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ICAI submits 26 Post Budget suggestions related to Income Tax

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POST-BUDGET MEMORANDUM – 2018

1. INTRODUCTION

1.0 The Council of the Institute of Chartered Accountants of India considers it a privilege to submit this Post-Budget Memorandum to the Government.

1.1 In this memorandum, we have suggested certain amendments to the proposals contained in the Finance Bill, 2018 which would help the Government to achieve the desired objectives.

1.2 We have noted with great satisfaction that the suggestions given by the Committee in the past have been considered very positively. In formulating our suggestions in regard to the Finance Bill 2018, the Direct Taxes Committee and Committee on International Taxation of the ICAI have considered in a balanced way, the objectives and rationale of the Government and the practical difficulties/hardships faced by taxpayers and professionals in application of the provisions of the Income-tax Act, 1961. We are confident that the suggestions of the Direct Taxes Committee and Committee on International Taxation of ICAI given in this Memorandum shall receive positive consideration.

1.3 In this memorandum, suggestions on the specific clauses of the Finance Bill, 2018 relating to Income-tax Act have been given in detail.

1.4 In case any further clarifications or data is considered necessary, we shall be pleased to furnish the same.

Name and Designation Contact Details
CA. Tarun
Chairman, Committee Jamnadas Direct Ghia, Taxes		 [email protected]
Secretary, Committee Direct Taxes [email protected]

ICAI Submits 26 Post Budget Suggestions Related to Income Tax

POST BUDGET MEMORANDUM – 2018

C. Detailed Suggestions

Page Contents

1. Section 139 – Change in due dates of filing various returns & reports

Assessees mentioned under clause (c) of Explanation 2 to section 139(1), are generally small taxpayers or salaried persons and they are quite unorganised in respect of record keeping about tax matters. They approach the Chartered Accountants towards the end of due date of filing Income tax returns with the result that substantial time of Chartered Accountants remains devoted to these non-audit entities till 31st July of the Assessment Year. The Chartered Accountants can more fruitfully utilise this time for conducting tax audits and corporate audits. The major part of tax collection from salaried persons comes in advance by way of TDS and in similar manner from other small taxpayer by way of TDS and advance tax. Therefore, the revenue’s stake in these non- audit entities is comparatively very low.

Further, in many of individuals’ cases, the relevant Forms 26AS to be completed by the payers being firms or companies are not complete before 30th September.

The partners of firms as such also are dependent upon the firms’ computations to arrive at remunerations and share of profits.

Therefore, keeping the dates of filing returns for the assessees falling under clause (c) of Explanation 2 to section 139(1) to 31st December will not prejudice the revenue’s interest materially but at the same time the Chartered Accountants who are the backbone to file reports of tax audits and corporate audits will get better environment to expedite the same. Consequent to such extension, the Chartered Accountants would engage in full swing in preparing and filing the returns of such assessees. Resultantly, they can effectively concentrate on the work of conducting tax and corporate audit immediately towards or after end of the relevant previous year.

To avoid such last minute rush & hassles, the Government may consider postponing the date of aforesaid returns as they contribute a small portion to the Government’s revenue.

We are aware that in this year’s finance bill, the section prescribing due dates has not been touched. But at the same time, if the rationale and the need is accepted, then the solution is not difficult to accept and implement.

Suffice to say that if the following suggestion is accepted, it will help the chartered accountants to organise the audits and returns of audit entities in far better and expeditious manner which would also mean expeditious collection of tax.

Suggestion:

In consideration of such connected factors, it would be helpful to all concerned if the due date of filing returns is shifted from the present 31st July to 31st December.

2. Clause 3 – Section 2(22) – Insertion of Explanation 2A in section 2(22)-

Accumulated profits (AP) of amalgamating company included in AP of amalgamated company

With a view to prevent abusive arrangements whereby companies with large accumulated profits (AP) adopt amalgamation route to circumvent dividend distribution tax (DDT) levy on capital reduction, Finance Bill 2018, proposes to insert Explanation 2A to section 2(22) to provide that the AP for the purposes of DDT levy in case of an amalgamated company shall be increased by the accumulated profits of the amalgamating company as on the date of the amalgamation.

The proposed amendment is applicable to each of the deemed dividend clauses specified in section 2(22)(a) to 2(22)(e), and is applicable from A.Y. 20 18-19.

The determination of AP has direct impact on DDT liability of the company. DDT liability of the company u/s 2(22) is based on AP on the date of distribution or payment in respect of deemed dividend.

The amendments to section 115-O regarding DDT liability have always been made on a prospective basis. The coverage of section 2(22)(e) within the scope of section 115-O by FB 2018 has also been made applicable prospectively in respect of payment made post 1st April 2018.

Suggestions:

It is suggested that:

(i) Reconsider introducing the provision: The amendment is proposed as an anti-avoidance measure to prevent abusive arrangements being adopted to curtail the scope of AP for deemed dividend taxation under section 2(22). Given that GAAR provisions have a wide reach, such amendment may need to be reconsidered.

(ii) Modify the provision to clear an unintended ambiguity so as to clarify that adjustment of AP is not to be made outside the books of amalgamated company: The language of the proposed amendment creates an ambiguity about the scope and manner of adjustment needed and whether the adjustment may need to be made outside the books of the amalgamated This would be clearly inconsistent with the concept of AP understood in the Act and by the judiciary over the years. The concept is confined to ascertainment of AP on the basis of the books of the amalgamated company. The amount of past reserves already utilized and/or applied up to the date of distribution is required to be reduced so as to ascertain the amount of AP on the date of distribution. Such ascertainment is not possible if an adjustment of AP of amalgamating company is contemplated outside the books of account of the amalgamated company. It throws no light on the amount  already used up from the date of amalgamation to the date of distribution. It also leads to the vice of duplication and complex calculation which may potentially frustrate charge due to ambiguities.

(iii) The language of proposed amendment may make it clear that in the determination of AP, the amalgamated company will be precluded from claiming that profits of amalgamating company up to the date of amalgamation is to be excluded.

(iv) Clarify explicitly that the provisions apply to mergers post 1 April 2018: In any case, consistent with the philosophy of the Government, the amendment may be made effective on a prospective basis. It needs to be kept in view that amalgamations may have been concluded in a number of years prior to the date of distribution of dividend. Say, for example, a company which was established a century back may have undergone amalgamations decades back. A specific clarification may be provided that Explanation 2A is applicable in respect of amalgamations made on or after 1 April 2018.

(v) In any case, make Explanation 2A applicable to distributions post 1st April 2018: In any case, and without prejudice to the above, since the amendment to definition of AP will have direct impact on calculation of DDT liability, to avoid any unintended implications, it is suggested that the amendment may be made applicable in respect of distribution or payment made after 1 April 2018.

To illustrate, if the amendment is applied to capital reduction which has already been effected on 1st June 2017, the company would have discharged DDT liability based on the applicable legal position and the shareholder would have discharged capital gains tax liability on the residual amount. If the amendment is made applicable from Assessment Year 2018-19, there may be increase in DDT liability and a corresponding reduction in capital gains tax liability of the shareholder. This will lead to unintended refund and payments. Also, technically, the company can face risk of prosecution under section 276B.

3. Clause 3(b)(ii) – Section 2(42A) – Period of holding in case of fund of funds

Section 2(42A) provides the definition of the expression ‘short term capital asset’. First proviso to section 2(42A) provides that, a security (other than units) listed in a recognised stock exchange in India, unit of unit trust of India, unit of equity oriented funds or zero-coupon funds shall be considered as long term if such capital asset is held for a period of more than 12 months. Explanation 4 to section 2(42A) provides that ‘equity oriented fund’ shall have the meaning assigned to it in section 10(38).

The definition of ‘equity oriented fund’ provided in section 10(38) provides that a fund shall be ‘equity oriented fund’ where investible fund are invested in equity shares of domestic companies to the extent of more than 65% of total proceeds of the fund. Definition of ‘equity oriented fund’ in section 10(38) does not cover ‘fund of funds’ (one fund investing in units of another fund).

New taxation regime is proposed u/s 1 12A in respect of transfer of long term capital asset being equity shares, unit of equity oriented mutual fund and units of business trust.

Explanation to section 11 2A, inter alia, provides the definition of ‘equity oriented fund’. The definition of ‘equity oriented fund’ is  divided into following two limbs:

  • Limb 1: Fund of funds (one fund investing in units of another fund).
  • Limb 2: Funds investing in equity shares of domestic companies

Issue

Under the new regime, the benefit of lower rate of taxation of 10% is available to equity oriented funds which includes ‘fund of funds’. Section 2(42A) however, stands unamended and does not make reference to the definition of ‘equity oriented fund’ as provided in section 1 12A.

As a result, where fund is investing in units of another fund (fund of fund), the units of first mentioned fund will be regarded as long-term capital asset if held for a period of 36 months. However, where the fund is investing such percentage of funds in shares of domestic companies, units of such fund are regarded as long-term capital asset if it is held for a period of more than 12 months. Such distinction may not be the intent of the legislature.

Units of equity oriented funds are regarded as long-term capital asset if held for a period of 12 months. Section 2(42A) borrows definition of ‘equity oriented fund’ from section 10(38) which does not include ‘funds of fund’ (one fund investing in other fund) which is now provided in section 1 12A. Definition of ‘equity oriented fund’ in section 2(42A) may be amended to take definition from section 1 12A.

Suggestion:

It is suggested that Explanation 4 to section 2(42A) may be

amended to provide that ‘equity oriented fund’ shall have the same meaning as assigned to it in Explanation to section 1 12A.

4. Clause 3, 9 and 18 – Section 2(24), 28 and 49 – Deferment of tax on conversion of stock-in-trade into capital asset and step up of cost for Section 43(1)

There is no provision in the Income-tax Act specifying tax treatment of conversion or treatment of stock in trade (SIT) as capital asset (CA). Finance Bill 2018 proposes following tax treatment, from A.Y. 2019-20, for conversion into, or treatment of stock in trade as capital asset:

  • Section 28(via) considers FMV of stock in trade as on date of conversion into or treatment of stock in trade as capital asset as business income;
  • Section 2(24)(xiia) proposes to amend the definition of income to include FMV of stock in trade referred to in section 28(via);
  • FMV [which has been taken into account under section 28(via)] is deemed as cost of acquisition of capital asset referred to in section 28(via);
  • Period of holding of capital asset referred to in section 28(via) is reckoned from date of conversion into or treatment as capital asset [Explanation 1(i) (ba) to section 2 (42A)].

As per explanatory memorandum, the intention of proposed amendment is to provide symmetrical treatment and discourage the practice of deferring tax payment by converting stock in trade into capital asset.

Issue:

(i) Though the intention as per explanatory memorandum is to provide tax treatment symmetrical to conversion of capital asset into stock in trade, the proposed amendment is asymmetrical to the extent it provides for upfront taxation of FMV of stock in trade as on date of conversion as business income, without the taxpayer actually having realised any income as of the date of conversion.

The very intention of conversion into capital asset is to hold the asset for long-term. The realisation of income may happen only on transfer of capital asset, which may practically happen many years after the date of conversion or may never happen. However, the proposed amendment provides for upfront taxation of FMV of stock in trade as on the date of conversion.

Any conversion, if it has a sole purpose of avoiding or deferring tax liability is impermissible and has already been addressed by introduction of GAAR provisions. It would be unjust to penalise a taxpayer for taking a valid commercial step of deciding to convert stock in trade into capital asset.

The proposed amendment, to the extent resulting in upfront taxation, is harsh and unjust. It is inconsistent with the core principle embodying various other provisions of the Income-tax Act which ignore fair valuation and/or do not envisage tax on notional profit, absent actual realisation of income.

The tax consequences may turn out so harsh that a taxpayer, having taken a bona fide commercial decision of converting a stock in trade into capital asset, is involuntarily required to dispose that asset in order to discharge the tax liability.

Suggestion. 

Accordingly, it is suggested that the tax treatment to be accorded to the conversion may be at par with the tax treatment presently provided for in the context of conversion of capital asset into stock- in-trade. Accordingly, there may be no upfront taxation. The tax may be payable at the time of transfer of capital asset.

Issue.

(ii) There is a clear case of deficiency if the fair value of the converted asset is not considered as cost of acquisition for the purposes of Section 43(1) of the Act. For example, a real estate vendor may convert a part of his property to say, hotel premises or a mall. In ordinary parlance, he would be entitled to claim depreciation in respect of an asset which is used for the purposes of business. As per proposed amendment, he would not be able to claim depreciation with reference to FMV as on the date of conversion since, for the purposes of section 43(1), the cost of acquisition is not yet a substituted figure.

Suggestion.

It is suggested that:

i. A specific provision may be inserted in section 43(1) to provide that the “actual cost” of stock in trade converted into  or treated as capital asset shall be the FMV of stock in trade  as on the date of conversion, that has been taken into account for the purpose of section 28(via).

ii. A specific provision may be incorporated in proposed section 49(9) to ensure that once the FMV is considered for granting depreciation, there shall be no deduction under section 49(9).

5. Clause 5(b)(i) – Section 10(12A) – Extending the benefit of tax-free withdrawal from NPS to non-employee subscribers under section 10(12A) – Similar amendment may also be made in section 10 (12B)

For A.Y. 20 18-19, section 10(12A) provides for an exemption of upto 40% of the total amount payable to an employee contributing to the NPS on closure of his account or on his opting out the scheme. Further, in cases of partial withdrawal from NPS, section 10(12B) provides for exemption of upto 25% of contributions made by an employee. These exemptions were, however, not available to non-employee assessee contributing to NPS.

The Finance Bill, 2018 proposes to extend the benefit of exemption under section 10(12A) to all assessees, in order to provide a level playing field to both employee and non-employee assessee subscribers.

However, the Finance Bill, 2018 does not contain a similar proposal in respect of benefit of exemption under section 10(1 2B), consequent to which such benefit of exemption in case of partial withdrawal continues to be restricted to employees alone.

To provide equity between the employee and non-employee subscriber, similar amendment may be made in section 10(12B) to extend the benefit available thereunder to non-employee subscribers.

Suggestion:

It is suggested that the amendment as proposed in section 10(12A) may also be made in section 10(12B) thereby extending the benefit of exemption in case of partial withdrawal to non-employee subscribers as well. The said amendment would also be in line 

with the intention of the legislature to provide a level playing field to both types of subscribers to NPS.

6. Clause 5 and 31 – Amendment of section 10(38) and introduction of new Section 112A – New regime for taxation of long-term capital gains on sale of equity shares etc. – retention of old regime

Clause (38) of section 10, inter alia, provides for exemption from tax on the income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust subject to certain conditions specified in the said clause.

However, the Finance Bill, 2018 proposes to amend the said clause so as to provide that the provisions of said clause shall not apply to any income arising from the transfer of long-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust, made on or after 1st April, 2018.

The stated intent for removal of exemption as explained in the Memorandum to the Finance Bill 2018 is that the existing regime is inherently biased against manufacturing and has encouraged diversion of investment in financial assets. It has also led to significant erosion in the tax base resulting in revenue loss. The problem has been further compounded by abusive use of tax arbitrage opportunities created by these exemptions.

In order to minimize economic distortions and curb erosion of tax base, the Finance Bill 2018 proposes to withdraw the exemption under clause (38) of section 10 and to introduce new section 1 12A in the Act to provide that long-term capital gains arising from transfer of a long-term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust shall be taxed at 10% of such capital gains exceeding one lakh rupees.

This concessional rate of 10% will be applicable to such long- term capital gains, if –

i. in a case where long -term capital asset is in the nature of an equity share in a company, securities transaction tax has been paid on both acquisition and transfer of such capital asset; and

ii. in a case where long -term capital asset is in the nature of a unit of an equity oriented fund or a unit of a business trust, securities transaction tax has been paid on transfer of such capital asset.

Further, sub-section (4) of the new section 1 12A empowers the Central Government to specify by notification the nature of acquisitions in respect of which the requirement of payment of securities transaction tax shall not apply in the case of equity share in a company. Similarly, the requirement of payment of STT at the time of transfer of long term capital asset, being a unit of equity oriented fund or a unit of business trust, shall not apply if the transfer is undertaken on recognized stock exchange located in any International Financial Services Centre (IFSC) and the consideration of such transfer is received or receivable in foreign currency.

Further, the new provision of section 11 2A also proposes to provide the following:-

i. The long-term capital gains will be computed without giving effect to the first and second provisos to section 48, i.e. inflation indexation in respect of cost of acquisitions and cost of improvement, if any, and the benefit of computation of capital gains in foreign currency in the case of a non-resident, will not be allowed.

ii. The cost of acquisitions in respect of the long -term capital asset acquired by the assessee before the 1st day of February,20 18, shall be deemed to be the higher of –

a. the actual cost of acquisition of such asset; and

b. the lower of –

(I) the fair market value of such asset; and

(II) the full value of consideration received or accruing as a result of the transfer of the capital asset.

The removal of exemption on long-term capital gains on transfer of listed equity shares and units of equity oriented fund as a measure to promote investment in manufacturing sector may, however, adversely affect the equity market. The FII inflow through this route may suffer a set-back since they would also be subject to long-term capital gains tax. This revenue garnering measure may dampen the spirit of the equity market and resultantly, impact on the economy as a whole.

Accordingly, it is suggested that the said section may not be introduced and the existing regime of not taxing the long-term capital gain may continue. However, in the event of the new regime of taxing LTCG under the proposed section 112A being actually introduced, the benefit of indexation may be provided and the transfer may not be chargeable to Securities Transaction Tax (STT) as this will lead to double taxation.

Suggestions:

It is suggested that:

i. The existing regime of exempting Long term capital gain from tax may continue so that the equity market does not suffer a setback and the economy as a whole is not impacted.

In case if the said section is proposed to be inserted, it is suggested that:

ii. The benefit of indexation may be provided in respect of such long term capital gains.

iii. As there is no proposal to withdraw Securities Transaction Tax (STT) in the Finance Bill 2018, so bringing the related LTCG within the ambit of taxation will lead to double taxation. Hence, STT may be done away with. Otherwise, adjustment of STT against long term capital gain tax may be permitted to avoid double taxation of the same income.

7. Clause 6 – Section 11 – Amendment in computation of total income for charitable entities 

The Finance Bill 2018 proposed an amendment in section 11 and 10(23C) to incorporate section 40(a)(ia), 40A(3) and 40A(3A) (hereinafter referred as specified provisions), mutatis mutandis for taxation of charitable trust under section 11 and other institutions specified in clause (iv) / (v) / (vi) / (via) of section 10(23C) (hereinafter referred as charitable entities).

Section 40A(3) provides for disallowance of any expenditure in respect of which payment has not been made through banking channel in excess of Rs 10,000.

Section 40(a)(ia) disallows expenditure if taxes are not withheld and default is made as per Chapter XVII-B. However, proviso to section 40(a)(ia) provides exception to this disallowance if payer has complied with withholding provisions or payee has filed his tax return including the payment received and a declaration to that effect is provided to the payer.

The proposed amendment of introducing specified provisions into trust taxation is harsh and may adversely impact genuine charitable entities. Listed below are a few hardships / ambiguities in relation to the proposed amendment on implementation to charitable entities.

Issues:

Barring few established charitable entities, most of others are small and medium size entities with no or moderate infrastructure. Many of them operate in unorganised form with limited or no resources. Many of them are not equipped with nor do they afford to have well educated people as their employees.

Tax withholding and other provisions are complex and will require technical knowledge of the provisions of the Act. It is not easy for semi-qualified, part-time accountant or similar undergraduate staff (on whom charitable entities normally depend) to understand and apply such provisions in day to day affair of the charitable activities.

Largely, charitable entities operate in the remote areas of the country which are devoid of basic facilities. There may be no fixed place of operations for such entities. e.g. charities may be engaged in enhancing awareness for education in one month in a village in Bihar and in the next month they may move to another village in Haryana. For this, they need support of local vendors. In almost all cases, charitable entities will have one-time transactions with local vendors in that area. In view thereof, there may be challenge in acceptance of cheque payments by vendor in absence of established rapport with the entities.

There is also an ambiguity as to whether the specified provisions would apply at the stage of determination of ‘amount of application’ in respect computation of income post giving effect to the specified provision or the specified provision would operate post determination of exemption under section 11 with a view to disallow the ‘application of income’ per se. There could be further challenges in giving effect to these provisions in subsequent year on correction of default such as proviso to section 40(a)(ia).

It would be too complex to apply the provisions in the context of charitable trusts having regard to peculiar computation mechanism applicable to charitable trust. It may also result in complete loss to charitable entities in respect of amount disallowed by applying the specified provision. This can be better understood by way of the following illustration:

  • Amount spent in Year 1 without withholding taxes is disallowed as ‘application of income’ to the extent of 30% of such amount. This may result in trust being liable to tax in respect of amount disallowed.
  • Further, in terms of proviso to section 40(a) (ia), trust would be entitled to deduction of impugned amount in Year 2 on compliance of said proviso.
  • If application of section 40(a)(ia) is considered as application to ‘total income’ of the trust, there may be no scope for getting deduction of expense under proviso to section 40(a)(ia), since, in Year 2 trust may not have any taxable income due to operation of section 11. This may result in loss of benefit of proviso to section 40(a)(ia) in Year 2.
  • If proviso to section 40(a)(ia) is applied to determine amount of ‘application of income’, in Year 2, there may be no actual spending to happen in Year 2. To allow the said amount as deemed application in Year 2, there has to be specific provision to that effect in the Act.
  • If, however, trust has already spent amount to the extent of 85% of its income in Year 2 on actual basis, there could be challenge in availing benefit of deemed application in Year 2. If appropriate back up provision is not made to carry forward the benefit to subsequent year, trust may lose out the benefit of proviso to section 40(a)(ia).
  • In any case, tax cost incurred by trust in Year 1 is clear loss to the trust and will impact its funds meant for charitable purpose.

Unlike in the case of business, charitable entities many times will have one-time transaction with the payees. So once a payment is made without withholding tax, there may not be an opportunity for the trust to make good such default and seek reimbursement of the same from such party. Thus, this will also result in permanent disallowance of such amount which may not be the intent of the amendment.

Disregarding quantum of application of income by applying Section 40A(3)/(3A) and Section 40(a)(ia) may have harsh impact on genuine charities who operate in remote areas and who have limited resources for compliance and tax knowledge. In any case, the scope of amendment may be clarified to provide that the proposed amendment is only applicable to those charitable entities having total donation of more than Rs 50 Lacs in the preceding previous year.

Suggestions:

It is suggested that:

i. Blanket disallowance of application of income will lead to dilute the basic objective of ‘charity’. It is hence recommended that the present proposal be dropped as it has adverse impact on many of the genuine charitable entities.

ii. Without prejudice, proposal be restricted to large charitable entities having total donation –say of more than Rs 50 lacs in immediately preceding previous year thus sparing the small charitable entities from rigors of this proposal.

iii. Proposal of importing section 40A(3) / (3A) in charity may be

iv. Without prejudice, if above recommendation is not accepted, considering that amount disallowed under section 40A(3)/(3A) is in the nature of permanent disallowance and such amount would never be allowed as application of income to the charitable entity, the rigor of provision may be toned down to disallow only 30% of expenses rather than whole of the expense.

v. Still, without prejudice, disallowance provision may be made applicable to expense where whole of invoice is settled in cash and such amount exceeds the threshold limit or provision should not be applied to initial advances payable to vendor- say, up to Rs 25,000 in connection with contract where balance payment is made by banking channel.

vi. Since provision of section 40(a)(ia) has only timing difference, Government may refrain from implementing it in the context of charitable trust / institution.

vii. In case if above is not acceptable, a specific and self-contained provision may be introduced in section 11 which can align with smooth working of the provision for charitable trust. Once there is default in compliance of withholding provision, application  of income for that year with reference to 30% defaulted amount may be de-recognised. However, once there is compliance with  proviso to section 40(a)(ia), it would relate back to the year of default and recognition of application of income may be restored in Year 1.

8. Clause 7 – Section 16 – Standard Deduction on Salary income – Existing transport allowance and medical reimbursements may be retained along with the proposed standard deduction

The Finance Bill 2018 proposes to provide standard deduction of Rs 40,000 from salary and pension income of taxpayers. In lieu thereof, exemption of Transport allowance (except for differently abled persons) of Rs 19,200 and exclusion of reimbursement of medical expenses of Rs 15,000 from perquisite is proposed to be withdrawn by the Finance Bill 2018.

Issue:

Intention of the proposal is that, this standard deduction will simplify the tax system by reducing the paper work and also shall be beneficial to all salaried class and pensioners. While pensioners will be able to enjoy the benefit at the fullest, in respect of salaried class, this benefit is nugatory in many cases due to increase in cess to 4%. The maximum additional benefit for a salaried person is only Rs 5,800 (Rs 40,000 – Rs 34,200). For a salaried person who falls in 10% tax bracket, the tax benefit is merely Rs 580 which is reduced to Rs 574 due to 1% additional cess.

The Hon’ble Finance Minister in his budget speech mentioned that major portion of personal income tax collection comes from the salaried class (as compared to the individual business persons) and in order to provide relief and incentivise the salaried class, the standard deduction from salary income is proposed.

However, as seen from the above, the proposed standard deduction is not meaningful to large number of salaried tax payers due to withdrawal of exemption for transport allowance upto Rs 19,200 and medical reimbursement upto Rs 15,000 as also due to levy of additional cess of 1%.

Suggestions:

It is suggested that:

i. The standard deduction may be granted in addition to exemption for transport allowance and medical reimbursement. The administrative hassles for the employer of collecting evidences for medical reimbursement can be relieved through amendment in rules or through the annual salary TDS Circular and 

ii. the Government may consider inflation index while setting the limit of standard deduction in order to benefit all classes of taxpayers.

9. Clause 10 and 11 – Section 36(1)(xviii) and 40A(13) – Disallowance of MTM/ expected loss (in line with ICDS I) – certain clarifications required

Issue:

i. Clarity regarding non- taxability of MTM Gains

The newly proposed provisions in section 36(1)(xviii) and 40A(13) seeks to codify para 4(ii) of ICDS I which provides that no MTM loss or expected loss shall be recognised unless permitted by other ICDS.

This has been widely understood to impact following items: –

  • MTM loss on derivatives (other than those covered by ICDS VI)
  • Foreseeable loss on onerous construction contracts

Since MTM loss is not permitted, CBDT vide Circular No 10/2017, dated 23.3.17 in FAQ No. 8 had clarified that even MTM gain will not be taxed and such gain will be taxed only upon actual realisation.

While specific provision has been inserted to deny MTM loss, there is no provision which clarifies that MTM gain shall not be taxed. This raises apprehension for the taxpayers whether there will be double whammy whereby MTM gain will be taxed whereas MTM loss will be disallowed.

Suggestion:

It is suggested to insert a specific provision on lines of FAQ No. 8 of Circular No 10/2017, dated 23.3.17 to clarify that MTM gain shall not be taxed.

Issue:

ii. Clarification for banks and other authorised dealers offering forward exchange contracts to their constituents, MTM loss on forward contracts shall be allowed as per RBI Guidelines

Banks and other Authorised Dealers recognise MTM loss on forward contracts offered to constituents in their books as per RBI guidelines. Part B of ICDS VIII permits banks and Public Financial Institutions to value ‘securities’ held as inventory as per RBI Guidelines. ‘Securities’ definition is as per Section 2(h) of Securities Contract (Regulation) Act, 1956 (SCRA) which includes derivatives.

It is widely understood that ‘securities’ as per SCRA will not cover bilateral forward contracts between banks and constituents which are not marketable in nature and not listed on any stock exchange. ICDS VI requires loss/gain on forward contracts entered for trading or speculation purposes to be recognised only on actual settlement. Hence, on a strict literal reading, proposed section 36(1)(xviii) r.w.s 40A(13) and ICDS I/VI may not permit banks to claim MTM loss on such forward contracts.

This would adversely impact banks and authorised dealers. It clearly appears to be unintentional since ICDS was consciously revised to apply RBI Guidelines to banks and Public Financial Institutions for valuation of securities held as stock in trade.

Suggestion:

It is suggested that an exception should be carved out in section 36(1)(xviii), 40A (1 3) and ICDS VI to permit MTM loss recognition for banks and other authorised dealers as per RBI Guidelines.

10. Clause 12 – Section 43(5) – Request to consider, exclusion of transactions in agricultural commodity derivatives from scope of “speculative transaction” under section 43(5) from a retroactive date

Commodity transaction tax (CTT) was introduced vide Finance Act, 2013 (FA 2013). At enactment stage, FA, 2013 amended section 43(5) with effect from A.Y. 2014-15 to exclude, from the scope of “speculative transaction”, an eligible transaction in respect of trading in commodity derivatives carried out in a recognized association. Accordingly, a, transaction was not a speculative transaction even if CTT was not chargeable.

Finance (No. 2) Act, 2014 retrospectively amended section 43(5) from A.Y. 2014-15 to provide an additional condition of chargeability to CTT. Hence, transactions in agricultural commodity derivatives, which are not chargeable to CTT, became exposed to risk of treatment as speculative transaction.

Finance Bill 2018, proposes to remove the condition of chargeability to CTT insofar as transactions in agricultural commodity derivatives are concerned. The intent of proposed amendment, according to explanatory memorandum (EM), is to encourage participation in trading of agricultural commodity derivatives. The proposed amendment is prospective from A.Y. 20 19-20.

Issue:

The proposed amendment is prospective from A.Y. 20 19-20 and does not protect trading in agricultural commodity derivatives in the earlier years. While future transactions are protected, the transactions in earlier years continue to stand exposed to risk of treatment as speculative transaction.

Suggestion:

In as much as the law seeks to correct the anomaly created by Finance (No. 2) Act, 2014 and having regard to the legislative intent of encouraging participation in trading of agricultural commodity derivatives, the amendment should also protect the interest of  taxpayers who have traded in the agricultural commodity derivatives market without payment of CTT. Such amendment if made will not make the amount non- chargeable to tax. It will only alter the characterization of income.

11. Clause 13 – Proposed Section 43AA – Taxation of foreign exchange fluctuations (in line with ICDS VI) – Certain clarification required 

Issue:

i. Clarification regarding non-applicability to individuals/HUFs not having business income and/or not liable to tax audit

Proposed section 43AA treats any gain or loss on foreign currency transaction as taxable gain and deductible loss. It does not make distinction between capital and revenue nature of such gain contrary to settled judicial position.

A literal reading of Section 43AA raises an apprehension whether it is also applicable to individuals/HUFs not having business income. For example, residents (through Liberalised Remittance Scheme) or foreign expatriates working in India may hold deposits in foreign banks in foreign currency. Doubts may arise whether the gain or loss in INR terms of such foreign currency deposits due to change in foreign exchange rates during the relevant tax year will become taxable or deductible.

It appears that Section 43AA is not intended to apply to individuals/HUFS who do not have business incomes and/or are not liable to tax audit since Section 43AA requires computation of gain or loss as per ICDS and ICDS does not apply to individuals/HUFs not liable to tax audit.

When section 2(24) (xviii) was inserted by the Finance Act 2015 to align the Act with ICDS in relation to taxation of government grants, the Ministry of Finance had immediately clarified vide Press Release dated 5th May 2015 and subsequently reiterated by CBDT in its Circular No. 19 / 2015, dated 27.11.2015 that the amendment does not impact individuals/HUFs not having business incomes and individual welfare subsidies (like LPG subsidy) are not taxable under this provision.

Suggestion: 

It is suggested that similar clarification as aforesaid (issued vide Press Release dated 5.5.17 and Circular No 19/2015, dated 27.11.2015) may be specifically issued in context of section 43AA to remove the doubts.

Issue:

ii. Clarity regarding opening balance of FCTR as on 1st April 2016 shall not taxed on upfront basis in F.Y. 2016-17 (A.Y. 2017-18)

Vide Circular No 10/2017, dated 23.3.17, CBDT via FAQ 16 clarified that Foreign Currency Translation Reserve (FCTR) balance as on 1 April 2016 pertaining to exchange differences on monetary items for non-integral operations as per ICAI AS-11, shall be recognised in A.Y. 20 17-18 to the extent not recognised in the income computation in the past. This is by virtue of transitional provision of para 9(3) of ICDS VI.

The Hon’ ble Delhi HC in its Judgement dated 8.11.2017 in the case of Chamber of Tax Consultants v. Union of India held that gains/losses recognised in FCTR represent notional gain/loss and are not taxable.

Section 43AA specifically includes Foreign Currency Translation Reserve within its scope in respect of which gain/loss shall be taxable in accordance with ICDS (which includes transitional provision dealt by CBDT FAQ 16).

The amendment will lead to upfront taxation of FCTR balance as on 1 April 2016 as indicated by CBDT FAQ which will cause significant hardship for taxpayers since the FCTR contains gains accumulated over several years in the past.

Since the transitional provision is meant to protect the interests of revenue and taxpayers from unintended consequences of escapement of income/double taxation of income, the opening balance should get taxed as and when it is realized and credited to P&L.

Suggestion:

It is suggested that section 43AA may be amended to provide that opening balance of FCTR as on 1 April 2016 shall be taxable in the year in which it is realised and credited to P&L as per method of accounting followed by the taxpayer.

12. Clause 14, 19 and 21 – Section 43CA, 50C and 56 – Proposed allowance of variation of 5% between stamp duty value and the sale consideration – Increasing the permissible variation and need for retrospective amendment

The existing provisions of section 43CA (business profits), 50C (capital gains) and 56 (income from other sources) while taxing income arising out of transactions in immovable property require adoption of the sale consideration or stamp duty value, whichever is higher.

However, to minimize hardship in case of genuine transactions in the real estate sector, the Finance Bill 2018 proposes to amend the said sections to provide that no adjustments shall be made in a case where the variation between stamp duty value and the sale consideration is not more than five percent of the sale consideration.

The Finance Bill 2018 proposes that in cases where the stamp duty value of immoveable property does not exceed 105% of consideration received/receivable on transfer of capital asset/stock in trade being land or building or both, consideration received/receivable shall be full value of consideration.

Similarly, it proposes that where the stamp duty value does not exceed 105% of consideration paid to acquire immovable property, there will be no trigger of taxation u/s 56(2) (x) of the Income-tax Act.

Issues:

i. In certain states, there is generally a significant/considerable difference between the stamp duty value/rate and the actual sale consideration and consequently in such cases gap between the two values is more than 5%. Hence, it is suggested to further increase the permissible variation.

ii. The delta of 5% of consideration is highly inadequate as stamp duty value is determined as per area and not as per property. The circle rate may vary due to several reasons.

iii. In the context of section 50C, Tribunals have adopted a view that where the difference between consideration and stamp duty value does not exceed 10%, provisions of section 50C are not applicable

  • Sita Bai Khetan vs. ITO (ITA No. 823/JP/2013) (delta of 10%)
  • John Fowler (India) Private Ltd v DCIT (ITA No. 7545/Mum/2014) (delta 10%)
  • Krishna Enterprises v ACIT [ITA No. 5402/Mum/2014) (delta 10%)

Suggestion:

i. The erstwhile provisions dealing with transfer of immovable property for lower consideration had delta of 15% and 25% respectively in section 52(2) and section 269C(2)(a) of the Act. The present delta of 5% is accordingly far too inadequate and may be increased to atleast 15%.

ii. Also, since the proposed amendment is rationalisation measure it may be made applicable from the date the provisions were

13. Clause 15 – Proposed Section 43CB –

Computation of income from construction and service contracts – Clarification regarding ‘grandfathered’ construction/service contracts which are incomplete as on 1 April 2016 will not be required to be mandatorily recognised on POCM basis

Section 43CB codifies ICDS III/IV which provide for POCM method of revenue recognition for construction contracts and service contracts except following service contracts :-

  • Service contracts with duration of less than 90 days which shall be determined on completed contract basis
  • Service contracts involving indeterminate number of acts over a specific period of time which shall be determined on SLM basis

The transitional provisions of ICDS III/IV provide that contracts which commenced on or before 31 March 2016 and not completed by that date shall be recognised based on method regularly followed by the taxpayer prior to 1 April 2016. This provision ‘grandfathers’ existing incomplete contracts as on 31 March 2016 which are not mandatorily required to be recognised as per POCM.

However, no such exception is provided in section 43CB which raises apprehension whether even such incomplete contracts need to be recognised as per POCM by virtue of statutory compulsion. Doubt arise since this represents conflict between section 43CB and ICDS III in which case, as per Preamble to ICDS, the Act shall override ICDS. We believe this is unintentional and requires to be clarified.

Suggestion:

Since it is intended to codify ICDS III in the form as notified by CBDT without causing conflict between the Act and ICDS, it is suggested that it may be clarified either through amendment in section 43CB or through a clarificatory Circular that contracts commenced prior to 1 April 2016 shall be recognised as per method of accounting regularly followed by the taxpayer prior to 1 April 2016.

14. Clause 20 – Section 54EC –

Request to roll back the amendments proposing increase in lock in period from 3 years to 5 years as well as restriction of benefit of exemption to LTCG on transfer of long-term capital asset, being Land or Building or both – Request to clarify prospective applicability of proposed amendment to section 54EC

Section 54EC of the Income-tax Act, 1961 inter alia, provides that capital gain arising from the transfer of a long-term capital asset, invested in the long-term specified asset at any time within a period of six months after the date of such transfer, shall not be charged to tax subject to certain conditions specified in the said section.

The benefit of this exemption is now proposed to be restricted only to transfer of a Long-term capital asset, being land or building or both. Further, Clause (ba) of the Explanation defines a ??long-term specified asset?? for making any investment under the said section to mean any bond, redeemable after three years and issued on or after the1st day of April, 2007 by the National Highways Authority of India or by the Rural Electrification Corporation Limited; or any other bond notified by the Central Government in this behalf.

Further the lock in period for bonds issued on or after the 1 st day of April, 2018 is proposed to be increased from 3 to 5 years.

Issues:

1) The proposal to increase the lock in period of investment in the specified bonds may discourage investments in specified bonds to avail exemption u/s 54EC. Higher period of 5 years means locking of funds for 2 more years than the existing 3 years thus making the investment less attractive from assessee’s point of view. Assessees may divert the funds to other investments with lesser lock in period. It would ultimately lead to lesser availability of low cost funds to the government for building infrastructure which is the need of the hour.

2) The Memorandum explaining the provisions of the Finance Bill 20 1 8 does not contain the intent behind restricting the scope of reinvestment in allowable bonds only on capital gains arising on transfer of a long-term asset, being a land or building or both. There could be situations where capital assets like leasehold right, tenancy right (which are very similar to right in the land or building itself) held by individual or HUFs for more than 2 years are transferred. The assessee may be interested in investing such capital gains in bonds notified u/s 54EC to avail the benefit of exemption from capital gains. Further, encouraging more investments in these bonds from capital gains would provide sufficient financial support to NHAI and REC at a low cost making it a favourable situation for funding options for infrastructure development that NHAI and REC would be undertaking.

3) Section 54EC specifically permits the taxpayer to reinvest the capital gains arising from transfer of any long-term capital asset, in long term specified asset, at any time within a period of 6 months from the date of transfer of such capital asset.

Consider a scenario where taxpayer transfers the long-term capital asset say land on 1st January 20 18. As per provisions of section 54EC, assessee is permitted to invest in section 54EC bonds by 30th June 2018. Assuming that the taxpayer invests in specified bonds in May 2018, and as per the proposed amendment, lock-in period of 5 years would apply instead of current lock-in period of 3 years since the bonds will be issued on or after 1st April 2018.

This would prejudicially affect the taxpayers who sold their assets prior to 31st March 2018 when the provision itself permitted them to invest in specified bonds within a period of 6 months. Conditions as existing on the date of transfer of capital asset should apply to the taxation of transfer of capital asset which is subsequently relieved on satisfaction of certain conditions.

This creates a disparity between a taxpayer (say Mr. A) who sold his asset on 1st Jan 2018 and invested in specified bonds prior to 31 March 2018 as against a taxpayer (Mr. B) who sells his asset on 1 Jan 2018 but for some reason invest in specified bonds post 31st March 2018 but before 30th June 2018 i.e the period of 6 months available u/s 54EC.

Suggestions:

It is suggested that:

i. the proposed amendment in section 54EC increasing of lock in period of investments in specified bonds from existing 3 years to 5 years may be reconsidered in light of the fact that it may result in reduction of investment of such bonds ultimately reducing the low-cost funds which would be available to the government for infrastructure projects.

ii. the proposed amendment restricting the scope of exemption u/s 54EC to capital gains arising from transfer of any long-term capital asset being land or building or both may be reconsidered so that long term capital gains arising from transfer of other capital assets may also be eligible for exemption thereunder. 

iii. for capital gains arising upto 31st March 2018, the taxpayer may be permitted to invest in section 54EC bonds with a lock-in period of 3 years and the proposed amendment providing for increased lock-in period of 5 years may not be applicable to capital gains effected prior to 31st March 2018. 

15. Clause 22 – Insertion of third proviso in Section 79- relief for change in shareholding of subsidiaries pursuant to resolution plan

Section 79 of the Income-tax Act, 1961 restricts the carry forward and set off of losses in the hands of a closely held company, if the shares carrying more than 51 % of voting power of such company are not beneficially held by persons who beneficially held such shares on the last day of the previous year in which such loss was incurred.

In general, implementation of resolution plan in respect of a company undergoing resolution process may involve either issue of additional shares or other restructuring exercise resulting in change in the shareholding of such company beyond the permissible limit u/s 79.

In addition, thereto, the company may also be required to hive off its investments in subsidiaries by selling its stake to interested investors. This may result in change in shareholding of the subsidiaries triggering consequences u/s 79 of the Income-tax Act,1961 in the hands of subsidiaries as well. Hence, this may discourage the interested acquirers/bidders from making investments in loss making subsidiaries and also in offering higher bids.

Finance Bill 2018 has amended the provisions of section 79 by inserting third proviso to section 79, to state that section 79 will not apply to companies, where the change in the shareholding is pursuant to implementation of a resolution plan approved by adjudicating authority (AA). This benefit is proposed to be provided after an opportunity of being heard is given to the jurisdictional Commissioner or Principal Commissioner.

Issue:

Thus, in terms of the proposed third proviso to section 79, carry forward and set off of losses of a company undergoing insolvency resolution process as well as its subsidiaries will not be impacted by section 79, if the change in shareholding takes place pursuant to a resolution plan approved by AA.

While such be the case, it is likely that NCLT will not hear Principal Commissioner/Commissioner holding jurisdiction over the subsidiaries. Hence, the reference to an opportunity of being heard to be given to the Principle Commissioner/Commissioner by AAs may raise a doubt that the third proviso to section 79 only refers to the company which is undergoing a resolution process under IBC.

Suggestion:

It is suggested that the language of the proposed third proviso to section 79 be modified to clarify that it applies both to the company undergoing resolution process as well as its subsidiaries. The provision may be modified as follows:

“Provided also that nothing contained in this section shall apply to a company as well as its subsidiary where a change in the shareholding takes place in a previous year pursuant to a resolution plan approved under the Insolvency and Bankruptcy Code, 2016, after affording a reasonable opportunity of being heard to the jurisdictional Principal Commissioner or Commissioner holding jurisdiction over the applicant”.

16. Clause 26 – Section 80-IAC – Start-up and rationalization of Section 80-IAC

Section 80-IAC provides an incentive in the form of profit-linked deduction to start-ups on satisfaction of certain conditions. The deduction is available for a period of 3 consecutive years out of 7 years from the date of incorporation of the start-up.

One of the conditions for a start-up to qualify for a deduction u/S. 80-IAC is that the turnover of the start-up should not exceed Rs. 25 crores in any of the previous years beginning on or after the 1st April, 2016 and ending on 31st March, 2021.

Finance Bill 2018 proposes to amend this condition to provide that deduction u/s 80-IAC will be available only if total turnover of the start-up is less than Rs. 25 crores in any of the 7 previous years beginning from the year in which such entity is incorporated.

Issues:

(i) The condition that turnover of such start-up should not exceed Rs. 25 Cr in any of the 7 previous years beginning from the year in which it is incorporated is prone to ambiguous interpretation.

(ii) A question that arises is if the turnover criteria is breached in any of the 7 years beginning from the year of incorporation, will the deduction claimed in the earlier years be forfeited. For instance, if the turnover threshold is breached in the third year of deduction, whether 80-IAC deduction be forfeited in the first and second year as well?

(iii)The intention of Government is not to revoke the benefits available to an eligible start-up from the inception itself, if the turnover of start-up exceeds Rs. 25 crs in any of the seven years from the date of incorporation.

(iv) Reference in this regard can be drawn from the Notification G.S.R. 50 1(E) issued by Department of Industrial Policy and Promotion (DIPP) dated 23 January 2017. The notification states that

“An entity shall cease to be a startup on completion of seven years from the date of its incorporation/ registration or if its turnover for any previous year exceeds Rs. 25 crores”.

The notification indicates that an entity ceases to be a start-up only from the date its turnover exceeds Rs. 25 crores, while its status as start-up for the past years continues unhindered.

Suggestion:

It is suggested that:

(i) The intent of the government is to promote start-ups. In line with this objective, the condition of turnover may be amended suitably to clarify that a start-up shall be eligible to claim deduction u/s. 80-IAC if its turnover does not exceed Rs. 25 crores in any of the years from the year of incorporation up to the year of claim of deduction and such claim shall be allowed notwithstanding the higher turnover, if any, in any of the subsequent years.

(ii) For instance, a start-up shall be eligible to claim deduction of its profits in 4th year if its turnover has not exceeded Rs. 25 crs in any of the earlier 4 years beginning from the year of incorporation. If the turnover of start-up, say in 5th year, exceeds Rs. 25 crs, the start-up shall not be eligible for deduction from 5th year onwards. However, this should not jeopardise the claim of deduction for the 4th year.

17. Clause 27 – Section 80JJAA – Request to make the retrospective application of proposed beneficial provisions

The current provisions of section 80JJAA provide for a deduction of 30% in addition to normal deduction of 100% in respect of emoluments paid to eligible new employees who have been employed for a minimum period of 240 days during the year. However, the minimum period of employment is relaxed to 150 days in the case of apparel industry vide the Taxation Laws (Amendment) Act, 2016, w.e.f. 1.4.2017.

The Finance Bill 2018 proposes to extend the said benefit to footwear and leather industry as well. Further, it is also proposed to rationalise the deduction of 30% by allowing the benefit for a new employee who is employed for less than the minimum period during the first year but continues to remain employed for the minimum period in subsequent year.

It is a welcome move of the government and will promote employment in leather and footwear industry in specified and other businesses in general. However, the said beneficial amendments are proposed to be made applicable from AY 20 19-20 and subsequent assessment years.

Since the amendment allowing the benefit of reduced number of days of minimum employment (150) in case of apparel industry is applicable w.e.f. AY 2017-18 and in order to have parity, it is recommended that the proposed amendment of extending the same benefit to footwear and leather industry be also made applicable retrospectively from AY 2017-18 instead of AY 2019-20.

Similarly, the other beneficial proposal regarding allowing the benefit of section 80JJAA deduction even in case of a new employee who is employed for less than the minimum period during the first year but continues to remain employed for the minimum period in subsequent year may also be made applicable retrospectively w.e.f. AY 20 17-18. The said amendment may be made effective retrospectively from AY 2017-18 and onwards. This will avoid any litigation that may arise on the said issue during the AYs 2017-18 and 20 18-19.

Suggestion

It is suggested that the both the proposed amendments in section 80JJAA be made applicable retrospectively from AY 2017-18 instead of AY 2019-20 as proposed in the Finance Bill, 2018. Hence, it is suggested that the amendment may be made applicable with retrospective effect from A. Y. 2014-1 5.

18. Clause 28 – Proposed Section 80PA – Deduction in respect of income of Farm Producer Companies – Clarification required regarding availability of period of deduction

The Finance Bill 2018 proposes to insert a new section 80PA to incentivise Farm Producer companies on lines similar to existing section 80P. The proposed provision provides for 100% deduction in respect of Farm Producer companies having total turnover upto Rs 100 crore whose gross total income includes the incomes specified therein.

As per the Honourable Finance Minister’s speech and memorandum explaining the provisions of the Finance Bill 2018, the proposed benefit is to be made available for a period of 5 years starting with Financial Year 20 18-19 (AY 20 19-20). Further, Clause 28 containing proposed provision 80PA( 1) of the Finance Bill 2018 reads as under:

“(1) Where the gross total income of an assessee, being a Producer Company having a total turnover of less than one hundred crore rupees in any previous year, includes any profits and gains derived from eligible business, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to one hundred per cent. of the profits and gains attributable to such business for the previous year relevant to an assessment year commencing on or after the 1st day of April, 2019, but before the 1st day of April, 2025.”

It is clear from the aforesaid proposed section 80PA(1) that the deduction shall be available from AY 20 19-20 till AY 2024-25 which comes to 6 years as against 5 years in the Budget speech and Explanatory Memorandum. A Clarification in this regard may be issued so as to clearly specify the intent of the law makers regarding the availability of period of deduction i.e. 6 years or 5 years.

Suggestion

It is suggested that a clarification may be issued clearly specifying the period of deduction available to Farm Producer Companies under the Section 80PA i.e 5 years or 6 years.

19. Clause 30 – Proposed Section 80TTB – Deduction in respect of interest on deposits in case of senior citizens –

Request to extend the benefit by including interest on National Savings Certificate within the ambit of section 80TTB

The Finance Bill 2018 proposes to insert a new section 80TTB so as to allow a deduction upto Rs 50,000/- in respect of interest income on deposits made by senior citizens.

The proposed new section, inter alia, provides that where the gross total income of an assessee, being a senior citizen, includes any income by way of interest on deposits with a banking company to which the Banking Regulation Act, 1949, applies (including any bank or banking institution referred to in section 51 of that Act) or a co-operative society engaged in the business of banking (including a co-operative land mortgage bank or a co-operative land development bank) or a Post Office as defined in clause (k) of section 2 of the Indian Post Office Act, 1898, a deduction of an amount up to Rs. 50,000 shall be allowed.

This amendment will greatly benefit the senior citizens whose main source of income is generally from interest income.

It is pertinent to mention that another main source of income for senior citizens is interest income on National Savings Certificate which can be purchased from Post Offices in India. In order to extend the benefit of proposed provisions of section 80TTB to senior citizens, it is recommended that interest income arising to Senior Citizens on National savings Certificate may also be included within the ambit of proposed section 80TTB.

Suggestion

It is suggested that income by way of interest on National Savings Certificate also be included within the ambit of proposed provisions of section 80TTB, so that senior citizens who have purchased NSCs from post offices are also able to avail the benefit of enhanced deduction under section 80TTB.

20. Clause 31 – Proposed Section 112A – Introduction of new Section 112A and providing transitional relief u/s. 112A

Section 1 12A(6) proposed to be inserted in the Income-tax Act, 1961 by Finance Bill 2018, aims at providing FMV substitution till 31st January 2018 while computing capital gains under the new capital gains tax regime. The provision is inserted with the object of making transition to new scheme less painful and thus gives as prospective effect to the provision as possible. This aspect is reiterated in the clarifications on proposed provisions issued vide F No. 370149/20/2018-TPL dated 4th February 2018.

Section 1 12A(6) has been inserted so as to substitute fair market value (FMV) as on 31st January 2018 as the cost of acquisition, in specified circumstances. The intent is to hand out concession of substitution of FMV without altering the other parameters of capital gain chapter.

Issues:

i. Presently the way section 11 2A(6) has been worded, it appears to be unconnected with the computation of capital gains as provided in Chapter IV-E of the Income-tax Act. To illustrate:

  • It makes no reference to section 48 or section 49, and hence questions may arise whether it is meant to be a computation scheme which, for the purposes of determination of cost of acquisition, is a self-contained
  • It uses the expression “actual cost of acquisition” as distinct from the expression “cost of acquisition” which is otherwise used in capital gains chapter.
  • It applies only in respect of long term capital assets acquired by the taxpayer before 1st February 2018, and thus may exclude acquisition of capital asset after 1st February 2018, including in cases where section 49 may otherwise apply as well as the cases where the asset may get transformed in the hand of the same taxpayer.

ii. These features lead to some anomalous situations which are referred hereunder in greater detail.

iii. It is true that some of the anomalies can be corrected or clarified by the means of a Circular. But, the risk from the perspective of tax department could be that a taxpayer who seeks unintended benefit may not regard the circular to be binding if it is not in harmony with the plausible legal interpretation.

iv. The cumulative conditions of section 11 2A(6) are neither in harmony with nor in accordance with the scheme of capital gains computation provisions which involve multiple following scenarios of tax neutral transfers.

> Situation 1: Gift or inheritance:

Mr. A acquires the shares of XYZ Limited (listed company) in May 2010. On demise of Mr. A, legal heir of Mr. A i.e. Mr. B acquired the asset in May 2018. Had it been a case where Mr. A transfers the shares of XYZ Limited, he would have been entitled to claim the cost step up in terms of section 11 2A(6). However, there may be difficulty in claiming cost step up in the hands of Mr. B as he has acquired the shares post 31 January 2018.

The hardship arises in this situation since the Tax Authority may contend as under:

  • Section 1 12A(6) is a self-contained mechanism for determining cost of acquisition.
  • Asset is acquired by the taxpayer upon inheritance or gift after 31stJanuary 2018;
  • The expression ‘actual cost of acquisition’ is different from normally understood expression ‘cost of acquisition’. But for that, there is no significance of the qualification ‘actual’ as appearing in section 11 2A(6) (i).
  • There is no ‘actual cost of acquisition’, since, in a transaction of gift/inheritance, no cost is incurred.
  • The preceding owner may have been entitled to the benefit of FMV substitution as on 31stJanuary 2018, but, the current taxpayer cannot be given the benefit of substitution.
  • As a result, the benefit of grandfathering FMV will not apply, though, the benefit of first and the second proviso to Section 48 will be denied.

> Situation 2: Case of shareholder of merging company

Mr. A is holding shares of XYZ Limited (listed company). He holds the shares since May 2013. XYZ Limited is to be merged with PQR Limited (listed company) with appointed date of 1st May 2018. On amalgamation, Mr. A is issued shares of PQR Limited on 1st May 2018. If shares of XYZ Limited were  transferred, Mr. A would have been eligible to claim cost step up in terms of section 11 2A(6) of Income-tax Act. However, doubts on eligibility to claim cost step up may arise where shares of PQR Limited (amalgamated company) are transferred as shares of PQR limited are received after 1st February 2018.

Case of shareholder of merging company

> Situation 3: Vesting of asset of merging company

XYZ Limited is a listed company and is holding shares of other listed companies from May 2013. XYZ Limited is to be amalgamated with PQR Limited (listed company) with appointed date of 1st May 2018. Where XYZ Limited had transferred the shares of listed companies, benefit of cost step up in terms of section 112A(6) could have availed. However, doubts on eligibility to claim cost step up may arise where shares are transferred by PQR Limited (amalgamated company) as it has acquired shares after 1st February 2018.

Vesting of asset of merging company

v. The above situations are consistent with the philosophy of Section 47 read with Section 49 read with Explanation to Section 2(42A) where the tax neutral transfers provide for substitution of cost and holding period in the hands of transferee.

vi. The philosophy of Section 47 and 49 is well reflected in the Notification No. 43/2017 dated 5th June 2017 which is presently issued u/s. 10(38) and which will also be notified for the purposes of S.1 12A(4) as provided vide FAQ No. 2 of F No. 370149/20/2018-TPL dated 4th February 2018. Thus, the condition at the time of acquisition is relieved in case of the successor and is seen in the hands of immediately preceding owner of the asset.

vii. The judicial precedents on similar controversy have always preferred a view that the scheme of capital gains taxation needs to be understood in a wholistic manner and the fictions enshrined in Section 47, 49 or section 2(42A) are to be taken to the logical end. To illustrate, in case of Madras HC ruling in case of H F Craig Harvey v CIT [2000] 244 ITR 578, the FMV substitution as of the cut-off date was permitted in respect of shares of amalgamated company even when the shares of amalgamated company came to be issued only post the cut-off date. Likewise, while granting the benefit of indexation, the courts have consistently taken into account holding period of  the previous owner which is substituted by virtue of Section 2 (42A). Refer, several High Court rulings 1.

viii. However, insertion of sub-section (5) and (6) of section 11 2A raises a doubt whether it is concurrently also a computation If it is construed also as a computation provision, the above controversies will become more relevant because the Court may consider section 112A to be a self-contained computation methodology in derogation of other computational provisions.

ix. Related to the above is also another point of clarification i.e whether FMV substitution which is permitted in terms of Section 55(2)(b)(i) and (ii). These provisions ensure that the cost of acquisition of capital asset which became the property of the taxpayer or the previous owner covered by Section 49 before 1st April 2001 gets substituted by FMV as on 1st April This substitution, at the option of the taxpayer is a substitution which alters the base cost of acquisition of the asset. It is dealt with separately from the provision which grants exchange fluctuation or indexation benefit. There is no legislative intent in section 11 2A(6) to deny any benefit other than the indexation benefit.

Suggestions:

Section 1 12A is proposed to be introduced in Chapter XII which primarily deals with determination of tax in special cases. The role of provisions along the lines of Section 112 of Income-tax Act is to provide tax computation of tax quantum on certain basis and by providing for limited tweaking for instance computation of capital gains without grant of benefit of first or the second proviso to S.48 in certain cases.

1 CIT v Manjula J Shah [2013] 355 ITR 474 (Bombay), CIT v Raman Kumar Suri [2013] 255 CTR 257 (Bombay), CIT v Nita Kamlesh Tanna [2014] 220 Taxman 165 (Bombay), CIT v Gautam Manubhai Doshi [2013] 218 Taxman 319 (Gujarat), CIT v Smt. Mina Deogun [2015] 375 ITR 586 (Calcutta), CIT v Asha Machaiah [2014] 227 Taxman 155 (Karnataka), CIT v Smt. Kaveri Thimmaiah [2014] 364 ITR 81 (Karnataka), DCIT v Sushil Kumar [2015] 231 Taxman 788 (Punjab & Haryana)  \

Section 1 12A (6) is comparable to provisions of Section 55(2)(b)(i)/(ii) by which the cost gets substituted by FMV as of 31st January 2018 if conditions of Section 1 12A(1) read with Section 1 12A(4) are fulfilled.

The scheme of Section 55(2)(b) has worked seamlessly and has been well understood. Section 1 12A(6)(ii) is at par or similar to Section 55(2)(b) except for the difference that the statute does not desire such substitution to give rise to the losses nor does it intend to provide indexation on such FMV substitution.

As a consequence, it may be evaluated if amendment along the lines of Section 1 12A(6) is made as part of Section 48 or Section 55 with a suitable caveat that substitution will not form the basis of indexation nor will give rise to capital loss in the hands of the taxpayer.

It is suggested that:

i. Clarification in the form of FAQ ought to be codified into law or Circular:

On account of introduction of section 1 12A, various issues relating to proposed taxation scheme were raised. CBDT acting pro-actively issued clarification vide F. No. 370149/20/2018-TPL dated 4th February 2018. However, the clarifications issued in the form of FAQs may not be considered as Circular as it is issued prior to formal enactment of section 1 12A. Clarifications issued by CBDT may either be incorporated in the Income-tax Act at the enactment stage of Finance Bill, 2018 or clarified by way of a formal CBDT Circular once section 1 12A is enacted.

ii. Insert method of computing FMV of unlisted shares on 31. 01.18

The proposed section 1 12A of Income-tax Act will be applicable to shares which at the time of acquisition may be listed or unlisted. For example, a company unlisted on 31st January 2018 is eventually listed through IPO and shares are sold. Section 1 12A(6) provides for cost substitution for capital assets covered u/s 1 12A. However, the definition of FMV as provided in Explanation (b) to section 1 12A does not provide manner of computation of FMV of unlisted shares as on 31 January 2018. It may be clarified in the definition that FMV of unlisted equity shares is to be determined in terms of section 2(22B) of Income-tax Act or any other specific mechanism.

iii. Apprehended inadvertent slip in language:

As per section 1 12A(2), the tax payable on the total income shall be the aggregate of, 

► the amount of income-tax calculated on long-term capital gains exceeding one lakh rupees at the rate of 10% per cent.; and

► the amount of income-tax payable on the balance amount of the total income as if such balance amount were the total income of the taxpayer.

Under Section 112, it is specifically provided that tax payable by the taxpayer on the total income shall be aggregate of the amount of income tax payable on the total income as reduced by the amount of long term capital gains. Accordingly, it is suggested that amendment may be carried out under section 1 12A(2)(ii) along the lines of section 112 so as to exclude Rs. 1 lac of long term capital gain from total income.

21. Clause 35 – Section 115JB – Insertion of clause (iih) in Explanation 1 to section 115JB – Downward adjustment of aggregate brought forward losses and depreciation u/s 115JB

The newly legislated Insolvency and Bankruptcy code, 2016 (IBC) is a comprehensive legislation in India dealing with insolvency and bankruptcy of Corporates. The Code consolidates all the other laws in India dealing with insolvency. Pursuant to enactment of IBC, the Sick Industrial Companies Act (SICA) has been repealed and provisions are made to enable sick companies undergoing resolution through BIFR to approach National Company Law Tribunal (NCLT). IBC provides for implementation of resolution plan which is intended to revive distressed companies in a time bound manner under the creditor in command process.

Stakeholders have been facing enormous bottlenecks due to lack of clarity on tax issues. Unfortunately, there is no provision in IBC or Income-tax Act which provides for an overriding impact of resolution plan sanctioned by NCLT.

The Finance Bill, 2018 has proposed that while computing book profits u/s 115JB of the Income-tax Act, a deduction will be allowed for aggregate of book profits and unabsorbed depreciation in case of companies in respect of which an application for initiating resolution process has been accepted by the adjudicating authority.

Issues:

i. The language used in Section 11 5JB creates a confusion as to whether aggregate of losses and depreciation as per books is to be considered for deduction or whether aggregate of losses and depreciation as computed for tax purposes is to be considered for downward adjustment from book profits.

ii. The scheme of MAT is linked to book profits. The legislative intent also appears to be to refer to the amounts as per books of accounts. However, the language as is presently used in Section 11 5JB creates ambiguity.

iii. Re-organisation by way of merger of distressed company is one of the known forms of reorganising a distress companies against whom proceeding under IBC has been initiated. There is a concern that the benefit u/s 1 15JB has been extended merely to the defaulting/distressed company against whom the application for resolution plan has been admitted and thus may not extend to the company into which the defaulting company may merge pursuant to the implementation of the resolution plan.

Suggestions:

It is suggested that:

i. Suitable clarification may be inserted in Section 11 5JB to clarify that the brought forward losses and unabsorbed depreciation for this purpose should be considered as per books of account. It may be provided that the aggregate of the brought forward losses and unabsorbed depreciation as at the end of the year preceding the year in which application is admitted may be allowed to be reduced from book profits.

ii. Also, it may be provided that, in the event of merger of default/distressed company with a special purpose vehicle or with any company of the bidder group pursuant to the resolution plan, the benefit of deduction of the aggregate of book losses and unabsorbed depreciation will also be extended to the merged company.

22. Clause 38 – Section 115-O – DDT on deemed dividend u/s 2(22)(e)

Section 2(22)(e) is now proposed to be amended to provide that, in the event of grant of loans and advances by closely held company either to the shareholders having 10% equity or to a concern in which such 10% equity holder has 20% beneficial ownership, the company itself will be liable to pay dividend distribution tax u/s. 115-  O at the applicable rate to the extent of accumulated profits, which the company possesses. Such tax will be payable regardless of the fact that the loan may have been given against proper interest and may have been repaid on due date.

When a loan is given to a tainted concern, there has been a controversy whether the amount of dividend needs to be taxed in the hands of equity holder (who holds a nexus with the concern) or in the hands of the concern.

Issues:

(i) There could have been basic debate whether any such provision is at all fair where loans and advances are given either on proper interest and re-payment terms or when loans and advances are given in connection with the business needs or in the ordinary course of Avoidable litigation have arisen even in cases where the advances are given for the purpose of purchase of goods in the ordinary course of business. The proposed amendment makes the provision stupendously unfair.

(ii) The limit of 10% shareholding, which can establish nexus with the concern is considered in practice to be considerably low and impractical. It is quite possible that an investor like PE investor or a passive investor may create such a situation without the concerns being aware of the same. Further, the requirement is beneficial holding in the concern. It may not be possible for a company giving loan to ascertain the beneficial holding of its shareholders in another concern. The company will be dependent wholly on the certification of the shareholder. Further, if the company proceeds on the basis of the certification provided by shareholder and the same were to be untrue, there might be adverse consequences considering the company and its principal officer will be regarded as assessee in default and all consequences of interest, penalty prosecution, etc. will consequently follow.

(iii) One wonders whether the controversy (which is at the genesis of the proposed amendment) could have been taken care of by specifying in an explicit manner whether the amount will be chargeable in the hands of the concern or in the hands of the concerned shareholder. That alone was the controversy and a difficult solution may be avoided to get rid of the controversy

(iv) The company will have extreme consequences of not being able to comply with the provision. This may often be due to unawareness. Unwarranted litigation may accrue on such subject.

(v) It could be within the corporate governance for one company to give a loan to another on fair terms. Taxability in the hands of the company in the form of DDT – that too, where a mere 10% holder has shares in the company is a harsh blow to the remaining 90% of the shareholders who lose their value on simultaneous basis upto the amount of tax paid. This would be a permanent loss to the shareholders. They are being punished for no fault of theirs.

(vi) There is very limited scope available for mitigating the liability by means of set off provided for in the section. This is unlikely to be a possibility where loan is to a concern. As a result, as the Annexure 1 will show, the corporate group will end up with extraordinary liability which can range up to 70.53 % of income of the company. This will be a highly discriminatory treatment against the closely held company structures.

Suggestions:

It is suggested that:

(i) The continuance of the base provision itself in the current form may be re-considered. The provision was introduced at a time the tax rates were materially substantial, governance was difficult and closely held companies were almost universally governed by a singular family.

(ii) Assuming it is not re-considered, by way of rationalisation, the applicability may be restricted to a case where the shareholder has at least 25% stake in each company, so as to capture a loan or advance to a concern.

(iii) It would be desirable to address the genesis of the controversy instead of punishing the closely held companies. The current controversy may be retained with by the legislature specifying whether the amount of  dividend should be taxed in the hands of the concerned shareholder or in the hands of the concern.

(iv) From the scope of dividend, the advances and loans which are in connection with the business or which are in ordinary course of business should be excluded. Currently, this exclusion is available only to certain specific categories of taxpayers.

(v) It would also be fair to exclude loans and advances which are given on terms which are regarded as ALP and / or reasonable.

(vi) A liberal set off may be available by amending section 2(22)(e) to provide that, out of amount distributed by the company either in the same year or in the succeeding year, the amount of DDT paid earlier will be considered as a credit against DDT payable at the time of distribution.

23. Clause 42 – Section 139A – Rationalisation of provisions u/s. 139A(1)(v)/ (vi) on extended scope of persons mandated to obtain PAN – Need to define the term ‘financial transaction’ and make consequential amendments in Rule 37BC

Sub-section (1) of section 1 39A of the Income-tax Act, 1961 relating to permanent account number, inter alia, provides that every person specified therein and who has not been allotted a permanent account number shall apply to the Assessing Officer for allotment of a permanent account number.

The Finance Bill, 2018 proposes to amend section 139A(1) by inserting new clause (v) in the said sub-section so as to provide that every person, not being an individual, which enters into a financial transaction of an amount aggregating to two lakh fifty thousand rupees or more in a financial year shall apply to the Assessing Officer for allotment of a permanent account number.

Further new clause (vi) is also proposed to be inserted in the said sub-section so as to provide that the managing director, director, partner, trustee, author, founder, karta, chief executive officer, principal officer or office bearer of the person referred to in clause (v), or any person competent to act on behalf of the person referred to in clause (v), shall also apply to the Assessing Officer for the allotment of permanent account number.

The above proposed amendment does not exclude the non-residents from the ambit of obtaining PAN.

Further, section 206AA(7), as substituted by the Finance Act 2016, inter alia, provides that the provisions of the said section would not apply to a non-resident, not being a company, or to a foreign company subject to conditions to be prescribed. In exercise of the powers conferred by section 206AA(7)(ii) read with section 295, the CBDT has inserted new Rule 37BC to provide for relaxation from deduction of tax at higher rate under section 206AA. The provisions of section 206AA shall not apply to a non-corporate non-resident, or to a foreign company not having PAN in respect of payments in the nature of interest, royalty, fees for technical services and payments on transfer of any capital asset on furnishing to the deductor information like name, e-mail id, contact number, address in the country or specified territory outside India of which the deductee is a resident and tax identification number/ unique number of the deductee in the country or specified territory of residence.

The term ‘Financial transaction’ may be defined. Further, consequential amendments may be made in Rule 37BCto include within its scope payments in respect of such financial transactions provided the deductee furnishes the required details to the deductor.

Suggestion:

It is suggested that:

1. The term ‘Financial transaction’ may be defined to avoid any ambiguities, and.

2. Consequential amendments may be made in Rule 37BC to include within its scope payments in respect of such financial transactions provided the deductee furnishes the required details to the deductor. 

24. Clause 45 – Section 145A – Clarification regarding inventory of securities held by banks and Public Financial institutions will be valued as per RBI Guidelines

Section145A(iii)/(iv) provides that inventory of unlisted/not regularly traded securities shall be valued at cost and inventory of other (i.e listed) securities shall be valued at lower of cost or NRV on category-wise basis in accordance with ICDS.

Section 145A does not make any distinction between taxpayers being banks/PFIs and other taxpayers while mandatorily prescribing the above valuation methodology. On the other hand, ICDS VIII recognises such distinction and accordingly, has two parts – Part A applicable to taxpayers other than banks/PFIs and Part B applicable to banks/PFIs.

Part B applicable to banks/PFIs provides that inventory of securities (including derivatives) held by such taxpayers shall be valued as per RBI Guidelines.

This creates conflict between section 145A and ICDS VIII. To illustrate, it may be suggested that banks should value inventory of debt/government securities which are not listed on recognised stock exchange at cost by ignoring RBI guidelines which requires them to be valued at lower of cost or NRV. This may lead to unnecessary litigation.

Suggestion:

Since section 145A requires valuation of inventory including inventory being securities in accordance with ICDS, it is suggested that section145A may be specifically modified on lines of ICDS VIII to carve out distinction for banks & PFIs for whom valuation may be prescribed as per extant RBI Guidelines as laid down in Part B of ICDS VIII. Further, it is also suggested that even NBFCs and Housing Finance companies who are equally governed by RBI/NHB guidelines should be treated at par with banks and PFIs in the matter of valuation of securities. 

25. Clause 45 – Proposed Section 145B – Clarification sought regarding taxation of government grants shall be in accordance with ICDS

Section 145B(3) providing for taxation of subsidy in the year of receipt can lead to harsh consequences where Government support is provided on a conditional basis and non-fulfilment of such conditions may lead to a contingency of refund. Upfront taxation of conditional grant can cause significant cash outflow for the taxpayer even assuming that refund contingency at a future date may be admitted as deduction of loss.

It is suggested that subsidy covered by Section 145B(3) is at par with export incentives covered by Section145B(2).

Suggestion:

It is suggested that subsidy covered by Section 145B(3) is at par with export incentives covered by Section145B(2) and Accordingly, its taxability should only be linked to reasonable certainty of realisation akin to para 4(1) of ICDS VII or section 145B(2).

Alternatively, as proposed in other amendments like section 36(1)(xviii), section 43AA, it is suggested that government grants should also be recognised as income as computed in accordance with ICDS without making specific reference to taxation on receipt basis.

26. Clause 50 – Section 253(1) – Necessary amendment required enabling filing of Appeal against penalty imposed by Assessing Officer under section 271J

Sub-section (1) of section 253 provides that any assessee aggrieved by any of the orders mentioned therein may appeal to the Appellate Tribunal.

The Finance Bill 2018 proposes to amend clause (a) of the said sub-section so as to make an order passed by a Commissioner (Appeals) under section 27 1J also appealable to the Appellate Tribunal.

This amendment will take effect from 1st April, 2018.

Issue:

The proposed amendment in section 253(1) allows an appeal to be filed before ITAT, if the order imposing penalty is passed by CIT(A). However, if the order is passed by Assessing Officer, the same would not be appealable either before CIT(A) u/s 246A or before ITAT u/s 253(1), thereby leading to denying principles of natural justice. This may be an unintended omission.

Suggestion:

It is suggested that necessary amendment may be made in Section 253(1) so as to make an order passed by an Assessing Officer under section 271J also appealable to the Appellate Tribunal. 

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