Finance Bill – 2010-Discussion on Proposed Amendments - Income-tax Act. 1961

DEFINITIONS:

Charitable Purpose – Section 2(15)

The original clause before its amendment by Finance Act, 2008 stood as follows

Finance Act, 2008 has amended the clause with a view to exclude (i) any activity in the nature of trade, commerce or business, or (ii) any activity of rendering any service in relation to any trade, commerce or business, for a cess or fee or any other consideration, irrespective of the nature of the use or application, or retention, of the income from any such activity from “advancement of any other object of general public utility”. 

After the above amendment the clause stood as follows:

The amendment came into force with effect from 1.4.2009.

Finance (No.2) Act, 2009 has amended the clause to expand the definition of “charitable purpose”  to include the preservation of environment (including watersheds, forest and wildlife) and preservation of monuments or places or objects of artistic or historic interest, so that it would not be affected by the amendment which excluded from the “advancement of any other object of general public utility” activities in the nature of trade, commerce or business, or any other consideration, irrespective of the nature of use or application, or retention , of the income from such activity.

After the amendment the clause stood as follows:

The above amendment came into force with effect from 1.04.2009.

Now Finance Bill , 2010 proposed to amend the clause once again by  inserting  second proviso to the above clause  which is intended to come into force with effect from 1.4.2009 retrospectively which reads as under:

The above amendment is proposed to give relief from the hardship that may arise because of the absolute restriction on any receipt of commercial nature to the organizations which receive sundry considerations from such activities.

This amendment is proposed to come into effect retrospectively with effect from 1.04.2009.

“income” – section 2(24)

The Finance Bill, 2010 proposed to amend the definition of  “income” in clause (24) of section by amending sub-clause (xv).  This is a consequent amendment.  The amendment has to be made because of the proposed amendment of section 56.  This amendment is proposed to come into force with effect from 01.06.2010.

Income deemed to accrue or arise in India – Section 9

As per the existing provisions of the section 9(1) certain incomes listed in clauses (v), (vi) and (vii) shall be included in the total income of a non-resident, whether or not the non-resident has a residence or place of business or business connection in India as per the provisions of Explanation under sub-section (2) of the section .

The Supreme Court of India in the case of Ishikawajima-Harima Heavy Industries Ltd., Vs. DIT [2007] 288 ITR 408 held that in order to be chargeable to tax in the hands of the non-resident, fees for technical services had to be rendered in India as well as utilized in India.  It has been further held that if both the conditions were not fulfilled, the fees for technical services was not chargeable in India.

To supercede the above judgment of the Supreme Court Finance Act, 2007  has inserted the present Explanation with retrospective effect from 01.04.1976.

Latter the Authority for Advance Ruling (AAR) in Worely Persons

Services Pty. Ltd., (AAR) 312 ITR 273 has distinguished the above judgment of the Supreme Court.

The Bombay High Court in Celifford Chance 318 ITR 237 (Bom) and the Karnataka High Court in Jindal Thermal Power Company 225 CTR 220 held that ratio in Ishikawajima’s case is a good law despite the retrospective amendment.

Now Finance Act 2010 has proposed to substitute the said Explanation with a new Explanation to supercede the ratio of judgment in the case of Ishikawajima.  The said new explanation reads as under:

The new explanation shall be deemed to have come into effect retrospectively from 01.04.1976.

Incomes which do not form part of total income – section 10

AS per the provisions of clause (21) of section 10 the income of a scientific research association for the time being approved for the purposes of clause (ii) of sub-section (1) of section 35 does not form the part of total income. 

An amendment is proposed to substitute the words “research association” for the words “scientific research association” with effect from 01.04.2011.

This is a consequential amendment.  It is also  proposed to amend section 35 also.

Special Provisions in respect of newly established Units in Special Economic Zones – Section 10AA

There was an anomaly in the provisions of sub-section (7) of section 10AA in respect of exemption of profits and gains derived from the export of articles or things or from services of the unit of an Entrepreneur as referred to clause (j) of section (2) of Special Economic Zones Act, 2005. The anomaly was cured by amending sub-section (7) by Finance (No.2) Act, 2009 by substituting the word “undertaking” for the word “assessee” with effect from 01.04.2010. 

Now the following proviso is proposed to be inserted after sub-section (7) with retrospective effect from 01.04.2006 to enable the assessees to get relief retrospectively.

Procedure for registration – Section 12AA

Sub-section (3) of section 12AA empowers the Commissioner to cancel the registration to a charitable trust or institution if he is satisfied that the activities of the such trust or institution are not genuine or are not being carried out in accordance with the objects of the trust or institution as the case may be.  Before canceling the registration the Commissioner is under legal obligation to afford an opportunity of being heard to the trust or institution.  Sub-section (3) was inserted by Finance Act, 2004 with effect from 1.10.2004.

Judicial rulings in some cases have held that the Commissioner does not have the power to cancel the registration which was obtained earlier by any trust or institution under the provisions of section 12A as it is not specifically mentioned in section 12AA.

To plug the legal lacuna it is proposed to amend section 12AA so as to provide that the commissioner can also cancel the registration obtained under section 12A as it stood before amendment by Finance

(No.2) Act, 1996. After the proposed amendment sub-section (3) of section 12AA reads as under:

Depreciation – section 32

It is proposed to  substitute the words, brackets and figures “clause (xiii) and clause (xiv) the words, brackets, figures and letters “clause (xiii), clause (xiiib) and clause (xiv) with effect from 1.04.2011  This is a consequential amendment as an amendment is proposed to bring in section 47 also.

Expenditure on scientific research – section 35

The provisions of existing section 35(1)(ii) provide for a weighted deduction from business income to the extent of 125 percent of any sum paid to an approved and notified research association or a university, college or other institution to be utilized for scientific research.  Section 35(1)(iii) provides similar deduction if the sum is paid to an approved notified university, college or other institution to be used to carry on research in social science or statistical research .

Now it is proposed to amend clause (ii) so as to enhance the weighted deduction from 125% to 175%.

It is further proposed to amend clause (iii) to include research associations which have their object of undertaking  research in social science or undertaking statistical research provided such associations are approved and notified.

This amendment will come into force with effect from 01.04.2011.

The Finance (No.2) Act, 2009 has   inserted a new section – section 35AD after section 35AC of the Income-tax Act, 1961.

v     The section allows any capital expenditure  incurred  other than  for the acquisition of any land or good will or financial instrument during the year wholly and exclusively for specified business during the year as deduction. The specified business has been defined to mean

(i)                            setting up and operating of cold chain facilities for storage or transportation of agricultural produce, dairy products and other related items

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

(iii)                      laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities  being integral part of such net work.

Now it is proposed to include the business of building and operating a new hotel of two-star category, anywhere in India, which starts functioning after 1.04.2010 within the purview of “specified business”. By inserting the following new clause (aa) after clause (a) of sub-section 5.

Specified business has been defined in clause  (c).  Now a new sub-clause (iv) is proposed to be inserted to clause  (c) with effect from 01.04.2011 which reads as under:

Amortisation of Expenditure incurred under the voluntary retirement scheme-section 35DDA 

Sction 35DDA provides ammortisation of any expenditure incurred by an assessee on payment of any sum to an employee in connection with  his voluntary retirement in five equal instalments by allowing 1/5^th of the expenditure in an assessment year.

Finance Bill 2010 proposes to insert a new sub-section 4A for facilitating the deduction of such expenditure in case of reorganization of business whereby a private company or unlisted public limited company is succeeded by a limited liability partnership fulfilling the conditions laid down in the proviso to clause (xiiib) of section 47.

Another consequential amendment has also been proposed in sub-section 5 of section 35DDA.

Both the above amendments will come into force with effect from 1.04.2011.

Amounts not deductible – section 40

As per the provisions of sub-clause (ia) of clause (a) of section 40 any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work including supply of labour for carrying out any work on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or after deduction has not been paid-

in a case where the tax was deductible and was so deducted during the last month of the previous year on or before due date specified in sub-section (1) of section 139 or in any case on or before the last day of the previous year - shall not be deducted in computing the income chargeable under the head profits and gains of business or profession.

Finance Bill 2010 proposes to amend sub-clause (ia) of clause (a) of section 40 to facilitate deduction of such expenditure if the tax deducted at source is paid on or before the due date specified under sub-section (1) of section 139.

Another amendment has also been proposed in section 40 by substituting the proviso to allow the deduction of the such expenses in computing the profits and gains of business or profession in the year of payment if the deducted tax is paid after the due date specified under sub-section (1) of section 139.

 This amendment will take effect retrospectively from 1.04.2010 and will apply in relation to the assessment year 2010-2011 and subsequent years.

Definitions of certain terms relevant to income from profits and gains of business or profession –section 43

Finance Bill 2010 has proposed some consequential amends to Explanation 13 of section 43 and to insert a new Explanation 2C in clause (6) after Explanation 2B to give necessary effects in case of business reorganization.

This amendment will come into force with effect from 1.04.2011

Audit of accounts of certain persons carrying on business or profession –section 44AB

An assessee who is carrying on business has to get his accounts audited by a Chartered Accountant if his turnover in the previous year exceeds forty lakh rupees.  Similarly an assessee who is carrying on any profession has to get his accounts audited by a Chartered Accountant is his gross receipts exceed ten lakh rupees in the previous year.

The Finance Bill 2010 has proposed to enhance the threshold limit of sales turnover or gross receipts from rupees forty lakhs to sixty lakhs in the case of an assessee carrying on business gross receipts from rupees ten lakhs to fifteen lakhs in the case of an assessee carrying on profession.

This amendment will come into force with effect from 1.04.2011.

Special provisions for comuting profits and gains of business on presumptive basis – section 44AD

As per the provisions of section 44AD,  income of an eligible assessee engaged in a n  eligible business shall be  @ 8% of the gross receipts or a sum higher than the said sum claimed to have been earned by the eligible assessee.  The provisions of this section are applicable to the assesssee whose turnover in the previous year does not exceed forty laksh rupees.

Now Finance Bill 2010 proposes to enhance the threshold limit of rupees forty lakhs to rupees sixty lakhs.

This amendment will come into force with effect from 1.04.2011.

-To be continued