatre, radio or television artists and musicians) from performance in India shall be taxable at the rate of 20% of gross receipts.

Under the present law, taxability is on net basis.

–          A non-citizen, non-resident sportsmen or non-resident sports association, shall be taxable at the rate of 20% of gross receipts.

Under the present law, taxability is @ 10%.

5. Income arising on sale of shares of offshore company – Reversal of Vodafone Case

The Finance Bill, 2012 has proposed a series of new amendments in the Act retrospectively to tax offshore share transactions. These amendments are an aftermath of the judgement given in favour of the assessee by the Supreme Court in the Vodafone case. The Govt has proposed to reverse the Apex Court’s interpretation of the law by making these retrospective amendments to explain the Act in a manner which it finds suitable.

In the Vodafone case, shares of an offshore company were transferred by the Hutchinson Group to Vodafone Group. The offshore Company through various intermediate companies had an indirect stake of 67% in Hutchinson Essar Ltd. (an Indian Company). At the heart of the controversy was the interpretation of Section 9(1)(i) of the Act. As per the said section, income accruing or arising directly or indirectly from the transfer of a capital asset situated in India is deemed to accrue/ arise in India in the hands of a non-resident. As

The Supreme Court ruled in favour of the assessee and held that Section 9(1)(i) of the Act does not cover indirect transfer of capital asset / property situated in India and that gains arising from the said transaction were not liable to tax in India. Thus there was no obligation on Vodafone to deduct tax at source.

The amendments proposed are as follows:

–          Scope of income deemed to accrue or arise in India to non-residents directly or indirectly through the transfer of a capital asset situated in India expanded retrospectively from 1 April 1962 to tax indirect transfer of shares in an Indian Company. The expression ‘through’ will now mean “by means of” or “in consequence of” or “by reason of”.

–          The share or interest in an overseas company or entity has been clarified to be situated in India if they directly or indirectly derive substantial value from assets which are located in India.

–          The term ‘property’ will now include rights in or in relation to an Indian company including rights of management or control or any other such rights.

–          The ambit of ‘transfer’ in such cases widened to include disposition of share of company registered/incorporated outside India where it relates to such ‘property’.

–          Section 195(1) to apply to all residents and non-residents whether or not the non-resident has a place of business, residence or a business connection in India or any other presence in any manner whatsoever.

The amendments are proposed to be made to Sections 9(1)(i), 2(14), 2(47), and 195(1).

These amendments are sought to be made effective retrospectively from 1st April, 1962 and will accordingly apply in relation to the assessment year 1962-63 and subsequent assessment years.

These amendments thus make a distinction between controlling interest in the shares and ownership of shares which cannot be separated.

This amendment will have a very far-reaching and adverse impact on the Foreign Direct Investment coming into India. The amendment from retrospective effect plays a damper.

A Validation Clause is proposed to be inserted to provide for validation of all actions of the Income Tax authorities under the Income Tax Act in cases of income arising from transfer of a capital asset situated in India, in consequence of the transfer of shares of a company registered or incorporated outside India irrespective of any judgement, decree or order of any Court or Tribunal or any Authority.

6. Definition of Royalty further clarified

Explanations are proposed to be inserted with retrospective effect from 1st June 1976 to clarify the meaning of royalty, thereby reversing judgements given by various Courts in favour of the assessee. The following are proposed to be clarified:

–          Transfer of all or any right for use of or right to use computer software (including granting of licence), irrespective of the medium through which it is transferred, is covered within the meaning of Royalty.

Accordingly this amendment reversed the decision of Delhi High Court in DIT v. Ericsson AB (204 Taxman 192) which held that  royalty contemplates a payment that is dependent upon user of copyright and not a lump sum payment made for acquisition of a copyrighted article.

–          Royalty includes consideration in respect of any right, property or information and is not dependent on whether it’s possession or control is with the payer, whether it is used directly by the payer and whether it’s location is in India.

–          The expression “process” used in the definition of Royalty includes transmission by satellite, cable, optic fibre or similar technology, whether or not such process is secret. This reverses the decision of Delhi High Court in Asia Satellite Telecommunications Co. Ltd. v. DIT (197 Taxman 263).

7. Time limit for issue of notice to agent of non-resident extended

Section 149 is proposed to be amended to extend the time limit for issue of notice in case of person who is treated as agent of non-resident from 2 years to 6 years.

Author

CA Vivek Newatia, FCA, B.Com (Hons.), CISA, DISA

Partner of M/s S. Jaykishan, Chartered Accountants

12, Ho-chi-minh Sarani, Suite – 2D, Kolkata – 700071

Phone: 033-40035801, Mobile: +91 9831088818

Email: vnewatia@sjaykishan.com

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0 responses to “Budget 2012- Analysis of Income Tax Provisions”

  1. CA RIDDHI MAHESHWARI says:

    it is easy to understand analysis of the budget.. i liked it.

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