Finance (No. 2) Act, 2004 – Explanatory Notes on provisions relating to Direct Taxes

CIRCULAR NO. 05/2005, DATED 15-7-2005

Introduction

1. The Finance (No. 2) Act, 2004 as passed by the Parliament, received the assent of the President on the 10th September, 2004 and has been enacted as Act No. 23 of 2004. This circular explains the substance of the provisions of the Act relating to direct taxes.

2. Changes made by the Finance (No. 2) Act, 2004

2.1 The Finance (No. 2) Act, 2004 (hereinafter referred to as the ‘Act’) has,—

  (i)  amended sections 2, 7, 10, 12AA, 17, 32, 33AC, 35AC, 40, 48, 56, 71, 80DD, 80-IA, 80-IB, 80U, 87, 88, 90, 94, 115AD, 115JB, 115R, 119, 139, 139A, 153, 153B, 194C, 197, 198, 199, 200, 202, 203, 204, 205, 206, 206C, 206CA, 245RR, 246A, 253, 272A, 272B, 272BBB, 273B, 278B, 279 and Thirteenth Schedule of the Income-tax Act, 1961;

 (ii)  inserted new sections 80CCD, 88D, 88E, 111A, 142A, 194LA, 203AA, 271FA, 277A and new Chapter XII-G in the Income-tax Act, 1961;

(iii)  substituted new sections 203A, 285BA of the Income-tax Act, 1961;

 (iv)  amended section 35HA of the Wealth-tax Act, 1957;

  (v)  introduced a new Chapter VII to levy Securities Transaction Tax.

3. Provisions in brief

3.1 The provisions of the Act in the sphere of direct taxes relate to the following matters:—

  (i)  Prescribing the rates of income-tax on income liable to tax for the assessment year 2004-05; the rates at which the tax will be deductible at source in the financial year 2004-05 from interest (including interest on securities), winnings from lotteries or cross-word puzzles, winnings from horse races, insurance commission and other categories of income liable for tax deduction at source under the Income-tax Act, rates for computing ‘advance tax’, deduction of income-tax from ‘Salaries’ and charging of income-tax on current income in certain cases for the financial year 2004-05.

 (ii)  Amendment of the Income-tax Act, 1961, with a view to :

     –  modifying the definition of income to include any sum of money exceeding Rs. 25,000 received without any consideration by an individual or HUF.

     –  providing a sunset provision to section 10(4)( ii) relating to interest in a Non-Resident (External) Account.

     –  reintroducing exemption under section 10(6BB).

     –  exempting income payable to the European Investment Bank on loans granted in pursuance of the framework agreement.

     –  providing a sunset provision to section 10(15)(iv)( fa) relating to interest on Foreign Currency Deposits.

     –  withdrawing exemption under section 10(15A).

     –  exempting family pension received by the family members of armed forces personnel killed in action in certain circumstances.

     –  modifying the definition of venture capital undertaking.

     –  providing for taxation on income of infrastructure capital company under section 115JB.

     –  providing for exemption on capital gains arising from compulsory acquisition of agricultural land situated within specified urban limits.

     –  explicitly providing power to the Commissioner for cancelling registration under section 12AA.

     –  introducing a new provision to give effect to the New Pension Scheme.

     –  reducing the limit for increase in installed capacity for the purposes of additional depreciation.

     –  providing for additional ground for withdrawal of approval granted to associations/institutions or withdrawal of notification of eligible project or scheme by the National Committee.

     –  providing for disallowance of certain amounts while computing income under the head “Profits and gains of business or profession” if tax has not been deducted at source.

     –  not allowing set-off of business loss against income from salary.

     –  providing deduction in respect of maintenance including medical treatment of a dependent being a person with disability or severe disability suffering from autism, cerebral palsy or multiple disabilities.

     –  extending tax benefits under section 80-IA in the case of substantial renovation and modernization of transmission and distribution lines in the power sector.

     –  extending the time limit for providing telecommunication services, etc. for the purpose of tax holiday under section 80-IA.

     –  extending the time-limit for setting up of industries in the State of Jammu and Kashmir for the purpose of tax holiday under section 80-IB.

     –  extending the time-limit for the purpose of tax holiday under section 80-IB to any company carrying on scientific research and development.

     –  extending the time-limit for obtaining approval of housing projects for the purpose of tax holiday under section 80-IB, and allowing deduction for redevelopment or reconstruction of existing buildings in slum areas.

     –  providing tax holiday for agro-processing industry.

     –  giving incentive to an undertaking building, operating and maintaining a hospital in a rural area.

     –  providing for deduction in respect of a person with disability or severe disability suffering from autism, cerebral palsy or multiple disabilities.

     –  giving rebate for repayment of housing loans taken from an authority established by a Central or State Act.

     –  introducing a new provision for allowing deduction from tax payable for individuals having total income up to rupees one lakh.

     –  amending section 90.

     –  curbing tax avoidance via dividend and bonus stripping.

     –  reducing the opportunity of arbitrage for the companies.

     –  continuing exemption to open-ended equity oriented funds without any time-limit.

     –  amending section 119 relating to instructions to subordinate authorities.

     –  clarifying provisions regarding estimates by Valuation Officer in certain cases.

     –  excluding the time taken by the Authority for Advance Rulings in rejecting an application or pronouncing an advance ruling from the period of limitation for making an assessment.

     –  amending section 194C relating to tax deduction at source from payments made to contractors and sub-contractors.

     –  providing for deduction of tax at source from compensation or enhanced compensation paid on acquisition of certain immovable property other than agricultural land.

     –  providing for common identification number in cases of tax deduction at source and tax collection at source.

     –  amending the provision for filing of returns of tax deducted at source.

     –  expanding the scope of collection of tax at source.

     –  amending the provisions for filing of returns of tax collected at source.

     –  inserting a new chapter for special provisions relating to income of shipping companies.

     –  enabling de-materialisation of TDS and TCS certificates.

     –  providing for prosecution in case of falsification of books of account or documents etc.

     –  Rationalising provisions relating to offences by a company.

     –  modifying the provisions for filing of annual information return.

(iii)  Introduction of provisions for levy of Securities Transaction Tax and to provide :

     –  exemption from income-tax on long-term capital gain arising from transactions chargeable to securities transaction tax;

     –  concessional rate of income-tax on short-term capital gain arising from transaction chargeable to securities transaction tax;

     –  rebate of securities transaction tax paid on transactions forming part of business against income-tax liability on business income arising from such transactions.

Rate Structure

4. Rates of income-tax in respect of incomes liable to tax for the assessment year 2004-05.

In respect of incomes of all categories of taxpayers (corporate as well as non-corporate) liable to tax for the assessment year 2004-05, the rates of income-tax have been specified in Part I of the First Schedule to the Act and are the same as those laid down in Part III of the First Schedule to the Finance Act, 2003 for the purposes of computation of “advance tax”, deduction of tax at source from “Salaries” and charging of tax payable in certain cases during the financial year 2003-04. It has also been specified that in the case of individuals, Hindu undivided families, association of persons and body of individuals having total income exceeding Rs. 8,50,000, the tax so computed after rebate under Chapter VIII-A, shall be enhanced by a surcharge of ten per cent for purposes of the Union. In the case of every artificial juridical person, the tax computed shall be enhanced by a surcharge of ten per cent. In case of a firm, a local authority, a co-operative society and a company, the tax computed shall be enhanced by a surcharge of two and one-half per cent.

Rates for deduction of income-tax at source during the financial year 2004-05 from income other than “Salaries”

The rates for deduction of income-tax at source during the financial year 2004-05 from incomes other than “Salaries” have been specified in Part II of the First Schedule to the Act. These rates apply to income by way of interest on securities, interest other than “interest on securities”, insurance commission, winnings from lotteries or crossword puzzles, winnings from horse races and income of non-residents (including non-resident Indians). These rates are broadly the same as those specified in Part II of the First Schedule to the Finance Act, 2003, for the purposes of deduction of income-tax at source during the financial year 2003-04. The tax deducted at source in each case shall be increased by a surcharge for purposes of the Union as follows :

  (i)  in the case of every individual, Hindu undivided family, association of persons and body of individuals, at the rate of ten per cent of such tax where the income or the aggregate of such incomes paid or likely to be paid exceeds Rs. 8,50,000;

 (ii)  in the case of every co-operative society, firm, local authority and company, at the rate of two and one-half per cent of such tax; and

(iii)  in the case of every artificial juridical person, at the rate of ten per cent of such tax.

An additional surcharge to be called the Education Cess is to be levied at the rate of two per cent on the amount of tax deducted, inclusive of surcharge if any.

Rates for deduction of income-tax at source from “Salaries”, computation of “advance tax” and charging of Income-tax in special cases during the financial year 2004-05

The rates for deduction of income-tax at source from “Salaries” during the financial year 2004-05 and also for computation of “advance tax” payable during that year in the case of all categories of taxpayers have been specified in Part III of the First Schedule to the Act. These rates are also applicable for charging income-tax during the financial year 2004-05 on current incomes in cases where accelerated assessments have to be made, e.g., provisional assessment of shipping profits arising in India to non-residents, assessment of persons leaving India for good during that financial year, assessment of persons who are likely to transfer property to avoid tax, or assessment of bodies formed for short duration, etc.

An additional surcharge, to be called the Education Cess, is to be levied at the rate of two per cent on the amount of tax deducted or advance tax paid, inclusive of surcharge if any. However, so far as the liability of the deductor is concerned, education cess in the case of tax deducted at source, is to be levied only in respect of tax deducted at source on payments made or credited on or after 10th September, 2004, i.e., the day on which the Finance (No. 2) Act, 2004 received the assent of the President. To reiterate, the payee shall be liable to an additional surcharge, i.e., education cess on the tax payable on the total income of the whole of the financial year.

The salient features of the rates specified in the said Part III are indicated in the following paragraphs:—

A. Individuals, Hindu undivided families, etc.

Paragraph A of Part III of the First Schedule specifies the rates of income-tax in the case of individuals, Hindu undivided families, association of persons, body of individuals or every artificial juridical persons other than a co-operative society, firm, local authority and company.

No change has been made in the rate structure. The tax payable would be enhanced by a surcharge for the purposes of the Union at the rate of ten per cent of the tax payable (after allowing rebate under Chapter VIII-A) in cases of individuals, Hindu undivided families, association of persons, body of individuals having total income exceeding Rs. 8,50,000. No surcharge would be payable by persons having incomes of Rs. 8,50,000 or below. Marginal relief would be provided to ensure that the additional amount of income-tax payable, including surcharge, on the excess of income over Rs. 8,50,000 is limited to the amount by which the income is more than Rs. 8,50,000. No marginal relief shall, however, be available in respect of the Education Cess. In the case of every artificial juridical person other than a co-operative society, firm, local authority and company, surcharge would be levied at ten per cent of the income-tax payable.

Section 22 of the Act has inserted a new section 88D in the Income-tax Act to provide for rebate of the entire amount of tax payable in case of a resident individual having total income up to Rs. 1,00,000. Consequently, resident individuals having taxable income up to Rs. 1,00,000 will not be required to pay any income-tax. Marginal relief has also been provided for in the section.

The Table below gives the income slabs and the rates of income-tax. Column (a) specifies the rates given in Paragraph A of Part I of the First Schedule to the Act; and column (b) specifies the rates given in Paragraph A of Part III of the First Schedule to the Act.

TABLE

(a)
(b)
Income slab
Rates as specified in Part I of First Schedule to the Act (i.e.,existing rates)
Income slab
Rates as specified in Part III of First Schedule to the Act (i.e., new rates)
Up to Rs. 50,000
Nil
Up to Rs. 50,000
Nil
Rs. 50,001 to Rs. 60,000
10%
Rs. 50,001 to Rs. 60,000
10% + 2% Education Cess
Rs. 60,001 to Rs. 1,50,000
20%
Rs. 60,001 to Rs. 1,50,000
20% + 2% Education Cess
Above Rs. 1,50,000
30% + Surcharge @ 10% in cases where total income exceeds Rs. 8.5 lakhs
Above Rs. 1,50,000
[30% + Surcharge @ 10% in cases where total income exceeds Rs. 8.5 lakhs] + 2% Education Cess

B. Co-operative societies

In the case of co-operative societies, the rates of income-tax have been specified in Paragraph B of Part III of the First Schedule to the Act. These rates are the same as those specified in the corresponding Paragraph of Part I of the First Schedule to the Act. The tax payable would be enhanced by a surcharge for the purposes of the Union at the rate of two and one-half per cent of the tax payable. The additional surcharge called Education Cess is to be levied at 2% on tax and surcharge.

C. Firms

In the case of firms, the rate of income-tax has been specified in Paragraph C of Part III of the First Schedule to the Act. This rate remains at 35 per cent. The tax payable by firms would be enhanced by a surcharge for the purposes of the Union at the rate of two and one-half per cent of the tax payable. The additional surcharge called Education Cess is to be levied at 2% on tax and surcharge.

D. Local authorities

In the case of local authorities, the rate of income-tax has been specified in Paragraph D of Part III of the First Schedule to the Act. This rate is the same as that specified in the corresponding Paragraph of Part I of the First Schedule to the Act. The tax payable would be enhanced by a surcharge for the purposes of the Union at the rate of two and one-half per cent of the tax payable. The additional surcharge called Education Cess is to be levied at 2% on tax and surcharge.

E. Companies

In the case of companies, the rate of income-tax has been specified in Paragraph E of Part III of the First Schedule to the Act. There is no change in the existing rates of thirty-five per cent for domestic companies and forty per cent for foreign companies. The tax payable by all companies would be enhanced by a surcharge at the rate of two and one-half per cent of the tax payable. The additional surcharge called Education Cess is to be levied at 2% on tax and surcharge.

[Sections 2, 22 and First Schedule]

Modification of the definition of income to include any sum of money exceeding twenty-five thousand rupees received without consideration

In order to curb bogus capital-building and money-laundering, a new sub-clause has been inserted in section 56 to provide that any sum received without consideration on or after the 1st day of September, 2004, by an individual or a Hindu undivided family from any person, shall be treated as income from other sources. A threshold limit of twenty-five thousand rupees has also been provided. If the amount so received exceeds this limit, the whole of the amount shall become taxable.

In order to avoid hardship in genuine cases, certain sums have been excluded. The sums which shall not be included in the income are : (a) the sums received (i) from any relative, or (ii) on the occasion of marriage of the individual, or (iii) under a will or by way of inheritance, or (iv) in contemplation of death of the payer. The expression ‘relative’ has also been defined for the purposes of this clause.

Section 2 has also been amended to provide that ‘income’ defined in clause (24) shall also include the income referred to in the new sub-clause (v) of clause (2) of section 56.

This amendment has taken effect from 1st April, 2005, and applies in relation to the assessment year 2005-06 and subsequent assessment years.

[Section 3]

Discontinuation of the exemption under sub-clause (ii ) of clause (4) of section 10 in respect of interest on deposits in a Non-Resident (External) Account

Under the existing provisions contained in section 10(4)(ii ), in the case of an individual, any income by way of interest on moneys standing to his credit in a Non-Resident (External) Account in any bank in India is not to be included in computing his total income.

The Finance (No. 2) Act, 2004 has amended clause (4)(ii ) of section 10 to provide that this exemption will not be available in respect of such income paid to him or credited to his Non-Resident (External) account in any bank in India, on or after the 1st day of April, 2005.

This amendment has become applicable in relation to the assessment year 2006-07 and subsequent assessment years.

[Section 5(a)]

Exemption for European Investment Bank

Under the existing provisions, the interest payable to the European Investment Bank on developmental loans granted by it, is taxable.

With a view to honour the commitment given under a sovereign agreement, the interest payable to the European Investment Bank on loans granted in pursuance of the framework agreement for financial co-operation entered into by the Central Government with the said Bank on 25-11-1993 has been exempted from income-tax by insertion of a new sub-clause (iiic) of clause (15) of section 10.

This amendment takes effect from 1st April, 2005.

[Section 5(c)( A)]

Sunset provision to section 10(15)(iv)(fa) relating to interest on Foreign Currency Deposits

Under the existing provisions contained in section 10(15)(iv )(fa), the interest payable by a scheduled bank to a non-resident or to a person who is not ordinarily resident on deposits in foreign currency where the acceptance of such deposits by the bank is approved by the Reserve Bank of India shall not be included in computing his total income.

The Finance (No. 2) Act, 2004 has amended clause (15)(iv )(fa) of section 10 to provide that this exemption will not be available in respect of such interest payable on or after the 1st day of April, 2005.

This amendment has become applicable in relation to the assessment year 2006-07 and subsequent assessment years.

[Section 5(c)( B)]

Re-introduction of exemption under section 10(6BB) and withdrawal of exemption under section 10(15A)

Under the existing provisions of section 10(6BB), tax paid by an Indian company, engaged in the business of operation of aircraft on income derived by the Government of a foreign State or a foreign enterprise as consideration of acquiring an aircraft or an aircraft engine on lease by the Indian concern under an agreement entered after the 31st day of March, 1997 but before the 1st day of April, 1999 and approved by the Central Government in this behalf, and the tax on such income is payable by such Indian company under the terms of that agreement to the Central Government, is not included in computing the total income of the foreign enterprise.

The Finance (No. 2) Act, 2004 has amended clause (6BB ) of section 10 to provide that the said exemption shall also be allowed in respect of such agreements entered into on or after the 1st day of April, 2005.

Under the existing provisions of section 10(15A), any payment made by an Indian company engaged in the business of operation of aircraft, to acquire an aircraft or an aircraft engine on lease from Government of a foreign State or a foreign enterprise under an agreement, not being an agreement entered into between the 1st day of April, 1997 and 31st day of March, 1999, and approved by the Central Government is not included in computing the total income.

This exemption is being withdrawn in respect of the agreements entered into on or after the 1st day of April, 2005.

These amendments apply in relation to the assessment year 2006-07 and subsequent assessment years.

[Sections 5(b) and 5(d)]

Exemption of family pension received by the family members of armed forces personnel killed in action in certain circumstances

Under the existing provisions contained in clause (18 ) of section 10, the pension income received by the recipients of Param Vir Chakra, Mahavir Chakra, Vir Chakra or certain other notified gallantry awards, as well as the family pension received by specified family members of such individuals is not included in computing the total income of such individuals.

In the interest of the welfare of the armed forces personnel, a new clause (19) has been inserted in the said section so as to provide that where the death of a member of the armed forces (including para-military forces) of the Union has occurred in the course of operational duties, in such circumstances and subject to such conditions as may be prescribed, the family pension received by the widow or children or nominated heirs, as the case may be, shall be exempt from tax. Circumstances and conditions have been prescribed in rule 2BBA of the Income-tax Rules, 1962.

The proposed amendment takes effect from the 1st April, 2005 and applies in relation to assessment year 2005-06 and subsequent years.

[Section 5(e)]

Modification of definition of venture capital undertaking

Under the existing provisions contained in section 10(23FB ), Venture Capital Undertaking (VCU) is defined to mean a domestic company whose shares are not listed in the recognized stock exchange in India and which is engaged in the business of providing services, production or manufacture of an article or thing but does not include such activities or sectors which are specified by the Securities and Exchange Board of India (SEBI) with the approval of Central Government by way of notification in the Official Gazette. This definition was intended to be in line with the definition in the Securities and Exchange Board of India (Venture Capital Funds) Regulation, 1996 made under the SEBI Act, 1992. Therefore, any amendment in the SEBI Regulations had to be followed by a consequential amendment in the Income-tax Act.

In order to eliminate the process involving a time lag, the amendment to clause (c) of Explanation seeks to define VCU as one referred to in the Securities and Exchange Board of India (Venture Capital Funds) Regulation, 1996 made under the Securities and Exchange Board of India Act, 1992 and notified in the Official Gazette by the Central Board of Direct Taxes for this purpose. In this regard, the Board has issued Notification S.O. No. 1060(E), dated 28th September, 2004.

This amendment has taken effect from 1st October, 2004.

[Section 5(f)]

Income of infrastructure capital company liable to tax under section 115JB

Under the existing provisions contained in clause (23G ) of section 10, any income by way of dividends, other than dividends referred to in section 115-O, interest, or long term capital gains of an infrastructure capital fund or an infrastructure capital company or a co-operative bank from investments made in any undertaking engaged in an infrastructure project or a housing project or a hotel or hospital project is excluded from the total income.

With a view to rationalise the provision, a proviso has been inserted in the said clause so as to provide that in the case of an infrastructure capital company the abovementioned incomes shall be taken into account in computing the book profit for the purpose of section 115JB and for payment of tax under that section. Consequential amendments have been made in section 115JB.

These amendments take effect from 1st April, 2005 and apply in relation to the assessment year 2005-06 and subsequent years.

[Sections 5(g), 28]

Providing for exemption on capital gains arising from compulsory acquisition of agricultural land situated within specified urban limits

Section 10 of the Income-tax Act, 1961, relates to incomes which do not form part of total income.

In order to provide relief to the farmers, a new clause (37 ) has been inserted in section 10 providing exemption on capital gains arising to a Hindu undivided family or to an individual from the transfer of agricultural land [being capital asset within the meaning of clause (14) of section 2] by way of compulsory acquisition under any law or under a transfer of such land, the consideration for which is determined or approved by the Central Government or the Reserve Bank of India. Such exemption shall be available where the compensation/enhanced compensation/enhanced consideration or consideration has been received on or after 1st April, 2004, and such land, during the period of two years immediately preceding the date of transfer was being used for agricultural purposes by such Hindu undivided family or individual or a parent of his.

This amendment takes effect from 1st April, 2005 and applies in relation to the assessment year 2005-06 and subsequent years.

[Section 5(h)]

Power to the Commissioner for cancelling registration under section 12AA

Section 12AA provides for the procedure for registration of a trust or institution by the Commissioner of Income-tax. Although the power of cancellation of registration flows from the power to register, there has been unnecessary litigation on this issue.

This section has been amended so as to specifically provide that if the Commissioner of Income-tax is satisfied that the activities of any trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution, he shall, after giving reasonable opportunity of being heard to the concerned trust or institution, pass an order in writing cancelling the registration granted under the said section.

This amendment takes effect from 1st October, 2004.

[Section 6]

New provision to give effect to the New Pension Scheme

A New Pension Scheme applicable to new entrants to Central Government service (except Armed Forces in the first stage) has been notified by the Central Government (Department of Economic Affairs) on 22nd December, 2003 and has become effective from 1-1-2004. As per the scheme it is mandatory for persons entering the service of the Central Government on or after 1st January, 2004, to contribute ten per cent of salary every month towards a non-withdrawable pension tier-I account. A matching contribution is required to be made by the Government to the said account.

To give effect to the New Pension Scheme of the Central Government, a new section 80-CCD has been inserted to provide for a deduction from the total income of an individual employed by the Central Government on or after 1st January, 2004, of the amounts paid or deposited by him in the non-withdrawable pension tier-I account, which do not exceed ten per cent of his salary in the previous year. The employee has been provided a further deduction, equal to the matching contribution made by the Central Government to the said account. For the purposes of section 80CCD, ‘salary’ includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.

The amounts standing to the credit of the assessee in the tier-I account, for which a deduction has already been allowed to him, and accretions to such account, shall be taxed as income in the year in which such amounts are received by the assessee or his nominee on closure of the account or his opting out of the tier-I account or on receipt of pension from the annuity plan purchased or taken on closure or opting out of the said account.

No rebate is allowed under section 88 in respect of amounts on which deduction has been claimed under section 80CCD.

Sections 7 and 17 have also been amended to provide that the contribution made by the Central Government in the previous year to the non-withdrawable pension tier-I account of an employee participating in the New Pension Scheme, shall be deemed to be income received in the previous year and shall be chargeable to tax under the head ‘salary’.

The proposed amendments take effect retrospectively from 1st April, 2004 and apply in relation to the assessment year 2004-05 and subsequent years.

[Sections 4, 7 and 15]

Relaxation of the conditions for allowing initial depreciation

Under the existing provisions of clause (iia) of sub-section (1) of section 32 of the Income-tax Act, a further deduction at the rate of fifteen per cent of the actual cost of new plant and machinery other than ships and aircrafts acquired and installed on or after 1-4-2002 is allowed. This deduction is available to—

  (i)  a new industrial undertaking during any previous year in which it begins to manufacture produce any article or thing on or after 1-4-2002;

 (ii)  an undertaking existing before 1-4-2002, in the previous year in which it achieves not less than 25% increase in installed capacity.

“Installed capacity” has been defined to mean the capacity of production as existing on the 31st day of March, 2002.

With a view to give a thrust to investment in the manufacturing sector, the minimum requisite increase in installed capacity has been reduced to 10% from the existing level of 25%.

This amendment takes effect from 1st April, 2005 and applies in relation to the assessment year 2005-06 and subsequent years.

[Section 8]

Withdrawal of approval granted to associations/institutions or withdrawal of notification of eligible project or scheme by the National Committee

Under the existing provisions of section 35AC of the Income-tax Act, a deduction of the amount of expenditure incurred during the previous year by way of payment of any sum to a public sector company or a local authority or to an association or institution approved by the National Committee for carrying out any eligible project or scheme is allowed. Sub-section (4) of the said section provides that where National Committee is satisfied that the project or scheme is not being carried on in accordance with all or any of the conditions, it may withdraw the approval earlier granted to the association or institution. Sub-section (5) similarly provides for withdrawal of the notification of the eligible project or scheme if it is not being carried out in accordance with all or any of the conditions on the basis of which such project or scheme was notified.

Certain cases have come to notice where the projects or schemes are not implemented or have been abandoned midway. In some cases donations raised have not been used on the eligible projects are the projects and schemes were not implemented in proper manner.

With a view to ensure effective monitoring in cases where associations/institutions are approved or eligible projects or schemes have been notified, the Act has substituted sub-sections (4) and (5) to provide for an additional mechanism for withdrawal of approval granted to associations/institutions or withdrawal of notification of eligible project or scheme by the National Committee. It has been provided that where an association or institution, to which approval has been granted, fails to furnish a progress report in the prescribed form within the prescribed time after the end of each financial year to the National Committee, the Committee may, at any time, after giving a reasonable opportunity of showing cause, withdraw the approval. It has also been provided that the notification of an eligible project or scheme may be withdrawn by the National Committee, after giving a reasonable opportunity of being heard in case a report in the prescribed form in respect of such project or scheme is not furnished within the prescribed time after the end of each financial year. It has also been provided that a copy of the order withdrawing the approval or notification through which the notification of eligible project or scheme is withdrawn shall be forwarded to the Assessing Officer having jurisdiction over the concerned association or institution or local autho-rity or public sector company. This power of withdrawal will be in addition to the existing power of withdrawal of approvals or notifications in case the project or scheme is not being carried out in accordance with all or any of the conditions subject to which the approval was granted or project/scheme notified.

This amendment takes effect from 1st October, 2004.

[Section 10]

Certain amounts not to be allowed as deduction while computing income under the head “Profits and gains of business or profession” if tax not deducted at source

Under the existing provisions of sub-clause (i) of clause (a) of section 40 of the Income-tax Act, no deduction is allowed in the computation of income on account of interest, royalty, fees for technical services or any other sum which is payable outside India, or in India to a non-resident or to a foreign company, if tax is not deducted at source from payments of these sums or after deduction of tax at source, payment is not made to the account of the Central Government before the expiry of time prescribed under sub-section (1) of section 200 and in accordance with other provisions of Chapter XVII-B. Deduction of the sum is, however, allowed where tax has been deduced, or after deduction has been paid in any subsequent year in computing the income of that previous year.

With a view to rationalize the provisions of sub-clause (i ), the Act has substituted the said sub-clause to provide that in any case in which tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of time prescribed under sub-section (1) of section 200, the sum from which tax has been so deducted or paid shall be allowed as deduction in computing the income of the previous year in which the tax has been paid to the account of the Central Government.

Further, with a view to augment compliance of TDS provisions in the case of residents and curb bogus payments to them it has been provided that no deduction will be allowed in the computation of income where tax is not deducted from payments of interest, commission or brokerage, fees for professional services or fees for technical services and payments to a contractor or sub-contractor for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200.

It has, however, been provided that in any case where tax has been deducted from the payments of any of the aforementioned sums to residents in any subsequent year or has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, the sum of payment shall be allowed as a deduction in computing the income of the previous year in which the tax has been paid to the account of the Central Government.

These amendments take effect from 1st April, 2005 and apply in relation to the assessment year 2005-06 and subsequent assessment years.

[Section 11]

No set-off of business loss against income from salary

Under the existing provisions of sub-section (1) of section 71 of the Income-tax Act, loss computed in current year under the head “Profits and gains of business or profession” can be set off against salary income.

In order to prevent abuse of the provisions of set-off of losses, the Act has amended section 71 by way of insertion of a new sub-section (2A) to provide that an assessee shall not be entitled to set off any loss under the head “Profits and gains of business or profession” against income under the head “Salaries”.

This amendment takes effect from 1-4-2005 and applies in relation to the assessment year 2005-06 and subsequent years.

[Section 14]

Deduction in respect of maintenance including medical treatment of a dependent being a person with disability or severe disability suffering from autism, cerebral palsy or multiple disabilities

Under the existing provisions contained in section 80DD, an assessee, who is resident in India, being an individual or Hindu undivided family, is allowed a deduction of an amount of rupees fifty thousand, if the assessee has during the previous year, incurred any expenditure for the medical treatment, training and rehabilitation in respect of a dependent, being a ‘person with disability’, as defined under the Persons with Disability (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995. A deduction of rupees seventy-five thousand is allowed, where such dependent is a ‘person with severe disability’ suffering from eighty per cent or more of one or more disabilities. A person claiming deduction under this section is required to furnish a copy of the certificate issued by the medical authority along with the return of income.

The Explanation to the said section defines, inter alia, the expressions, “disability”, “medical authority”, “person with disability” and “person with severe disability” with reference to the relevant provisions of the Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995.

With a view to extend the benefits under section 80DD to persons suffering from autism, cerebral palsy and multiple disability, the said Explanation has been amended so as to expand these definitions to include the abovementioned expressions as provided for under the National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999.

The amendments take effect from 1-4-2005 and apply in relation to the assessment year 2005-06 and subsequent years.

[Section 16]

Extension of tax benefit under section 80-IA in the case of substantial renovation and modernization of transmission and distribution lines in the power sector

Under the existing provisions contained in clause (iv ) of sub-section (4) of section 80-IA, an undertaking engaged in the generation, generation and distribution, or the transmission or distribution of power which begins such generation or transmission before 31-3-2006, is allowed a hundred per cent deduction of the profits for any ten out of fifteen assessment years beginning from the year in which the undertaking starts generating power or commences transmission or distribution of power. However, the deduction is only available to a new undertaking and not to an undertaking formed by way of reconstruction or splitting up of a business already in existence. Further, the deduction is not available in the case of the transfer of old plant and machinery to the new business.

Recognising the need to encourage investment in renovation and modernization of the transmission and distribution network, the tax benefit under the section has been extended to undertakings which undertake substantial renovation and modernization of the existing network of transmission or distribution lines during the period beginning on 1-4-2004 and ending on 31-3-2006. ‘Substantial renovation and modernisation’ means 50 per cent increase in the book value of plant and machinery in the network of transmission or distribution lines, as on 1-4-2004.

Further, in view of the on-going reforms of the State Electricity Boards, the restrictions imposed on the transfer of old plant and machinery and splitting up or reconstruction of an old business shall no longer be applicable in the case of splitting up or, reconstruction, or re-organisation of State Electricity Boards. However, this benefit shall be available only in such cases where the splitting up or reconstruction or reorganization of the State Electricity Board(s) has taken place on or after 1-4-2004.

The proposed amendments take effect from 1-4-2005 and apply in relation to the assessment year 2005-06 and subsequent years.

[Section 17(a), 17(b)(B) and 17(c)(B)]

Extension of time limit for providing telecommunication services, etc. for the purpose of tax holiday under section 80-IA

Under the existing provision contained in clause (ii ) of sub-section (4) of section 80-IA, an undertaking which has started or starts providing telecommunication services, whether basic or cellular, including radio paging, domestic satellite service, network of trunking, broadband network and internet services, before the 31-3-2004, is allowed a deduction for any ten consecutive assessment years out of fifteen years beginning from the year in which the undertaking starts providing telecommunication services. The amount of deduction is one hundred per cent of profits for the first five years, and thereafter thirty per cent of profits for the next five years. Further, this deduction is, inter alia, available to an undertaking providing telecommunication services if such undertaking is formed by splitting up or the reconstruction of a business already in existence or by the transfer to a new business of old plant and machinery.

With a view to give incentive to the telecom sector, the terminal date for the eligible undertaking to start providing telecommunication services, etc. has been extended from 31-3-2004 to 31-3-2005. Further, in order to rationalize the provisions of the section and prevent misuse, the deduction shall be available to an undertaking which begins to provide telecommunication services on or after 1-4-2004 subject to, inter alia, the conditions that it is not formed by the transfer of old plant and machinery or splitting up or reconstruction of a business already in existence. However, the condition introduced by the Finance (No. 2) Act, 2004 will not apply to undertakings, which have started providing telecommunication services prior to 1-4-2004. Therefore, if an undertaking is formed by the transfer of old plant and machinery or splitting up or reconstruction of a business already in existence but has started providing telecommunication services prior to 1-4-2004, it will continue to get the tax benefit available under section 80-IA of the Income-tax Act.

This amendment takes effect from 1-4-2005 and applies in relation to the assessment year 2005-06 and subsequent years.

[Section 17(b)(A) and 17(c)(A)]

Extension of time limit for setting up of industries in the State of Jammu and Kashmir for the purpose of tax holiday under section 80-IB

Under the existing provisions contained in sub-section (4) of section 80-IB, industrial undertakings engaged in manufacture or production or operation of a cold storage plant and set up during the period 1-4-1993 to 31-3-2004 in the industrially backward States as listed in the VIII Schedule, including the State of Jammu and Kashmir, are eligible for a 100 per cent deduction of profits for a period of 5 years, followed by 25 per cent (30 per cent in the case of a company) for the next 5 years. The deduction is not available to industries set up after 31-3-2004.

The terminal date for setting up of industrial undertakings in the State of Jammu and Kashmir has been extended by one more year, i.e., till 31-3-2005. The Thirteenth Schedule has also been amended to include a negative list of commodities which should not be manufactured or produced by such undertakings. Thus the industrial undertakings which are set-up in Jammu and Kashmir and begin to manufacture or produce tobacco products, alcoholic drinks and aerated beverages etc. during the period 1-4-2004 to 31-3-2005 shall not be eligible for deduction under section 80-IB of the Income-tax Act.

These amendments take effect from 1-4-2005 and apply in relation to the assessment year 2005-06 and subsequent years.

[Sections 18(b) and 64]

Extension of time limit for the purpose of tax holiday under section 80-IB to any company carrying on scientific research and development

Under the existing provision of sub-section (8A) of section 80-IB, any company carrying on scientific research and development is allowed a deduction of hundred per cent of the profits and gains of such business for a period of ten consecutive assessment years, if such company is for the time being approved by the prescribed authority after 31-3-2000, but before 1-4-2004. For this purpose, the prescribed authority is the Secretary, Department of Scientific and Industrial Research, Ministry of Science and Technology, Government of India.

With a view to encourage scientific research and development in the country, the deduction is being extended to companies carrying on scientific research and development, which are approved by the prescribed authority before 1-4-2005.

This amendment takes effect from 1-4-2005 and applies in relation to assessment year 2005-06 and subsequent years.

[Section 18(c)]

Extension of the time limit for obtaining approval of housing projects for the purpose of tax holiday under section 80-IB, and allowing deduction for redevelopment or reconstruction of existing buildings in slum areas

Under the existing provisions contained in sub-section (10) of section 80-IB, a deduction equal to one hundred per cent of the profits of an undertaking developing and building housing projects is allowed if the housing project is approved by a local authority before 31-3-2005. The deduction is subject to the conditions that the undertaking should have commenced development of the housing project on or after the 1-10-1998, the project should be on a size of a plot of land which has a minimum area of one acre, and that the residential unit should have a maximum built-up area of one thousand square feet where such residential unit is situated in Delhi or Mumbai and one thousand and five hundred square feet at other places.

This tax incentive was provided to increase the stock of houses for lower and middle income groups. Keeping in view the fact that there is still a huge shortage of houses, the time limit for obtaining approval from the local authority has been extended from 31-3-2005 to 31-3-2007. However, a time limit has been introduced for completion of the housing project, where development and construction has commenced or commences on or after 1-10-1998. Such housing project approved by the local authority before 1-4-2004 has to be completed on or before 31-3-2008 and the housing project approved on or after 1-4-2004 should be completed within four years from the end of the financial year in which the project is approved by the local authority. For this purpose the date of approval shall be the date on which the building plan is first approved by the local authority and the date of completion of the housing project, shall be the date on which the completion certificate is issued by such authority. It has also been provided that the built-up area of the shops and other commercial establishments included in the housing project should not exceed five per cent of the aggregate built-up area of the housing project or 2000 sq. ft., whichever is less. The expression “built-up area” has also been defined for this purpose.

This section does not specifically provide area limit for the garden, the development plan roads, internal means of access, etc. in the housing project. Therefore, the same should conform to the project plan approved by the local authority in accordance with the regulations in force. Also the area limit of the plot has to be construed with reference to the area of the site on which the housing project is constructed and not with reference to the demarcation of land done by the land development authority.

Further, with a view to encourage the redevelopment of slum dwellings, the condition of minimum plot size of one acre and also the time limit for completion of the construction has been relaxed in the case of a housing project, carried out in accordance with a scheme framed by the Central Government or a State Government for reconstruction or redevelopment of existing buildings in areas declared to be slum areas under any law in force, and notified by the Board in this behalf.

These amendments take effect from 1-4-2005 and apply in relation to the assessment year 2005-06 and subsequent years.

[Section 18(d) and 18(g)]

Tax holiday for agro-processing industry

Under the existing provisions of section 80-IB(11A), an undertaking deriving profit from the integrated business of handling, storage and transportation of foodgrains, is allowed a deduction of hundred per cent of such profits for a period of five assessment years and thereafter twenty five per cent (thirty per cent in the case of companies) for the next five years. Since the agro-processing industry is an important source of employment, especially in the rural areas, the deduction has been extended to undertakings engaged in the business of processing, preservation and packaging of fruits or vegetables.

This amendment takes effect from 1-4-2005 and applies in relation to the assessment year 2005-06 and subsequent years.

[Section 18(e) and 18(g)]

Deduction in the case of an undertaking operating and maintaining a hospital in rural area

The existing provisions of section 80-IB provide for a deduction in respect of profits and gains from certain industrial undertakings, other than infrastructure development undertakings, engaged in the business of building, owning and operating multiplex theatres or convention centres, developing and building housing projects, or which are engaged in the integrated business of handling, storage and transportation of foodgrains or the production or refining of mineral oil.

With a view to increase the penetration of medical services in the rural areas, a new sub-section (11B) in the said section has been inserted so as to provide that the profits derived by an undertaking or an enterprise from the business of operating and maintaining a hospital in a rural area shall be eligible for a deduction of hundred per cent of such profits and gains. The deduction shall be available for a period of five assessment years beginning from the assessment year in which the undertaking or enterprise begins to provide medical services. The undertaking or enterprise shall be eligible for the deduction if such hospital is constructed during the period beginning on the 1-10-2004 and ending on the 31-3-2008, in accordance with the local regulations in force, and has at least one hundred beds for patients. Further, for claiming the deduction, the assessee has to file an audit report in the prescribed form, i.e., in Form No. 10CCBC along with the return of income.

This amendment takes effect from 1-4-2005 and applies in relation to the assessment year 2005-06 and subsequent years.

[Section 18(f) and 18(g)]

Deduction in respect of a person with disability or severe disability suffering from autism, cerebral palsy or multiple disabilities

Under the existing provisions contained in section 80U, a deduction of fifty thousand rupees is allowed to a resident individual who is a ‘person with disability’, as defined under the Persons with Disability (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995. A deduction of seventy-five thousand rupees is allowed where such individual is a ‘person with severe disability’ suffering from eighty per cent or more of one or more disabilities. An individual claiming deduction under this section is required to furnish a copy of the certificate issued by the medical authority along with the return of income.

The Explanation to the said section defines, inter alia, the expressions, “disability”, “medical authority”, “person with disability” and “person with severe disability” with reference to the relevant provisions of the Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995.

With a view to extend the benefits under section 80U to persons suffering from autism, cerebral palsy and multiple disability, the said Explanation has been substituted so as to expand these definitions to include the abovementioned expressions as provided for under the National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999.

The amendment takes effect from 1-4-2005 and applies in relation to the assessment year 2005-06 and subsequent years.

[Section 19]

Rebate for repayment of housing loans taken from an authority established by a Central or State Act

Section 88 of the Income-tax Act provides for a deduction from the tax payable on the total income of an individual or a Hindu undivided family, which is equal to a fixed percentage of sums paid or deposited in specified schemes.

The existing provisions contained in sub-clause (c) of clause (xv) of sub-section (2) of section 88 provide for tax rebate for repayment of loans taken for purchase or construction of a residential house property, up to a limit of Rs. 20,000 in one year within the overall investment ceiling of Rs. 70,000. Repayment of the amount borrowed, however, has to be to the Central Government, or any State Government, or any bank including a Co-operative Bank, or the Life Insurance Corporation, or the National Housing Bank, or any public company engaged in the business of housing finance, or from an employer who is a public company, or a public sector company, or a university, or a local authority or a co-operative society.

However, employees of a number of autonomous bodies established under the State or Central Acts were not eligible for rebate under section 88 of the Income-tax Act on account of repayment of housing loan from their employers.

With a view to rationalize the provision, the sub-clause (c ) of clause (xv) of sub-section (2) of section 88 has been amended so as to include within the purview to tax rebate under section 88, any sum paid on account of repayment of the amount borrowed by the assessee for the purchase or construction of a residential house property, from an authority or a board or a corporation or any other body established or constituted under a Central or State Act.

The amendment takes effect from 1-4-2005 and applies in relation to assessment year 2005-06 and subsequent years.

[Section 21]

New provision for allowing deduction from tax payable for individuals having total income up to rupees one lakh

To provide relief to assessees belonging to the lower income group, a new section 88D has been inserted providing for a rebate of the entire amount of the income-tax payable by an individual, resident in India whose total income does not exceed one hundred thousand rupees. Marginal relief has also been provided to ensure that the tax liability does not exceed the amount by which the total income is in excess of one lakh rupees.

The amendment takes effect from 1-4-2005 and applies in relation to the assessment year 2005-06 and subsequent years.

[Section 22]

Amendment of section 90

Under the existing provisions contained in the Explanation to section 90 it is declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company, where such foreign company has not made the prescribed arrangement for declaration and payment within India, of the dividends (including dividends on preference shares) payable out of its income in India.

The words “where such foreign company has not made the prescribed arrangement for declaration and payment within India, of the dividends (including dividends on preference shares) payable out of its income in India” in the Explanation have been omitted, as these words are redundant in the case of a foreign company.

This amendment takes effect from 1-4-1962, and applies in relation to the assessment year 1962-63 and subsequent assessment years.

[Section 24]

Measures to curb tax avoidance via dividend and bonus stripping

The existing provisions contained in sub-section (7) of section 94 provide that where a person buys or acquires any securities or unit within a period of three months prior to the record date fixed for declaration of dividend or income in respect of such security or unit, and sells or transfers the same within a period of three months after such record date, and the dividend or income received or receivable on such securities or unit is exempt, then the loss, if any, arising from such purchase and sale shall be ignored to the extent such loss does not exceed the amount of such dividend or income for the purposes of computing the income chargeable to tax of such person.

It was felt that for units, the holding period of three months prior to sale as specified in the said sub-section did not provide sufficient deterrence to tax avoidance.

The Finance (No. 2) Act, 2004, has amended sub-section (7) of section 94 so as to increase the holding period in respect of units from three months to nine months after the record date.

With a view to curb tax avoidance via bonus stripping, Finance (No. 2) Act, 2004 has inserted a new sub-section (8) in section 94 so as to provide that where a person buys or acquires any units within a period of three months prior to the record date and he is allotted additional units on the basis of such units without making any payment, and thereafter he sells or transfers within a period of nine months after such date all or any of such units while continuing to hold all or any of the additional units, then, the loss, if any, arising to him on account of such purchase and sale of units shall be ignored for the purposes of computing income chargeable to tax of such person and the amount of loss so ignored shall be deemed to be the cost of purchase or acquisition of such additional units as are held by him on the date of such transfer or sale.

These amendments take effect from 1st April, 2005 and apply in relation to the assessment year 2005-06 and subsequent years.

[Section 25]

Additional income-tax on income distributed by the specified company and Mutual Funds

Under the existing provisions of sub-section (2) of section 115R, any amount of income distributed by the specified company or a mutual fund to its unit holders is chargeable to tax and they are liable to pay additional income-tax on such distributed income at the rate of twelve and one-half per cent.

Section 115R(2) has been amended so that while the specified company or a mutual fund shall continue to pay income-tax on such distributed income at the rate of twelve and one-half per cent. If distribution is made to any individual or Hindu undivided family, the rate shall be twenty per cent. If income is distributed to any person, other than individual or HUF.

This amendment takes effect from 9th July, 2004.

[Section 29(a)]

Exemption to open-ended equity oriented funds

Under the existing provisions of sub-section (2) of section 115R, no additional tax was to be levied in respect of any income distributed to the unit holders of open-ended equity oriented funds in respect of any distribution made from such funds for a period of one year commencing from 1st April, 2003.

With a view to encourage investment in such funds, the limit of one year has been done away with. The exemption shall continue without any time limit.

This amendment takes effect retrospectively from 1-4-2004 and is relevant for assessment year 2005-06 and subsequent assessment years.

[Section 29(b)]

Amendment of section 119 relating to instructions to subordinate authorities

The existing provisions contained in clause (a) of sub-section (2) of section 119 of the Income-tax Act, empower the Board to issue instructions or directions to subordinate authorities for relaxation,inter alia, of provisions of section 158BFA, sub-section (1A) of section 201, section 234A, sections 234B and 234C relating to charging of interest in case of block assessments, regular assessments and tax deduction at source.

With a view to empower the Board to issue orders of waiver of interest in cases of distribution tax where a company or a mutual fund may become liable to interest under section 115P or 115S, as the case may be, the Act has amended clause (a) of sub-section (2) of section 119 so as to enable the Central Board of Direct Taxes to issue such directions as the Board deems fit for relaxation of the provisions of sections 115P and 115S.

This amendment takes effect from 1st October, 2004.

[Section 31]

Clarificatory amendments regarding estimates by Valuation Officer in certain cases

The existing provisions of section 131 provide that the Assessing Officer shall have the same powers as are vested in a Court under the Code of Civil Procedure, 1908, when trying a suit. One such power which has been provided in clause (d) of sub-section (1) of section 131, is the power to issue commissions. Section 75 of CPC and order XXVI of the Schedule thereto lays down the power of ‘issuing commission’, which inter alia, empowers the Court to make a local investigation and also “to hold a scientific, technical and expert investigation”. Using this power, the Assessing Officer has been making a reference to the Valuation Officer for estimating the cost of construction of properties.

The scope of power vested in an Assessing Officer under section 131 to make a reference to the Valuation Officer for estimating the cost of construction of properties has been a subject-matter of litigation.

A new section 142A has been inserted by the Finance (No. 2) Act, 2004 to specifically provide that an Assessing Officer has the power to make a reference to the Valuation Officer for estimating the value of investment, expenditure, etc. This section has been inserted with retrospective effect from 15th November, 1972 to save the cases where such references have been made in the past and are still pending in litigation at one stage or the other.

Sub-section (1) of the new section provides that where an estimate of the value of any investment referred to in section 69 or section 69B or the value of any bullion, jewellery or other valuable article referred to in section 69A or section 69B is required to be made for the purposes of making any assessment or re-assessment, the Assessing Officer may require the Valuation Officer to make an estimate of the same and report to the Assessing Officer.

Sub-section (2) of the new section provides that the Valuation Officer to whom such a reference is made under sub-section (1) shall, for the purpose of dealing with such reference, have all the powers that he has under section 38A of the Wealth-tax Act, 1957.

Sub-section (3) of the new section provides that on receipt of the report from the Valuation Officer, the Assessing Officer may after giving the assessee an opportunity of being heard, take into account such report in making such assessment or re-assessment.

It has been provided in the proviso to the new section that the provisions of the same shall not apply in respect of an assessment made on or before the 30th day of September, 2004 and where such assessment has become final and conclusive on or before that date, except in cases where a reassessment is required to be made in accordance with the provisions of section 153A.

This amendment takes effect retrospectively from 15th November, 1972.

[Section 34]

Allowing for time taken by the Authority for Advance Rulings in rejecting an application or pronouncing an advance ruling to be excluded from the period of limitation for making an assessment

The existing provisions contained in sections 245Q and 245R provide that the Authority for Advance Rulings shall on receipt of an application for advance ruling, forward the same to the Commissioner and if necessary call for the relevant records. The authority may either reject the application or pronounce its advance ruling after examining the application and the records. The existing provisions of section 245RR provide that no income-tax authority or the Appellate Tribunal shall proceed to decide any issue in respect of which an application has been made by a resident to the Authority for Advance Rulings.

Finance (No. 2) Act, 2004 has inserted clause (vi) in Explanation 1 to section 153 so as to provide that the period commencing on the date on which application has been filed to the Authority for Advance Rulings and ending on the date on which the order rejecting the application is received by the Commissioner shall be excluded for computing the period of limitation under this section.

Finance (No. 2) Act, 2004 has inserted clause (vii) in Explanation 1 to section 153 so as to provide that the period commencing on the date on which application has been filed to the Authority for Advance Rulings and ending on the date on which the order pronouncing the advance ruling is received by the Commissioner shall be excluded for computing the period of limitation under this section.

Similarly, two new clauses (v) and (vi) in Explanation to section 153B have also been inserted so as to provide that the period commencing on the date on which application has been filed to the Authority for Advance Rulings and ending on the date on which the order rejecting the application or pronouncing the advance ruling is received by the Commissioner shall be excluded for computing the period of limitation under this section.

This amendment takes effect from 1st October, 2004.

[Sections 35 & 36]

Amendment of section 194C relating to tax deduction at source from payments made to contractors and sub-contractors

The existing provisions contained in sub-section (3) of section 194C of the Income-tax Act, inter alia, provide that no deduction of tax is to be made at source from any sum credited or paid in pursuance of any contract, the consideration for which does not exceed twenty thousand rupees.

It had been reported that composite contracts were being split up into contracts valued at less than Rs. 20,000 each to escape the provisions of TDS.

To prevent this practice, the Act has amended section 194C to provide that tax will be required to be deducted at source where the amount credited or paid or likely to be credited or paid to a contractor or sub-contractor exceeds Rs. 20,000 in a single payment or Rs. 50,000 in aggregate during a financial year.

This amendment takes effect from 1st October, 2004.

[Section 37]

Tax to be deducted at source from compensation or enhanced compensation paid on acquisition of certain immovable property other than agricultural land

With the growing development and rapid urbanization in the country, large areas of land and many residential buildings are being acquired by various agencies including Government agencies and other local authorities from the owners who are compensated.

With a view to curb the tendency of evading taxes by not reporting the income comprised in the compensation or enhanced compensation, the Act has inserted a new section 194LA in the Income-tax Act with effect from 1-10-2004 requiring deduction of tax at the rate of ten cent on the sum of compensation or enhanced compensation received.

It has also been provided that no deduction of tax shall be made where the immovable property is agricultural land, whether situated within municipal limits or not, and where the amount of compensation or enhanced compensation paid is less than one hundred thousand rupees.

Section 197 of the Income-tax Act relating to certificate for deduction of tax at lower rates or no deduction of tax from the Assessing Officer has also been amended to include a reference to the newly inserted section 194LA. Consequential amendments have also been made in sections 198, 199, 200, 202, 203, 204 and 205 of the Income-tax Act.

These amendments take effect from 1-10-2004.

[Sections 38, 39, 40, 41(a), 42(1), 43, 44(a), 47 and 48]

Common identification number in cases of tax deduction at source and tax collection at source

Under the existing provisions of section 203A of the Income-tax Act, every person responsible for deduction of tax under the provisions of Chapter XVII-B is required to apply to the Assessing Officer for the allotment of a tax deduction account number if he has not been allotted such number.

Similarly, every person responsible for collection of tax in accordance with the provisions of section 206C of the Income-tax Act is required to apply to the Assessing Officer for the allotment of tax collection account number under section 206CA.

Penalty is levied under sections 272BB and 272BBB for failure to comply with the provisions of sections 203A and 206CA (provisions of section 206CA are not applicable on or after 1-10-2004) respectively.

The purpose of obtaining tax deduction account number and tax-collection account number is identification of the deductor or the person responsible for collection of tax, as the case may be. Multiplicity of identification numbers is reported to have created confusion and resulted in procedural delays. Moreover, there is a single form, namely Form No. 49B, for the allotment of tax-deduction account number and tax collection account number.

The Act has, therefore, amended section 206CA to do away with the requirement of obtaining tax collection account number separately on or after 1-10-2004. Section 203A has been substituted to provide that persons required to deduct tax at source and collect tax at source shall be required to obtain a common tax deduction and collection account number. The amended section also provides where such number shall be required to be quoted.

Consequently, section 272BBB has also been amended to restrict it to cases of default prior to 1-10-2004.

These amendments take effect from 1-10-2004.

[Sections 45, 51 and 58]

Filing of returns of tax deducted at source

Under the existing provisions of sub-section (1) of section 206, the pres-cribed person in the case of every Government office, principal officer in the case of every company, the prescribed person in the case of every local authority or other public body or association, every private employer or every other person responsible for deducting tax is required to prepare and deliver or cause to be delivered to the prescribed income-tax authority, such returns in such form and verified in such manner and setting forth such particulars as may be prescribed within the prescribed time after the end of every financial year.

Further sub-section (2) of the said section provides for filing of such returns in accordance with such scheme as may be specified by the Board in this behalf by notification in the Official Gazette on a floppy, diskette, magnetic cartridge, CD-ROM or any other computer media. The filing of TDS returns on computer media under the said scheme is mandatory in the case of a company.

The Act has amended sub-section (1) of section 206 to provide for filing of return of tax deducted at source with an authority or agency as may be prescribed. It has also been provided that the Board may, if it considers necessary or expedient so to do, frame a scheme for the purposes of filing of return with such other authority or agency referred to in sub-section (1). A scheme for furnishing paper returns of Tax Deducted at Source was notified vide Notification No. 179/2005, dated 30-6-2005.

These amendments take effect from the 1-10-2004.

The Act has also amended sub-section (2) of section 206 to provide that the prescribed person in the case of every office of Government shall also be required to deliver or cause to be delivered within the prescribed time (rule 37) after the end of each financial year, TDS returns on computer media under the scheme notified by the Board. A scheme for electronic filing of returns of Tax Deducted at Source was notified vide Notification No. 205/2003, dated 26-8-2003.

This amendment takes effect from 1-4-2005.

[Section 49]

Collection of tax at source in respect of parking auctions, toll auctions, mining or quarrying leases

Under the existing provisions of sub-section (1) of section 206C of the Income-tax Act, collection of tax is required to be made by the seller of certain specified goods from any amount payable by the buyer to the seller at the specified percentage.

The Act has amended the said section by inserting a new sub-section (1C) to provide for collection of tax at the rate of two per cent by every person who grants a lease or a license or enters into a contract or otherwise transfers any right or interest in any parking lot or toll plaza or mining to another person, other than a public sector company for the use of such parking lot or toll plaza or mining for the purposes of business. The tax shall be collected from the licensee or lessee of any such license, contract of lease of the specified nature, at the time of debiting of the amount payable by the licencee or lessee to the account of the licencee or lessee or at the time of such receipt of such amount from the said licencee or lessee in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier.

Consequential amendments have also been made in sub-sections (2), (3), (5) and (9) of section 206C.

Sub-sections (5C) and (5D) of section 139A relating to permanent account number have also been amended so as to require the licensee or lessee, referred to in sub-section (1C) of section 206C to intimate his permanent account number and require every person collecting tax to quote such permanent account number in all the certificates furnished under sub-section (5) of section 206C and all returns under sub-section (5A) or (5B) of section 206C.

This amendment takes effect from 1-10-2004.

[Sections 33(b) and 50]

Filing of returns of tax collected at source

Under the existing provisions of sub-section (5A) of section 206C of the Income-tax Act, every person collecting tax at source is required to furnish half-yearly returns for the periods ending on 30th September and 31st March, in each financial year, and deliver or cause to be delivered to the prescribed income-tax authority such returns in such form and verified in such manner and setting for the such particulars and within such time as may be prescribed (rule 37E).

Sub-section (5B) of the said section further provides that the returns of tax collected at source may be filed on computer readable media such as floppies, diskettes, magnetic cartridge tapes, etc. as may be specified by the Board and that the information in such returns shall be admitted in evidence in any proceeding under the Income-tax Act.

Sub-section (5C) of the said section provides for the requirement of checking and authenticating of the return by the Assessing Officer and due care by him for preservation of the return in the computer media by duplicating, transferring, mastering or storage without loss of data.

With a view to bring the provisions relating to filing of TCS returns at par with those relating to filing of TDS returns, the Act has amended sub-section (5A) of section 206C to provide for filing of returns of tax collected at source within the time, as may be prescribed. With this amendment, the requirement of filing the half-yearly return of TCS has been dispensed with and an annual return is to be filed.

It has also been provided that return of tax collected at source can be filed with any authority or agency as may be specified and that the Board may, if it considers necessary or expedient so to do, frame a scheme for the purposes of filing of returns with such other authority or agency. A scheme for furnishing of paper returns of Tax Collected at Source was notified vide Notification No. 180/2005, dated 30-6-2005.

These amendments take effect from 1-10-2004.

The Act has also substituted sub-section (5B) to provide that the person responsible for collecting tax other than in the case of company, the Central Government or a State Government may, at his option, deliver or cause to be delivered such return to the prescribed Income-tax authority in accordance with such scheme as may be specified by the Board in this behalf, by notification in the Official Gazette, and subject to such conditions as may be specified therein, on or before the prescribed time after the end of each financial year, on a floppy, diskette, magnetic cartridge etc, CD-ROM or any other computer media and in the manner as may be specified in that scheme. The filing of TCS return on computer media under the said scheme has been made mandatory in cases where a company, the Central Government or a State Government, collects the tax. A scheme for Electronic filing of returns of Tax Collected at Source was notified vide Notification No. 121/2005, dated 30-3-2005.

Sub-section (5C) has also been substituted to provide that a return filed on computer media shall be deemed to be a return for the purposes of sub-section (5A) of section 206C and the rules made thereunder and shall be admissible in any proceedings thereunder, without further proof of production of the original, as evidence of any contents of the original or of any fact stated therein.

A new sub-section (5D) has also been inserted which provides that where the Assessing Officer considers that the return delivered or cause to be delivered under sub-section (5B) is defective, he may intimate the defect to the person responsible for collecting tax and give him an opportunity of rectifying the defect within a period of fifteen days from the date of such intimation or within such further period which, on an application made in this behalf, the Assessing Officer may, at his discretion, allow; and if the defect is not rectified within the said period of fifteen days or, as the case may be, the further period so allowed, then, regardless of anything contained in any other provision of this Act, such return will be treated as an invalid return and the provision of this Act shall apply as if such person had failed to deliver the return.

These amendments take effect from 1-4-2005.

[Section 50]

Special provisions relating to income of shipping companies

A new chapter XII-G has been inserted in the Income-tax Act containing sections 115V to 115VZC. This Chapter has special provisions for taxation of the income of shipping companies. The Chapter has seven parts and thirty sections from sections 115V to 115VZC.

Section 115V defines certain expressions used in the Chapter.

Section 115VA provides that a company, may at its option, compute the income from the business of operating qualifying ships in accordance with the provisions of Chapter XII-G and the income thus computed shall be deemed to be the income chargeable to tax under the head “Profits and gains of business or profession”.

Section 115VB stipulates when a company is to be considered as operating a ship. A company is regarded as operating a ship if it operates a ship, whether owned or chartered by it, and includes a case where even a part of the ship has been chartered in by it in an arrangement for slot charter, space charter or joint charter. A company is not considered as operating a ship if the ship has been chartered out by it on bareboat charter-cum -demise terms or on bare boat charter terms for a period exceeding three years.

Section 115VC provides that a company shall be a qualifying company if it is—

  (i)  an Indian company;

 (ii)  the place of effective management of the company is in India;

(iii)  it owns at least one qualifying ship; and

 (iv)  the main object of the company is to carry on the business of operating ships.

The expression “place of effective management of the company” has been defined in the Explanation to mean the place where the board of directors of the company or its executive directors, as the case may be, make their decisions; or in a case where the board of directors routinely approve the commercial and strategic decisions made by the executive directors or officers of the company, the place where such executive directors or officers of the company perform their functions.

Section 115VD deals with what is a qualifying ship. A ship is a qualifying ship if it is a sea going ship or vessel of 15 net tons or more; is registered under the Merchant Shipping Act, 1958, or is a ship registered outside India in respect of which a licence has been issued by the Director-General of Shipping under section 406 or section 407 of the Merchant Shipping Act, 1958; and a valid certificate indicating the net tonnage of the ship has been issued by the Director General (Shipping).

[Section 115VX provides that the tonnage of a ship shall be determined in accordance with a valid certificate indicating its tonnage and also gives the meaning of valid certificate in case of ships registered in India and ships registered outside India.]

Section 115VD also provides for exclusion of certain ships/vessels from the category of qualifying ships. The exclusions are—

  (i)  a sea going ship or vessel if the main purpose for which it is used is the provision of goods or services of a kind normally provided on land;

 (ii)  fishing vessels;

(iii)  factory ships;

 (iv)  pleasure crafts;

  (v)  harbour and river ferries;

 (vi)  offshore installations;

(vii) dredgers;

(viii)a qualifying ship which is used as fishing vessel for a period of more than thirty days during a previous year.

Section 115VE gives the manner of computation of tax under tonnage tax scheme. The business of operating qualifying ships giving rise to relevant shipping income [referred to in sub-section (1) of section 115V-I] is to be considered as a separate business distinct from all other activities or business carried on by the company. It has also been provided that the profits referred to in sub-section (1) are to be computed separately from the profits and gains from any other business. A tonnage tax company engaged in the business of operating qualifying ships is required to compute the profits from the business of operating qualifying ships under the tonnage tax scheme and such profits are required to be computed separately from the profit and gains from any other business. The scheme is to apply only if an option is made in accordance with the provisions of section 115VP. The profits and gains of a company engaged in the business of qualifying ships but not covered under the tonnage tax scheme or, which has not made an option, shall be computed in accordance with the other provisions of the Income-tax Act.

Section 115VF stipulates that the tonnage income shall be computed in accordance with the provisions of section 115VG and the income so computed shall be deemed to be the income of a tonnage tax company chargeable to tax under the head “Profits and gains of business or profession”. The relevant shipping income referred to in sub-section (1) of section 115V-I is not chargeable to tax. The provisions of section 115V-I only intend to specify and segregate profits from the core activities of a tonnage tax company and profits from incidental activities. Charging provision is under section 115VA read with section 115VF and 115VG.

Section 115VG deals with the method of computation of tonnage income. After computation of the tonnage income, tonnage tax is to be determined by applying the prevailing corporation tax rate on the notional profit computed in accordance with this section. For the purpose of computing the tonnage income, first the daily income is to be calculated for each qualifying ship on the basis of the following rates:

Qualifying ship having net tonnage
Amount of daily tonnage income
(1)
(2)
up to 1,000
Rs. 46 for each 100 tons
exceeding 1,000 but not more than 10,000
Rs. 460 plus Rs. 35 for each 100 tons exceeding 1,000 tons
exceeding 10,000 but not more than 25,000
Rs. 3,610 plus Rs. 28 for each 100 tons exceeding 10,000 tons
exceeding 25,000
Rs. 7,810 plus Rs. 19 for each 100 tons exceeding 25,000 tons.

The tonnage income for each ship is to be derived by multiplying the daily tonnage income by the number of days in the previous year or the number of days the ship is operated by the company as a qualifying ship.

The tonnage income so arrived at in case of all ships will then be aggregated. The tonnage income shall be further increased by the deemed tonnage which is to be computed in the manner prescribed in rule 11Q. Deemed tonnage means, the tonnage in respect of an arrangement of purchase of slots, slot charter and an arrangement of sharing of break bulk vessels. The prevailing corporation tax rate in respect of the year is to be applied on the total tonnage income to derive the tax liability.

An example of how the tonnage tax liability is to be computed is given below:

Suppose a tonnage tax company operates only one qualifying ship throughout the year. The ship has a net tonnage of 25,000 tons and the corporation tax rate for that year is 35 per cent. Tonnage tax liability of such company would be calculated as follows:

Daily profit:
(Rs.)
For the first 1,000 tons
460
For 1,001 to 10,000 tons
3,150
For remaining 15,000 tons
4,200
Total
7,810
Notional annual profit:
Rs. 7810 × 365 days
Rs. 28,50,650
Tonnage tax:
Rs. 28,50,650 × 35/100=
Rs. 9,97,727

The section also provides for rounding off of the tonnage. It has also been provided that notwithstanding anything contained in any other provisions of the Income-tax Act, no deduction or set off is to be allowed in computing the tonnage income under this Chapter.

Section 115VH provides for computation in case of joint operation. The said section provides that where a qualifying ship is operated by two or more companies by way of joint interest in the ship or by way of an agreement for the use of the ship and their respective shares and definite and ascertainable, the tonnage income of each such company shall be an amount equal to a share of income proportionate to its share of that interest. It has also been provided that where two or more companies are operators of a qualifying ship, the tonnage income of each company shall be computed as if each had been the only operator.

Section 115V-I relates to relevant shipping income. It has been provided that relevant shipping income of a tonnage tax company means its profits from core activities and its profits from incidental activities. It has been provided that where the aggregate of all the incidental activities exceeds one-fourth per cent of the turnover from core activities, such excess shall not form part of relevant shipping income for the purposes of this chapter and shall be taxable under the other provisions of the Act.

Core activities of a tonnage tax company have been specified in sub-section (2) of the said section. These include its activities from operating qualifying ships and other ship related activities being—

  (i)  shipping contracts in respect of earning from pooling arrangements and contracts of affreightment;

 (ii)  specific shipping trades being on-board or on shore activities of passenger ships comprising of fares and food and beverages consumed on board; and slot charters, space charters, joint charters, feeder services, container box leasing of container shipping.

It has also been provided that the Central Government, if it considers necessary or expedient so to do, may, by notification in the Official Gazette, exclude any of the other ship related activities which have been referred to in clause (ii) of sub-section (2) of the said section or prescribe the limit up to which such activities shall be included in the core activities for the purposes of the section. It is also provided that every notification issued under sub-section (3) shall be laid before Parliament.

The incidental activities of the tonnage tax company shall be activities which are incidental to the core activities and are prescribed in rule 11R. It has been provided that the relevant shipping income attributable to operating non-qualifying ships shall be taxable under other provisions of this Act. It has also been provided that where any goods or services held for the purposes of tonnage tax business are transferred to any other business carried on by a tonnage tax company, or where any goods or services held for the purposes of any other business carried on by such tonnage tax company are transferred to the tonnage tax business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the tonnage tax business does not correspond to the market value of such goods or services as on the date of the transfer, the relevant shipping income under this section shall be computed as if the transfer, in either case had been made at the market value of such goods or services as on that date. Where, in the opinion of the Assessing Officer, the computation of the relevant shipping income in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such income on such reasonable basis as he may deem fit. It has also been provided that where it appears to the Assessing Officer that, owing to the close connection between the tonnage tax company and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the tonnage tax company more than the ordinary profits which might be expected to arise in the tonnage tax business, the Assessing Officer shall, in computing the relevant shipping income of the tonnage tax company for the purpose of this Chapter, take the amount of income as may be reasonably deemed to have been derived therefrom. The relevant shipping income of a tonnage tax company shall include a loss and such loss shall be deemed to have never accrued for the purposes of the Act.

Principles pertaining to arm’s length price will be applicable to transactions between tonnage tax companies and unconnected (as well as connected) non-tonnage and tonnage tax entities. This principle will also apply within a single company as between its tonnage tax activities and its non-tonnage tax activities (if any).

Section 115VJ relates to treatment of common cost. Common costs and losses will be apportioned on a just and reasonable basis to determine what is attributable to a company’s shipping and non-shipping activities. It has also been provided that where any asset, other than qualifying ship, is not exclusively used for the tonnage tax business by the tonnage tax company, depreciation on such asset shall be allocated between its tonnage tax business and other business on a fair proportion to be determined by the Assessing Officer, having regard to the use of such asset for the purpose of the tonnage tax business and for the other business.

Section 115VK provides that the depreciation for the first previous year of the tonnage tax scheme shall be computed on the written down value of the qualifying ships which will be computed in accordance with the provisions of sub-section (2). The written down value of the block of assets, being ships, as on the first day of the previous year, shall be divided in the ratio of the book written down value of the qualifying ships and the book written down value of the non-qualifying ships. The block of qualifying assets shall constitute a separate block of assets. The manner of computation of the book written down value of the block of qualifying assets and the block of other assets has been specified in sub-section (4). This is as follows:

Step 1

The assets falling within each of the new blocks, i.e., block of qualifying assets and block of other assets, would be identified and their book WDV listed.

Step 2

Total of book WDV of assets falling in each of the new blocks will be determined.

Step 3

The WDV as per the Income-tax Act of the existing common block (as on the last day of immediately preceding previous year) be allocated to each of the new blocks in ratio of their respective book WDVs.

To illustrate the above process, the following example may be taken:

  (i)  The WDV of the existing block is Rs. 70 crores. This comprises three qualifying assets (Q) and two non-qualifying assets (NQ). The book WDV of each of the qualifying and the non-qualifying assets is identified as under as the first step:

Assets
Book WDV
Q1
30
Q2
20
Q3
30
80
NQ1
15
NQ2
5
20

 (ii)  Book WDV of all the existing qualifying assets is Rs. 80 crores and that for the non-qualifying is Rs. 20 crores.

(iii)  Thus, the ratio of book WDV of qualified assets to that of non-qualifying assets is 4:1.

 (iv)  In the final step, the existing WDV of the common block, which is Rs. 70 crores, is to be allocated in this ratio of qualifying block and non-qualifying blocks. Accordingly, WDV of qualifying block would be Rs. 56 crores and that of non-qualifying block would be Rs. 14 crores.

The method of allocation of depreciation in a case where an asset forming part of the block of qualifying assets begins to be used for purposes other than the tonnage tax business and in a case where an asset forming part of the block of other assets begins to be used for tonnage tax business has been given in sub-sections (5), (6) and (7). It has also been provided that for the purposes of the Act, depreciation on the block of qualifying assets and block of other assets so created shall be allowed as if such written down value has been brought forward from the preceding previous year. The expression “book written down value” has been defined.

Section 115VL relates to general exclusion of deduction and set off, etc. It has been provided that sections 30 to 43B and section 57 shall apply as if every loss allowance or deduction referred to therein and relating to or allowable for any of the relevant previous years, had been given full effect to for that previous year itself: no loss referred to in sub-sections (1) and (3) of section 70 or sub-sections (1) and (2) of section 71 or sub-section (1) of section 72 or sub-section (1) of section 72A, in so far as such loss relates to the business of operating qualifying ships of the company, shall be carried forward or set off where such loss relates to any of the previous years when the company is under the tonnage tax scheme; no deduction shall be allowed under Chapter VI-A in relation to the profits and gains from the business of operating qualifying ships; and in computing the depreciation allowance under section 32 of this Act, the written down value of any asset used for the purposes of the tonnage tax business shall be computed as if the company has claimed and has been actually allowed the deduction in respect of depreciation for the relevant previous year.

Section 115VM provides that section 72 shall apply in respect of any losses that have been accrued to a company before its entry in tonnage tax scheme and are attributable to its tonnage tax business as if such losses had been set off against the relevant shipping income in any of the previous years when the company is under the tonnage tax scheme. The losses referred to in sub-section (1) shall not be available for set off against any income other than relevant shipping income in any previous year beginning on or after the company exercises its option under section 115VP. It has also been provided that any apportionment necessary to determine the losses referred to in sub-section (1) shall be made on a reasonable basis.

Section 115VN relates to chargeable gains from transfer of tonnage tax assets. The said section provides that profits or gains arising from the transfer of a capital asset being an asset forming part of the block of qualifying assets shall be chargeable to income-tax in accordance with the provisions of section 45, read with section 50, and the capital gains so arising shall be computed in accordance with the provisions of sections 45 to 51.

Section 115V-O provides for exclusion of book profits or loss derived from the activities of a tonnage tax company referred to in sub-section (1) of section 115V-I from section 115JB.

Section 115VP relates to method and time of opting for tonnage tax scheme. A qualifying company may opt for the tonnage tax scheme by making an application to the Joint Commissioner having jurisdiction over the company in the Form No. 65 and manner prescribed in Rule 11P. The initial period in which a company will be able to opt for the scheme will be for a period of three months starting from 1st October, 2004 and ending on 31st December, 2004. After the end of the initial period, only those companies which are incorporated after the initial period or which become qualifying companies after the initial period for the first time (in case of existing companies) shall be able to opt for the scheme. In such cases, however, the application for exercising the option will have to be made within three months of the date of the incorporation or, as the case may be, the date on which the company became a qualifying company.

The Joint Commissioner may call for such information or documents as may be necessary for the purpose of satisfying himself regarding the eligibility of the company to exercise the option and after satisfying himself, he shall pass an order in writing either approving the option for the scheme or refusing the approval for such option. The order granting or refusing the option shall be passed within one month of filing the application. Where an order granting approval has been passed, the provisions of the Chapter shall apply from the assessment year relevant to the previous year in which the option for tonnage tax scheme is exercised.

The company in whose case the tonnage tax option is denied, may file an appeal before the CIT (Appeals).

Section 115VQ provides that an option for tonnage tax scheme, after it has been approved under section 115VP shall remain in force for a period of ten years. It has also been provided that an option for the tonnage tax scheme shall cease to have effect in cases where the qualifying company ceases to be a qualifying company or gives a declaration in writing to the Assessing Officer to the effect that the provisions of the Chapter may not be made applicable to it or defaults with regard to provisions relating to tonnage tax reserves, charter in limits and training requirements. The tonnage tax scheme will also cease to have effect in case the tonnage tax company is excluded from the scheme by an order under section 115VZC or the conditions pertaining to amalgamation in respect of tonnage tax companies are not complied with. In such cases, the profits and gains of the company from the business of operating qualifying ships shall be computed in accordance with the other provisions of the Income-tax Act.

Section 115VR relates to renewal of tonnage tax scheme and it provides that an option for the tonnage tax scheme which has been approved under sub-section (3) of section 115VP may be renewed within one year from the end of the previous year in which the option ceases to have effect. It has also been provided that the provisions relating to method and time of opting for tonnage tax scheme (section 115VP) and the period for which tonnage tax option to remain in force (section 115VQ) shall apply in relation to a renewal of the option as they apply in relation to the approval of option for the tonnage tax scheme.

Section 115VS provides that a qualifying company, if it leaves the scheme at any time, whether voluntary or through expulsion, will not be eligible to opt for the tonnage tax scheme for a period of ten years from the date of opting out or default or expulsion, as the case may be. The reasons for the prohibition are—

  (i)  default in complying with the provisions relating to creation of reserves;

 (ii)  being excluded from the scheme on grounds of abuse of the tonnage tax scheme;

(iii)  default in complying with the training requirements for more than five consecutive years; and

 (iv)  exceeding the limit for charter in of tonnage for more than two consecutive years.

Section 115VT relates to transfer of profits to tonnage tax reserve account. Sub-section (1) of the said section provides that a tonnage tax company shall be required to credit to a reserve account an amount not less than twenty per cent of the book profits derived from the activities referred to in clauses (i) and (ii) of sub-section (1) of section 115V-I in each previous year. The amount credited to the reserve account are to be utilized in the manner laid down in the section. It has been provided that a tonnage tax company may transfer a sum in excess of twenty per cent of the book profits and such excess sum transferred shall also be utilized in the manner laid down in the section. The explanation below sub-section (1) defines the expression “book profit”. It has further been provided under sub-section (2) that where the company has book profits from the business of operating qualifying ships and book loss from any other sources, and consequently, the company is not in a position to create the full or any part of the reserves under sub-section (1), the company shall create the reserves to the extent permissible in that previous year and the shortfall, if any, shall be added to the amount of the reserves required to be created for the following previous year and such shortfall shall be deemed to be part of the reserve requirement of that following previous year. Sub-section (3) of the said section provides for the manner in which the amount credited to the reserve account under sub-section (1) shall be utilized by the company. Sub-section (4) of the said section provides for taxing of an appropriate portion of the relevant shipping income in case where any amount credited to the reserve account under sub-section (1) has been utilized for any purpose other than that referred to in clause (a) or clause (b) of sub-section (3) or (b) has not been utilized for the purpose specified in clause (a) or sub-section (3); or (c) has been utilized for the purpose of acquiring a new ship as specified in clause (a) of sub-section (3), but such ship is sold or otherwise transferred, other than in any scheme of demerger by the company to any person at any time before the expiry of three years from the end of the previous year in which it was acquired. Sub-section (5) of the said section provides for taxing of a proportion of the relevant shipping income in case of shortfall of credit to the reserve account. Sub-section (6) of the said section provides that if the reserve required to be created under sub-section (1) is not created for any two consecutive previous years of a tonnage tax company, the company’s option for tonnage tax scheme shall cease to have effect from the start of the previous year following the second consecutive previous year in which the failure to create the reserve under sub-section (1) occurred and the company will be prohibited from exercising the option for tonnage tax scheme for a period of ten years in accordance with the provisions of section 115VS. Explanation to section 115VT defines the expression “new ship”.

Section 115VU relates to minimum training requirement for tonnage tax companies. The said section provides that a tonnage tax company, after its option has been approved under sub-section (3) of section 115VP, shall be required to comply with the minimum training requirement in respect of trainee officers in accordance with the guidelines framed by the Director General of Shipping and notified in the Official Gazette by the Central Government. A copy of the certificate issued by the Director General of Shipping to the effect that such company has complied with the minimum training requirement in accordance with the guidelines referred to in sub-section (1) for the previous year shall be required to be furnished along with the return of income. It has also been provided that if the minimum training requirement is not complied with for any five consecutive previous years, the company’s option for tonnage tax scheme shall cease to have effect from the start of the previous year following the fifth consecutive year in which the failure to comply with the minimum training requirement under sub-section (1) occurred and the company will be prohibited from exercising the option for tonnage tax scheme for a period of ten years in accordance with the provisions of section 115VS.

Section 115VV relates to limit for charter-in of tonnage. Sub-section (1) of the section provides that in the case of every company which has opted for tonnage tax scheme, not more than forty nine per cent of the net tonnage of the qualifying ships operated by it during any previous year shall be chartered-in. Sub-section (2) of the said section provides that the proportion of net tonnage referred in sub-section (1) in respect of a previous year shall be calculated based on the average of net tonnage during that previous year . Sub-section (3) provides that the average of net tonnage shall be computed in the manner prescribed in Rule 11S. Sub-section (4) of the said section provides that where the net tonnage of ships chartered-in exceeds the limit under sub-section (1) during any previous year, the total income of such company in relation to that previous year shall be computed as if the option for tonnage tax scheme does not have effect for that previous year. Sub-section (5) of the said section provides that where the limit under sub-section (1) is exceeded in any two consecutive previous years. The option for tonnage tax scheme shall cease to have effect from the beginning of the previous year following the second consecutive previous year in which the limit was exceeded. Further, as per the provisions of section 115VS, the company will not be eligible to opt for the tonnage tax scheme for a period of 10 years.

Section 115VW relates to maintenance and audit of accounts. The section provides that an option for tonnage tax scheme by a tonnage tax company shall not have effect in relation to a previous year unless such company maintains separate books of account in respect of the business of operating qualifying ships and furnishes, along with the return of income for that previous year, the report of an accountant, in Form No. 66 (Rule 11T) duly signed and verified by such accountant.

Section 115VX relates to determination of tonnage. The said section provides that tonnage of a ship shall be determined in accordance with the valid certificate indicating its net tonnage. Clause (b) of the section specifies the certificates for the said purpose in respect of the both, i.e., in the case of ships registered in India and those registered outside India.

Section 115VY relates to amalgamation. The said section provides that in case of amalgamation, the provisions relating to the tonnage tax scheme shall, as far as may be, apply to the amalgamated company, if it is a qualifying company. It has also been provided that where the amalgamated company is not a tonnage tax company, it shall exercise an option for tonnage tax scheme under sub-section (1) of section 115VP within six months of the date of the approval of the scheme of amalgamation. It has also been provided that where the amalgamating companies are tonnage tax companies, the provisions of this Chapter shall, as far as may be, apply to the amalgamated company for such period as the option for tonnage tax scheme which has the longest unexpired period continues to be in force. It has also been provided that where one of the amalgamating companies is a qualifying company on the date on 1-10-2004 and which has not exercised option for tonnage tax scheme within the initial period, the provisions of this Chapter shall not apply to the amalgamated company and the income of the amalgamated company from the business of operating qualifying ships shall be computed in accordance with the other provisions of the Income-tax Act.

Section 115VZ relates to demerger. The section provides that in a scheme of demerger, the tonnage tax scheme shall, as far as may be, apply to the resulting company for the unexpired period if it is a qualifying company. It has also been provided that the option for tonnage tax scheme in respect of the demerged company shall remain in force for the unexpired period of the tonnage tax scheme if it continues to be a qualifying company.

Section 115VZA provides that a temporary cessation of operating any qualifying ship by a company shall not be considered as a cessation of operating of such qualifying ship and the company shall be deemed to be operating such qualifying ship for the purposes of this Chapter. It has also been provided that where a company continues to operate a ship which temporarily ceases to be a qualifying ship, such ship shall not be considered as qualifying ship for the purpose of the Chapter.

Section 115VZB relates to avoidance of tax. The said section provides that the tonnage tax scheme shall not apply where a tonnage tax company is a party to any transaction or arrangement which amounts to an abuse of the tonnage tax scheme. Sub-section (2) of the said section specifies that a transaction or arrangement shall be considered as an abuse of the tonnage tax scheme if the entering into or the application of the transaction or arrangement results in a tax advantage being obtained for a person other than a tonnage tax company or a tonnage tax company in respect of its non-tonnage tax activities. The Explanation to the said sub-section defines the expression “tax advantage”.

Section 115VZC relates to exclusion from tonnage tax scheme. Sub-section (1) of the said section provides that where a tonnage tax company is a party to any transaction or arrangement referred to in sub-section (1) of section 115VZA, the Assessing Officer shall, by an order in writing, exclude such company from the tonnage tax scheme after giving an opportunity of being heard to such company. It has also been provided that no order under this sub-section shall be passed without the previous approval of the Chief Commissioner. Sub-section (2) of the said section provides that the section shall not apply where the company shows to the satisfaction of the Assessing Officer that the transaction or arrangement were bona fide commercial transaction and had not been entered into for the purpose of obtaining tax advantage under this Chapter. Sub-section (3) of the said section provides that where an order has been passed under sub-section (1) by the Assessing Officer excluding the tonnage tax company from the tonnage tax scheme the option for tonnage tax scheme shall cease to be in force from the 1st day of April of the previous year in which the transaction or arrangement was entered into and the income from the business of operating ships shall be computed in accordance with the other provisions of this Act. Consequential amendments have also been made to provide for appeal to the Appellate Tribunal against the orders of expulsion in cases of abuse of the scheme.

Section 33AC of the Income-tax Act relating to reserves for shipping business which provides for hundred per cent deduction of the profits derived from the business of operation of ships has also been amended to provide that no deduction shall be allowed under the said section from assessment year 2005-06 onwards.

These amendments take effect from 1-4-2005 and apply in relation to assessment year 2005-06 and subsequent years.

[Sections 9, 30, 53 and 54]

Dematerialisation of TDS and TCS certificates

Under the existing provisions of the Income-tax Act, for the purpose of claiming credit for tax deducted at source or tax collected at source, TDS or TCS certificates, as the case may be, are required to be filed along with the return of income. Returns are deemed to be defective in case they are not accompanied with proof of tax claimed to have been deducted/collected at source.

With a view to computerising the TDS and TCS functions as also enable the process of dematerialisation of TDS and TCS certificates, the Act has incorporated certain amendments in the provisions relating to tax deduction at source and tax collection at source.

Section 199 of the Income-tax Act which provides for credit for tax deducted on production of TDS certificate has been amended to provide that in cases where tax is deducted on or after 1st April, 2005 and is paid to the credit of the Central Government, the amount of tax deducted and specified in the statement referred to in section 203AA shall be treated as tax paid on behalf of the persons from whose income-tax has been deducted or in respect of whose income the tax has been paid and credit shall be given to such persons for the amounts so deducted in the assessment made for the assessment year for which the income is assessable without the production of a certificate. Similar amendments have also been made in sub-section (4) of section 206C. Consequently, section 139(9) has also been amended to provide that returns will not be deemed to be defective if they are not accompanied by a TDS certificate in respect of tax claimed to have been deducted at source on or after 1st April, 2005.

Section 200 relating to duty of person deducting tax has also been amended by way of insertion of a new sub-section (3) to provide that any person deducting any sum on or after 1st April, 2005 or any person being an employer referred to in sub-section (1A) of section 192 shall be required to prepare quarterly statements for the period ending on the 30th June, the 30th September, the 31st December and the 31st March in each financial year and deliver or cause to be delivered such statement in such form and verified in such manner and setting forth such particulars and within such time as may be prescribed to the prescribed income-tax authority or the person authorized by such authority (Rule 31A). In respect of cases of tax collection at source, similar amendments have been made in sub-section (3) of section 206C. Further, sub-section (2) of section 272A relating to penalty for failure to answer questions, sign statements, furnish information, returns or statements, allow inspection, etc. has also been amended by way of insertion of a new clause (k) to provide for a penalty of hundred rupees for every day for failure to deliver or cause to be delivered the quarterly statements.

Section 203 relating to certificate for tax deducted has also been amended to provide that there shall be no requirement to furnish a certificate referred to in the said section where the tax has been deducted or paid on or after 1st April, 2005. Similar amendments have also been made in sub-section (5) of section 206C by way of insertion of the first proviso.

A new section 203AA relating to furnishing of statement of tax deducted has been inserted in the Income-tax Act to provide that the prescribed income-tax authority or the person authorized by such authority to whom the quarterly statements shall be delivered, shall, within the prescribed time after the end of each financial year beginning on or after 1st April, 2005 prepare and deliver to every person from whose income-tax has been deducted or in respect of whose income-tax has been paid, a statement in the prescribed form specifying the amount of tax deducted or paid and such other particulars as may be prescribed (Rule 31AB). Similar amendments have also been made in sub-section (5) of section 206C by way of insertion of the second proviso.

All assessees, including non-residents, will be required to intimate the permanent account number to the person deducting or collecting tax in the absence of which credit for TDS or TCS cannot be given. Hence, the first proviso to sub-section (5A) of section 139A not requiring quoting of PAN by non-residents, has been omitted.

Section 272B relating to penalty for failure to comply with the provisions of section 139A has been amended so as to provide for a penalty of a sum of ten thousand rupees in case a person who is required to intimate his permanent account number as required by sub-section (5C) intimates a number which is false and which he either knows or believes to be false or does not believe to be true.

These amendments take effect from 1st April, 2005.

[Sections 32, 33(a), 42(b), 44(b ), 46, 50, 57 and 56]

Measures to provide for prosecution in case of falsification of books of account or documents etc.

Under the existing provisions of section 278 a person can be punished for abetting or inducing any other person to evade tax. To establish a charge of abetment in the case of first person it is necessary to establish that tax has been evaded by the other person.

Provisions of section 278 do not provide adequate deterrence against making false entries in books of account or documents by a person enabling another person to evade tax, when in fact there is no underlying transaction. Many a times, even the confession made by a person that he has made false entries in books of account or documents to enable the other person to evade tax is not held to be sufficient evidence to substantiate tax evasion by such other person.

Finance (No. 2) Act, 2004 has inserted a new section 277A providing that a person who wilfully and with intent to enable any other person to evade any tax or interest or penalty chargeable or imposable under the Income-tax Act, 1961, makes or causes to be made any entry or statement which is false and which the other person either knows to be false, or does not believe to be true, in any books of account or other document then such person shall be punished with rigorous imprisonment for a term not less than three months but which may extend to three years and with fine.

It has been clarified in the Explanation to the said section that to establish charge under this section it shall not be necessary to prove that the second person has actually evaded any tax, penalty or interest chargeable or imposable under the Act.

Reference of the said section has been made in section 279 of the Income-tax Act, 1961, relating to prosecution to be at the instance of the Chief Commissioner or Commissioner of Income-tax.

This amendment takes effect from 1st October, 2004. [Sections 60, 62]

Rationalisation of provisions relating to offences by a company

The existing provisions of section 278B provide that where an offence has been committed by a company, the company as well as the person who was in charge of, and was responsible for the conduct of the business of the company at the time when the offence was committed will be deemed to be guilty of the offence. The said section also provides that where the offence has been committed with the consent or connivance of any director, manager, secretary or other officer of the company, such director or other officer shall also be deemed to be guilty of the offence.

In respect of some of the offences [wilful attempt to evade tax (section 276C), false statement in verification (section 277), failure to deposit tax deducted at source with the Government (section 276B), etc.] it has been provided that the person found guilty shall be punishable with rigorous imprisonment and with fine. There has been a judicial controversy as to whether a company, being a juristic person, can be punished with imprisonment where the statute refers to punishment of imprisonment and fine. In the case of M/s. M.V. Javali v. Mahajan Borewell & Co. [1998] 230 ITR 1, the Hon’ble Supreme Court held that on a harmonious interpretation of section 276B read with section 278B, a company, which cannot be punished with imprisonment can be punished with fine only. However, in a subsequent decision by majority in the case of ACIT v. Velliappa Textiles Ltd. 263 ITR 550, dated 16-9-2003, the Apex Court dissented with its earlier judgment, observing that a penal statute needs to be construed strictly, and it is for the legislature and not for the Courts to plug the loopholes. The Hon’ble Court observed that each of the sections 276C, 277 and 278, read with section 278B, requires the imposition of a mandatory term of imprisonment coupled with a fine and leaves no choice to the Court to impose only a fine. The Court held that since it is difficult to impose punishment of fine in lieu of imprisonment on a company, the prosecution against the company cannot be sustained.

In order to plug the loopholes pointed out by the Hon’ble Supreme Court in the case of ACIT v. Velliappa Textiles Ltd. (supra), a new sub-section (3) has been inserted in section 278B by the Finance (No. 2) Act, 2004, so as to provide that if an offence under the Act has been committed by a person being the company, and the punishment for such offence is imprisonment and fine, then, such company shall be punished with fine and any other person who was in-charge and was responsible for the conduct of business of the company, or any director, manager, secretary or other officer of the company shall be liable for punishment of imprisonment and fine, wherever so provided. (It may be relevant to mention here that the Hon’ble Supreme Court in the case of Standard Chartered Bank v. Directorate of Enforcement and Other Appeals and a Writ petition [275 ITR 81, 5th May, 2005] has overruled its decision in the case of ACIT v. Velliappa Textiles [supra].

Section 35HA of the Wealth-tax Act has also been similarly amended.

This amendment takes effect from 1st October, 2004.

[Section 61]

Modification of the provisions for filing of annual information return

Under the existing provisions of the section 285BA as inserted by the Finance Act, 2003 any assessee who enters into any financial transaction, as may be prescribed, with any other person is required to furnish an annual information return in such form and manner, as may be prescribed, in respect of such financial transactions entered into by him during any previous year.

With a view to gather information from Government agencies and other authorities who are valuable sources of information, the Finance (No. 2) Act, 2004, has substituted the said section by a new section. The substituted section 285BA provides that an assessee or certain agencies responsible for registering or maintaining books of account or other documents containing a record of any specified financial transaction, under any law for the time being in force, shall furnish an annual information return in respect of such specified financial transaction as may be prescribed by the Board. The return shall be furnished in respect of transactions registered or recorded on or after the 1st day of April, 2004.

Sub-section (2) of the said section provides that the annual information return shall be furnished within the prescribed time after the end of such financial year and in such form and manner as may be prescribed.

Sub-section (3) of the said section defines the “specified financial transaction” to mean any transaction of purchase, sale or exchange of goods or property or right or interest in a property or transaction for rendering any service or transaction under a works contract or transaction by way of an investment made or expenditure incurred or a transaction for taking or accepting any loan or deposit as may be prescribed.

It has also been provided that the Board may prescribe different monetary values for different transactions in respect of different persons. The said sub-section further provides that the value or the aggregate value of such transactions during a financial year so prescribed shall not be less than fifty thousand rupees.

Sub-section (5) of the said section provides that the where any person who is require to furnish an annual information return has not furnished the same within the prescribed time, the prescribed Income-tax authority may serve upon such person a notice requiring him to furnish such return within a period not exceeding sixty days from the date of service of such notice.

Vide Notification S.O. No. 1316(E), dated 1-12-2004, a new section 114E relating to furnishing of Annual Information Return has been prescribed. The form and manner in which the annual information return shall be furnished has been prescribed in the said rule. Further, it has also been prescribed in the said rule that every person mentioned in column (2) of the Table below shall furnish an Annual Information Return in respect of transactions specified in the corresponding entry of column (3) of the said table.

TABLE

Sl. No.
Class of person
Nature and value of transaction
(1)
(2)
(3)
1.
A Banking company to which the Banking Regulation Act, 1949 (10 of 1949), applies (including any bank or banking institution referred to in section 51 of that Act).
Cash deposits aggregating to ten lakh rupees or more in a year in any savings account of a person maintained in that bank.
2.
A Banking company to which the Banking Regulation Act, 1949 (10 of 1949), applies (including any bank or banking institution referred to in section 51 of that Act) or any other company or institution issuing credit card.
Payments made by any person against bills raised in respect of a credit card issued to that person, aggregating to two lakh rupees or more in the year.
3.
A trustee of a Mutual Fund or such other person managing the affairs of the Mutual Fund as may be duly authorised by the trustee in this behalf.
Receipt from any person of an amount of two lakh rupees or more for acquiring units of that Fund.
4.
A company or institution issuing bonds or debentures.
Receipt from any person of an amount of five lakh rupees or more for acquiring bonds or debentures issued by the company or institution.
5.
A company issuing shares through a public or rights issue.
Receipt from any person of an amount of one lakh rupees or more for acquiring shares issued by the company.
6.
Registrar or Sub-Registrar appointed under section 6 of the Registration Act, 1908.
Purchase or sale by any person of immovable property valued at thirty lakh rupees or more.
7.
A person being an officer of the Reserve Bank of India, constituted under section 3 of the Reserve Bank of India Act, 1934, who is duly authorized by the Reserve Bank of India in this behalf.
Receipt from any person of an amount or amounts aggregating to five lakh rupees or more in a year for bonds issued by the Reserve Bank of India.

It has also been provided in the said rule that Annual Information Return shall be furnished on or before 31st August immediately following the financial year in which transaction is registered or recorded.

Finance (No. 2) Act, 2004 has inserted a new section 271FA providing for penalty for failure to furnish the annual information return. The said section provides that where any person who is required to furnish the annual information return fails to furnish the same within the prescribed time, the prescribed income-tax authority may direct that such person shall pay by way of penalty a sum of one hundred rupees for every day during which the failure continues.

Reference of the newly inserted section 271FA has been made in section 273B of the Income-tax Act, 1961, relating to penalty not to be imposed where assessee proves that there was reasonable cause for the failure.

[Sections 55, 59, 63]

New provisions for levy of Securities Transaction Tax

Chapter VII of the Finance (No. 2) Act, 2004 contains provisions relating to Securities Transaction Tax. It provides, inter alia, that the provisions of the Chapter shall come into force on such date as may be notified by the Central Government in the Official Gazette. Accordingly, the Central Government has notified the 1st day of October, 2004 as the date of commencement, vide notification S.O. No. 1058(E) dated 28th September, 2004.

This Chapter provides that Securities Transaction Tax shall be charged in respect of the following transactions at the rates as under:—

  (i)  @ 0.075% on the value of transactions of delivery-based purchase of an equity share in a company or a unit of an equity oriented fund, entered in a recognised stock exchange, to be paid by the buyer,

 (ii)  @ 0.075% on the value of transactions of delivery-based sale of an equity share in a company or a unit of an equity oriented fund, entered in a recognised stock exchange, to be paid by the seller,

(iii)  @ 0.015% on the value of transactions of non-delivery based sale of an equity share in a company or a unit of an equity oriented fund, entered in a recognised stock exchange to be paid by the seller,

 (iv)  @ 0.01%, on the value of transactions of derivatives entered in a recognised stock exchange to be paid by the seller,

  (v)  @ 0.15% on the value of transactions of sale of units of an equity oriented fund to the mutual fund to be paid by the seller.

“Equity oriented fund” has been defined to mean a fund where the investible funds are invested by way of equity shares in domestic companies to the extent of more than 50% of the total proceeds of such funds and which has been set up under a scheme of a mutual fund. It has been provided that the percentage of equity shareholding of the fund shall be computed with reference to the annual average of the monthly averages of the opening and closing figures.

It has been provided in the said Chapter that the Board may specify by rules the method of determining the value of taxable securities transaction.

Securities Transaction Tax Rules, 2004, notified by the Central Government vide notification S.O. No. 1059(E) dated 28th September, 2004, lay down the method for determining the price in respect of transactions of purchase and sale of equity shares and units in three modes of settlement, i.e., netted settlement mode, trade to trade settlement mode and auction settlement mode in a recognized stock exchange.

Section 100 of Chapter VII of Finance (No. 2) Act, 2004, provides that every recognised stock exchange and the prescribed person in case of every mutual fund shall collect the securities transaction tax. These persons are required to pay the same to the credit of the Central Government by the seventh day of the month immediately following the calendar month in which tax is collected.

Section 101 of the said Chapter provides that the recognised stock exchange on the prescribed person in case of the mutual fund shall within the prescribed time, furnish a return in such form and verified in such manner as may be prescribed by the Board, in respect of all taxable securities transactions entered into during any financial year.

In respect of mutual fund, it has been provided in the rules that the trustee of the mutual fund or such other person managing the affairs of the mutual fund as may be duly authorised by the trustee in this behalf shall be responsible for collection and payment of securities transaction tax.

It has been provided in the rules that the return of taxable securities transaction shall be furnished by the recognised stock exchange in Form No. STTS-1 and by the mutual fund in Form No. STTS-2. The format of the Form No. STTS-1 and Form No. STTS-2 has also been prescribed. The return of taxable securities transaction entered into during a financial year shall be furnished on or before 30th June of the financial year immediately following the financial year in relation to which taxable securities transactions are to be reported.

The following persons shall be required to sign the return—

  (i)  in case of a corporate recognized stock exchange, the managing director or a director,

 (ii)  in case of any other recognized stock exchange, the principal officer thereof,

(iii)  in case of a mutual fund, the trustee or such other person managing the affairs of the mutual fund as may be duly authorised by the trustee.

It has been provided that in cases where the return of taxable securities transaction has not been filed in time by any assessee, the Assessing Officer may issue a notice to such assessee requiring him to furnish the return within thirty days of date of service of notice.

Section 102 of the said Chapter provides that the Assessing Officer shall make an assessment of the value of taxable securities transactions made during any relevant financial year and determine the amount of securities transaction tax payable or refundable on the basis of the return filed by the assessee and on the basis of such accounts or documents or other evidence as may be submitted by the assessee.

Forms of notice of demand have been prescribed in the Securities Transaction Tax Rules, 2004.

In sub-section (3) of section 102, it has been provided that in case any amount is refunded on assessment to the assessee, then the assessee shall within the time prescribed refund the same to the concerned person from whom the amount was collected.

It has been provided in the rules that such amount shall be refunded by the assessee to the persons from whom it was collected within thirty days of receipt of same from the Government.

Section 103 relates to rectification of mistakes apparent from the record, by the Assessing Officer in any order passed by him.

Section 104 provides for charging of simple interest @ one per cent per month of delay in paying the securities transaction tax to the account of the Government within specified time.

Sections 105 to 108 relates to levy of penalty for certain failures.

Section 110 provides for filing of appeal to the Commissioner of Income-tax (Appeals), in such form and verified in such manner as may be prescribed by the Board, in cases where the assessee is aggrieved by any assessment order/rectification order passed by the Assessing Officer.

Section 111 provides for filing of appeal to the Appellate Tribunal in such form and verified in such manner as may be prescribed by the Board, in cases where the assessee is aggrieved by any order passed by the Commissioner of Income-tax (Appeals).

Forms for filing of appeal to the Commissioner of Income-tax (Appeals) and Income-tax Appellate Tribunal have been prescribed in the Rules.

Section 109 of the said Chapter provides that sections 120, 131, 133A, 156, 178, 220 to 227, 229, 232, 260A, 261, 262, 265 to 269, 278B, 282 and 288 to 293 of the Income-tax Act, 1961, shall apply in relation to the Securities Transaction Tax as they apply in relation to income-tax.

Consequent upon the levy of Securities Transaction Tax, the following amendments have been brought in the Income-tax Act.

  (i)  A new clause (38) has been inserted in section 10 providing for exemption for income from the long term capital gains arising out of transfer of an equity share in company, or unit of an equity oriented fund, where such transfer takes place on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force and such transaction is chargeable to Securities Transaction Tax under the said Chapter.

 (ii)  A new section 111A has been inserted so as to provide that short term capital gains arising out of transfer of an equity share in a company, or unit of an equity oriented fund, where such transfer takes place on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force and such transaction is chargeable to Securities Transaction Tax under the said Chapter, shall be charged at the rate of 10%.

(iii)  Section 115AD of the Income-tax Act, 1961, relates to tax on income of Foreign Institutional Investors from securities or capital gains arising from their transfer. Section 115AD has been amended so as to provide that income by way of short term capital gains referred to in the newly inserted section 111A shall be charged at the rate of 10%.

 (iv)  A new proviso has been inserted in section 48 providing that any sum paid on account of securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004, shall not be allowed as a deduction for the purposes of computing the income chargeable under the head “Capital gains”.

  (v)  A new section 88E has been inserted providing that where the total income of the assessee in a previous year includes any income chargeable under the head “Profits and gains of business or profession” arising from transactions chargeable to securities transaction tax, he shall be allowed a deduction of an amount equal to the securities transaction tax paid by him in respect of transactions chargeable to securities transaction tax entered into in the course of his business during that previous year, from the amount of income-tax on such income arising from such transactions.

        It has further been provided that no deduction under this section shall be allowed unless the assessee furnishes along with the return of income, evidence of payment of STT in the prescribed form. Rule 20AB has prescribed that evidence of payment of securities transaction tax on transactions entered in a recognized stock exchange shall be furnished in Form No. 10DB and evidence of payment of securities transaction tax on transactions of sale of unit of equity oriented fund to the mutual fund shall be furnished in Form No. 10DC.

 (vi)  A new sub-clause (ib) has been inserted in clause (a) of section 40 providing that any sum paid on account of securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004, shall not be allowed as a deduction for the purposes of computing the income chargeable under the head “Profits and gains of business or profession”.

Finance (No. 2) Act, 2004 – Explanatory Notes on provisions relating to Direct Taxes

CIRCULAR NO. 05/2005, DATED 15-7-2005

Introduction

1. The Finance (No. 2) Act, 2004 as passed by the Parliament, received the assent of the President on the 10th September, 2004 and has been enacted as Act No. 23 of 2004. This circular explains the substance of the provisions of the Act relating to direct taxes.

2. Changes made by the Finance (No. 2) Act, 2004

2.1 The Finance (No. 2) Act, 2004 (hereinafter referred to as the ‘Act’) has,—

  (i)  amended sections 2, 7, 10, 12AA, 17, 32, 33AC, 35AC, 40, 48, 56, 71, 80DD, 80-IA, 80-IB, 80U, 87, 88, 90, 94, 115AD, 115JB, 115R, 119, 139, 139A, 153, 153B, 194C, 197, 198, 199, 200, 202, 203, 204, 205, 206, 206C, 206CA, 245RR, 246A, 253, 272A, 272B, 272BBB, 273B, 278B, 279 and Thirteenth Schedule of the Income-tax Act, 1961;

 (ii)  inserted new sections 80CCD, 88D, 88E, 111A, 142A, 194LA, 203AA, 271FA, 277A and new Chapter XII-G in the Income-tax Act, 1961;

(iii)  substituted new sections 203A, 285BA of the Income-tax Act, 1961;

 (iv)  amended section 35HA of the Wealth-tax Act, 1957;

  (v)  introduced a new Chapter VII to levy Securities Transaction Tax.

3. Provisions in brief

3.1 The provisions of the Act in the sphere of direct taxes relate to the following matters:—

  (i)  Prescribing the rates of income-tax on income liable to tax for the assessment year 2004-05; the rates at which the tax will be deductible at source in the financial year 2004-05 from interest (including interest on securities), winnings from lotteries or cross-word puzzles, winnings from horse races, insurance commission and other categories of income liable for tax deduction at source under the Income-tax Act, rates for computing ‘advance tax’, deduction of income-tax from ‘Salaries’ and charging of income-tax on current income in certain cases for the financial year 2004-05.

 (ii)  Amendment of the Income-tax Act, 1961, with a view to :

     –  modifying the definition of income to include any sum of money exceeding Rs. 25,000 received without any consideration by an individual or HUF.

     –  providing a sunset provision to section 10(4)( ii) relating to interest in a Non-Resident (External) Account.

     –  reintroducing exemption under section 10(6BB).

     –  exempting income payable to the European Investment Bank on loans granted in pursuance of the framework agreement.

     –  providing a sunset provision to section 10(15)(iv)( fa) relating to interest on Foreign Currency Deposits.

     –  withdrawing exemption under section 10(15A).

     –  exempting family pension received by the family members of armed forces personnel killed in action in certain circumstances.

     –  modifying the definition of venture capital undertaking.

     –  providing for taxation on income of infrastructure capital company under section 115JB.

     –  providing for exemption on capital gains arising from compulsory acquisition of agricultural land situated within specified urban limits.

     –  explicitly providing power to the Commissioner for cancelling registration under section 12AA.

     –  introducing a new provision to give effect to the New Pension Scheme.

     –  reducing the limit for increase in installed capacity for the purposes of additional depreciation.

     –  providing for additional ground for withdrawal of approval granted to associations/institutions or withdrawal of notification of eligible project or scheme by the National Committee.

     –  providing for disallowance of certain amounts while computing income under the head “Profits and gains of business or profession” if tax has not been deducted at source.

     –  not allowing set-off of business loss against income from salary.

     –  providing deduction in respect of maintenance including medical treatment of a dependent being a person with disability or severe disability suffering from autism, cerebral palsy or multiple disabilities.

     –  extending tax benefits under section 80-IA in the case of substantial renovation and modernization of transmission and distribution lines in the power sector.

     –  extending the time limit for providing telecommunication services, etc. for the purpose of tax holiday under section 80-IA.

     –  extending the time-limit for setting up of industries in the State of Jammu and Kashmir for the purpose of tax holiday under section 80-IB.

     –  extending the time-limit for the purpose of tax holiday under section 80-IB to any company carrying on scientific research and development.

     –  extending the time-limit for obtaining approval of housing projects for the purpose of tax holiday under section 80-IB, and allowing deduction for redevelopment or reconstruction of existing buildings in slum areas.

     –  providing tax holiday for agro-processing industry.

     –  giving incentive to an undertaking building, operating and maintaining a hospital in a rural area.

     –  providing for deduction in respect of a person with disability or severe disability suffering from autism, cerebral palsy or multiple disabilities.

     –  giving rebate for repayment of housing loans taken from an authority established by a Central or State Act.

     –  introducing a new provision for allowing deduction from tax payable for individuals having total income up to rupees one lakh.

     –  amending section 90.

     –  curbing tax avoidance via dividend and bonus stripping.

     –  reducing the opportunity of arbitrage for the companies.

     –  continuing exemption to open-ended equity oriented funds without any time-limit.

     –  amending section 119 relating to instructions to subordinate authorities.

     –  clarifying provisions regarding estimates by Valuation Officer in certain cases.

     –  excluding the time taken by the Authority for Advance Rulings in rejecting an application or pronouncing an advance ruling from the period of limitation for making an assessment.

     –  amending section 194C relating to tax deduction at source from payments made to contractors and sub-contractors.

     –  providing for deduction of tax at source from compensation or enhanced compensation paid on acquisition of certain immovable property other than agricultural land.

     –  providing for common identification number in cases of tax deduction at source and tax collection at source.

     –  amending the provision for filing of returns of tax deducted at source.

     –  expanding the scope of collection of tax at source.

     –  amending the provisions for filing of returns of tax collected at source.

     –  inserting a new chapter for special provisions relating to income of shipping companies.

     –  enabling de-materialisation of TDS and TCS certificates.

     –  providing for prosecution in case of falsification of books of account or documents etc.

     –  Rationalising provisions relating to offences by a company.

     –  modifying the provisions for filing of annual information return.

(iii)  Introduction of provisions for levy of Securities Transaction Tax and to provide :

     –  exemption from income-tax on long-term capital gain arising from transactions chargeable to securities transaction tax;

     –  concessional rate of income-tax on short-term capital gain arising from transaction chargeable to securities transaction tax;

     –  rebate of securities transaction tax paid on transactions forming part of business against income-tax liability on business income arising from such transactions.

Rate Structure

4. Rates of income-tax in respect of incomes liable to tax for the assessment year 2004-05.

In respect of incomes of all categories of taxpayers (corporate as well as non-corporate) liable to tax for the assessment year 2004-05, the rates of income-tax have been specified in Part I of the First Schedule to the Act and are the same as those laid down in Part III of the First Schedule to the Finance Act, 2003 for the purposes of computation of “advance tax”, deduction of tax at source from “Salaries” and charging of tax payable in certain cases during the financial year 2003-04. It has also been specified that in the case of individuals, Hindu undivided families, association of persons and body of individuals having total income exceeding Rs. 8,50,000, the tax so computed after rebate under Chapter VIII-A, shall be enhanced by a surcharge of ten per cent for purposes of the Union. In the case of every artificial juridical person, the tax computed shall be enhanced by a surcharge of ten per cent. In case of a firm, a local authority, a co-operative society and a company, the tax computed shall be enhanced by a surcharge of two and one-half per cent.

Rates for deduction of income-tax at source during the financial year 2004-05 from income other than “Salaries”

The rates for deduction of income-tax at source during the financial year 2004-05 from incomes other than “Salaries” have been specified in Part II of the First Schedule to the Act. These rates apply to income by way of interest on securities, interest other than “interest on securities”, insurance commission, winnings from lotteries or crossword puzzles, winnings from horse races and income of non-residents (including non-resident Indians). These rates are broadly the same as those specified in Part II of the First Schedule to the Finance Act, 2003, for the purposes of deduction of income-tax at source during the financial year 2003-04. The tax deducted at source in each case shall be increased by a surcharge for purposes of the Union as follows :

  (i)  in the case of every individual, Hindu undivided family, association of persons and body of individuals, at the rate of ten per cent of such tax where the income or the aggregate of such incomes paid or likely to be paid exceeds Rs. 8,50,000;

 (ii)  in the case of every co-operative society, firm, local authority and company, at the rate of two and one-half per cent of such tax; and

(iii)  in the case of every artificial juridical person, at the rate of ten per cent of such tax.

An additional surcharge to be called the Education Cess is to be levied at the rate of two per cent on the amount of tax deducted, inclusive of surcharge if any.

Rates for deduction of income-tax at source from “Salaries”, computation of “advance tax” and charging of Income-tax in special cases during the financial year 2004-05

The rates for deduction of income-tax at source from “Salaries” during the financial year 2004-05 and also for computation of “advance tax” payable during that year in the case of all categories of taxpayers have been specified in Part III of the First Schedule to the Act. These rates are also applicable for charging income-tax during the financial year 2004-05 on current incomes in cases where accelerated assessments have to be made, e.g., provisional assessment of shipping profits arising in India to non-residents, assessment of persons leaving India for good during that financial year, assessment of persons who are likely to transfer property to avoid tax, or assessment of bodies formed for short duration, etc.

An additional surcharge, to be called the Education Cess, is to be levied at the rate of two per cent on the amount of tax deducted or advance tax paid, inclusive of surcharge if any. However, so far as the liability of the deductor is concerned, education cess in the case of tax deducted at source, is to be levied only in respect of tax deducted at source on payments made or credited on or after 10th September, 2004, i.e., the day on which the Finance (No. 2) Act, 2004 received the assent of the President. To reiterate, the payee shall be liable to an additional surcharge, i.e., education cess on the tax payable on the total income of the whole of the financial year.

The salient features of the rates specified in the said Part III are indicated in the following paragraphs:—

A. Individuals, Hindu undivided families, etc.

Paragraph A of Part III of the First Schedule specifies the rates of income-tax in the case of individuals, Hindu undivided families, association of persons, body of individuals or every artificial juridical persons other than a co-operative society, firm, local authority and company.

No change has been made in the rate structure. The tax payable would be enhanced by a surcharge for the purposes of the Union at the rate of ten per cent of the tax payable (after allowing rebate under Chapter VIII-A) in cases of individuals, Hindu undivided families, association of persons, body of individuals having total income exceeding Rs. 8,50,000. No surcharge would be payable by persons having incomes of Rs. 8,50,000 or below. Marginal relief would be provided to ensure that the additional amount of income-tax payable, including surcharge, on the excess of income over Rs. 8,50,000 is limited to the amount by which the income is more than Rs. 8,50,000. No marginal relief shall, however, be available in respect of the Education Cess. In the case of every artificial juridical person other than a co-operative society, firm, local authority and company, surcharge would be levied at ten per cent of the income-tax payable.

Section 22 of the Act has inserted a new section 88D in the Income-tax Act to provide for rebate of the entire amount of tax payable in case of a resident individual having total income up to Rs. 1,00,000. Consequently, resident individuals having taxable income up to Rs. 1,00,000 will not be required to pay any income-tax. Marginal relief has also been provided for in the section.

The Table below gives the income slabs and the rates of income-tax. Column (a) specifies the rates given in Paragraph A of Part I of the First Schedule to the Act; and column (b) specifies the rates given in Paragraph A of Part III of the First Schedule to the Act.

TABLE

(a)
(b)
Income slab
Rates as specified in Part I of First Schedule to the Act (i.e.,existing rates)
Income slab
Rates as specified in Part III of First Schedule to the Act (i.e., new rates)
Up to Rs. 50,000
Nil
Up to Rs. 50,000
Nil
Rs. 50,001 to Rs. 60,000
10%
Rs. 50,001 to Rs. 60,000
10% + 2% Education Cess
Rs. 60,001 to Rs. 1,50,000
20%
Rs. 60,001 to Rs. 1,50,000
20% + 2% Education Cess
Above Rs. 1,50,000
30% + Surcharge @ 10% in cases where total income exceeds Rs. 8.5 lakhs
Above Rs. 1,50,000
[30% + Surcharge @ 10% in cases where total income exceeds Rs. 8.5 lakhs] + 2% Education Cess

B. Co-operative societies

In the case of co-operative societies, the rates of income-tax have been specified in Paragraph B of Part III of the First Schedule to the Act. These rates are the same as those specified in the corresponding Paragraph of Part I of the First Schedule to the Act. The tax payable would be enhanced by a surcharge for the purposes of the Union at the rate of two and one-half per cent of the tax payable. The additional surcharge called Education Cess is to be levied at 2% on tax and surcharge.

C. Firms

In the case of firms, the rate of income-tax has been specified in Paragraph C of Part III of the First Schedule to the Act. This rate remains at 35 per cent. The tax payable by firms would be enhanced by a surcharge for the purposes of the Union at the rate of two and one-half per cent of the tax payable. The additional surcharge called Education Cess is to be levied at 2% on tax and surcharge.

D. Local authorities

In the case of local authorities, the rate of income-tax has been specified in Paragraph D of Part III of the First Schedule to the Act. This rate is the same as that specified in the corresponding Paragraph of Part I of the First Schedule to the Act. The tax payable would be enhanced by a surcharge for the purposes of the Union at the rate of two and one-half per cent of the tax payable. The additional surcharge called Education Cess is to be levied at 2% on tax and surcharge.

E. Companies

In the case of companies, the rate of income-tax has been specified in Paragraph E of Part III of the First Schedule to the Act. There is no change in the existing rates of thirty-five per cent for domestic companies and forty per cent for foreign companies. The tax payable by all companies would be enhanced by a surcharge at the rate of two and one-half per cent of the tax payable. The additional surcharge called Education Cess is to be levied at 2% on tax and surcharge.

[Sections 2, 22 and First Schedule]

Modification of the definition of income to include any sum of money exceeding twenty-five thousand rupees received without consideration

In order to curb bogus capital-building and money-laundering, a new sub-clause has been inserted in section 56 to provide that any sum received without consideration on or after the 1st day of September, 2004, by an individual or a Hindu undivided family from any person, shall be treated as income from other sources. A threshold limit of twenty-five thousand rupees has also been provided. If the amount so received exceeds this limit, the whole of the amount shall become taxable.

In order to avoid hardship in genuine cases, certain sums have been excluded. The sums which shall not be included in the income are : (a) the sums received (i) from any relative, or (ii) on the occasion of marriage of the individual, or (iii) under a will or by way of inheritance, or (iv) in contemplation of death of the payer. The expression ‘relative’ has also been defined for the purposes of this clause.

Section 2 has also been amended to provide that ‘income’ defined in clause (24) shall also include the income referred to in the new sub-clause (v) of clause (2) of section 56.

This amendment has taken effect from 1st April, 2005, and applies in relation to the assessment year 2005-06 and subsequent assessment years.

[Section 3]

Discontinuation of the exemption under sub-clause (ii ) of clause (4) of section 10 in respect of interest on deposits in a Non-Resident (External) Account

Under the existing provisions contained in section 10(4)(ii ), in the case of an individual, any income by way of interest on moneys standing to his credit in a Non-Resident (External) Account in any bank in India is not to be included in computing his total income.

The Finance (No. 2) Act, 2004 has amended clause (4)(ii ) of section 10 to provide that this exemption will not be available in respect of such income paid to him or credited to his Non-Resident (External) account in any bank in India, on or after the 1st day of April, 2005.

This amendment has become applicable in relation to the assessment year 2006-07 and subsequent assessment years.

[Section 5(a)]

Exemption for European Investment Bank

Under the existing provisions, the interest payable to the European Investment Bank on developmental loans granted by it, is taxable.

With a view to honour the commitment given under a sovereign agreement, the interest payable to the European Investment Bank on loans granted in pursuance of the framework agreement for financial co-operation entered into by the Central Government with the said Bank on 25-11-1993 has been exempted from income-tax by insertion of a new sub-clause (iiic) of clause (15) of section 10.

This amendment takes effect from 1st April, 2005.

[Section 5(c)( A)]

Sunset provision to section 10(15)(iv)(fa) relating to interest on Foreign Currency Deposits

Under the existing provisions contained in section 10(15)(iv )(fa), the interest payable by a scheduled bank to a non-resident or to a person who is not ordinarily resident on deposits in foreign currency where the acceptance of such deposits by the bank is approved by the Reserve Bank of India shall not be included in computing his total income.

The Finance (No. 2) Act, 2004 has amended clause (15)(iv )(fa) of section 10 to provide that this exemption will not be available in respect of such interest payable on or after the 1st day of April, 2005.

This amendment has become applicable in relation to the assessment year 2006-07 and subsequent assessment years.

[Section 5(c)( B)]

Re-introduction of exemption under section 10(6BB) and withdrawal of exemption under section 10(15A)

Under the existing provisions of section 10(6BB), tax paid by an Indian company, engaged in the business of operation of aircraft on income derived by the Government of a foreign State or a foreign enterprise as consideration of acquiring an aircraft or an aircraft engine on lease by the Indian concern under an agreement entered after the 31st day of March, 1997 but before the 1st day of April, 1999 and approved by the Central Government in this behalf, and the tax on such income is payable by such Indian company under the terms of that agreement to the Central Government, is not included in computing the total income of the foreign enterprise.

The Finance (No. 2) Act, 2004 has amended clause (6BB ) of section 10 to provide that the said exemption shall also be allowed in respect of such agreements entered into on or after the 1st day of April, 2005.

Under the existing provisions of section 10(15A), any payment made by an Indian company engaged in the business of operation of aircraft, to acquire an aircraft or an aircraft engine on lease from Government of a foreign State or a foreign enterprise under an agreement, not being an agreement entered into between the 1st day of April, 1997 and 31st day of March, 1999, and approved by the Central Government is not included in computing the total income.

This exemption is being withdrawn in respect of the agreements entered into on or after the 1st day of April, 2005.

These amendments apply in relation to the assessment year 2006-07 and subsequent assessment years.

[Sections 5(b) and 5(d)]

Exemption of family pension received by the family members of armed forces personnel killed in action in certain circumstances

Under the existing provisions contained in clause (18 ) of section 10, the pension income received by the recipients of Param Vir Chakra, Mahavir Chakra, Vir Chakra or certain other notified gallantry awards, as well as the family pension received by specified family members of such individuals is not included in computing the total income of such individuals.

In the interest of the welfare of the armed forces personnel, a new clause (19) has been inserted in the said section so as to provide that where the death of a member of the armed forces (including para-military forces) of the Union has occurred in the course of operational duties, in such circumstances and subject to such conditions as may be prescribed, the family pension received by the widow or children or nominated heirs, as the case may be, shall be exempt from tax. Circumstances and conditions have been prescribed in rule 2BBA of the Income-tax Rules, 1962.

The proposed amendment takes effect from the 1st April, 2005 and applies in relation to assessment year 2005-06 and subsequent years.

[Section 5(e)]

Modification of definition of venture capital undertaking

Under the existing provisions contained in section 10(23FB ), Venture Capital Undertaking (VCU) is defined to mean a domestic company whose shares are not listed in the recognized stock exchange in India and which is engaged in the business of providing services, production or manufacture of an article or thing but does not include such activities or sectors which are specified by the Securities and Exchange Board of India (SEBI) with the approval of Central Government by way of notification in the Official Gazette. This definition was intended to be in line with the definition in the Securities and Exchange Board of India (Venture Capital Funds) Regulation, 1996 made under the SEBI Act, 1992. Therefore, any amendment in the SEBI Regulations had to be followed by a consequential amendment in the Income-tax Act.

In order to eliminate the process involving a time lag, the amendment to clause (c) of Explanation seeks to define VCU as one referred to in the Securities and Exchange Board of India (Venture Capital Funds) Regulation, 1996 made under the Securities and Exchange Board of India Act, 1992 and notified in the Official Gazette by the Central Board of Direct Taxes for this purpose. In this regard, the Board has issued Notification S.O. No. 1060(E), dated 28th September, 2004.

This amendment has taken effect from 1st October, 2004.

[Section 5(f)]

Income of infrastructure capital company liable to tax under section 115JB

Under the existing provisions contained in clause (23G ) of section 10, any income by way of dividends, other than dividends referred to in section 115-O, interest, or long term capital gains of an infrastructure capital fund or an infrastructure capital company or a co-operative bank from investments made in any undertaking engaged in an infrastructure project or a housing project or a hotel or hospital project is excluded from the total income.

With a view to rationalise the provision, a proviso has been inserted in the said clause so as to provide that in the case of an infrastructure capital company the abovementioned incomes shall be taken into account in computing the book profit for the purpose of section 115JB and for payment of tax under that section. Consequential amendments have been made in section 115JB.

These amendments take effect from 1st April, 2005 and apply in relation to the assessment year 2005-06 and subsequent years.

[Sections 5(g), 28]

Providing for exemption on capital gains arising from compulsory acquisition of agricultural land situated within specified urban limits

Section 10 of the Income-tax Act, 1961, relates to incomes which do not form part of total income.

In order to provide relief to the farmers, a new clause (37 ) has been inserted in section 10 providing exemption on capital gains arising to a Hindu undivided family or to an individual from the transfer of agricultural land [being capital asset within the meaning of clause (14) of section 2] by way of compulsory acquisition under any law or under a transfer of such land, the consideration for which is determined or approved by the Central Government or the Reserve Bank of India. Such exemption shall be available where the compensation/enhanced compensation/enhanced consideration or consideration has been received on or after 1st April, 2004, and such land, during the period of two years immediately preceding the date of transfer was being used for agricultural purposes by such Hindu undivided family or individual or a parent of his.

This amendment takes effect from 1st April, 2005 and applies in relation to the assessment year 2005-06 and subsequent years.

[Section 5(h)]

Power to the Commissioner for cancelling registration under section 12AA

Section 12AA provides for the procedure for registration of a trust or institution by the Commissioner of Income-tax. Although the power of cancellation of registration flows from the power to register, there has been unnecessary litigation on this issue.

This section has been amended so as to specifically provide that if the Commissioner of Income-tax is satisfied that the activities of any trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution, he shall, after giving reasonable opportunity of being heard to the concerned trust or institution, pass an order in writing cancelling the registration granted under the said section.

This amendment takes effect from 1st October, 2004.

[Section 6]

New provision to give effect to the New Pension Scheme

A New Pension Scheme applicable to new entrants to Central Government service (except Armed Forces in the first stage) has been notified by the Central Government (Department of Economic Affairs) on 22nd December, 2003 and has become effective from 1-1-2004. As per the scheme it is mandatory for persons entering the service of the Central Government on or after 1st January, 2004, to contribute ten per cent of salary every month towards a non-withdrawable pension tier-I account. A matching contribution is required to be made by the Government to the said account.

To give effect to the New Pension Scheme of the Central Government, a new section 80-CCD has been inserted to provide for a deduction from the total income of an individual employed by the Central Government on or after 1st January, 2004, of the amounts paid or deposited by him in the non-withdrawable pension tier-I account, which do not exceed ten per cent of his salary in the previous year. The employee has been provided a further deduction, equal to the matching contribution made by the Central Government to the said account. For the purposes of section 80CCD, ‘salary’ includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and perquisites.

The amounts standing to the credit of the assessee in the tier-I account, for which a deduction has already been allowed to him, and accretions to such account, shall be taxed as income in the year in which such amounts are received by the assessee or his nominee on closure of the account or his opting out of the tier-I account or on receipt of pension from the annuity plan purchased or taken on closure or opting out of the said account.

No rebate is allowed under section 88 in respect of amounts on which deduction has been claimed under section 80CCD.

Sections 7 and 17 have also been amended to provide that the contribution made by the Central Government in the previous year to the non-withdrawable pension tier-I account of an employee participating in the New Pension Scheme, shall be deemed to be income received in the previous year and shall be chargeable to tax under the head ‘salary’.

The proposed amendments take effect retrospectively from 1st April, 2004 and apply in relation to the assessment year 2004-05 and subsequent years.

[Sections 4, 7 and 15]

Relaxation of the conditions for allowing initial depreciation

Under the existing provisions of clause (iia) of sub-section (1) of section 32 of the Income-tax Act, a further deduction at the rate of fifteen per cent of the actual cost of new plant and machinery other than ships and aircrafts acquired and installed on or after 1-4-2002 is allowed. This deduction is available to—

  (i)  a new industrial undertaking during any previous year in which it begins to manufacture produce any article or thing on or after 1-4-2002;

 (ii)  an undertaking existing before 1-4-2002, in the previous year in which it achieves not less than 25% increase in installed capacity.

“Installed capacity” has been defined to mean the capacity of production as existing on the 31st day of March, 2002.

With a view to give a thrust to investment in the manufacturing sector, the minimum requisite increase in installed capacity has been reduced to 10% from the existing level of 25%.

This amendment takes effect from 1st April, 2005 and applies in relation to the assessment year 2005-06 and subsequent years.

[Section 8]

Withdrawal of approval granted to associations/institutions or withdrawal of notification of eligible project or scheme by the National Committee

Under the existing provisions of section 35AC of the Income-tax Act, a deduction of the amount of expenditure incurred during the previous year by way of payment of any sum to a public sector company or a local authority or to an association or institution approved by the National Committee for carrying out any eligible project or scheme is allowed. Sub-section (4) of the said section provides that where National Committee is satisfied that the project or scheme is not being carried on in accordance with all or any of the conditions, it may withdraw the approval earlier granted to the association or institution. Sub-section (5) similarly provides for withdrawal of the notification of the eligible project or scheme if it is not being carried out in accordance with all or any of the conditions on the basis of which such project or scheme was notified.

Certain cases have come to notice where the projects or schemes are not implemented or have been abandoned midway. In some cases donations raised have not been used on the eligible projects are the projects and schemes were not implemented in proper manner.

With a view to ensure effective monitoring in cases where associations/institutions are approved or eligible projects or schemes have been notified, the Act has substituted sub-sections (4) and (5) to provide for an additional mechanism for withdrawal of approval granted to associations/institutions or withdrawal of notification of eligible project or scheme by the National Committee. It has been provided that where an association or institution, to which approval has been granted, fails to furnish a progress report in the prescribed form within the prescribed time after the end of each financial year to the National Committee, the Committee may, at any time, after giving a reasonable opportunity of showing cause, withdraw the approval. It has also been provided that the notification of an eligible project or scheme may be withdrawn by the National Committee, after giving a reasonable opportunity of being heard in case a report in the prescribed form in respect of such project or scheme is not furnished within the prescribed time after the end of each financial year. It has also been provided that a copy of the order withdrawing the approval or notification through which the notification of eligible project or scheme is withdrawn shall be forwarded to the Assessing Officer having jurisdiction over the concerned association or institution or local autho-rity or public sector company. This power of withdrawal will be in addition to the existing power of withdrawal of approvals or notifications in case the project or scheme is not being carried out in accordance with all or any of the conditions subject to which the approval was granted or project/scheme notified.

This amendment takes effect from 1st October, 2004.

[Section 10]

Certain amounts not to be allowed as deduction while computing income under the head “Profits and gains of business or profession” if tax not deducted at source

Under the existing provisions of sub-clause (i) of clause (a) of section 40 of the Income-tax Act, no deduction is allowed in the computation of income on account of interest, royalty, fees for technical services or any other sum which is payable outside India, or in India to a non-resident or to a foreign company, if tax is not deducted at source from payments of these sums or after deduction of tax at source, payment is not made to the account of the Central Government before the expiry of time prescribed under sub-section (1) of section 200 and in accordance with other provisions of Chapter XVII-B. Deduction of the sum is, however, allowed where tax has been deduced, or after deduction has been paid in any subsequent year in computing the income of that previous year.

With a view to rationalize the provisions of sub-clause (i ), the Act has substituted the said sub-clause to provide that in any case in which tax has been deducted in any subsequent year or, has been deducted in the previous year but paid in any subsequent year after the expiry of time prescribed under sub-section (1) of section 200, the sum from which tax has been so deducted or paid shall be allowed as deduction in computing the income of the previous year in which the tax has been paid to the account of the Central Government.

Further, with a view to augment compliance of TDS provisions in the case of residents and curb bogus payments to them it has been provided that no deduction will be allowed in the computation of income where tax is not deducted from payments of interest, commission or brokerage, fees for professional services or fees for technical services and payments to a contractor or sub-contractor for carrying out any work (including supply of labour for carrying out any work), on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 200.

It has, however, been provided that in any case where tax has been deducted from the payments of any of the aforementioned sums to residents in any subsequent year or has been deducted in the previous year but paid in any subsequent year after the expiry of the time prescribed under sub-section (1) of section 200, the sum of payment shall be allowed as a deduction in computing the income of the previous year in which the tax has been paid to the account of the Central Government.

These amendments take effect from 1st April, 2005 and apply in relation to the assessment year 2005-06 and subsequent assessment years.

[Section 11]

No set-off of business loss against income from salary

Under the existing provisions of sub-section (1) of section 71 of the Income-tax Act, loss computed in current year under the head “Profits and gains of business or profession” can be set off against salary income.

In order to prevent abuse of the provisions of set-off of losses, the Act has amended section 71 by way of insertion of a new sub-section (2A) to provide that an assessee shall not be entitled to set off any loss under the head “Profits and gains of business or profession” against income under the head “Salaries”.

This amendment takes effect from 1-4-2005 and applies in relation to the assessment year 2005-06 and subsequent years.

[Section 14]

Deduction in respect of maintenance including medical treatment of a dependent being a person with disability or severe disability suffering from autism, cerebral palsy or multiple disabilities

Under the existing provisions contained in section 80DD, an assessee, who is resident in India, being an individual or Hindu undivided family, is allowed a deduction of an amount of rupees fifty thousand, if the assessee has during the previous year, incurred any expenditure for the medical treatment, training and rehabilitation in respect of a dependent, being a ‘person with disability’, as defined under the Persons with Disability (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995. A deduction of rupees seventy-five thousand is allowed, where such dependent is a ‘person with severe disability’ suffering from eighty per cent or more of one or more disabilities. A person claiming deduction under this section is required to furnish a copy of the certificate issued by the medical authority along with the return of income.

The Explanation to the said section defines, inter alia, the expressions, “disability”, “medical authority”, “person with disability” and “person with severe disability” with reference to the relevant provisions of the Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995.

With a view to extend the benefits under section 80DD to persons suffering from autism, cerebral palsy and multiple disability, the said Explanation has been amended so as to expand these definitions to include the abovementioned expressions as provided for under the National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999.

The amendments take effect from 1-4-2005 and apply in relation to the assessment year 2005-06 and subsequent years.

[Section 16]

Extension of tax benefit under section 80-IA in the case of substantial renovation and modernization of transmission and distribution lines in the power sector

Under the existing provisions contained in clause (iv ) of sub-section (4) of section 80-IA, an undertaking engaged in the generation, generation and distribution, or the transmission or distribution of power which begins such generation or transmission before 31-3-2006, is allowed a hundred per cent deduction of the profits for any ten out of fifteen assessment years beginning from the year in which the undertaking starts generating power or commences transmission or distribution of power. However, the deduction is only available to a new undertaking and not to an undertaking formed by way of reconstruction or splitting up of a business already in existence. Further, the deduction is not available in the case of the transfer of old plant and machinery to the new business.

Recognising the need to encourage investment in renovation and modernization of the transmission and distribution network, the tax benefit under the section has been extended to undertakings which undertake substantial renovation and modernization of the existing network of transmission or distribution lines during the period beginning on 1-4-2004 and ending on 31-3-2006. ‘Substantial renovation and modernisation’ means 50 per cent increase in the book value of plant and machinery in the network of transmission or distribution lines, as on 1-4-2004.

Further, in view of the on-going reforms of the State Electricity Boards, the restrictions imposed on the transfer of old plant and machinery and splitting up or reconstruction of an old business shall no longer be applicable in the case of splitting up or, reconstruction, or re-organisation of State Electricity Boards. However, this benefit shall be available only in such cases where the splitting up or reconstruction or reorganization of the State Electricity Board(s) has taken place on or after 1-4-2004.

The proposed amendments take effect from 1-4-2005 and apply in relation to the assessment year 2005-06 and subsequent years.

[Section 17(a), 17(b)(B) and 17(c)(B)]

Extension of time limit for providing telecommunication services, etc. for the purpose of tax holiday under section 80-IA

Under the existing provision contained in clause (ii ) of sub-section (4) of section 80-IA, an undertaking which has started or starts providing telecommunication services, whether basic or cellular, including radio paging, domestic satellite service, network of trunking, broadband network and internet services, before the 31-3-2004, is allowed a deduction for any ten consecutive assessment years out of fifteen years beginning from the year in which the undertaking starts providing telecommunication services. The amount of deduction is one hundred per cent of profits for the first five years, and thereafter thirty per cent of profits for the next five years. Further, this deduction is, inter alia, available to an undertaking providing telecommunication services if such undertaking is formed by splitting up or the reconstruction of a business already in existence or by the transfer to a new business of old plant and machinery.

With a view to give incentive to the telecom sector, the terminal date for the eligible undertaking to start providing telecommunication services, etc. has been extended from 31-3-2004 to 31-3-2005. Further, in order to rationalize the provisions of the section and prevent misuse, the deduction shall be available to an undertaking which begins to provide telecommunication services on or after 1-4-2004 subject to, inter alia, the conditions that it is not formed by the transfer of old plant and machinery or splitting up or reconstruction of a business already in existence. However, the condition introduced by the Finance (No. 2) Act, 2004 will not apply to undertakings, which have started providing telecommunication services prior to 1-4-2004. Therefore, if an undertaking is formed by the transfer of old plant and machinery or splitting up or reconstruction of a business already in existence but has started providing telecommunication services prior to 1-4-2004, it will continue to get the tax benefit available under section 80-IA of the Income-tax Act.

This amendment takes effect from 1-4-2005 and applies in relation to the assessment year 2005-06 and subsequent years.

[Section 17(b)(A) and 17(c)(A)]

Extension of time limit for setting up of industries in the State of Jammu and Kashmir for the purpose of tax holiday under section 80-IB

Under the existing provisions contained in sub-section (4) of section 80-IB, industrial undertakings engaged in manufacture or production or operation of a cold storage plant and set up during the period 1-4-1993 to 31-3-2004 in the industrially backward States as listed in the VIII Schedule, including the State of Jammu and Kashmir, are eligible for a 100 per cent deduction of profits for a period of 5 years, followed by 25 per cent (30 per cent in the case of a company) for the next 5 years. The deduction is not available to industries set up after 31-3-2004.

The terminal date for setting up of industrial undertakings in the State of Jammu and Kashmir has been extended by one more year, i.e., till 31-3-2005. The Thirteenth Schedule has also been amended to include a negative list of commodities which should not be manufactured or produced by such undertakings. Thus the industrial undertakings which are set-up in Jammu and Kashmir and begin to manufacture or produce tobacco products, alcoholic drinks and aerated beverages etc. during the period 1-4-2004 to 31-3-2005 shall not be eligible for deduction under section 80-IB of the Income-tax Act.

These amendments take effect from 1-4-2005 and apply in relation to the assessment year 2005-06 and subsequent years.

[Sections 18(b) and 64]

Extension of time limit for the purpose of tax holiday under section 80-IB to any company carrying on scientific research and development

Under the existing provision of sub-section (8A) of section 80-IB, any company carrying on scientific research and development is allowed a deduction of hundred per cent of the profits and gains of such business for a period of ten consecutive assessment years, if such company is for the time being approved by the prescribed authority after 31-3-2000, but before 1-4-2004. For this purpose, the prescribed authority is the Secretary, Department of Scientific and Industrial Research, Ministry of Science and Technology, Government of India.

With a view to encourage scientific research and development in the country, the deduction is being extended to companies carrying on scientific research and development, which are approved by the prescribed authority before 1-4-2005.

This amendment takes effect from 1-4-2005 and applies in relation to assessment year 2005-06 and subsequent years.

[Section 18(c)]

Extension of the time limit for obtaining approval of housing projects for the purpose of tax holiday under section 80-IB, and allowing deduction for redevelopment or reconstruction of existing buildings in slum areas

Under the existing provisions contained in sub-section (10) of section 80-IB, a deduction equal to one hundred per cent of the profits of an undertaking developing and building housing projects is allowed if the housing project is approved by a local authority before 31-3-2005. The deduction is subject to the conditions that the undertaking should have commenced development of the housing project on or after the 1-10-1998, the project should be on a size of a plot of land which has a minimum area of one acre, and that the residential unit should have a maximum built-up area of one thousand square feet where such residential unit is situated in Delhi or Mumbai and one thousand and five hundred square feet at other places.

This tax incentive was provided to increase the stock of houses for lower and middle income groups. Keeping in view the fact that there is still a huge shortage of houses, the time limit for obtaining approval from the local authority has been extended from 31-3-2005 to 31-3-2007. However, a time limit has been introduced for completion of the housing project, where development and construction has commenced or commences on or after 1-10-1998. Such housing project approved by the local authority before 1-4-2004 has to be completed on or before 31-3-2008 and the housing project approved on or after 1-4-2004 should be completed within four years from the end of the financial year in which the project is approved by the local authority. For this purpose the date of approval shall be the date on which the building plan is first approved by the local authority and the date of completion of the housing project, shall be the date on which the completion certificate is issued by such authority. It has also been provided that the built-up area of the shops and other commercial establishments included in the housing project should not exceed five per cent of the aggregate built-up area of the housing project or 2000 sq. ft., whichever is less. The expression “built-up area” has also been defined for this purpose.

This section does not specifically provide area limit for the garden, the development plan roads, internal means of access, etc. in the housing project. Therefore, the same should conform to the project plan approved by the local authority in accordance with the regulations in force. Also the area limit of the plot has to be construed with reference to the area of the site on which the housing project is constructed and not with reference to the demarcation of land done by the land development authority.

Further, with a view to encourage the redevelopment of slum dwellings, the condition of minimum plot size of one acre and also the time limit for completion of the construction has been relaxed in the case of a housing project, carried out in accordance with a scheme framed by the Central Government or a State Government for reconstruction or redevelopment of existing buildings in areas declared to be slum areas under any law in force, and notified by the Board in this behalf.

These amendments take effect from 1-4-2005 and apply in relation to the assessment year 2005-06 and subsequent years.

[Section 18(d) and 18(g)]

Tax holiday for agro-processing industry

Under the existing provisions of section 80-IB(11A), an undertaking deriving profit from the integrated business of handling, storage and transportation of foodgrains, is allowed a deduction of hundred per cent of such profits for a period of five assessment years and thereafter twenty five per cent (thirty per cent in the case of companies) for the next five years. Since the agro-processing industry is an important source of employment, especially in the rural areas, the deduction has been extended to undertakings engaged in the business of processing, preservation and packaging of fruits or vegetables.

This amendment takes effect from 1-4-2005 and applies in relation to the assessment year 2005-06 and subsequent years.

[Section 18(e) and 18(g)]

Deduction in the case of an undertaking operating and maintaining a hospital in rural area

The existing provisions of section 80-IB provide for a deduction in respect of profits and gains from certain industrial undertakings, other than infrastructure development undertakings, engaged in the business of building, owning and operating multiplex theatres or convention centres, developing and building housing projects, or which are engaged in the integrated business of handling, storage and transportation of foodgrains or the production or refining of mineral oil.

With a view to increase the penetration of medical services in the rural areas, a new sub-section (11B) in the said section has been inserted so as to provide that the profits derived by an undertaking or an enterprise from the business of operating and maintaining a hospital in a rural area shall be eligible for a deduction of hundred per cent of such profits and gains. The deduction shall be available for a period of five assessment years beginning from the assessment year in which the undertaking or enterprise begins to provide medical services. The undertaking or enterprise shall be eligible for the deduction if such hospital is constructed during the period beginning on the 1-10-2004 and ending on the 31-3-2008, in accordance with the local regulations in force, and has at least one hundred beds for patients. Further, for claiming the deduction, the assessee has to file an audit report in the prescribed form, i.e., in Form No. 10CCBC along with the return of income.

This amendment takes effect from 1-4-2005 and applies in relation to the assessment year 2005-06 and subsequent years.

[Section 18(f) and 18(g)]

Deduction in respect of a person with disability or severe disability suffering from autism, cerebral palsy or multiple disabilities

Under the existing provisions contained in section 80U, a deduction of fifty thousand rupees is allowed to a resident individual who is a ‘person with disability’, as defined under the Persons with Disability (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995. A deduction of seventy-five thousand rupees is allowed where such individual is a ‘person with severe disability’ suffering from eighty per cent or more of one or more disabilities. An individual claiming deduction under this section is required to furnish a copy of the certificate issued by the medical authority along with the return of income.

The Explanation to the said section defines, inter alia, the expressions, “disability”, “medical authority”, “person with disability” and “person with severe disability” with reference to the relevant provisions of the Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995.

With a view to extend the benefits under section 80U to persons suffering from autism, cerebral palsy and multiple disability, the said Explanation has been substituted so as to expand these definitions to include the abovementioned expressions as provided for under the National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999.

The amendment takes effect from 1-4-2005 and applies in relation to the assessment year 2005-06 and subsequent years.

[Section 19]

Rebate for repayment of housing loans taken from an authority established by a Central or State Act

Section 88 of the Income-tax Act provides for a deduction from the tax payable on the total income of an individual or a Hindu undivided family, which is equal to a fixed percentage of sums paid or deposited in specified schemes.

The existing provisions contained in sub-clause (c) of clause (xv) of sub-section (2) of section 88 provide for tax rebate for repayment of loans taken for purchase or construction of a residential house property, up to a limit of Rs. 20,000 in one year within the overall investment ceiling of Rs. 70,000. Repayment of the amount borrowed, however, has to be to the Central Government, or any State Government, or any bank including a Co-operative Bank, or the Life Insurance Corporation, or the National Housing Bank, or any public company engaged in the business of housing finance, or from an employer who is a public company, or a public sector company, or a university, or a local authority or a co-operative society.

However, employees of a number of autonomous bodies established under the State or Central Acts were not eligible for rebate under section 88 of the Income-tax Act on account of repayment of housing loan from their employers.

With a view to rationalize the provision, the sub-clause (c ) of clause (xv) of sub-section (2) of section 88 has been amended so as to include within the purview to tax rebate under section 88, any sum paid on account of repayment of the amount borrowed by the assessee for the purchase or construction of a residential house property, from an authority or a board or a corporation or any other body established or constituted under a Central or State Act.

The amendment takes effect from 1-4-2005 and applies in relation to assessment year 2005-06 and subsequent years.

[Section 21]

New provision for allowing deduction from tax payable for individuals having total income up to rupees one lakh

To provide relief to assessees belonging to the lower income group, a new section 88D has been inserted providing for a rebate of the entire amount of the income-tax payable by an individual, resident in India whose total income does not exceed one hundred thousand rupees. Marginal relief has also been provided to ensure that the tax liability does not exceed the amount by which the total income is in excess of one lakh rupees.

The amendment takes effect from 1-4-2005 and applies in relation to the assessment year 2005-06 and subsequent years.

[Section 22]

Amendment of section 90

Under the existing provisions contained in the Explanation to section 90 it is declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company, where such foreign company has not made the prescribed arrangement for declaration and payment within India, of the dividends (including dividends on preference shares) payable out of its income in India.

The words “where such foreign company has not made the prescribed arrangement for declaration and payment within India, of the dividends (including dividends on preference shares) payable out of its income in India” in the Explanation have been omitted, as these words are redundant in the case of a foreign company.

This amendment takes effect from 1-4-1962, and applies in relation to the assessment year 1962-63 and subsequent assessment years.

[Section 24]

Measures to curb tax avoidance via dividend and bonus stripping

The existing provisions contained in sub-section (7) of section 94 provide that where a person buys or acquires any securities or unit within a period of three months prior to the record date fixed for declaration of dividend or income in respect of such security or unit, and sells or transfers the same within a period of three months after such record date, and the dividend or income received or receivable on such securities or unit is exempt, then the loss, if any, arising from such purchase and sale shall be ignored to the extent such loss does not exceed the amount of such dividend or income for the purposes of computing the income chargeable to tax of such person.

It was felt that for units, the holding period of three months prior to sale as specified in the said sub-section did not provide sufficient deterrence to tax avoidance.

The Finance (No. 2) Act, 2004, has amended sub-section (7) of section 94 so as to increase the holding period in respect of units from three months to nine months after the record date.

With a view to curb tax avoidance via bonus stripping, Finance (No. 2) Act, 2004 has inserted a new sub-section (8) in section 94 so as to provide that where a person buys or acquires any units within a period of three months prior to the record date and he is allotted additional units on the basis of such units without making any payment, and thereafter he sells or transfers within a period of nine months after such date all or any of such units while continuing to hold all or any of the additional units, then, the loss, if any, arising to him on account of such purchase and sale of units shall be ignored for the purposes of computing income chargeable to tax of such person and the amount of loss so ignored shall be deemed to be the cost of purchase or acquisition of such additional units as are held by him on the date of such transfer or sale.

These amendments take effect from 1st April, 2005 and apply in relation to the assessment year 2005-06 and subsequent years.

[Section 25]

Additional income-tax on income distributed by the specified company and Mutual Funds

Under the existing provisions of sub-section (2) of section 115R, any amount of income distributed by the specified company or a mutual fund to its unit holders is chargeable to tax and they are liable to pay additional income-tax on such distributed income at the rate of twelve and one-half per cent.

Section 115R(2) has been amended so that while the specified company or a mutual fund shall continue to pay income-tax on such distributed income at the rate of twelve and one-half per cent. If distribution is made to any individual or Hindu undivided family, the rate shall be twenty per cent. If income is distributed to any person, other than individual or HUF.

This amendment takes effect from 9th July, 2004.

[Section 29(a)]

Exemption to open-ended equity oriented funds

Under the existing provisions of sub-section (2) of section 115R, no additional tax was to be levied in respect of any income distributed to the unit holders of open-ended equity oriented funds in respect of any distribution made from such funds for a period of one year commencing from 1st April, 2003.

With a view to encourage investment in such funds, the limit of one year has been done away with. The exemption shall continue without any time limit.

This amendment takes effect retrospectively from 1-4-2004 and is relevant for assessment year 2005-06 and subsequent assessment years.

[Section 29(b)]

Amendment of section 119 relating to instructions to subordinate authorities

The existing provisions contained in clause (a) of sub-section (2) of section 119 of the Income-tax Act, empower the Board to issue instructions or directions to subordinate authorities for relaxation,inter alia, of provisions of section 158BFA, sub-section (1A) of section 201, section 234A, sections 234B and 234C relating to charging of interest in case of block assessments, regular assessments and tax deduction at source.

With a view to empower the Board to issue orders of waiver of interest in cases of distribution tax where a company or a mutual fund may become liable to interest under section 115P or 115S, as the case may be, the Act has amended clause (a) of sub-section (2) of section 119 so as to enable the Central Board of Direct Taxes to issue such directions as the Board deems fit for relaxation of the provisions of sections 115P and 115S.

This amendment takes effect from 1st October, 2004.

[Section 31]

Clarificatory amendments regarding estimates by Valuation Officer in certain cases

The existing provisions of section 131 provide that the Assessing Officer shall have the same powers as are vested in a Court under the Code of Civil Procedure, 1908, when trying a suit. One such power which has been provided in clause (d) of sub-section (1) of section 131, is the power to issue commissions. Section 75 of CPC and order XXVI of the Schedule thereto lays down the power of ‘issuing commission’, which inter alia, empowers the Court to make a local investigation and also “to hold a scientific, technical and expert investigation”. Using this power, the Assessing Officer has been making a reference to the Valuation Officer for estimating the cost of construction of properties.

The scope of power vested in an Assessing Officer under section 131 to make a reference to the Valuation Officer for estimating the cost of construction of properties has been a subject-matter of litigation.

A new section 142A has been inserted by the Finance (No. 2) Act, 2004 to specifically provide that an Assessing Officer has the power to make a reference to the Valuation Officer for estimating the value of investment, expenditure, etc. This section has been inserted with retrospective effect from 15th November, 1972 to save the cases where such references have been made in the past and are still pending in litigation at one stage or the other.

Sub-section (1) of the new section provides that where an estimate of the value of any investment referred to in section 69 or section 69B or the value of any bullion, jewellery or other valuable article referred to in section 69A or section 69B is required to be made for the purposes of making any assessment or re-assessment, the Assessing Officer may require the Valuation Officer to make an estimate of the same and report to the Assessing Officer.

Sub-section (2) of the new section provides that the Valuation Officer to whom such a reference is made under sub-section (1) shall, for the purpose of dealing with such reference, have all the powers that he has under section 38A of the Wealth-tax Act, 1957.

Sub-section (3) of the new section provides that on receipt of the report from the Valuation Officer, the Assessing Officer may after giving the assessee an opportunity of being heard, take into account such report in making such assessment or re-assessment.

It has been provided in the proviso to the new section that the provisions of the same shall not apply in respect of an assessment made on or before the 30th day of September, 2004 and where such assessment has become final and conclusive on or before that date, except in cases where a reassessment is required to be made in accordance with the provisions of section 153A.

This amendment takes effect retrospectively from 15th November, 1972.

[Section 34]

Allowing for time taken by the Authority for Advance Rulings in rejecting an application or pronouncing an advance ruling to be excluded from the period of limitation for making an assessment

The existing provisions contained in sections 245Q and 245R provide that the Authority for Advance Rulings shall on receipt of an application for advance ruling, forward the same to the Commissioner and if necessary call for the relevant records. The authority may either reject the application or pronounce its advance ruling after examining the application and the records. The existing provisions of section 245RR provide that no income-tax authority or the Appellate Tribunal shall proceed to decide any issue in respect of which an application has been made by a resident to the Authority for Advance Rulings.

Finance (No. 2) Act, 2004 has inserted clause (vi) in Explanation 1 to section 153 so as to provide that the period commencing on the date on which application has been filed to the Authority for Advance Rulings and ending on the date on which the order rejecting the application is received by the Commissioner shall be excluded for computing the period of limitation under this section.

Finance (No. 2) Act, 2004 has inserted clause (vii) in Explanation 1 to section 153 so as to provide that the period commencing on the date on which application has been filed to the Authority for Advance Rulings and ending on the date on which the order pronouncing the advance ruling is received by the Commissioner shall be excluded for computing the period of limitation under this section.

Similarly, two new clauses (v) and (vi) in Explanation to section 153B have also been inserted so as to provide that the period commencing on the date on which application has been filed to the Authority for Advance Rulings and ending on the date on which the order rejecting the application or pronouncing the advance ruling is received by the Commissioner shall be excluded for computing the period of limitation under this section.

This amendment takes effect from 1st October, 2004.

[Sections 35 & 36]

Amendment of section 194C relating to tax deduction at source from payments made to contractors and sub-contractors

The existing provisions contained in sub-section (3) of section 194C of the Income-tax Act, inter alia, provide that no deduction of tax is to be made at source from any sum credited or paid in pursuance of any contract, the consideration for which does not exceed twenty thousand rupees.

It had been reported that composite contracts were being split up into contracts valued at less than Rs. 20,000 each to escape the provisions of TDS.

To prevent this practice, the Act has amended section 194C to provide that tax will be required to be deducted at source where the amount credited or paid or likely to be credited or paid to a contractor or sub-contractor exceeds Rs. 20,000 in a single payment or Rs. 50,000 in aggregate during a financial year.

This amendment takes effect from 1st October, 2004.

[Section 37]

Tax to be deducted at source from compensation or enhanced compensation paid on acquisition of certain immovable property other than agricultural land

With the growing development and rapid urbanization in the country, large areas of land and many residential buildings are being acquired by various agencies including Government agencies and other local authorities from the owners who are compensated.

With a view to curb the tendency of evading taxes by not reporting the income comprised in the compensation or enhanced compensation, the Act has inserted a new section 194LA in the Income-tax Act with effect from 1-10-2004 requiring deduction of tax at the rate of ten cent on the sum of compensation or enhanced compensation received.

It has also been provided that no deduction of tax shall be made where the immovable property is agricultural land, whether situated within municipal limits or not, and where the amount of compensation or enhanced compensation paid is less than one hundred thousand rupees.

Section 197 of the Income-tax Act relating to certificate for deduction of tax at lower rates or no deduction of tax from the Assessing Officer has also been amended to include a reference to the newly inserted section 194LA. Consequential amendments have also been made in sections 198, 199, 200, 202, 203, 204 and 205 of the Income-tax Act.

These amendments take effect from 1-10-2004.

[Sections 38, 39, 40, 41(a), 42(1), 43, 44(a), 47 and 48]

Common identification number in cases of tax deduction at source and tax collection at source

Under the existing provisions of section 203A of the Income-tax Act, every person responsible for deduction of tax under the provisions of Chapter XVII-B is required to apply to the Assessing Officer for the allotment of a tax deduction account number if he has not been allotted such number.

Similarly, every person responsible for collection of tax in accordance with the provisions of section 206C of the Income-tax Act is required to apply to the Assessing Officer for the allotment of tax collection account number under section 206CA.

Penalty is levied under sections 272BB and 272BBB for failure to comply with the provisions of sections 203A and 206CA (provisions of section 206CA are not applicable on or after 1-10-2004) respectively.

The purpose of obtaining tax deduction account number and tax-collection account number is identification of the deductor or the person responsible for collection of tax, as the case may be. Multiplicity of identification numbers is reported to have created confusion and resulted in procedural delays. Moreover, there is a single form, namely Form No. 49B, for the allotment of tax-deduction account number and tax collection account number.

The Act has, therefore, amended section 206CA to do away with the requirement of obtaining tax collection account number separately on or after 1-10-2004. Section 203A has been substituted to provide that persons required to deduct tax at source and collect tax at source shall be required to obtain a common tax deduction and collection account number. The amended section also provides where such number shall be required to be quoted.

Consequently, section 272BBB has also been amended to restrict it to cases of default prior to 1-10-2004.

These amendments take effect from 1-10-2004.

[Sections 45, 51 and 58]

Filing of returns of tax deducted at source

Under the existing provisions of sub-section (1) of section 206, the pres-cribed person in the case of every Government office, principal officer in the case of every company, the prescribed person in the case of every local authority or other public body or association, every private employer or every other person responsible for deducting tax is required to prepare and deliver or cause to be delivered to the prescribed income-tax authority, such returns in such form and verified in such manner and setting forth such particulars as may be prescribed within the prescribed time after the end of every financial year.

Further sub-section (2) of the said section provides for filing of such returns in accordance with such scheme as may be specified by the Board in this behalf by notification in the Official Gazette on a floppy, diskette, magnetic cartridge, CD-ROM or any other computer media. The filing of TDS returns on computer media under the said scheme is mandatory in the case of a company.

The Act has amended sub-section (1) of section 206 to provide for filing of return of tax deducted at source with an authority or agency as may be prescribed. It has also been provided that the Board may, if it considers necessary or expedient so to do, frame a scheme for the purposes of filing of return with such other authority or agency referred to in sub-section (1). A scheme for furnishing paper returns of Tax Deducted at Source was notified vide Notification No. 179/2005, dated 30-6-2005.

These amendments take effect from the 1-10-2004.

The Act has also amended sub-section (2) of section 206 to provide that the prescribed person in the case of every office of Government shall also be required to deliver or cause to be delivered within the prescribed time (rule 37) after the end of each financial year, TDS returns on computer media under the scheme notified by the Board. A scheme for electronic filing of returns of Tax Deducted at Source was notified vide Notification No. 205/2003, dated 26-8-2003.

This amendment takes effect from 1-4-2005.

[Section 49]

Collection of tax at source in respect of parking auctions, toll auctions, mining or quarrying leases

Under the existing provisions of sub-section (1) of section 206C of the Income-tax Act, collection of tax is required to be made by the seller of certain specified goods from any amount payable by the buyer to the seller at the specified percentage.

The Act has amended the said section by inserting a new sub-section (1C) to provide for collection of tax at the rate of two per cent by every person who grants a lease or a license or enters into a contract or otherwise transfers any right or interest in any parking lot or toll plaza or mining to another person, other than a public sector company for the use of such parking lot or toll plaza or mining for the purposes of business. The tax shall be collected from the licensee or lessee of any such license, contract of lease of the specified nature, at the time of debiting of the amount payable by the licencee or lessee to the account of the licencee or lessee or at the time of such receipt of such amount from the said licencee or lessee in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier.

Consequential amendments have also been made in sub-sections (2), (3), (5) and (9) of section 206C.

Sub-sections (5C) and (5D) of section 139A relating to permanent account number have also been amended so as to require the licensee or lessee, referred to in sub-section (1C) of section 206C to intimate his permanent account number and require every person collecting tax to quote such permanent account number in all the certificates furnished under sub-section (5) of section 206C and all returns under sub-section (5A) or (5B) of section 206C.

This amendment takes effect from 1-10-2004.

[Sections 33(b) and 50]

Filing of returns of tax collected at source

Under the existing provisions of sub-section (5A) of section 206C of the Income-tax Act, every person collecting tax at source is required to furnish half-yearly returns for the periods ending on 30th September and 31st March, in each financial year, and deliver or cause to be delivered to the prescribed income-tax authority such returns in such form and verified in such manner and setting for the such particulars and within such time as may be prescribed (rule 37E).

Sub-section (5B) of the said section further provides that the returns of tax collected at source may be filed on computer readable media such as floppies, diskettes, magnetic cartridge tapes, etc. as may be specified by the Board and that the information in such returns shall be admitted in evidence in any proceeding under the Income-tax Act.

Sub-section (5C) of the said section provides for the requirement of checking and authenticating of the return by the Assessing Officer and due care by him for preservation of the return in the computer media by duplicating, transferring, mastering or storage without loss of data.

With a view to bring the provisions relating to filing of TCS returns at par with those relating to filing of TDS returns, the Act has amended sub-section (5A) of section 206C to provide for filing of returns of tax collected at source within the time, as may be prescribed. With this amendment, the requirement of filing the half-yearly return of TCS has been dispensed with and an annual return is to be filed.

It has also been provided that return of tax collected at source can be filed with any authority or agency as may be specified and that the Board may, if it considers necessary or expedient so to do, frame a scheme for the purposes of filing of returns with such other authority or agency. A scheme for furnishing of paper returns of Tax Collected at Source was notified vide Notification No. 180/2005, dated 30-6-2005.

These amendments take effect from 1-10-2004.

The Act has also substituted sub-section (5B) to provide that the person responsible for collecting tax other than in the case of company, the Central Government or a State Government may, at his option, deliver or cause to be delivered such return to the prescribed Income-tax authority in accordance with such scheme as may be specified by the Board in this behalf, by notification in the Official Gazette, and subject to such conditions as may be specified therein, on or before the prescribed time after the end of each financial year, on a floppy, diskette, magnetic cartridge etc, CD-ROM or any other computer media and in the manner as may be specified in that scheme. The filing of TCS return on computer media under the said scheme has been made mandatory in cases where a company, the Central Government or a State Government, collects the tax. A scheme for Electronic filing of returns of Tax Collected at Source was notified vide Notification No. 121/2005, dated 30-3-2005.

Sub-section (5C) has also been substituted to provide that a return filed on computer media shall be deemed to be a return for the purposes of sub-section (5A) of section 206C and the rules made thereunder and shall be admissible in any proceedings thereunder, without further proof of production of the original, as evidence of any contents of the original or of any fact stated therein.

A new sub-section (5D) has also been inserted which provides that where the Assessing Officer considers that the return delivered or cause to be delivered under sub-section (5B) is defective, he may intimate the defect to the person responsible for collecting tax and give him an opportunity of rectifying the defect within a period of fifteen days from the date of such intimation or within such further period which, on an application made in this behalf, the Assessing Officer may, at his discretion, allow; and if the defect is not rectified within the said period of fifteen days or, as the case may be, the further period so allowed, then, regardless of anything contained in any other provision of this Act, such return will be treated as an invalid return and the provision of this Act shall apply as if such person had failed to deliver the return.

These amendments take effect from 1-4-2005.

[Section 50]

Special provisions relating to income of shipping companies

A new chapter XII-G has been inserted in the Income-tax Act containing sections 115V to 115VZC. This Chapter has special provisions for taxation of the income of shipping companies. The Chapter has seven parts and thirty sections from sections 115V to 115VZC.

Section 115V defines certain expressions used in the Chapter.

Section 115VA provides that a company, may at its option, compute the income from the business of operating qualifying ships in accordance with the provisions of Chapter XII-G and the income thus computed shall be deemed to be the income chargeable to tax under the head “Profits and gains of business or profession”.

Section 115VB stipulates when a company is to be considered as operating a ship. A company is regarded as operating a ship if it operates a ship, whether owned or chartered by it, and includes a case where even a part of the ship has been chartered in by it in an arrangement for slot charter, space charter or joint charter. A company is not considered as operating a ship if the ship has been chartered out by it on bareboat charter-cum -demise terms or on bare boat charter terms for a period exceeding three years.

Section 115VC provides that a company shall be a qualifying company if it is—

  (i)  an Indian company;

 (ii)  the place of effective management of the company is in India;

(iii)  it owns at least one qualifying ship; and

 (iv)  the main object of the company is to carry on the business of operating ships.

The expression “place of effective management of the company” has been defined in the Explanation to mean the place where the board of directors of the company or its executive directors, as the case may be, make their decisions; or in a case where the board of directors routinely approve the commercial and strategic decisions made by the executive directors or officers of the company, the place where such executive directors or officers of the company perform their functions.

Section 115VD deals with what is a qualifying ship. A ship is a qualifying ship if it is a sea going ship or vessel of 15 net tons or more; is registered under the Merchant Shipping Act, 1958, or is a ship registered outside India in respect of which a licence has been issued by the Director-General of Shipping under section 406 or section 407 of the Merchant Shipping Act, 1958; and a valid certificate indicating the net tonnage of the ship has been issued by the Director General (Shipping).

[Section 115VX provides that the tonnage of a ship shall be determined in accordance with a valid certificate indicating its tonnage and also gives the meaning of valid certificate in case of ships registered in India and ships registered outside India.]

Section 115VD also provides for exclusion of certain ships/vessels from the category of qualifying ships. The exclusions are—

  (i)  a sea going ship or vessel if the main purpose for which it is used is the provision of goods or services of a kind normally provided on land;

 (ii)  fishing vessels;

(iii)  factory ships;

 (iv)  pleasure crafts;

  (v)  harbour and river ferries;

 (vi)  offshore installations;

(vii) dredgers;

(viii)a qualifying ship which is used as fishing vessel for a period of more than thirty days during a previous year.

Section 115VE gives the manner of computation of tax under tonnage tax scheme. The business of operating qualifying ships giving rise to relevant shipping income [referred to in sub-section (1) of section 115V-I] is to be considered as a separate business distinct from all other activities or business carried on by the company. It has also been provided that the profits referred to in sub-section (1) are to be computed separately from the profits and gains from any other business. A tonnage tax company engaged in the business of operating qualifying ships is required to compute the profits from the business of operating qualifying ships under the tonnage tax scheme and such profits are required to be computed separately from the profit and gains from any other business. The scheme is to apply only if an option is made in accordance with the provisions of section 115VP. The profits and gains of a company engaged in the business of qualifying ships but not covered under the tonnage tax scheme or, which has not made an option, shall be computed in accordance with the other provisions of the Income-tax Act.

Section 115VF stipulates that the tonnage income shall be computed in accordance with the provisions of section 115VG and the income so computed shall be deemed to be the income of a tonnage tax company chargeable to tax under the head “Profits and gains of business or profession”. The relevant shipping income referred to in sub-section (1) of section 115V-I is not chargeable to tax. The provisions of section 115V-I only intend to specify and segregate profits from the core activities of a tonnage tax company and profits from incidental activities. Charging provision is under section 115VA read with section 115VF and 115VG.

Section 115VG deals with the method of computation of tonnage income. After computation of the tonnage income, tonnage tax is to be determined by applying the prevailing corporation tax rate on the notional profit computed in accordance with this section. For the purpose of computing the tonnage income, first the daily income is to be calculated for each qualifying ship on the basis of the following rates:

Qualifying ship having net tonnage
Amount of daily tonnage income
(1)
(2)
up to 1,000
Rs. 46 for each 100 tons
exceeding 1,000 but not more than 10,000
Rs. 460 plus Rs. 35 for each 100 tons exceeding 1,000 tons
exceeding 10,000 but not more than 25,000
Rs. 3,610 plus Rs. 28 for each 100 tons exceeding 10,000 tons
exceeding 25,000
Rs. 7,810 plus Rs. 19 for each 100 tons exceeding 25,000 tons.

The tonnage income for each ship is to be derived by multiplying the daily tonnage income by the number of days in the previous year or the number of days the ship is operated by the company as a qualifying ship.

The tonnage income so arrived at in case of all ships will then be aggregated. The tonnage income shall be further increased by the deemed tonnage which is to be computed in the manner prescribed in rule 11Q. Deemed tonnage means, the tonnage in respect of an arrangement of purchase of slots, slot charter and an arrangement of sharing of break bulk vessels. The prevailing corporation tax rate in respect of the year is to be applied on the total tonnage income to derive the tax liability.

An example of how the tonnage tax liability is to be computed is given below:

Suppose a tonnage tax company operates only one qualifying ship throughout the year. The ship has a net tonnage of 25,000 tons and the corporation tax rate for that year is 35 per cent. Tonnage tax liability of such company would be calculated as follows:

Daily profit:
(Rs.)
For the first 1,000 tons
460
For 1,001 to 10,000 tons
3,150
For remaining 15,000 tons
4,200
Total
7,810
Notional annual profit:
Rs. 7810 × 365 days
Rs. 28,50,650
Tonnage tax:
Rs. 28,50,650 × 35/100=
Rs. 9,97,727

The section also provides for rounding off of the tonnage. It has also been provided that notwithstanding anything contained in any other provisions of the Income-tax Act, no deduction or set off is to be allowed in computing the tonnage income under this Chapter.

Section 115VH provides for computation in case of joint operation. The said section provides that where a qualifying ship is operated by two or more companies by way of joint interest in the ship or by way of an agreement for the use of the ship and their respective shares and definite and ascertainable, the tonnage income of each such company shall be an amount equal to a share of income proportionate to its share of that interest. It has also been provided that where two or more companies are operators of a qualifying ship, the tonnage income of each company shall be computed as if each had been the only operator.

Section 115V-I relates to relevant shipping income. It has been provided that relevant shipping income of a tonnage tax company means its profits from core activities and its profits from incidental activities. It has been provided that where the aggregate of all the incidental activities exceeds one-fourth per cent of the turnover from core activities, such excess shall not form part of relevant shipping income for the purposes of this chapter and shall be taxable under the other provisions of the Act.

Core activities of a tonnage tax company have been specified in sub-section (2) of the said section. These include its activities from operating qualifying ships and other ship related activities being—

  (i)  shipping contracts in respect of earning from pooling arrangements and contracts of affreightment;

 (ii)  specific shipping trades being on-board or on shore activities of passenger ships comprising of fares and food and beverages consumed on board; and slot charters, space charters, joint charters, feeder services, container box leasing of container shipping.

It has also been provided that the Central Government, if it considers necessary or expedient so to do, may, by notification in the Official Gazette, exclude any of the other ship related activities which have been referred to in clause (ii) of sub-section (2) of the said section or prescribe the limit up to which such activities shall be included in the core activities for the purposes of the section. It is also provided that every notification issued under sub-section (3) shall be laid before Parliament.

The incidental activities of the tonnage tax company shall be activities which are incidental to the core activities and are prescribed in rule 11R. It has been provided that the relevant shipping income attributable to operating non-qualifying ships shall be taxable under other provisions of this Act. It has also been provided that where any goods or services held for the purposes of tonnage tax business are transferred to any other business carried on by a tonnage tax company, or where any goods or services held for the purposes of any other business carried on by such tonnage tax company are transferred to the tonnage tax business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the tonnage tax business does not correspond to the market value of such goods or services as on the date of the transfer, the relevant shipping income under this section shall be computed as if the transfer, in either case had been made at the market value of such goods or services as on that date. Where, in the opinion of the Assessing Officer, the computation of the relevant shipping income in the manner hereinbefore specified presents exceptional difficulties, the Assessing Officer may compute such income on such reasonable basis as he may deem fit. It has also been provided that where it appears to the Assessing Officer that, owing to the close connection between the tonnage tax company and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the tonnage tax company more than the ordinary profits which might be expected to arise in the tonnage tax business, the Assessing Officer shall, in computing the relevant shipping income of the tonnage tax company for the purpose of this Chapter, take the amount of income as may be reasonably deemed to have been derived therefrom. The relevant shipping income of a tonnage tax company shall include a loss and such loss shall be deemed to have never accrued for the purposes of the Act.

Principles pertaining to arm’s length price will be applicable to transactions between tonnage tax companies and unconnected (as well as connected) non-tonnage and tonnage tax entities. This principle will also apply within a single company as between its tonnage tax activities and its non-tonnage tax activities (if any).

Section 115VJ relates to treatment of common cost. Common costs and losses will be apportioned on a just and reasonable basis to determine what is attributable to a company’s shipping and non-shipping activities. It has also been provided that where any asset, other than qualifying ship, is not exclusively used for the tonnage tax business by the tonnage tax company, depreciation on such asset shall be allocated between its tonnage tax business and other business on a fair proportion to be determined by the Assessing Officer, having regard to the use of such asset for the purpose of the tonnage tax business and for the other business.

Section 115VK provides that the depreciation for the first previous year of the tonnage tax scheme shall be computed on the written down value of the qualifying ships which will be computed in accordance with the provisions of sub-section (2). The written down value of the block of assets, being ships, as on the first day of the previous year, shall be divided in the ratio of the book written down value of the qualifying ships and the book written down value of the non-qualifying ships. The block of qualifying assets shall constitute a separate block of assets. The manner of computation of the book written down value of the block of qualifying assets and the block of other assets has been specified in sub-section (4). This is as follows:

Step 1

The assets falling within each of the new blocks, i.e., block of qualifying assets and block of other assets, would be identified and their book WDV listed.

Step 2

Total of book WDV of assets falling in each of the new blocks will be determined.

Step 3

The WDV as per the Income-tax Act of the existing common block (as on the last day of immediately preceding previous year) be allocated to each of the new blocks in ratio of their respective book WDVs.

To illustrate the above process, the following example may be taken:

  (i)  The WDV of the existing block is Rs. 70 crores. This comprises three qualifying assets (Q) and two non-qualifying assets (NQ). The book WDV of each of the qualifying and the non-qualifying assets is identified as under as the first step:

Assets
Book WDV
Q1
30
Q2
20
Q3
30
80
NQ1
15
NQ2
5
20

 (ii)  Book WDV of all the existing qualifying assets is Rs. 80 crores and that for the non-qualifying is Rs. 20 crores.

(iii)  Thus, the ratio of book WDV of qualified assets to that of non-qualifying assets is 4:1.

 (iv)  In the final step, the existing WDV of the common block, which is Rs. 70 crores, is to be allocated in this ratio of qualifying block and non-qualifying blocks. Accordingly, WDV of qualifying block would be Rs. 56 crores and that of non-qualifying block would be Rs. 14 crores.

The method of allocation of depreciation in a case where an asset forming part of the block of qualifying assets begins to be used for purposes other than the tonnage tax business and in a case where an asset forming part of the block of other assets begins to be used for tonnage tax business has been given in sub-sections (5), (6) and (7). It has also been provided that for the purposes of the Act, depreciation on the block of qualifying assets and block of other assets so created shall be allowed as if such written down value has been brought forward from the preceding previous year. The expression “book written down value” has been defined.

Section 115VL relates to general exclusion of deduction and set off, etc. It has been provided that sections 30 to 43B and section 57 shall apply as if every loss allowance or deduction referred to therein and relating to or allowable for any of the relevant previous years, had been given full effect to for that previous year itself: no loss referred to in sub-sections (1) and (3) of section 70 or sub-sections (1) and (2) of section 71 or sub-section (1) of section 72 or sub-section (1) of section 72A, in so far as such loss relates to the business of operating qualifying ships of the company, shall be carried forward or set off where such loss relates to any of the previous years when the company is under the tonnage tax scheme; no deduction shall be allowed under Chapter VI-A in relation to the profits and gains from the business of operating qualifying ships; and in computing the depreciation allowance under section 32 of this Act, the written down value of any asset used for the purposes of the tonnage tax business shall be computed as if the company has claimed and has been actually allowed the deduction in respect of depreciation for the relevant previous year.

Section 115VM provides that section 72 shall apply in respect of any losses that have been accrued to a company before its entry in tonnage tax scheme and are attributable to its tonnage tax business as if such losses had been set off against the relevant shipping income in any of the previous years when the company is under the tonnage tax scheme. The losses referred to in sub-section (1) shall not be available for set off against any income other than relevant shipping income in any previous year beginning on or after the company exercises its option under section 115VP. It has also been provided that any apportionment necessary to determine the losses referred to in sub-section (1) shall be made on a reasonable basis.

Section 115VN relates to chargeable gains from transfer of tonnage tax assets. The said section provides that profits or gains arising from the transfer of a capital asset being an asset forming part of the block of qualifying assets shall be chargeable to income-tax in accordance with the provisions of section 45, read with section 50, and the capital gains so arising shall be computed in accordance with the provisions of sections 45 to 51.

Section 115V-O provides for exclusion of book profits or loss derived from the activities of a tonnage tax company referred to in sub-section (1) of section 115V-I from section 115JB.

Section 115VP relates to method and time of opting for tonnage tax scheme. A qualifying company may opt for the tonnage tax scheme by making an application to the Joint Commissioner having jurisdiction over the company in the Form No. 65 and manner prescribed in Rule 11P. The initial period in which a company will be able to opt for the scheme will be for a period of three months starting from 1st October, 2004 and ending on 31st December, 2004. After the end of the initial period, only those companies which are incorporated after the initial period or which become qualifying companies after the initial period for the first time (in case of existing companies) shall be able to opt for the scheme. In such cases, however, the application for exercising the option will have to be made within three months of the date of the incorporation or, as the case may be, the date on which the company became a qualifying company.

The Joint Commissioner may call for such information or documents as may be necessary for the purpose of satisfying himself regarding the eligibility of the company to exercise the option and after satisfying himself, he shall pass an order in writing either approving the option for the scheme or refusing the approval for such option. The order granting or refusing the option shall be passed within one month of filing the application. Where an order granting approval has been passed, the provisions of the Chapter shall apply from the assessment year relevant to the previous year in which the option for tonnage tax scheme is exercised.

The company in whose case the tonnage tax option is denied, may file an appeal before the CIT (Appeals).

Section 115VQ provides that an option for tonnage tax scheme, after it has been approved under section 115VP shall remain in force for a period of ten years. It has also been provided that an option for the tonnage tax scheme shall cease to have effect in cases where the qualifying company ceases to be a qualifying company or gives a declaration in writing to the Assessing Officer to the effect that the provisions of the Chapter may not be made applicable to it or defaults with regard to provisions relating to tonnage tax reserves, charter in limits and training requirements. The tonnage tax scheme will also cease to have effect in case the tonnage tax company is excluded from the scheme by an order under section 115VZC or the conditions pertaining to amalgamation in respect of tonnage tax companies are not complied with. In such cases, the profits and gains of the company from the business of operating qualifying ships shall be computed in accordance with the other provisions of the Income-tax Act.

Section 115VR relates to renewal of tonnage tax scheme and it provides that an option for the tonnage tax scheme which has been approved under sub-section (3) of section 115VP may be renewed within one year from the end of the previous year in which the option ceases to have effect. It has also been provided that the provisions relating to method and time of opting for tonnage tax scheme (section 115VP) and the period for which tonnage tax option to remain in force (section 115VQ) shall apply in relation to a renewal of the option as they apply in relation to the approval of option for the tonnage tax scheme.

Section 115VS provides that a qualifying company, if it leaves the scheme at any time, whether voluntary or through expulsion, will not be eligible to opt for the tonnage tax scheme for a period of ten years from the date of opting out or default or expulsion, as the case may be. The reasons for the prohibition are—

  (i)  default in complying with the provisions relating to creation of reserves;

 (ii)  being excluded from the scheme on grounds of abuse of the tonnage tax scheme;

(iii)  default in complying with the training requirements for more than five consecutive years; and

 (iv)  exceeding the limit for charter in of tonnage for more than two consecutive years.

Section 115VT relates to transfer of profits to tonnage tax reserve account. Sub-section (1) of the said section provides that a tonnage tax company shall be required to credit to a reserve account an amount not less than twenty per cent of the book profits derived from the activities referred to in clauses (i) and (ii) of sub-section (1) of section 115V-I in each previous year. The amount credited to the reserve account are to be utilized in the manner laid down in the section. It has been provided that a tonnage tax company may transfer a sum in excess of twenty per cent of the book profits and such excess sum transferred shall also be utilized in the manner laid down in the section. The explanation below sub-section (1) defines the expression “book profit”. It has further been provided under sub-section (2) that where the company has book profits from the business of operating qualifying ships and book loss from any other sources, and consequently, the company is not in a position to create the full or any part of the reserves under sub-section (1), the company shall create the reserves to the extent permissible in that previous year and the shortfall, if any, shall be added to the amount of the reserves required to be created for the following previous year and such shortfall shall be deemed to be part of the reserve requirement of that following previous year. Sub-section (3) of the said section provides for the manner in which the amount credited to the reserve account under sub-section (1) shall be utilized by the company. Sub-section (4) of the said section provides for taxing of an appropriate portion of the relevant shipping income in case where any amount credited to the reserve account under sub-section (1) has been utilized for any purpose other than that referred to in clause (a) or clause (b) of sub-section (3) or (b) has not been utilized for the purpose specified in clause (a) or sub-section (3); or (c) has been utilized for the purpose of acquiring a new ship as specified in clause (a) of sub-section (3), but such ship is sold or otherwise transferred, other than in any scheme of demerger by the company to any person at any time before the expiry of three years from the end of the previous year in which it was acquired. Sub-section (5) of the said section provides for taxing of a proportion of the relevant shipping income in case of shortfall of credit to the reserve account. Sub-section (6) of the said section provides that if the reserve required to be created under sub-section (1) is not created for any two consecutive previous years of a tonnage tax company, the company’s option for tonnage tax scheme shall cease to have effect from the start of the previous year following the second consecutive previous year in which the failure to create the reserve under sub-section (1) occurred and the company will be prohibited from exercising the option for tonnage tax scheme for a period of ten years in accordance with the provisions of section 115VS. Explanation to section 115VT defines the expression “new ship”.

Section 115VU relates to minimum training requirement for tonnage tax companies. The said section provides that a tonnage tax company, after its option has been approved under sub-section (3) of section 115VP, shall be required to comply with the minimum training requirement in respect of trainee officers in accordance with the guidelines framed by the Director General of Shipping and notified in the Official Gazette by the Central Government. A copy of the certificate issued by the Director General of Shipping to the effect that such company has complied with the minimum training requirement in accordance with the guidelines referred to in sub-section (1) for the previous year shall be required to be furnished along with the return of income. It has also been provided that if the minimum training requirement is not complied with for any five consecutive previous years, the company’s option for tonnage tax scheme shall cease to have effect from the start of the previous year following the fifth consecutive year in which the failure to comply with the minimum training requirement under sub-section (1) occurred and the company will be prohibited from exercising the option for tonnage tax scheme for a period of ten years in accordance with the provisions of section 115VS.

Section 115VV relates to limit for charter-in of tonnage. Sub-section (1) of the section provides that in the case of every company which has opted for tonnage tax scheme, not more than forty nine per cent of the net tonnage of the qualifying ships operated by it during any previous year shall be chartered-in. Sub-section (2) of the said section provides that the proportion of net tonnage referred in sub-section (1) in respect of a previous year shall be calculated based on the average of net tonnage during that previous year . Sub-section (3) provides that the average of net tonnage shall be computed in the manner prescribed in Rule 11S. Sub-section (4) of the said section provides that where the net tonnage of ships chartered-in exceeds the limit under sub-section (1) during any previous year, the total income of such company in relation to that previous year shall be computed as if the option for tonnage tax scheme does not have effect for that previous year. Sub-section (5) of the said section provides that where the limit under sub-section (1) is exceeded in any two consecutive previous years. The option for tonnage tax scheme shall cease to have effect from the beginning of the previous year following the second consecutive previous year in which the limit was exceeded. Further, as per the provisions of section 115VS, the company will not be eligible to opt for the tonnage tax scheme for a period of 10 years.

Section 115VW relates to maintenance and audit of accounts. The section provides that an option for tonnage tax scheme by a tonnage tax company shall not have effect in relation to a previous year unless such company maintains separate books of account in respect of the business of operating qualifying ships and furnishes, along with the return of income for that previous year, the report of an accountant, in Form No. 66 (Rule 11T) duly signed and verified by such accountant.

Section 115VX relates to determination of tonnage. The said section provides that tonnage of a ship shall be determined in accordance with the valid certificate indicating its net tonnage. Clause (b) of the section specifies the certificates for the said purpose in respect of the both, i.e., in the case of ships registered in India and those registered outside India.

Section 115VY relates to amalgamation. The said section provides that in case of amalgamation, the provisions relating to the tonnage tax scheme shall, as far as may be, apply to the amalgamated company, if it is a qualifying company. It has also been provided that where the amalgamated company is not a tonnage tax company, it shall exercise an option for tonnage tax scheme under sub-section (1) of section 115VP within six months of the date of the approval of the scheme of amalgamation. It has also been provided that where the amalgamating companies are tonnage tax companies, the provisions of this Chapter shall, as far as may be, apply to the amalgamated company for such period as the option for tonnage tax scheme which has the longest unexpired period continues to be in force. It has also been provided that where one of the amalgamating companies is a qualifying company on the date on 1-10-2004 and which has not exercised option for tonnage tax scheme within the initial period, the provisions of this Chapter shall not apply to the amalgamated company and the income of the amalgamated company from the business of operating qualifying ships shall be computed in accordance with the other provisions of the Income-tax Act.

Section 115VZ relates to demerger. The section provides that in a scheme of demerger, the tonnage tax scheme shall, as far as may be, apply to the resulting company for the unexpired period if it is a qualifying company. It has also been provided that the option for tonnage tax scheme in respect of the demerged company shall remain in force for the unexpired period of the tonnage tax scheme if it continues to be a qualifying company.

Section 115VZA provides that a temporary cessation of operating any qualifying ship by a company shall not be considered as a cessation of operating of such qualifying ship and the company shall be deemed to be operating such qualifying ship for the purposes of this Chapter. It has also been provided that where a company continues to operate a ship which temporarily ceases to be a qualifying ship, such ship shall not be considered as qualifying ship for the purpose of the Chapter.

Section 115VZB relates to avoidance of tax. The said section provides that the tonnage tax scheme shall not apply where a tonnage tax company is a party to any transaction or arrangement which amounts to an abuse of the tonnage tax scheme. Sub-section (2) of the said section specifies that a transaction or arrangement shall be considered as an abuse of the tonnage tax scheme if the entering into or the application of the transaction or arrangement results in a tax advantage being obtained for a person other than a tonnage tax company or a tonnage tax company in respect of its non-tonnage tax activities. The Explanation to the said sub-section defines the expression “tax advantage”.

Section 115VZC relates to exclusion from tonnage tax scheme. Sub-section (1) of the said section provides that where a tonnage tax company is a party to any transaction or arrangement referred to in sub-section (1) of section 115VZA, the Assessing Officer shall, by an order in writing, exclude such company from the tonnage tax scheme after giving an opportunity of being heard to such company. It has also been provided that no order under this sub-section shall be passed without the previous approval of the Chief Commissioner. Sub-section (2) of the said section provides that the section shall not apply where the company shows to the satisfaction of the Assessing Officer that the transaction or arrangement were bona fide commercial transaction and had not been entered into for the purpose of obtaining tax advantage under this Chapter. Sub-section (3) of the said section provides that where an order has been passed under sub-section (1) by the Assessing Officer excluding the tonnage tax company from the tonnage tax scheme the option for tonnage tax scheme shall cease to be in force from the 1st day of April of the previous year in which the transaction or arrangement was entered into and the income from the business of operating ships shall be computed in accordance with the other provisions of this Act. Consequential amendments have also been made to provide for appeal to the Appellate Tribunal against the orders of expulsion in cases of abuse of the scheme.

Section 33AC of the Income-tax Act relating to reserves for shipping business which provides for hundred per cent deduction of the profits derived from the business of operation of ships has also been amended to provide that no deduction shall be allowed under the said section from assessment year 2005-06 onwards.

These amendments take effect from 1-4-2005 and apply in relation to assessment year 2005-06 and subsequent years.

[Sections 9, 30, 53 and 54]

Dematerialisation of TDS and TCS certificates

Under the existing provisions of the Income-tax Act, for the purpose of claiming credit for tax deducted at source or tax collected at source, TDS or TCS certificates, as the case may be, are required to be filed along with the return of income. Returns are deemed to be defective in case they are not accompanied with proof of tax claimed to have been deducted/collected at source.

With a view to computerising the TDS and TCS functions as also enable the process of dematerialisation of TDS and TCS certificates, the Act has incorporated certain amendments in the provisions relating to tax deduction at source and tax collection at source.

Section 199 of the Income-tax Act which provides for credit for tax deducted on production of TDS certificate has been amended to provide that in cases where tax is deducted on or after 1st April, 2005 and is paid to the credit of the Central Government, the amount of tax deducted and specified in the statement referred to in section 203AA shall be treated as tax paid on behalf of the persons from whose income-tax has been deducted or in respect of whose income the tax has been paid and credit shall be given to such persons for the amounts so deducted in the assessment made for the assessment year for which the income is assessable without the production of a certificate. Similar amendments have also been made in sub-section (4) of section 206C. Consequently, section 139(9) has also been amended to provide that returns will not be deemed to be defective if they are not accompanied by a TDS certificate in respect of tax claimed to have been deducted at source on or after 1st April, 2005.

Section 200 relating to duty of person deducting tax has also been amended by way of insertion of a new sub-section (3) to provide that any person deducting any sum on or after 1st April, 2005 or any person being an employer referred to in sub-section (1A) of section 192 shall be required to prepare quarterly statements for the period ending on the 30th June, the 30th September, the 31st December and the 31st March in each financial year and deliver or cause to be delivered such statement in such form and verified in such manner and setting forth such particulars and within such time as may be prescribed to the prescribed income-tax authority or the person authorized by such authority (Rule 31A). In respect of cases of tax collection at source, similar amendments have been made in sub-section (3) of section 206C. Further, sub-section (2) of section 272A relating to penalty for failure to answer questions, sign statements, furnish information, returns or statements, allow inspection, etc. has also been amended by way of insertion of a new clause (k) to provide for a penalty of hundred rupees for every day for failure to deliver or cause to be delivered the quarterly statements.

Section 203 relating to certificate for tax deducted has also been amended to provide that there shall be no requirement to furnish a certificate referred to in the said section where the tax has been deducted or paid on or after 1st April, 2005. Similar amendments have also been made in sub-section (5) of section 206C by way of insertion of the first proviso.

A new section 203AA relating to furnishing of statement of tax deducted has been inserted in the Income-tax Act to provide that the prescribed income-tax authority or the person authorized by such authority to whom the quarterly statements shall be delivered, shall, within the prescribed time after the end of each financial year beginning on or after 1st April, 2005 prepare and deliver to every person from whose income-tax has been deducted or in respect of whose income-tax has been paid, a statement in the prescribed form specifying the amount of tax deducted or paid and such other particulars as may be prescribed (Rule 31AB). Similar amendments have also been made in sub-section (5) of section 206C by way of insertion of the second proviso.

All assessees, including non-residents, will be required to intimate the permanent account number to the person deducting or collecting tax in the absence of which credit for TDS or TCS cannot be given. Hence, the first proviso to sub-section (5A) of section 139A not requiring quoting of PAN by non-residents, has been omitted.

Section 272B relating to penalty for failure to comply with the provisions of section 139A has been amended so as to provide for a penalty of a sum of ten thousand rupees in case a person who is required to intimate his permanent account number as required by sub-section (5C) intimates a number which is false and which he either knows or believes to be false or does not believe to be true.

These amendments take effect from 1st April, 2005.

[Sections 32, 33(a), 42(b), 44(b ), 46, 50, 57 and 56]

Measures to provide for prosecution in case of falsification of books of account or documents etc.

Under the existing provisions of section 278 a person can be punished for abetting or inducing any other person to evade tax. To establish a charge of abetment in the case of first person it is necessary to establish that tax has been evaded by the other person.

Provisions of section 278 do not provide adequate deterrence against making false entries in books of account or documents by a person enabling another person to evade tax, when in fact there is no underlying transaction. Many a times, even the confession made by a person that he has made false entries in books of account or documents to enable the other person to evade tax is not held to be sufficient evidence to substantiate tax evasion by such other person.

Finance (No. 2) Act, 2004 has inserted a new section 277A providing that a person who wilfully and with intent to enable any other person to evade any tax or interest or penalty chargeable or imposable under the Income-tax Act, 1961, makes or causes to be made any entry or statement which is false and which the other person either knows to be false, or does not believe to be true, in any books of account or other document then such person shall be punished with rigorous imprisonment for a term not less than three months but which may extend to three years and with fine.

It has been clarified in the Explanation to the said section that to establish charge under this section it shall not be necessary to prove that the second person has actually evaded any tax, penalty or interest chargeable or imposable under the Act.

Reference of the said section has been made in section 279 of the Income-tax Act, 1961, relating to prosecution to be at the instance of the Chief Commissioner or Commissioner of Income-tax.

This amendment takes effect from 1st October, 2004. [Sections 60, 62]

Rationalisation of provisions relating to offences by a company

The existing provisions of section 278B provide that where an offence has been committed by a company, the company as well as the person who was in charge of, and was responsible for the conduct of the business of the company at the time when the offence was committed will be deemed to be guilty of the offence. The said section also provides that where the offence has been committed with the consent or connivance of any director, manager, secretary or other officer of the company, such director or other officer shall also be deemed to be guilty of the offence.

In respect of some of the offences [wilful attempt to evade tax (section 276C), false statement in verification (section 277), failure to deposit tax deducted at source with the Government (section 276B), etc.] it has been provided that the person found guilty shall be punishable with rigorous imprisonment and with fine. There has been a judicial controversy as to whether a company, being a juristic person, can be punished with imprisonment where the statute refers to punishment of imprisonment and fine. In the case of M/s. M.V. Javali v. Mahajan Borewell & Co. [1998] 230 ITR 1, the Hon’ble Supreme Court held that on a harmonious interpretation of section 276B read with section 278B, a company, which cannot be punished with imprisonment can be punished with fine only. However, in a subsequent decision by majority in the case of ACIT v. Velliappa Textiles Ltd. 263 ITR 550, dated 16-9-2003, the Apex Court dissented with its earlier judgment, observing that a penal statute needs to be construed strictly, and it is for the legislature and not for the Courts to plug the loopholes. The Hon’ble Court observed that each of the sections 276C, 277 and 278, read with section 278B, requires the imposition of a mandatory term of imprisonment coupled with a fine and leaves no choice to the Court to impose only a fine. The Court held that since it is difficult to impose punishment of fine in lieu of imprisonment on a company, the prosecution against the company cannot be sustained.

In order to plug the loopholes pointed out by the Hon’ble Supreme Court in the case of ACIT v. Velliappa Textiles Ltd. (supra), a new sub-section (3) has been inserted in section 278B by the Finance (No. 2) Act, 2004, so as to provide that if an offence under the Act has been committed by a person being the company, and the punishment for such offence is imprisonment and fine, then, such company shall be punished with fine and any other person who was in-charge and was responsible for the conduct of business of the company, or any director, manager, secretary or other officer of the company shall be liable for punishment of imprisonment and fine, wherever so provided. (It may be relevant to mention here that the Hon’ble Supreme Court in the case of Standard Chartered Bank v. Directorate of Enforcement and Other Appeals and a Writ petition [275 ITR 81, 5th May, 2005] has overruled its decision in the case of ACIT v. Velliappa Textiles [supra].

Section 35HA of the Wealth-tax Act has also been similarly amended.

This amendment takes effect from 1st October, 2004.

[Section 61]

Modification of the provisions for filing of annual information return

Under the existing provisions of the section 285BA as inserted by the Finance Act, 2003 any assessee who enters into any financial transaction, as may be prescribed, with any other person is required to furnish an annual information return in such form and manner, as may be prescribed, in respect of such financial transactions entered into by him during any previous year.

With a view to gather information from Government agencies and other authorities who are valuable sources of information, the Finance (No. 2) Act, 2004, has substituted the said section by a new section. The substituted section 285BA provides that an assessee or certain agencies responsible for registering or maintaining books of account or other documents containing a record of any specified financial transaction, under any law for the time being in force, shall furnish an annual information return in respect of such specified financial transaction as may be prescribed by the Board. The return shall be furnished in respect of transactions registered or recorded on or after the 1st day of April, 2004.

Sub-section (2) of the said section provides that the annual information return shall be furnished within the prescribed time after the end of such financial year and in such form and manner as may be prescribed.

Sub-section (3) of the said section defines the “specified financial transaction” to mean any transaction of purchase, sale or exchange of goods or property or right or interest in a property or transaction for rendering any service or transaction under a works contract or transaction by way of an investment made or expenditure incurred or a transaction for taking or accepting any loan or deposit as may be prescribed.

It has also been provided that the Board may prescribe different monetary values for different transactions in respect of different persons. The said sub-section further provides that the value or the aggregate value of such transactions during a financial year so prescribed shall not be less than fifty thousand rupees.

Sub-section (5) of the said section provides that the where any person who is require to furnish an annual information return has not furnished the same within the prescribed time, the prescribed Income-tax authority may serve upon such person a notice requiring him to furnish such return within a period not exceeding sixty days from the date of service of such notice.

Vide Notification S.O. No. 1316(E), dated 1-12-2004, a new section 114E relating to furnishing of Annual Information Return has been prescribed. The form and manner in which the annual information return shall be furnished has been prescribed in the said rule. Further, it has also been prescribed in the said rule that every person mentioned in column (2) of the Table below shall furnish an Annual Information Return in respect of transactions specified in the corresponding entry of column (3) of the said table.

TABLE

Sl. No.
Class of person
Nature and value of transaction
(1)
(2)
(3)
1.
A Banking company to which the Banking Regulation Act, 1949 (10 of 1949), applies (including any bank or banking institution referred to in section 51 of that Act).
Cash deposits aggregating to ten lakh rupees or more in a year in any savings account of a person maintained in that bank.
2.
A Banking company to which the Banking Regulation Act, 1949 (10 of 1949), applies (including any bank or banking institution referred to in section 51 of that Act) or any other company or institution issuing credit card.
Payments made by any person against bills raised in respect of a credit card issued to that person, aggregating to two lakh rupees or more in the year.
3.
A trustee of a Mutual Fund or such other person managing the affairs of the Mutual Fund as may be duly authorised by the trustee in this behalf.
Receipt from any person of an amount of two lakh rupees or more for acquiring units of that Fund.
4.
A company or institution issuing bonds or debentures.
Receipt from any person of an amount of five lakh rupees or more for acquiring bonds or debentures issued by the company or institution.
5.
A company issuing shares through a public or rights issue.
Receipt from any person of an amount of one lakh rupees or more for acquiring shares issued by the company.
6.
Registrar or Sub-Registrar appointed under section 6 of the Registration Act, 1908.
Purchase or sale by any person of immovable property valued at thirty lakh rupees or more.
7.
A person being an officer of the Reserve Bank of India, constituted under section 3 of the Reserve Bank of India Act, 1934, who is duly authorized by the Reserve Bank of India in this behalf.
Receipt from any person of an amount or amounts aggregating to five lakh rupees or more in a year for bonds issued by the Reserve Bank of India.

It has also been provided in the said rule that Annual Information Return shall be furnished on or before 31st August immediately following the financial year in which transaction is registered or recorded.

Finance (No. 2) Act, 2004 has inserted a new section 271FA providing for penalty for failure to furnish the annual information return. The said section provides that where any person who is required to furnish the annual information return fails to furnish the same within the prescribed time, the prescribed income-tax authority may direct that such person shall pay by way of penalty a sum of one hundred rupees for every day during which the failure continues.

Reference of the newly inserted section 271FA has been made in section 273B of the Income-tax Act, 1961, relating to penalty not to be imposed where assessee proves that there was reasonable cause for the failure.

[Sections 55, 59, 63]

New provisions for levy of Securities Transaction Tax

Chapter VII of the Finance (No. 2) Act, 2004 contains provisions relating to Securities Transaction Tax. It provides, inter alia, that the provisions of the Chapter shall come into force on such date as may be notified by the Central Government in the Official Gazette. Accordingly, the Central Government has notified the 1st day of October, 2004 as the date of commencement, vide notification S.O. No. 1058(E) dated 28th September, 2004.

This Chapter provides that Securities Transaction Tax shall be charged in respect of the following transactions at the rates as under:—

  (i)  @ 0.075% on the value of transactions of delivery-based purchase of an equity share in a company or a unit of an equity oriented fund, entered in a recognised stock exchange, to be paid by the buyer,

 (ii)  @ 0.075% on the value of transactions of delivery-based sale of an equity share in a company or a unit of an equity oriented fund, entered in a recognised stock exchange, to be paid by the seller,

(iii)  @ 0.015% on the value of transactions of non-delivery based sale of an equity share in a company or a unit of an equity oriented fund, entered in a recognised stock exchange to be paid by the seller,

 (iv)  @ 0.01%, on the value of transactions of derivatives entered in a recognised stock exchange to be paid by the seller,

  (v)  @ 0.15% on the value of transactions of sale of units of an equity oriented fund to the mutual fund to be paid by the seller.

“Equity oriented fund” has been defined to mean a fund where the investible funds are invested by way of equity shares in domestic companies to the extent of more than 50% of the total proceeds of such funds and which has been set up under a scheme of a mutual fund. It has been provided that the percentage of equity shareholding of the fund shall be computed with reference to the annual average of the monthly averages of the opening and closing figures.

It has been provided in the said Chapter that the Board may specify by rules the method of determining the value of taxable securities transaction.

Securities Transaction Tax Rules, 2004, notified by the Central Government vide notification S.O. No. 1059(E) dated 28th September, 2004, lay down the method for determining the price in respect of transactions of purchase and sale of equity shares and units in three modes of settlement, i.e., netted settlement mode, trade to trade settlement mode and auction settlement mode in a recognized stock exchange.

Section 100 of Chapter VII of Finance (No. 2) Act, 2004, provides that every recognised stock exchange and the prescribed person in case of every mutual fund shall collect the securities transaction tax. These persons are required to pay the same to the credit of the Central Government by the seventh day of the month immediately following the calendar month in which tax is collected.

Section 101 of the said Chapter provides that the recognised stock exchange on the prescribed person in case of the mutual fund shall within the prescribed time, furnish a return in such form and verified in such manner as may be prescribed by the Board, in respect of all taxable securities transactions entered into during any financial year.

In respect of mutual fund, it has been provided in the rules that the trustee of the mutual fund or such other person managing the affairs of the mutual fund as may be duly authorised by the trustee in this behalf shall be responsible for collection and payment of securities transaction tax.

It has been provided in the rules that the return of taxable securities transaction shall be furnished by the recognised stock exchange in Form No. STTS-1 and by the mutual fund in Form No. STTS-2. The format of the Form No. STTS-1 and Form No. STTS-2 has also been prescribed. The return of taxable securities transaction entered into during a financial year shall be furnished on or before 30th June of the financial year immediately following the financial year in relation to which taxable securities transactions are to be reported.

The following persons shall be required to sign the return—

  (i)  in case of a corporate recognized stock exchange, the managing director or a director,

 (ii)  in case of any other recognized stock exchange, the principal officer thereof,

(iii)  in case of a mutual fund, the trustee or such other person managing the affairs of the mutual fund as may be duly authorised by the trustee.

It has been provided that in cases where the return of taxable securities transaction has not been filed in time by any assessee, the Assessing Officer may issue a notice to such assessee requiring him to furnish the return within thirty days of date of service of notice.

Section 102 of the said Chapter provides that the Assessing Officer shall make an assessment of the value of taxable securities transactions made during any relevant financial year and determine the amount of securities transaction tax payable or refundable on the basis of the return filed by the assessee and on the basis of such accounts or documents or other evidence as may be submitted by the assessee.

Forms of notice of demand have been prescribed in the Securities Transaction Tax Rules, 2004.

In sub-section (3) of section 102, it has been provided that in case any amount is refunded on assessment to the assessee, then the assessee shall within the time prescribed refund the same to the concerned person from whom the amount was collected.

It has been provided in the rules that such amount shall be refunded by the assessee to the persons from whom it was collected within thirty days of receipt of same from the Government.

Section 103 relates to rectification of mistakes apparent from the record, by the Assessing Officer in any order passed by him.

Section 104 provides for charging of simple interest @ one per cent per month of delay in paying the securities transaction tax to the account of the Government within specified time.

Sections 105 to 108 relates to levy of penalty for certain failures.

Section 110 provides for filing of appeal to the Commissioner of Income-tax (Appeals), in such form and verified in such manner as may be prescribed by the Board, in cases where the assessee is aggrieved by any assessment order/rectification order passed by the Assessing Officer.

Section 111 provides for filing of appeal to the Appellate Tribunal in such form and verified in such manner as may be prescribed by the Board, in cases where the assessee is aggrieved by any order passed by the Commissioner of Income-tax (Appeals).

Forms for filing of appeal to the Commissioner of Income-tax (Appeals) and Income-tax Appellate Tribunal have been prescribed in the Rules.

Section 109 of the said Chapter provides that sections 120, 131, 133A, 156, 178, 220 to 227, 229, 232, 260A, 261, 262, 265 to 269, 278B, 282 and 288 to 293 of the Income-tax Act, 1961, shall apply in relation to the Securities Transaction Tax as they apply in relation to income-tax.

Consequent upon the levy of Securities Transaction Tax, the following amendments have been brought in the Income-tax Act.

  (i)  A new clause (38) has been inserted in section 10 providing for exemption for income from the long term capital gains arising out of transfer of an equity share in company, or unit of an equity oriented fund, where such transfer takes place on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force and such transaction is chargeable to Securities Transaction Tax under the said Chapter.

 (ii)  A new section 111A has been inserted so as to provide that short term capital gains arising out of transfer of an equity share in a company, or unit of an equity oriented fund, where such transfer takes place on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force and such transaction is chargeable to Securities Transaction Tax under the said Chapter, shall be charged at the rate of 10%.

(iii)  Section 115AD of the Income-tax Act, 1961, relates to tax on income of Foreign Institutional Investors from securities or capital gains arising from their transfer. Section 115AD has been amended so as to provide that income by way of short term capital gains referred to in the newly inserted section 111A shall be charged at the rate of 10%.

 (iv)  A new proviso has been inserted in section 48 providing that any sum paid on account of securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004, shall not be allowed as a deduction for the purposes of computing the income chargeable under the head “Capital gains”.

  (v)  A new section 88E has been inserted providing that where the total income of the assessee in a previous year includes any income chargeable under the head “Profits and gains of business or profession” arising from transactions chargeable to securities transaction tax, he shall be allowed a deduction of an amount equal to the securities transaction tax paid by him in respect of transactions chargeable to securities transaction tax entered into in the course of his business during that previous year, from the amount of income-tax on such income arising from such transactions.

        It has further been provided that no deduction under this section shall be allowed unless the assessee furnishes along with the return of income, evidence of payment of STT in the prescribed form. Rule 20AB has prescribed that evidence of payment of securities transaction tax on transactions entered in a recognized stock exchange shall be furnished in Form No. 10DB and evidence of payment of securities transaction tax on transactions of sale of unit of equity oriented fund to the mutual fund shall be furnished in Form No. 10DC.

 (vi)  A new sub-clause (ib) has been inserted in clause (a) of section 40 providing that any sum paid on account of securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004, shall not be allowed as a deduction for the purposes of computing the income chargeable under the head “Profits and gains of business or profession”.

[Chapter VII, sections 5(h ), 11, 12, 23, 26, 27]

[Chapter VII, sections 5(h ), 11, 12, 23, 26, 27]

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