Circular

Finance Act, 2006

Finance Act, 2006 – Explanatory Notes on provisions relating to Direct Taxes

Circular No. 14/2006, Dated 28-12-2006

1. Introduction

1.1 The Finance Act, 2006 (hereafter referred to as the Act) as passed by the Parliament, received the assent of the President on the 18-4-2006 and has been enacted as Act No. 21 of 2006. This circular explains the substance of the provisions of the Act relating to direct taxes.

2. Changes made by the Finance Act, 2006

2.1 The Finance Act, 2006 (hereinafter referred to as the Act), has,

   (i)  specified the rates of income-tax for the assessment year 2006-07 and the rates of income-tax on the basis of which tax has to be deducted and advance tax has to be paid during financial Year 2006-07;

  (ii)  amended sections 2, 10, 10B, 13, 14A, 17, 36, 40, 43, 43B, 54EC, 54ED, 80C, 80CCC, 80-IA, 80P, 92C, 115JAA, 115JB, 115-O, 115R, 115T, 115WB, 115WC, 120, 139, 139A, 140A, 142, 148, 153, 153B, 155, 194A, 199, 201, 203, 203A, 203AA, 206, 206C, 234A, 234B, 234C, 246A, 272A, 272BB, 273B, of the Income-tax Act, 1961;

(iii)  inserted new sections 80AC, 90A, 115BBC, 139B, 271CA in the Income-tax Act, 1961;

(iv)  amended rule 3 and rule 4 of Part A of the Fourth Schedule to the Income-tax Act, 1961;

  (v)  amended section 97 of the Finance (No. 2) Act, 2004;

(vi)  amended section 17A of the Wealth-tax Act, 1957.

(vii)  increased the rates for levy of securities transaction tax in Chapter VII of the Finance (No. 2) Act, 2004.

3. Rate structure

3.1 Rates of income-tax in respect of incomes liable to tax for the assessment year 2006-07

3.1-1 In respect of income of all categories of taxpayers liable to tax for the assessment year 2006-07, the rates of income-tax have been specified in Part I of the First Schedule to the Act. The rates specified in Part I of the First Schedule to the Act are the same as those laid down in Part III of the First Schedule to the Finance Act, 2005 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 2005-06.

3.1-2 The salient features of the rates specified in the said Part I are indicated in the following paragraphs:

3.1-3 Individual, Hindu undivided family, association of persons, body of individuals or artificial juridical person.

Paragraph A of Part I of the First Schedule specifies the rates of income-tax in the case of every individual, Hindu undivided family, association of persons, body of individuals or artificial juridical person (other than a cooperative society, firm, local authority and company) as under:

Income chargeable to tax Rate
Individual (other than individual women resident in India and senior citizens resident in India), HUF, association of persons, body of individuals and artificial juridical person Individual woman, resi- dent in India and below the age of sixty- five years Individual senior citizen, resident in India, who is of the age of 65 years or more
Upto Rs. 1,00,000 Nil
  Nil
Rs. 1,00,001 – Rs. 1,35,000
10% Nil
Rs. 1,35,001 – Rs. 1,50,000 10%
Rs. 1,50,001 – Rs. 1,85,000
20% 20%
Rs. 1,85,001 – Rs. 2,50,000 20%
Exceeding Rs. 2,50,000 30% 30% 30%

3.1-4 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, as reduced by rebate under Chapter VIII-A, in the case of every individual, Hindu undivided family, association of persons or body of individuals having total income exceeding Rs. 10,00,000. No surcharge would be payable by persons having incomes of Rs. 10,00,000 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. 10,00,000 is limited to the amount by which the income is more than Rs. 10,00,000. For instance, the amount of tax and surcharge on a total income of Rs. 10,20,000 calculated at the rates specified would have been Rs. 2,56,000 and Rs. 25,600 totalling to Rs. 2,81,600. The additional tax liability, as per this computation, incurred as compared to a person having a total income of Rs. 10,00,000 is Rs. 31,600. However, additional income as compared to a person having a total income of Rs. 10,00,000 is only Rs. 20,000. Therefore, a marginal relief is given to the extent of Rs. 11,600 in this case thereby providing that the additional tax liability cannot be more than the additional income. The total tax liability in this case will, therefore, be Rs. 2,70,000 instead of Rs. 2,81,000.

3.1-5 In the case of an artificial juridical person, surcharge would be levied at ten per cent of the income-tax payable on all levels of income.

3.1-6 EDUCATION CESS – An additional surcharge called the Education Cess on Income-tax is to be levied at the rate of two per cent on the amount of tax computed, inclusive of surcharge, in all cases. For instance, if the income-tax computed is Rs. 1,00,000 and the surcharge is Rs. 10,000, then the education cess of two per cent is to be computed on Rs. 1,10,000 which works out to be Rs. 2,200. No marginal relief shall be available in respect of the Education Cess.

3.1-7 CO-OPERATIVE SOCIETIES – In the case of every co-operative society, the rates of income-tax have been specified in Paragraph B of Part I of the First Schedule to the Act as under

Income chargeable to tax Rate
Up to Rs. 10,000 10%
Rs. 10,001 – Rs. 20,000 20%
Exceeding Rs. 20,000 30%

No surcharge shall be levied. Education Cess is to be levied at the rate of two per cent on the amount of tax computed.

3.1-8 FIRMS – In the case of every firm, the rate of income-tax of thirty per cent has been specified in Paragraph C of Part I of the First Schedule to the Act. Surcharge at the rate of ten per cent shall be levied. Education Cess is to be levied at the rate of two per cent on the amount of tax computed.

3.1-9 LOCAL AUTHORITIES – In the case of every local authority, the rate of income-tax has been specified at thirty per cent in Paragraph D of Part I of the First Schedule to the Act. No surcharge shall be levied. Education Cess is to be levied at the rate of two per cent on the amount of tax computed.

3.1-10 COMPANIES – In the case of a company, the rate of income-tax has been specified in Paragraph E of Part I of the First Schedule to the Act. In case of a domestic company, the rate of income-tax is thirty per cent of the total income. The tax computed shall be enhanced by a surcharge of ten per cent. Education Cess is to be levied at the rate of two per cent on the amount of tax computed, inclusive of surcharge.

In the case of a company other than a domestic company, royalties received from Government or Indian concern under an approved agreement made after 31-3-1961, but before 1-4-1976 is taxed at fifty per cent. Similarly, fees for technical services received by such company from Government or Indian concern under an approved agreement made after 29-2-1964, but before 1-4-1976, is taxed at fifty per cent. On the balance of the total income of such company, the tax rate is forty per cent. The tax computed shall be enhanced by a surcharge of two and one-half per cent. Education Cess is to be levied at the rate of two per cent on the amount of tax computed, inclusive of surcharge.

3.2 Rates for deduction of income-tax at source from certain incomes during the financial year 2006-07

3.2-1 In every case in which under the provisions of sections 193, 194, 194A, 194B, 194BB, 194D and 195 of the Income-tax Act, tax is to be deducted at the rates in force, the rates for deduction of income-tax at source during the financial year 2006-07 have been specified in Part II of the First Schedule to the Act.

3.2-2 In the case of a non-resident (not being a company), the rate of deduction of tax at source during the financial year 2006-07 from income by way of royalties or fees from technical services received from the Government or an Indian concern in pursuance of an agreement entered into by it with the Government or Indian concern after the 31-5-1997 but before the 1-6-2005 shall be twenty per cent and in pursuance of an agreement made on or after the 1-6-2005, shall be 10 per cent. In the case of all non-residents, the rate of deduction of tax at source during the financial year 2006-07 from income by way of short-term capital gains referred to in section 111A shall be ten per cent.

3.2-3 In all other cases to which this Part applies; rates for deduction of income-tax at source during the financial year 2006-07 will continue to be the same as those specified in Part II of the First Schedule to the Finance Act, 2005.

3.2-4 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 and subject to deduction exceeds Rs. 10,00,000;

  (ii)  in the case of every firm, artificial juridical person and domestic company at the rate of ten per cent of such tax;

(iii)  in the case of every company other than a domestic company, at the rate of two and one-half per cent of such tax.

3.2-5 No surcharge is to be levied on the amount of income-tax deducted in the case of a co-operative society and local authority.

3.2-6 EDUCATION CESS – An additional surcharge called the Education Cess on Income-tax is to be levied at the rate of two per cent, in all cases on the amount of tax deducted, inclusive of surcharge, if any. For instance, if the income-tax computed is Rs. 1,00,000 and the surcharge is Rs. 10,000, then the education cess of two per cent is to be computed on Rs. 1,10,000 which works out to be Rs. 2,200.

3.3 Rates for deduction of income-tax at source from Salaries, computation of advance tax and charging of Income-tax in certain cases during the financial year 2006-07.

3.3-1 The rates for deduction of income-tax at source from Salaries during the financial year 2006-07 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. The rates are the same as those laid down in Part I of the First Schedule to the Act for the assessment year 2006-07. These rates are also applicable for charging income-tax during the financial year 2006-07 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. The rates are as follows:

3.3-2 Individual, Hindu undivided family, association of persons, body of individuals or artificial juridical person

Paragraph A of Part III of the First Schedule specifies the rates of income-tax in the case of every individual, Hindu undivided family, association of persons, body of individuals or artificial juridical person (other than a co-operative society, firm, local authority and company). The rates are as follows:

Income chargeable to tax Rate
Individual (other than individual women resident in India and senior citizens resident in India), HUF, association of persons, body of individuals and artificial juridical person Individual woman, resident in India and below the age of sixty- five years Individual senior citizen, resident in India, who is of the age of 65 years or more
Up to Rs. 1,00,000 Nil
  Nil
Rs. 1,00,001 – Rs. 1,35,000 10% Nil
Rs. 1,35,001 – Rs. 1,50,000 10%
Rs. 1,50,001 – Rs. 1,85,000 20% 20%
Rs. 1,85,001 – Rs. 2,50,000 20%
Exceeding Rs. 2,50,000 30% 30% 30%

3.3-3 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, as reduced by rebate under Chapter VIII-A, in the case of every individual, Hindu undivided family, association of persons or body of individuals having total income exceeding Rs. 10,00,000. No surcharge would be payable by persons having incomes of Rs. 10,00,000 or below. As illustrated in para 3.1.4, marginal relief would be provided to ensure that the additional amount of income-tax payable, including surcharge, on the excess of income over Rs. 10,00,000 is limited to the amount by which the income is more than Rs. 10,00,000.

3.3-4 In the case of artificial juridical person, surcharge would be levied at ten per cent of the income-tax payable on all levels of income.

3.3-5 EDUCATION CESS – An additional surcharge called the Education Cess on Income-tax is to be levied at the rate of two per cent on the amount of tax computed, inclusive of surcharge, in all cases. The numerical illustration for the computation of Education Cess is given in para 3.1-6. No marginal relief shall be available in respect of the Education Cess.

3.3-6 CO-OPERATIVE SOCIETIES – In the case of every co-operative society, the rates of income-tax have been specified in Paragraph B of Part III of the First Schedule to the Act. The rates are the same as that specified in the corresponding Paragraph of Part I of the First Schedule to the Act and are as follows

Income chargeable to tax Rate
Up to Rs. 10,000 10%
Rs. 10,001 – Rs. 20,000 20%
Exceeding Rs. 20,000 30%

No surcharge shall be levied. Education Cess is to be levied at the rate of two per cent.

3.3-7 FIRMS – In the case of every firm, the rate of income-tax of thirty per cent has been specified in Paragraph C of Part III of the First Schedule to the Act. Surcharge at the rate of ten per cent shall continue to be levied. Education Cess is to be levied at the rate of two per cent.

3.3-8 LOCAL AUTHORITIES – In the case of every local authority, the rate of income-tax has been specified as thirty per cent 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. No surcharge shall be levied. Education Cess is to be levied at the rate of two per cent.

3.3-9 COMPANIES – In the case of a company, the rate of income-tax has been specified in Paragraph E 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 of the Act and shall continue to be the same as specified for assessment year 2006-07.

In case of a domestic company, the rate of income-tax is thirty per cent of the total income. The tax computed shall be enhanced by a surcharge of ten per cent. Education Cess is to be levied at the rate of two per cent on the amount of tax computed, inclusive of surcharge.

In the case of a company other than a domestic company, royalty received from Government or Indian concern under an approved agreement made after 31-3-1961, but before 1-4-1976 is taxed at fifty per cent. Similarly, in the case of fees for technical services received by such company from Government or Indian concern under an approved agreement made after 29-2-1964, but before 1-4-1976, is taxed at fifty per cent. On the balance of the total income of such company, the tax rate is forty per cent. The tax computed shall be enhanced by a surcharge of two and one-half per cent. Education Cess is to be levied at the rate of two per cent on the amount of tax computed, inclusive of surcharge.

[Section 2 and First Schedule]

4. Exemption on aircraft lease rentals extended

4.1 Under 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 the Government of a foreign State or a foreign enterprise under an agreement approved by the Central Government is exempt. This exemption is available subject to the condition that the agreement under which the payment is made is entered into on or before 31-3-2006.

4.2 Further, under clause (6BB) of section 10, any tax payable by the Indian company on behalf of the Government of a foreign State or a foreign enterprise in respect of such lease payments is exempt where the payment is under an agreement entered into on or after 1-4-2006.

4.3 Clause (15A) of section 10 has been amended so as to continue to provide the above-mentioned exemption for lease payments made in pursuance of agreements entered into on or before 31-3-2007. Concomitantly, clause (6BB) of section 10 has been amended to provide the benefit of exemption from grossing up of tax in respect of lease payments made in pursuance of agreements entered into on or after 1-4-2007.

4.4 Applicability – From assessment year 2007-08 onwards.

[Section 4]

5. Exemption of the Constituency Allowances of MLAs

5.1 Under the provisions of section 10(17), the following income is exempt from income-tax:

   (i)  Daily allowance received by a Member of Parliament or Member of Legislative Assembly or a Member of any Committee of the Parliament or State Legislature.

  (ii)  Any Constituency Allowance received by a Member of Parliament.

(iii)  All other notified allowances up to Rs. 2,000 per month in the aggregate received by a Member of a Legislative Assembly or a Member of any Committee of the State Legislature.

5.2 With a view to bringing uniformity in the tax treatment of allowances received by MPs and MLAs, sub-clause (iii) of clause (17) of section 10 has been substituted to provide that any constituency allowance received by any Member of a State Legislative Assembly under any Act or rules made by the State Legislature will be exempt from tax. Accordingly, as in the case of Members of Parliament, all other allowances, besides daily allowance and constituency allowance, received by a member of a State Legislature will be taxable.

5.3 This amendment will take effect from assessment year 2007-08 onwards.

[Section 4]

6. Providing a time limit for grant/continuance of exemption for certain charitable and religious trusts and institutions and certain educational and medical institutions.

6.1 Under the provisions of section 10(23C)(iv), (v), (vi) and (via), a fund, trust or institution or university or other educational institution or hospital or other medical institution is required to make an application for grant of exemption under the said clauses to the prescribed authority.

6.2 A new proviso has been inserted in section 10(23C) to provide that such application made on or after 1-6-2006 shall be made at any time during the financial year immediately preceding the assessment year from which the exemption is sought.

6.3 Applicability – Assessment year 2007-08 onwards.

[Section 4]

7. Removal of exemption for certain income of Investor Protection Fund

7.1 Under the provisions of section 10(23EA), any income of an Investor Protection Fund set up by recognized stock exchanges in India, either jointly or separately and notified by the Central Government in the Official Gazette, is exempt from income-tax.

7.2 The section has been amended to provide that any income of such Investor Protection Fund by way of contributions received from recognized stock exchanges and the members thereof, alone, will be tax-exempt. All other income of the Fund will be taxable.

7.3 Applicability – Assessment year 2007-08 onwards.

[Section 4]

8. Removal of exemption of income from investment in infrastructure and other projects under section 10(23G)

8.1 Under the provisions of section 10(23G), 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 on or after 1-6-1998, by way of shares or long-term finance in any enterprise or undertaking engaged in an approved eligible business, is exempt from tax. The eligible business are those referred to in section 80-IA(4), section 80-IAB(3), a housing project referred to in section 80-IB(10), a hotel project or a hospital project.

8.2 Section 10(23G) has been omitted from the Act, as a result of which income from existing as well as future investments in any eligible business will be taxable.

8.3 Consequential amendments have been made in section 115-O to omit references to section 10(23G).

8.4 Applicability – Assessment year 2007-08 onwards.

[Sections 4 and 25]

9. Exemption of specified income of certain bodies or authorities

9.1 With a view to exempting certain notified bodies or authorities that satisfy certain prescribed criteria, a new clause (42) has been inserted in section 10 of the Act. This clause provides for tax exemption to any specified income arising to a notified non-profit body or authority which has been established, constituted or appointed under a treaty or agreement entered into by the Central Government with two or more countries or a convention signed by the Central Government. It has also been clarified by way of an Explanation therein that the specified income will be such income arising to the body or authority, the nature and extent of which is notified by the Central Government.

9.2 This amendment takes effect retrospectively from 1-4-2006 and applies in relation to the assessment year 2006-07 and subsequent years.

[Section 4]

10. Benefits of certain deductions not to be allowed in cases where return is not filed within the specified time limit

10.1 Section 139(1) casts an obligation on every assessee to furnish the return of income by the due date. With a view to enforce the compliance in this regard by the assessees who are entitled for deduction under section 10B from their income, a proviso (fourth proviso) to sub-section (1) of section 10B has been inserted so as to provide that no deduction under section 10B shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified in sub-section (1) of section 139. Similarly, with a view to enforce the compliance for furnishing the return of income by the due date by the assessees who are entitled for deductions under section 80-IA or section 80-IAB or section 80-IB or section 80-IC from their income, a new section 80AC has been inserted so as to provide that no deduction under section 80-IA or section 80-IAB or section 80-IB or section 80-IC shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified in sub-section (1) of section 139.

10.2 This amendment takes effect retrospectively from 1-4-2006 and applies in relation to the assessment year 2006-07 and subsequent years.

[Sections 5 and 15]

11. Method for allocating expenditure in relation to exempt income

11.1 Section 14A of the Income-tax Act, 1961, provides that for the purposes of computing the total income under Chapter-IV of the said Act, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Income-tax Act. In the existing provisions of section 14A, however, no method of computing the expenditure incurred in relation to income which does not form part of the total income has been provided for. Consequently, there is considerable dispute between the taxpayers and the Department on the method of determining such expenditure.

11.2 In view of the above, a new sub-section (2) has been inserted in section 14A so as to provide that it would be mandatory for the Assessing Officer to determine the amount of expenditure incurred in relation to such income which does not form part of the total income in accordance with such method as may be prescribed. However, the Assessing Officer shall follow the prescribed method if, having regard to the accounts of the assessee, he is not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to income which does not form part of the total income. Provisions of sub-section (2), will also be applicable in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income.

11.3 Applicability – From assessment year 2007-08 onwards.

[Section 7]

12. Rationalisation of provisions relating to deduction of health insurance premium paid by the employer and exempt status of such payments in the hands of employees

12.1 Any salary due or paid or allowed to an employee by the employer is chargeable to tax under the head salaries. The term salary has been defined in section 17 which, inter alia, includes wages, pension, perquisites or profits in lieu of or in addition to salary. However, clause (iii) of the proviso to clause (2) of section 17, exempts any premium paid by an employer to effect or to keep in force an insurance on the health of such an employee, from the purview of perquisite, provided it is in accordance with the scheme approved by the Central Government for the purposes of section 36(1)(ib). Section 36(1)(ib) refers to a scheme framed by the General Insurance Corporation under section 9 of the General Insurance Business (Nationalisation) Act, 1972 and approved by the Central Government.

12.2 Clause (iv) of the proviso to clause (2) of section 17 similarly exempts reimbursement of medical insurance premium of employees provided it is in accordance with the scheme approved by the Central Government for the purposes of section 80D. Section 80D, as amended by the Finance Act, 2001, provides that the scheme should be either a scheme framed by the General Insurance Corporation under the General Insurance Business (Nationalisation) Act, 1972 or it should be in accordance with the scheme framed by any other insurer which is approved by the Insurance Regulatory Development Authority under the Insurance Regulatory and Development Authority Act, 1999.

12.3 Section 36(1)(ib) provides that an employer is entitled to a deduction in the computation of his profits and gains from business or profession, in respect of the amount of any premium paid by cheque by him to keep in force an insurance on the health of his employees. However, the deduction is available only if the insurance is in accordance with a scheme framed by the General Insurance Corporation of India and approved by the Central Government for this purpose.

12.4 With a view to align the provisions of section 36(1)(ib) with those of section 80D, the said clause (ib) has been substituted so as to also provide for a deduction of the amount of any premium paid by cheque by the assessee, as an employer, to keep in force an insurance on the health of his employees under a scheme framed by any other insurer and approved by the Insurance Regulatory and Development Authority established under sub-section (1) of section 3 of the Insurance Regulatory and Development Authority Act, 1999.

12.5 Further, as a rationalisation measure, the provisions contained in clauses (iii) and (iv) of the proviso to clause (2) of section 17 have been amended so as to provide that any premium paid by the employer or any reimbursement of premium paid by the employees for health insurance schemes of other insurers, approved by the Insurance Regulatory and Development Authority, shall also be exempt from the purview of perquisites.

12.6 Applicability – From assessment year 2007-08 onwards.

[Sections 8 and 9]

13. Definition of infrastructure capital company, infrastructure capital fund and infrastructure facility

13.1 Under the existing provisions of the Income-tax Act, infrastructure capital company and infrastructure capital fund have been defined in clause (23G) of section 10. Further, this definition is also with reference to sections 80-IA and 80-IB. The definitions of infrastructure capital company and infrastructure capital fund existing in clause (23G) of section 10 have been referred in the Income-tax Act in various other provisions. In view of omission of clause (23G) of section 10, section 2 of the Income-tax Act has been amended by inserting clauses (26A) and (26B) to provide for general definitions of infrastructure capital company and infrastructure capital fund.

13.2 These amendments will take effect retrospectively from 1-4-2006 and apply in relation to the assessment year 2006-07 and subsequent years.

13.3 Further, in view of omission of clause (23G) of section 10, infrastructure facility for the purposes of clause (d) of the Explanation of clause (viii) of sub-section (1) of section 36 of the Income-tax Act has been defined, to mean,

   (i)  an infrastructure facility as defined in the Explanation to clause (i) of sub-section (4) of section 80-IA, or any other public facility of a similar nature as may be notified by the Board in this behalf in the Official Gazette and which fulfils the conditions as may be prescribed;

  (ii)  an undertaking referred to in clause (ii) or clause (iii) or clause (iv) of sub-section (4) of section 80-IA; and

(iii)  an undertaking referred to in sub-section (10) of section 80-IB.

13.4 This amendment will take effect from 1-4-2007 and will, accordingly, apply in relation to assessment year 2007-08 and subsequent years.

[Sections 3, 4 and 9]

13.5 Notification prescribing the conditions to be fulfilled by a public facility to be eligible for notification as infrastructure facility in accordance with the provisions of clause (d) of the Explanation to clause (viii) of sub-section (1) of section 36 has been issued vide S.O. 1152(E) dated 20-7-2006 through which rule 6ABAA has been inserted in the Income-tax Rules, 1962. By another notification vide S.O. 1153(E) dated 20-7-2006 certain public facilities have also been specified as infrastructure facility.

14. Reference to the definition of derivatives

14.1 Under the existing provisions of clause (5) of section 43, an eligible transaction in respect of trading in derivatives carried out in a recognised stock exchange is not deemed to be a speculative transaction. The definition of derivatives was earlier referred to in clause (aa) of section 2 of the Securities Contracts (Regulation) Act, 1956. Through an amendment made in January, 2005 to the Securities Contracts (Regulation) Act, 1956, the said clause (aa) was re-lettered as clause (ac). Accordingly, the reference to the definition of the term derivative has been re-lettered in clause (5) in section 43.

14.2 This amendment will take effect retrospectively from 1-4-2006.

[Section 11]

15. Deduction in the computation of income against taxes paid on income earned outside India not allowable

15.1 Under the existing provisions contained in sub-clause (ii) of clause (a) of section 40, any sum paid on account of any rate or tax levied on the profits or gains of any business or profession or assessed at a proportion of, or otherwise on the basis of, any such profits and gains (hereafter income-tax), is not allowed as deduction in the computation of income. Any such tax paid outside India is also not allowable as deduction in the computation of Income. However such tax paid outside India is eligible for credit against tax payable in India on the global income of the person in accordance with the provisions of section 90 or, as the case may be, section 91.

15.2 Doubts have been expressed whether Income-tax paid in a foreign country is eligible for deduction in the computation of profits and gains from business or profession. In this regard, the judicial opinion is divided with overwhelming number of decisions in favour of the Government. Nevertheless, some assessees continue to claim both i.e. income-tax paid in the foreign country, as deduction in the computation of profits and gains from business or profession and as credit against tax payable in India on their global income. This double benefit claimed by some taxpayers is against the legislative intent.

15.3 With a view to ending the judicial conflict, Explanation 1 has been inserted to sub-clause (ii) of clause (a) of section 40 of the Income-tax Act thereby clarifying that any sum paid outside India and eligible for relief of tax under section 90 or deduction from the income-tax payable under section 91 is not allowable, and is deemed to have never been allowable, as a deduction under section 40 of the Income-tax Act. The taxpayers, however, will continue to be eligible for tax credit in respect of income-tax paid in a foreign country in accordance with the provisions of section 90, or as the case may be, section 91.

15.4 This amendment is clarificatory in nature and is inserted in the Income-tax Act on 1-4-2006.

15.5 Another Explanation has been inserted in the aforementioned clause (ii) as Explanation 2 to provide that any sum paid outside India and eligible for relief of tax under newly inserted section 90A will not be allowed as a deduction in the computation of profits and gains of business or profession.

15.6 This amendment will take effect from 1-6-2006.

[Section 10]

16. Interest not actually paid not eligible for deduction under section 43B

16.1 Under the existing provisions contained in clause (d) of section 43B, any sum payable by the assessee as interest on any loan or borrowing referred to in that clause is allowed as deduction in the computation of income if the sum payable as interest is actually paid by the assessee.

16.2 It has come to notice that certain assessees were claiming deduction under section 43B on account of conversion of interest payable on an existing loan into a fresh loan on the ground that such conversion was a constructive discharge of interest liability and, therefore, amounted to actual payment. Claim of deduction against conversion of interest into a fresh loan is a case of misuse of the provisions of section 43B. A new Explanation 3C has, therefore, been inserted to clarify that if any sum payable by the assessee as interest on any loan or borrowing, referred to in clause (d) of section 43B, is converted into a loan or borrowing, the interest so converted, shall not be deemed to be actual payment.

16.3 This amendment takes effect retrospectively from 1-4-1989 i.e. the date from which clause (d) was inserted in section 43B and applies in relation to assessment year 1989-90 and subsequent years.

[Section 12]

16.4 Similarly, under the existing provisions contained in clause (e) of section 43B, any sum payable by the assessee as interest on any loan or advances referred to in that clause is allowed as deduction in the computation of income if the sum payable as interest is actually paid by the assessee.

16.5 A clarificatory Explanation similar to Explanation 3C is also required for the purposes of clause (e). A new Explanation 3D has, therefore, been inserted to the effect that if any sum payable by the assessee as interest on any loan or advance, referred to in clause (e) of section 43B, is converted into a loan or advance, the interest so converted, shall not be deemed to be actual payment.

16.6 This amendment also takes effect retrospectively from 1-4-1997 i.e. the date from clause (e) was inserted in section 43B and applies in relation to assessment year 1997-98 and subsequent years.

16.7 Subsequent to the passage of the Finance Bill, 2006 a clarification vide Circular No. 7 dated 17-7-2006 has been issued by the Board. The circular gives a few illustrations to enable the Assessing Officer and the assessee to allow or to claim the correct amount of deduction against actual payment of interest.

[Section 12]

17. Change in definition of long-term specified asset for exemption under section 54EC

17.1 Under the existing provisions of section 54EC capital gains arising from the transfer of a long-term capital asset are exempt from tax, to the extent such gains are invested in a long term specified asset. The expression long term specified asset has been defined in clause (b) of the Explanation to the said section to mean any bond redeemable after three years issued (i) on or after 1-4-2000 by the National Bank for Agriculture and Rural Development, or by the National Highways Authority of India, (ii) on or after 1-4-2001 by the Rural Electrification Corporation Limited, (iii) on or after 1-4-2002 by the National Housing Bank or by the Small Industries Development Bank of India.

17.2 With a view to raise tax revenues and also to channelise funds towards focused development of roads, highways, and rural electrification infrastructure, the provisions of section 54EC have been amended so as to restrict the benefit of tax exemption, only in respect of long-term capital gains invested in those bonds which are redeemable after three years, and are issued by the National Highways Authority of India, or by the Rural Electrification Corporation Limited on or after 1-4-2006 and are notified by the Central Government for the purposes of the said section. Thus, under the amended provisions, the benefits of section 54EC shall be available only if the long-term capital gains are invested on or after 1-4-2006 in the notified bonds of National Highways Authority of India or Rural Electrification Corporation Limited. It may further be clarified that amended provisions of section 54EC are not applicable for assessment year 2006-07.

[Section 13]

18. Withdrawal of exemption under section 54ED

Online GST Certification Course by TaxGuru & MSME- Click here to Join

18.1 The existing provisions of section 54ED provide that the capital gains arising from transfer of a long-term capital asset, being listed securities or units of a mutual fund or of the Unit Trust of India shall be exempt from tax, to the extent such gains are invested in equity shares forming part of an eligible issue of capital, made by a public company, and offered for subscription to the public.

18.2 Vide the Finance (No. 2) Act, 2004. Securities Transaction Tax has been levied on the value of certain specified transactions of equity shares of a company or units of an equity oriented mutual fund entered into a recognised stock exchange in India. Consequent upon the levy of the securities transaction tax, the long term capital gains arising from the transfer of equity share of a company or unit of an equity oriented mutual fund through a recognised stock exchange in India has been made exempt from tax. In view of the same, the provisions of section 54ED have lost their relevance. Accordingly, the provisions of section 54ED have been amended so as to restrict the benefit of the said section only in respect of capital gain arising from the transfer of a long-term capital asset on or before 31-3-2006.

18.3 Applicability – From assessment year 2007-08 onwards.

[Section 14]

19. Extending benefits of section 80C to fixed deposits in banks

19.1 Section 80C provides for a deduction of rupees one lakh to an individual or a Hindu undivided family, with respect to sums paid or deposited in certain specified schemes. The investments or payments eligible for deduction include life insurance premia, contributions to provident fund or schemes for deferred annuities, purchase of infrastructure bonds, payment of tuition fees, repayment of principal amount of housing loans, etc. Further, in order to minimise distortions, there are no sectoral caps and the assessee is free to choose any one or more of the eligible avenues within the overall ceiling specified.

19.2 Sub-section (2) of section 80C, provides that the amount paid or deposited in the previous year in schemes specified in clause (i) to clause (xx) is eligible for deduction under the said section. To provide a level playing field amongst banks and other institutions like insurance companies, mutual funds, etc. a new clause (xxi) in a sub-section (2) of section 80C has been inserted so as to provide that investment in a term deposit for a fixed period of not less than 5 years with any scheduled bank, and which is in accordance with a scheme framed and notified by the Central Government, shall be eligible for deduction under the said section. The expression scheduled bank has also been defined for this purpose. The Bank Term Deposit Scheme, 2006 has been notified on 28-7-2006.

19.3 Clause (xi) of sub-section (2) refers to contribution in the name of any person specified in sub-section (4) of section 80C for participation in any such Unit-linked insurance plan of the LIC mutual fund notified under clause (23D) of section 10 as the Central Government may, by notification, specified. Clause (xiii) of the said sub-section refers to subscription to any units of any mutual fund notified under clause (23D) of section 10 or from the administrator or the specified company under any plan formulated in accordance with such scheme as may be notified by the Central Government. Clause (xiv) of the said sub-section refers to the contribution by an individual to any pension fund set up by any mutual fund notified under clause (23D) of section 10 or by the administrator or the specified company, as the Central Government may, by notification, specify.

19.4 Since clause (23D) of section 10 has since been amended and it also refers to a mutual fund registered under Securities and Exchange Board of India Act, 1992 or regulations made thereunder, the provisions of clauses (xi), (xiii) and (xiv) of sub-section (2) have been amended so as to substitute the words notified under clause (23D) by the words referred to in clause (23D). This amendment is only for the purpose of aligning the provisions of these clauses with that of clause (23D) of section 10.

19.5 Applicability – From assessment year 2007-08 onwards.

[Section 16]

20. Rationalisation of provisions of section 80CCC

20.1 Section 80CCC provides that an assessee, being an individual, shall be allowed a deduction (up to rupees ten thousand) from his total income of the amount paid or deposited by him to effect or keep in force a contract for any annuity plan of Life Insurance Corporation of India or any other insurer for receiving pension from the fund referred to in clause (23AAB) of section 10.

20.2 Since the deduction available under section 80C and section 80CCC are capped by an overall limit of rupees one lakh, as laid down in section 80CCE, and there are no sectoral caps in section 80C, the provisions of the two sections have been aligned by amending the provisions of section 80CCC so as to increase the limit of investment from rupees ten thousand to rupees one lakh. As mentioned above, the amendment is subject to the overall cap of rupees one lakh provided under section 80CCE.

20.3 Applicability – From assessment year 2007-08 onwards.

[Section 17]

21. Extension of tax benefits to the Power Sector and to Industrial Parks

21.1 Section 80-IA of the Income-tax Act provides for deductions in respect of profits and gains derived by industrial undertakings or enterprises engaged in development operation and maintenance of infrastructure facility, industrial park or generation, distribution or transmission of power etc. Clause (iv) of sub-section (4) of the said section provides that deduction is available to an undertaking which

  (a)  is set up in India for generation or generation and distribution of power, if it begins to generate power during the period beginning on 1-4-1993 and ending on 31-3-2006;

  (b)  starts transmission or distribution by laying a network of new transmission or distribution lines during the period beginning on 1-4-1999 and ending on 31-3-2006;

  (c)  undertakes substantial renovation and modernisation of the existing network of transmission or distribution lines at any time during the period beginning on 1-4-2004 and ending on 31-3-2006.

21.2 Under the existing provisions, the deduction is not available to undertakings which start generation, or transmission or distribution by laying a network of new transmission or distribution lines after 31-3-2006, or undertake substantial renovation and modernisation of the existing network of transmission or distribution lines after the said date. With a view to fulfil the commitment of the Government to provide power to all by 2012, sub-clauses (a), (b) and (c) of clause (iv) of sub-section (4) of section 80-IA have been amended to extend the time limit from 31-3-2006 to 31-3-2010.

21.3 Similarly, clause (iii) of sub-section (4) of section 80-IA provides that an undertaking which develops, develops and operates or maintains and operates an industrial park or special economic zone notified by the Central Government in accordance with the scheme framed and notified by it for the period beginning on 1-4-1997 and ending on 31-3-2006, is eligible for deduction.

21.4 To continue attracting investments to industrial parks, the said clause (iii) has been amended to extend the time limit from 31-3-2006 to 31-3-2009.

21.5 Applicability – From assessment year 2007-08 onwards.

[Section 18]

22. Withdrawal of tax benefits available to certain co-operative banks

22.1 Section 80P, inter alia, provides for a deduction from the total income of the Co-operative societies engaged in the business of banking or providing credit facilities to its members, or business of a cottage industry, or of marketing of agricultural produce of its members, or processing, without the aid of power, of the agricultural produce of its members, etc.

22.2 The co-operative banks are functioning at par with other commercial banks, which do not enjoy any tax benefit. Therefore, section 80P has been amended and a new sub-section (4) has been inserted to provide that the provisions of the said section shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank. The expressions co-operative bank, primary agricultural credit society and primary co-operative agricultural and rural development bank have also been defined to lend clarity to them.

22.3 Further, a new sub-clause (viia) has been inserted in clause (24) of section 2 to provide that the profits and gains of any business of banking (including providing credit facilities) carried on by a co-operative society with its members shall be included in the definition of income.

22.4 Applicability – From assessment year 2007-08 onwards.

[Sections 3 and 19]

23. Provisions relating to double taxation relief etc.

23.1 Under the existing provisions of section 90, the Central Government is empowered to enter into a Double Taxation Avoidance Agreement with the Government of any country outside India. A need was felt to enable an agreement between specified non-government associations for grant of double taxation relief, with the Central Government subsequently adopting such agreement in order to implement or give effect to the same.

23.2 For this purpose, a new section 90A has been inserted to provide that any specified association in India may enter into an agreement for grant of double taxation relief, avoidance of double taxation, exchange of information or for recovery of income-tax, with any specified association in a specified territory outside India and that the Central Government may by notification in the Official Gazette, make necessary provisions for adopting and implementing such agreement.

23.3 Sub-section (2) of section 90A provides that in respect of such agreement and in relation to an assessee to whom such agreement applies, the provisions of the Income-tax Act will apply to the extent they are more beneficial to the assessee. Sub-section (3) of the said section provides that any term used but not defined in the Income-tax Act or in such agreement will have the same meaning as assigned to it in a notification issued by the Central Government unless the context otherwise requires and such meaning is not inconsistent with the provisions of the Act or the agreement, it has been clarified that the charge of tax in respect of a company incorporated in the specified territory outside India at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge of levy of tax in respect of such company.

23.4 For this purpose, specified association has been defined to mean any notified institution, association or body, whether incorporated or not, functioning under any law for the time being in force in India, or the laws of the specified territory outside India. Specified territory has been defined to mean any area outside India which may be notified as such by the Central Government for the purposes of the section. Consequential amendments have been made in section 2(37A).

23.5 Applicability – From 1-6-2006 onwards.

[Sections 3 and 20]

24. Rationalisation of provisions relating to Transfer Pricing

24.1 The existing provisions of section 92C provide for computation of arms length price. Sub-section (4) of the said section provides that the Assessing Officer may compute the total income of an assessee on the basis of the arms length price. The first proviso to sub-section (4) provides that where the total income of an assessee as computed by the Assessing Officer is higher than the income declared by the assessee, no deduction under section 10A or section 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub-section.

24.2 Sections 10A and 10B provide deductions in respect of the profits and gains derived from exports. Section 10AA also provides for deduction of profits and gains derived from exports, in respect of newly established units in Special Economic Zones. Provisions of sub-section (4) of section 92C have been rationalized so as to provide for similar treatment in respect of deduction under sections 10A, 10B and 10AA on the income enhanced by way of computing the income in accordance with Arms length price. Accordingly, the first proviso to sub-section (4) of section 92C has been amended so as to provide that no deduction under section 10AA shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under said sub-section.

24.3 Applicability – From Assessment year 2007-08 onwards.

[Section 21]

25. Taxation of anonymous donations received by wholly charitable trusts or institutions including non-profit educational or medical institutions

25.1 Income of wholly charitable or religious trusts or institutions as well as partly charitable or religious trusts or institutions is exempt from income-tax under sections 11 and 12, subject to the fulfilment, inter alia, of certain conditions of application of income and investment in specified modes. Similarly, income of any university or other educational institution referred to in sub-clause (iiiad) or sub-clause (via) or any hospital or other medical institution referred to in sub-clause (iiiae) or sub-clause (via) or any fund or institution referred to in sub-clause (iv) or any trust or institution referred to in sub-clause (v) of clause (23C) of section 10, is exempt from income-tax subject to the fulfilment of conditions specified in the said clause.

25.2 With a view to prevent channelisation of unaccounted money to these institutions by way of anonymous donations, a new section 115BBC has been inserted to provide that any income of a wholly charitable trust or institution by way of anonymous donation shall be included in its total income and taxed at the rate of 30 per cent. Anonymous donation made to wholly charitable and religious trusts or institutions, i.e. mixed purpose trusts or institutions shall be taxed only if it is for any university or other educational institution or any hospital or other medical institution run by them. Anonymous donation to wholly religious trusts or institutions will not be taxed.

25.3 Anonymous donation has been defined in the new section to mean any voluntary contribution referred to in section 2(24)(iia) of the Act, where a person receiving such contribution does not maintain a record of the identity indicating the name and address of the person making such contribution and such other particulars as maybe prescribed.

25.4 Consequential amendments have been made in section 10(23C) and section 13 to provide that any income by way of any anonymous donation which is taxable under section 115BBC, shall be included in the total income of the assessee.

25.5 Applicability – From Assessment year 2007-08 onwards.

25.6 Amendments of clarificatory nature have further been made in section 2(24)(iia) to include in the definition of income, voluntary contributions received by any university or other educational institution or any hospital or other medical institution referred to in sub-clauses (vi) and (via) respectively of section 10(23C). The sixth proviso to clause (23C) of section 10 already indicated treatment of voluntary contributions as income with exemption in certain circumstances.

25.7 Applicability – From assessment year 1999-2000 onwards.

25.8 Amendments have also been made to provide that voluntary contributions received by any university or other educational institution or any hospital or other medical institution referred to in sub-clauses (iiiad) and (iiiae) respectively of section 10(23C) shall be included in the definition of income.

25.9 Applicability – From Assessment year 2007-08 onwards.

[Sections 3, 4, 6 and 22]

26. Enhancing the period for carry forward of MAT credit

26.1 Sub-section (1) of section 115JAA provides that where any amount of tax is paid under section 115JA by a company for any assessment year, then credit in respect of the tax so paid shall be allowed in accordance with the provisions of the said section 115JAA. Sub-section (1A) of section 115JAA provides for a similar provision with regard to any amount of tax paid under section 115JB for the assessment year commencing on 1st April, 2006 and any subsequent year. Sub-section (2) of section 115JAA provides that the tax credit to be allowed under sub-section (1) shall be the difference of the tax paid for any assessment year under section 115JA or section 115JB and the amount of tax payable under the normal provisions of the Income-tax Act. Sub-section (3) of section 115JAA provides that the amount of credit determined under sub-section (2) shall be carried forward and set off in accordance with the provisions of sub-sections (4) and (5) of the said section, but such carry forward shall not be allowed beyond the fifth assessment year immediately succeeding the assessment year in which the tax credit becomes allowable under sub-section (1) of the said section.

26.2 To provide relief to assessees, being companies, who are required to pay MAT under section 115JB for any assessment year commencing on or after 1st April, 2006, the provisions of section 115JAA have been amended to provide that the amount of tax credit determined shall be allowed to be carried forward and set off for seven assessment years immediately succeeding the assessment year in which the tax credit becomes allowable under the said section.

26.3 Applicability – From assessment year 2007-08 onwards.

[Section 23]

27. Rationalisation of provisions relating to Minimum Alternate Tax

27.1 Section 115JB provides that, in the case of a company, if the tax payable on the total income as computed under the Income-tax Act in respect of any previous year relevant to the assessment year commencing on or after the 1st April, 2001 is less than seven and one-half per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable for the relevant previous year shall be seven and one-half per cent of such book profit.

27.2 Since the credit for MAT paid under section 115JB has been introduced from assessment year 2006-07 by Finance Act, 2005, and the period for availing the MAT credit has been increased from five years to seven years, sub-section (1) of the said section has been amended to provide that if the income-tax payable on the total income as computed under the Income-tax Act in respect of any previous year relevant to the assessment year commencing on or after the 1st April, 2007 is less than ten per cent of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable for the relevant previous year shall be ten per cent of such book profit.

27.3 The Explanation to sub-section (2) of section 115JB says that book profit means the net profit as shown in the profit and loss account for the relevant previous year, prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956, and as increased or reduced by certain adjustments as specified in the said Explanation. The aforesaid Explanation, inter alia, provides that the book profit shall be increased by the amount or amounts of expenditure relatable to any income referred to in section 10 [other than the provisions contained in clause (23G) thereof] if any such amount is debited to the profit and loss account and it shall be reduced by the amount of income referred to in the said section 10 if any such amount is credited to the profit and loss account.

27.4 The reference to other than the provisions contained in clause (23G) thereof has been omitted from clause (f) and clause (ii) of the Explanation to section 115JB. The amendment is consequential to omission of clause (23G) of section 10 vide section 4 of the Finance Act, 2006.

27.5 Further clause (f) of the aforesaid Explanation has been amended to provide that the book profit shall be increased by the amount or amounts of expenditure relatable to any income referred to in section 10 [excluding the income referred to in clause (38) thereof] and clause (ii) of the said Explanation has also been amended to provide that the book profit shall be reduced by the amount of income referred to in section 10 [excluding the income referred to in clause (38) thereof].

27.6 The provisions of sub-section (38) of section 10 have also been amended to provide that income by way of long-term capital gains of a company shall be taken into account in computing the book profit under section 115JB and for payment of Income-tax under that section.

27.7 Under the normal provisions of the Income-tax Act, claim of higher depreciation on account of revaluation of assets is not allowed. However, companies do resort to revaluation of assets to claim such higher depreciation. With a view to plug the leakage of revenue on account of claim of higher depreciation through revaluation of assets by certain companies, a new clause (g) has been inserted in the aforesaid Explanation to provide that the book profit shall be increased by the amount of depreciation debited to the profit and loss account and a new clause (iia) has been inserted in the said Explanation to provide that the amount of depreciation claimed in the profit and loss account, excluding the claim of depreciation on account of revaluation of assets, shall be reduced from the book profit. With a view to avoid double taxation on this account, a new clause (iib) has been inserted in the said Explanation to provide that the amount withdrawn from revaluation reserve and credited to the profit and loss account, to the extent it does not exceed the amount of depreciation on account of revaluation of assets referred to in the new clause (iia), shall be reduced from the book profit.

27.8 Applicability – From assessment year 2007-08 onwards.

[Sections 4 and 24]

28. Extension of exemption from levy of dividend distribution tax to all equity oriented funds and change in definition of equity oriented funds

28.1 Under section 115R(2), in respect of any amount of income distributed, inter alia, by a Mutual Fund to its unit holders, such Mutual Fund is liable to pay additional income-tax on such distributed income at the rate of 12.5 per cent on income distributed to any individual or HUF and at the rate of 20 per cent on income distributed to any other person. This additional income-tax is, however, not leviable on income distributed by an open-ended equity oriented fund to its unit holders. An open-ended equity oriented fund has been defined in the Explanation to section 115R as a fund where the investible funds are invested by way of equity shares in domestic companies to the extent of more than fifty per cent of the total proceeds of such fund.

28.2 As the provisions of section 115R(2) applied only to open-ended equity oriented funds, a need was felt to provide a level-playing field by extending the same to close-ended equity oriented funds as well. Accordingly, the word open-ended has been omitted from the proviso to section 115R(2) and from the Explanation to section 115T. All equity oriented funds, i.e. both open-ended and close-ended, will therefore not be liable to pay dividend distribution tax.

28.3 Further, in order to align the definition of equity-oriented fund given in the Explanation to section 115T with that given in SEBI guidelines, the said definition has been amended to, inter alia, provide that an equity-oriented fund means such fund where the investible funds are invested by way of equity shares in domestic companies to the extent of more than sixty five per cent of the total proceeds of such fund, in place of fifty per cent of such proceeds.

28.4 Similarly, in section 10(38) and in section 97(5)(i) of the Finance (No. 2) Act, 2004, equity-oriented fund has been defined as a fund where the investible funds are invested by way of equity shares in domestic companies to the extent of more than fifty per cent of the total proceeds of such fund. With the similar objective to align these definitions with the SEBI guidelines, section 10(38) and section 97(5)(i) of Finance (No. 2) Act, 2004 have been amended to provide that an equity-oriented fund means a fund where such investible funds are invested by way of equity shares in domestic companies to the extent of more than sixty-five per cent of the funds total proceeds instead of fifty per cent of such proceeds.

28.5 Applicability – From 1-6-2006 onwards.

[Sections 4, 26, 27 and 76]

29. Rationalising the provisions of Fringe Benefit Tax

29.1 Section 115WB provides a definition of the term fringe benefits. It, inter alia, means any privilege, service, facility or amenity, directly or indirectly, provided by an employer to his employees, any contribution by the employer to an approved superannuation fund for the employees, etc.

29.2 Sub-section (2) of the said section provides that the fringe benefits shall be deemed to have been provided by the employer to his employees, if the employer has in the course of his business or profession, incurred any expense on or made any payment for the purposes of entertainment, hospitality, conference, sales promotion including publicity, etc. Proviso to clause (D) of sub-section (2) of section 115WB excludes certain expenditure on advertisement from sales promotion including publicity.

29.3 To expand the domain of such exceptions to provide relief to employers, a new clause has been inserted in the proviso to clause (D) of sub-section (2) of the said section 115WB to provide that the expenditure on distribution of free samples of medicines or of medical equipment, to doctors and payment to any person of repute for promoting the sale of goods or services of the business of employers, shall not be included in sales promotion including publicity for valuation of fringe benefits.

29.4 Sub-section (3) of section 115WB provides that for the purposes of sub-section (1) of the said section, the privilege, service, facility or amenity does not include perquisites in respect of which tax is paid or payable by the employee.

29.5 To specifically exempt expenditure of employers, incurred on the to and fro journeys from residence to office of their employees, from the provisions of this tax, sub-section (3) of section 115WB has been amended to provide that any benefit or amenity in the nature of free or subsidised transport or any such allowance provided by the employer to his employees for journeys by the employees from their residence to the place of work or such place of work to the place of residence shall not form part of fringe benefits.

29.6 Under the existing provisions contained in section 115WC, the value of fringe benefits is to be determined in terms of percentage of certain expenses specified in section 115WB, which shall be taken as fringe benefits for the purpose of levy of fringe benefit tax.

29.7 Clause (b) of sub-section (1) of section 115WC provides that the actual amount of contribution by the employer to an approved superannuation fund for employees shall be the value of fringe benefits.

29.8 The said clause (b) has been amended to provide that contribution by an employer to an approved superannuation fund to the extent it does not exceed rupees one lakh per employee in respect of whom contribution is made, shall not be liable to fringe benefit tax. For example, consider an employer who has three employees: A, B and C and he makes contribution to their, account in the approved superannuation fund in the following manner :-

Employee Contribution to approved superannuation fund by the employer
A

Rs.

60,000
B

Rs.

95,000
C

Rs.

2,50,000

In the case of employees A and B, the value of fringe benefits shall be taken to be nil since contributions by the employer in respect of these employees does not exceed Rs. 1,00,000 in each case. However, in the case of employee C the value of fringe benefit shall be Rs. 1,50,000 (Rs. 2,50,000 – 1,00,000) for the purposes of levy of fringe benefit tax.

29.9 Under the existing provisions contained in clause (c) of sub-section (1) of said section 115WC, it is provided that twenty per cent of the expenses referred to in clauses (A) to (K) of sub-section (2) of section 115WB, which includes expenses incurred on conveyance, tour and travel (including foreign travel), shall be the value of fringe benefits.

29.10 A new clause (Q) in sub-section (2) of section 115WB and a new clause (e) in sub-section (1) of section 115WC have been inserted to provide that five per cent of the expenses incurred on tour and travel (including foreign travel) shall be taken for determining the value of fringe benefits. However, twenty per cent of the expenses incurred for the purposes of conveyance shall be continued to be taken for the purposes of valuation of fringe benefits.

29.11 Sub-section (2) of the said section 115WC provides for lower rate for valuation of fringe benefits in the case of certain expenses referred to in sub-section (2) of section 115WB.

29.12 New clauses (aa), (ab), (da) and (db) have been inserted in sub-section (2) of section 115WC to provide that in the case of an employer engaged in the business of carriage of passengers or goods by aircraft or ship, the value of fringe benefits for the purposes referred to in clauses (B) and (G) of sub-section (2) of section 115WB relating to hospitality and use of hotel, lodging and boarding respectively shall be five per cent instead of twenty per cent referred to in clause (c) of sub-section (1) of section 115 WC.

29.13 Applicability – From assessment year 2007-08 onwards.

[Sections 28 and 29]

30. Clarification regarding the powers of the Board to issue directions regarding the power and function of the Income-tax authorities

30.1 Section 120 lays down the jurisdiction of the income-tax authorities. The existing provisions contained in sub-section (1) of the said section, provide that the income-tax authorities shall exercise all or any of the powers and perform all or any of the functions conferred on or, assigned to, such authorities in accordance with directions issued by the Board for the exercise of such powers and functions by all or any of those authorities.

30.2 With a view to clarify the intention of the Legislature, an explanation to sub-section (1) of the said section has been inserted so as to clarify that any income-tax authority, being an authority higher in rank, may exercise the powers and perform the functions of the income-tax authority lower in rank, if it is so directed by the Board under the said section. It has also been clarified that any such direction shall be deemed to be a direction issued by the Board under the said sub-section (1).

30.3 This amendment will have retrospective effect and will be effective from 1st April, 1988.

[Section 30]

31. Modification of the return form

31.1 The existing provisions of sub-section (9) of section 139 provide that where the Assessing Officer considers that the return of income filed by an assessee is defective; he may intimate the assessee and give him an opportunity to rectify the same within fifteen days. The Explanation to the said sub-section provides that a return of income shall be regarded as defective unless, the conditions specified in clauses (a) to (f) of the explanation to the said sub-section are fulfilled.

31.2 A proviso to the Explanation to the said sub-section (9) has been inserted so as to confer power upon the Central Board of Direct Taxes to dispense with any of the conditions specified in clauses (a) to (f) of the Explanation to the said sub-section, in respect of a class or classes of persons. It has also been provided that the Board shall have the power to include any of the conditions specified in clauses (a) to (f) of the Explanation in the forms of return of income prescribed under sub-section (1) and sub-section (6) of section 139.

31.3 This amendment has come into effect from 1st June, 2006.

[Section 31]

32. Omission of the one-by-six scheme

32.1 Under the existing provision of the proviso to sub-section (1) of section 139, it has been provided that any person fulfilling any of the six expenditure/asset criteria listed therein, will be required to furnish his return of income, even if his total income did not exceed the maximum amount not chargeable to tax.

32.2 The said proviso to section 139 has been omitted and no return will be required to be furnished under the proviso.

32.3 Applicability – From the assessment year 2006-07 and onwards.

[Section 31]

33. Prescribing new class of persons for allotment of PAN and suo motu allotment of PAN

33.1 The existing provisions of sub-sections (1) and (1A) of section 139A provide for class of persons who are required to have a Permanent Account Number.

33.2 A new sub-section (1B) has been inserted so as to provide that for the purpose of collecting any information which may be useful for or relevant to the purposes of this Act, the Central Government may by way of notification specify any class or classes of persons, and such persons shall within the prescribed time apply to the Assessing Officer for allotment of a permanent account number.

33.3 Under the existing provisions contained in sub-section (2) of the said section, the Assessing Officer may also allot to any other person by whom tax is payable, a permanent account number.

33.4 The said sub-section has been amended so as to provide that the Assessing Officer may, having regard to the nature of transactions as may be prescribed, also allot a permanent account number to any other person (whether any tax is payable by him or not), in the manner and in accordance with the procedure as may be prescribed.

33.5 This amendment has come into effect from 1-6-2006.

[Section 32]

34. New Scheme to facilitate submission of returns through Tax Return Preparers

34.1 A new section 139B has been inserted in the Income-tax Act so as to provide that for the purpose of enabling any specified class or classes of persons to prepare and furnish returns of income, the Board may, by way of notification, frame a scheme providing that such persons may furnish their returns of income through a Tax Return Preparer authorized to act as such under the scheme. It has further been provided that the Scheme framed under the said section shall specify the manner in which the Tax Return Preparer shall assist the persons furnishing the return of income. A Tax Return Preparer shall affix his signature on the return prepared by him. It has also been provided that a person referred to in clause (ii) or clause (iv) of sub-section (2) of section 288 or an employee of the specified class or classes of persons shall not be authorised to act as a Tax Return Preparer. It has also been laid down that the Scheme to be notified under the said section may provide the manner in which and the period for which a Tax Return Preparer shall be authorized to act as such under the Scheme, the educational and other qualifications to be possessed and other conditions required to be fulfilled, by a person to act as a Tax Return Preparer. The scheme may also provide for the code of conduct and duties and obligations for the Tax Return Preparers, the circumstances under which the authorization given to a Tax Return Preparer may be withdrawn, and any other matter which is required to be or may be specified for the purpose of this section. This amendment has come into effect from 1-6-2006. Tax Return Preparer Scheme, 2006 has been notified vide S.O. 2039(E) dated 28-11-2006.

[Section 33]

35. Clarificatory amendment regarding the time limit for issue of notice under section 142

35.1The existing provisions contained in sub-section (1) of said section, inter alia, provide that for the purposes of making assessment in a case where a person has not made a return of his income within the time specified under sub-section (1) of section 139, the Assessing Officer may serve a notice under the said sub-section on such person requiring him to furnish the return of his income in the prescribed form and manner.

35.2 The provisions of clause (i) of sub-section (1) of section 142 have been amended so as to provide that in a case where a person has not made a return of his income before the end of the relevant assessment year, the Assessing Officer may serve a notice after the end of the relevant assessment year under the said sub-section requiring such person to furnish his return of income.

35.3 This amendment has come into effect from 1-6-2006.

35.4 A proviso to the said clause (i) has also been inserted so as to provide that where any notice has been served on or after 1-4-1990 under sub-section (1) after the end of the relevant assessment year to any person who has not made a return of his income before the end of the relevant assessment year, such notice shall be deemed to be a notice served in accordance with the provisions of the aforesaid sub-section (1).

35.5 This amendment will take effect retrospectively from 1-4-1990.

[Section 35]

36. The time limit for issue of notice under sub-section (2) of section 143 for the purposes of making assessment or re-assessment under section 147

36.1 The existing provisions of sub-section (1) of section 148 provide that before making any assessment, reassessment or re-computation under section 147, the Assessing Officer shall serve a notice under section 148, on the assessee, requiring him to furnish his return of income or the income of any other person in respect of which he is assessable and the provisions of the Act shall apply as if the return furnished in response to such notice were a return required to be furnished under section 139.

36.2 A proviso to sub-section (1) of section 148 has been inserted so as to provide that where a return has been furnished during the period from 1-10-1991 to 30-9-2005 in response to a notice served under section 148 and, subsequently a notice has been served under sub-section (2) of section 143 after the expiry of twelve months specified in the proviso to sub-section (2) of section 143 as it stood immediately before the amendment of the said sub-section by the Finance Act, 2002. but before the expiry of the time limit for making the assessment, reassessment or re-computation as specified in sub-section (2) of section 153, such notice shall be deemed to be valid notice.

36.3 Further a proviso has been inserted in the said sub-section so as to provide that where a return has been furnished during the period from 1-10-1991 to 30-9-2005 in response to a notice served under section 148 and, subsequently a notice has been served under clause (ii) of sub-section (2) of section 143 after the expiry of twelve months specified in the proviso to clause (ii) of sub-section (2) of section 143, but before the expiry of the time limit for making the assessment, reassessment or re-computation as specified in sub-section (2) of section 153, such notice shall be deemed to be valid notice.

36.4 These amendments will take effect retrospectively from the 1-10-1991.

36.5 An Explanation to sub-section (1) has also been inserted so as to clarify that the provisions of the newly inserted first proviso or the second proviso shall not apply in relation to any return which has been furnished on or after 1-10-2005 in response to a notice served under sub-section (1) of section 148.

36.6 This amendment will have retrospective effect and will be effective from 1-10-2005.

[Section 36]

37. Reduction of the time limits provided for completion of assessment and reassessment

37.1 The existing provisions of section 153 provide the time limit for completion of assessments and reassessments. Section 153B of the Income-tax Act provides the time limit or completion of assessment in cases where search has been initiated under section 132 or books of account, other documents or any assets have been requisitioned under section 132A. The existing provisions of section 17A of the Wealth-tax Act provide the time limit for completion of assessments and reassessments of the net wealth.

37.2 The time limits specified for completion of assessments and re-assessments in sections 153 and 153B of the Income-tax Act, and in section 17A of the Wealth-tax Act have been revised so that the demand raised during a financial year can be collected in the same year. The revised time limits shall be the time limits specified under the aforesaid sections, as reduced by three months.

37.3 These amendments have taken effect from 1-6-2006.

[Sections 37, 38 and 57]

38. Credit for payment of Minimum Alternate Tax (MAT) and tax paid in a country or specified territory outside India for the purposes of charge of interest under sections 234A, 234B and 234C

38.1 Under the existing provisions of sections 234A and 234B an assessee is held liable to pay simple interest at the rate of one per cent for every month or part of a month for default in furnishing the return of income and for default in payment of advance tax respectively. Similarly under the existing provisions of section 234C in respect of deferment of advance tax, the assessee is held liable to pay simple interest at the rate of one per cent per month and if there is shortfall of tax paid before the 15th March, one per cent on the amount of the shortfall. While computing interest, credit for advance tax paid and tax deducted or collected at source is allowed. MAT credit under section 115JAA, relief of tax under section 90 and deduction from income-tax payable under section 91 are not taken into account while charging interest under the aforesaid sections. Under section 140A also, interest is required to be paid for any delay in furnishing the return or for any default or delay in payment of advance tax.

38.2 It has been represented from several quarters that the tax credit allowed under section 115JAA is no different from the tax paid in advance and credit for having paid the minimum alternate tax should be allowed against the tax liability determined on assessment. On a similar analogy, credit for taxes paid in a country outside India has also been recommended to be allowed so that interest is not charged on an amount that equals to the taxes paid outside India. Accordingly, for calculating interest under sections 234A, 234B and 234C, the Finance Act, 2006 has provided for

  (a)  reduction of tax credit allowed to be set off under section 115JAA from the tax on the total income; and

  (b)  reduction of the amount of relief of tax allowed under section 90 and 90A and deduction from the Indian Income-tax before furnishing the return of income.

38.3 The credit for the above shall also be allowed under section 140A for calculating tax and interest before furnishing the return of income.

38.4 The above amendments will take effect from 1-4-2007 and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years.

38.5 Avoidable doubts were being raised by contending that there was an option available to the assessee to be charged interest under section 234A or 234B either on tax on total income as determined under sub-section (1) of section 143 or on tax on total income as determined after regular assessment. Though this is a fallacious contention, it has been considered necessary to clarify that interest is to be charged on the amount of tax on the total income as determined under sub-section (1) of section 143, and where a regular assessment is made, on tax on the total income determined after the regular assessment. An option has never been available to the assessee. This clarification is nothing but a reiteration of the Legislative intention inbuilt in the provisions of sub-section (1) of section 234A and Explanation 1 to sub-section (1) of section 234B of the Income-tax Act, 1961 as inserted originally by the Direct Tax Laws (Amendment) Act, 1987 and by the Direct Tax Laws (Amendment) Act, 1989 respectively, both with effect from 1-4-1989. These amendments to sections 234A and 234B have been inserted in the Income-tax Act, 1961 on 1-4-2007.

[Sections 34, 48, 49 and 50]

39. Deferment of dematerialization of TDS and TCS certificates

39.1 Finance (No. 2) Act, 2004 introduced a new procedure under the provisions of sub-section (3) of section 203 in respect of tax deduction at source and under the first proviso to sub-section (5) of section 206C in respect of tax collection at source laying down that the deductor or, as the case may be, the collector shall not be required to issue TDS or TCS certificates to the deductee or, as the case may be, the collectee. As a consequence of doing away with the requirement of issuance of certificate, it was provided under sub-section (3) of section 199 and under the proviso to sub-section (4) of section 206C that the deductee or the collectee would not be required to enclose a TDS or TCS certificate to his return of income for claiming credit of tax deducted or collected. Under the new procedure not requiring issuance of TDS or TCS certificates, credit for TDS or TCS was to be given by the Assessing Officer on the basis of annual statement of taxes to be issued in accordance with the provisions introduced under section 203AA in respect of TDS or in accordance with the second proviso to sub-section (5) of section 206C in respect of TCS. It was also provided under sub-section (9) of section 139 that the return of income shall not be deemed defective if it was not accompanied by proof of tax deducted.

39.2 The above dematerialisation provisions were to come into force with effect from 1-4-2005 in respect of tax deducted or collected on or after 1-4-2005. Through the Finance Act, 2005, however, dematerialisation provisions were deferred by one year so as to come into force in relation to taxes deducted or collected or paid on or after 1-4-2006.

39.3 A substantial number of deductors and collectors, have not started filing their quarterly statements which they are required to furnish under sub-section (3) of section 200 and under the proviso to sub-section (3) of section 206C. Quarterly statements are the primary documents from which details of tax deducted at source or tax collected at source are captured in the Departmental system. Further, the On-Line Tax Accounting System (OLTAS) is yet to fully stabilize as failure to quote and in many cases quoting of false PAN and TAN have resulted in getting the taxes deducted or collected or paid getting credited to the suspense account. The dematerialisation system is dependent upon filing of TDS or TCS statements by all the deductors or collectors with correct PAN and TAN in all the TDS and TCS statements and challans. Until all taxes deducted, collected or paid are matched in the OLTAS and complete information is populated in the deductees or collectees account, dematerialisation cannot substitute for the existing paper based system.

39.4 Keeping in view the aforementioned factors, the Finance Act, 2006 has deferred the commencement of dematerialisation provisions by two years by making such provisions applicable in respect of taxes deducted or paid [sub-section (3) of section 203] or collected [1st proviso to sub-section (5) of section 206C] from 1-4-2008.

39.5 These amendments will take effect retrospectively from 1-4-2006 and will, accordingly, apply in relation to the assessment year 2006-07 and subsequent years.

[Sections 31, 41, 43, 45 and 47]

39.6 Under the existing provisions of sub-section (14) of section 155 credit for tax deducted at source is allowed if the certificate of tax deduction at source under section 203 was not filed originally with the return of income but is produced before the Assessing Officer within two years from the end of the relevant assessment year. The Finance Act, 2006 has extended this provision in respect of certificate of collection of tax at source in view of the insertion of the requirement of such certificate as proof under sub-section (9) of section 139 in respect of tax collected at source before the 1-4-2008.

39.7 This amendment will take effect from 1-4-2007 and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years.

[Sections 31 and 39]

40. Payment of Interest for TDS or TCS default before furnishing TDS or TCS quarterly statements and deeming the person who fails to collect or pay the tax collected at source as an assessee in default

40.1 The existing provisions of sub-section (1A) of section 201 provide that if any person, principal officer or company, as referred to in sub-section (1) of that section, does not deduct the whole or any part of the tax or after deduction fails to pay the tax to the Central Government, such person is held liable to pay simple interest at the rate of twelve per cent per annum on the amount of such tax from the date on which such tax was deductible to the date on which such tax is actually paid. Similar provisions exist in respect of tax collection at source under sub-section (7) of section 206C. The existing provisions of TDS and TCS, however, do not have a streamlined procedure or mode for payment of interest.

40.2 In order to require the payment of interest by the deductor of tax on a self-assessment basis, sub-section (1A) of section 201 has been amended to provide that the person, the principal officer and the company [referred to in sub-section (1) of section 201] liable to pay interest under sub-section (1A) of section 201, shall pay such interest before furnishing the quarterly statement for each quarter in accordance with the provisions of sub-section (3) of section 200. On a similar line, sub-section (7) of section 206C has also been amended to provide that the person responsible for collection of tax and liable to pay interest under sub-section (7) of section 206C shall pay such interest before furnishing the quarterly statement for each quarter in accordance with the provisions of sub-section (3) of that section.

40.3 These amendments will take effect from 1-6-2006.

40.4 On the lines of consequences of failure regarding TDS as enacted under section 201(1), a new sub-section (6A) has also been inserted in section 206C relating to TCS to provide that any person responsible for collecting tax shall be deemed to be an assessee in default if such person does not collect the whole or any part of the tax or fails to pay such tax after having it collected at source. The new provisions further require that before levying any penalty under section 221, the Assessing Officer shall satisfy himself that the person has without good and sufficient reasons failed to collect and pay the tax.

40.5 These amendments will take effect from 1-4-2007 and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years.

[Sections 42 and 47]

41. Doing away with furnishing of annual TDS and TCS returns

41.1 Under the existing provisions of section 206 and sub-section (5A) of section 206C, any person responsible for deducting or collecting tax under the Income-tax Act is required to prepare and deliver to the prescribed income-tax authority an annual return of tax deducted or collected at source.

41.2 A system of quarterly statements of TDS and TCS was introduced under the provisions of sub-section (3) of section 200 and the proviso to sub-section (3) of section 206C in respect of taxes deducted or collected on or after 1-4-2005. With the system of quarterly statements in place, the requirement of furnishing annual TDS and annual TCS returns has been rendered superfluous. Therefore, the requirement of furnishing of the annual return of tax deducted and collected at source in respect of taxes deducted or collected on or after 1-4-2005 has been dispensed with. Failure to furnish the annual return for tax deduction or collection at source before 1-4-2005 shall continue to attract penalty under section 272A of the Income-tax Act.

41.3 Since quarterly statements have substituted for the annual returns, penal provisions for failure to furnish quarterly statements have been suitably rationalised to provide that the penalty leviable for failure to deliver the statements under clause (k) of sub-section (2) of section 272A shall not exceed the amount of tax deductible or, as the case may be, collectible.

41.4 The existing provisions of sub-sections (5B) and (5D) of section 139A have also been amended to provide for the requirement of quoting of PAN in all quarterly statements prepared and delivered or caused to be delivered in accordance with the provisions of sub-section (3) of section 200 or the proviso to sub-section (3) of section 206C. The requirement of quoting the tax deduction account number or the tax collection account number or the tax deduction and collection account number in all quarterly statements has been separately provided under clause (ba) in sub-section (2) of section 203A.

41.5 The amendment in relation to doing away with the annual returns of tax deduction under section 206 or collection at source under section 206C will take effect from 1-4-2006 and the amendments to sections 139A, 203A and 272A will take effect from 1-6-2006.

[Sections 32, 44, 46, 47 and 53]

42. Penalty for failure to collect tax at source

42.1 No penalty is, so far, specified under the Income-tax Act for failure to collect tax at source. Subsequent to expansion of the provisions of tax collection at source, Board have been receiving information from various quarters that in a number of cases collection of tax was not being made by the persons responsible for collecting tax.

42.2 A new section 271CA has been inserted to provide for imposition of penalty on any person who is responsible for collecting tax and who has failed to collect tax at source in accordance with the provisions of Chapter XVII-BB of the Act. Such penalty will be a sum equal to the amount of tax which he failed to collect at source and will be imposed by the Joint Commissioner of Income-tax. The order of penalty has been made an appealable order under section 246A. Section 273B has also been amended to provide that no penalty shall be imposed if the concerned person proves that there was a reasonable cause for his failure.

42.3 This amendment will take effect from 1-4-2007 and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent assessment years.

[Sections 51, 52 and 55]

43. Penalty for false quoting of TAN

43.1 Under the existing provisions of section 272BB of the Income-tax Act, a person becomes liable for penalty of a sum of ten thousand rupees if he fails to comply with the provisions of section 203A which require him to apply to the Assessing Officer for the allotment of a tax deduction and collection account number. After allotment of the tax deduction and collection account number, the deductor or, as the case may be, the collector is required to quote such number in all challans, certificates, returns and in all other documents.

43.2 The existing provisions of section 272BB, however, do not provide for a penalty for quoting false tax deduction and collection account number on the lines of a penalty specified for quoting or intimating a false permanent account number under section 272B.

43.3 The implications of quoting false TAN are as severe as quoting a false PAN. Quoting of false TAN as does the quoting of false PAN results in getting the tax deducted or collected posted to suspense account and not to the account of the deductee or the collectee. It has been learnt that certain bank branches having not applied for TAN, are quoting TAN allotted to other branches of the same bank. In such events, the computer system does not accept two different returns from the two branches bearing the common or same TAN. False quoting of PAN and TAN has been one of the reasons for tardy progress of dematerialisation of the paper based system. In order to make dematerialisation a reality, correct quoting of TAN by the deductors or collectors needs to be enforced. Until all taxes deducted or collected are matched in the On-Line Tax Accounting System (OLTAS) and complete information is populated in the deductees or collectees accounts, dematerialisation may not fully substitute for the existing paper based system. If past experience is any guide, mere existence of the provisions, requiring the deductors and the collectors to apply for TAN and quote the same in the specified documents, has not yielded desired compliance in the absence of penalty provisions for quoting a false TAN.

43.4 Therefore, a new sub-section (1A) has been inserted in section 272BB to provide that if a person who is required to quote his tax deduction account number or tax collection account number or tax deduction and collection account number in the challans or certificates or statements or other documents referred to in sub-section (2) of section 203A, quotes a number which is false and which he either knows or believes to be false or does not believe to be true, such person shall pay by way of penalty a sum of ten thousand rupees.

43.5 Further, under the existing provisions contained in sub-section (2), no penalty can be imposed unless the person concerned has been given a reasonable opportunity of being heard.

43.6 Sub-section (2) has also been amended to include a reference of sub-section (1A) therein for the purpose of giving an opportunity of being heard to the person on whom the penalty is proposed to be imposed under the said sub-section (1A). Reference to sub-section (1A) of section 272BB has also been made in section 273B which enables the assessee or the person, as the case may be to show that there was reasonable cause for failure to comply with the provisions of newly inserted sub-section (1A).

43.7 These amendments will take effect from 1-6-2006.

[Sections 54 and 55]

44. Rationalisation of provisions related to granting of recognition to a Provident Fund

44.1 Rule 4 of Part A of Schedule IV to the Income tax Act, 1961 provides for the conditions which are required to be satisfied by a provident fund for receiving or retaining recognition under the Income-tax Act.

44.2 Under the existing provisions contained in the said rule, a provident fund may receive and retain recognition if it satisfies certain conditions such as

   (i)  all employees shall be employed in India, or the employer has its principal place of business in India;

  (ii)  the fund shall be vested in two or more trustees or in the Official Trustee under an irrevocable trust;

(iii)  the contribution of an employee in any year shall be a definite proportion of his salary for that year and shall be deducted by the employer from the employees salary;

(iv)  the contribution of an employer to the individual account of an employee in any year shall not exceed the amount of contributions of the employee in that year; etc.

44.3 With a view to provide legislative synergy between the Income-tax Act and the Employees Provident Funds and Miscellaneous Provisions Act, 1952 to tackle the problems being faced by the small investors in the recognised provident funds, a new clause (ea) has been inserted in the said rule to provide that the fund shall be of an establishment to whom the provisions of sub-section (3) or sub-section (4) of section 1 of the Employees Provident Funds and Miscellaneous Provisions Act, 1952 are applicable and such establishment has been exempted under section 17 of the said Act from the operation of all or any of the provisions of any scheme referred to in that section.

44.4 Further, Rule 3 of Part A of Schedule IV provides that the Chief Commissioner or the Commissioner of Income-tax may accord recognition to any provident fund which satisfies the conditions prescribed in Rule 4 and the rules made by the Board in this behalf. He may, at any time, withdraw such recognition if the provident fund contravenes any of such conditions. There may be a number of provident funds recognised under the said rule, which do not fulfil the conditions set out in the proposed clause (ea) of Rule 4. Since a synergy between the provisions of the Income-tax Act and the Employees Provident Fund and Miscellaneous Provisions Act is to be established, a proviso in sub-rule (1) of Rule 3 has been inserted to provide that in a case where recognition has been accorded to any provident fund on or before 31-3-2006 and such provident fund does not satisfy the conditions set out in clause (ea) of Rule 4, and any other conditions which the Board may, by rules specify in this behalf, the recognition to such fund shall be withdrawn, if such fund does not satisfy such conditions on or before 31-3-2007.

44.5 Applicability – From assessment year 2007-08 onwards.

[Section 56]

45. Securities Transaction Tax

45.1 The existing provisions of Chapter VII of the Finance (No. 2) Act, 2004 provide for levy of a securities transaction tax on the value of transactions in respect of specified securities.

45.2 With a view to mobilize additional resources and plug revenue leakages, the Act has increased the rates for levy of the securities transaction tax with effect from 1-6-2006. The new rates are as follows:

   

Sl. No. Taxable securities transaction

Old rate (before 1-6-2006)

New rate (on or after 1-6-2006)

1. Purchase of an equity share in a company or a unit of an equity oriented fund, entered into in a recognized stock exchange and settled by actual delivery or transfer of such share or unit

0.1%

0.125%

2. Sale of an equity share in a company or a unit of an equity oriented fund, entered into in a recognized stock exchange and settled by actual delivery or transfer of such share or unit

0.1%

0.125%

3. Non-delivery based sale of an equity share in a company or a unit of an equity oriented fund, entered into in a recognized stock exchange

0.02%

0.025%

4. Sale of a derivative being an option or future, entered into in a recognized stock exchange

0.0133%

0.017%

5. Sale of units of an equity-oriented fund to the mutual fund.

0.2%

0.25%

[Section 76]

More Under Income Tax

Posted Under

Category : Income Tax (25163)
Type : Circulars (7511) Notifications/Circulars (30306)

Leave a Reply

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