direct tax
This query is : Resolved
23 November 2007
hi,
pls provide me simplified version of amendments made by finance act 2007 in direct tax.
i do not want bare act version as i already have supplementary material issued by the institute.
thanks
pls provide me simplified version of amendments made by finance act 2007 in direct tax.
i do not want bare act version as i already have supplementary material issued by the institute.
thanks
23 November 2007
I hope following article, which has been received me vide mail, may help you:-
The Finance Bill, 2007, has passed on 4th May 2007 and received the assent of the President on 11-5-2007. The Finance Act, as passed by the Parliament, contains 92 Sections making over 125 amendments to provisions of Income-tax and Wealth-tax Acts.
Why so much amendments:- The Finance Minister is continuously saying that very soon a new Direct Tax Code simplifying our tax laws, as prepared by the Internal Committee, will be introduced in the Parliament. If it is so, what is the requirement of so much amendments?
Broadly stated, these amendments can be divided into 5 parts :
• Some controversial provisions.
• Provisions made with retrospective effect, which will nullify the effect of some judicial pronouncements.
• Provisions which will adversely affect the assessees.
• Provisions which will give some relief to assessees.
• Procedural provisions.
The Taxation Laws (Amendment) Bill, 2005, introduced in the Lok Sabha on 12-5-2005, has been passed in the month of May, 2006 as Taxation Laws (Amendment) Act, 2006 (TLA — 2006). This Act also makes some important amendments in the Income-tax Act, which apply to the accounting year 2004-05 and onwards.
The Finance Act, 2007, amends provisions relating to Service Tax and Banking Cash Transaction Tax. While some new services are brought within the Service Tax net, the scope of some existing services is widened. The exemption limit for small service providers is increased from Rs.4 lacs to 8 lacs.
In this article, some of the important amendments made by the Finance Act, 2007 and TLA — 2006 are discussed.
2. Rates of Taxes, Surcharge and Education Cess :
2.1 Exemption limit :
The exemption limit has been increased by Rs.10,000 for individuals, HUF, AoP, and BoI w.e.f A.Y. 2008-09. Therefore, the position in such cases will be as under :
Existing Rs. Revised Rs.
(i) Individual (Male), HUF or AoP 1,00,000 1,10,000
(ii) Women (Below 65 years age) 1,35,000 1,45,000
(iii) Senior Citizens (Above 65 years age) 1,85,000 1,95,000
2.2 Rates of taxes :
There is no change in slabs of income for individuals, HUF, AoP and BoI and rates of taxes. Therefore, the existing rates will continue in A.Y. 2008-09. Similarly, there are no changes in rates of taxes for other assessees, including non-residents.
2.3 Rates of surcharge :
The rate of surcharge in the case of individuals, HUF, AoP and BoI, which is 10% of tax when income exceeds Rs.10 lacs continues. However, in the case of a domestic company and firm, the present rate of 10% of tax will now apply, w.e.f. A.Y. 2008-09, only if the income exceeds Rs.1 crore. Similarly, the present rate of 2.5% of tax payable by a non-resident company will now be payable w.e.f A.Y. 2008-09 only if the total income exceeds Rs.1 crore. No surcharge is payable by a co-operative society or local authority.
2.4 Surcharge on FBT :
The rate of surcharge on FBT is 10% of tax if fringe benefits in the case of AoP or body of individuals exceed Rs. 10 Lacs. In case of a domestic company and a firm, the rate of surcharge is 10% of FBT and in the case of a non-resident company, it is 2.5% of FBT. No surcharge is payable on FBT in the case of a local authority.
2.5 Education Cess :
In A.Y. 2007-08, the rate of Education Cess is 2% of tax and surcharge. From A.Y. 2008-09, further education cess at 1% of tax and surcharge is payable for meeting the Government’s commitment for higher education. Hence, the rate of Education Cess from A.Y. 2008-09 will be 3% of tax and surcharge.
2.6 Dividend Distribution Tax :
S. 115-O provides for payment of tax on dividend distribution by a domestic company at 12.5%. This rate is increased to 15% w.e.f 1-4-2007. Therefore, any dividend declared and distributed by a domestic company on or after 1-4-2007 will suffer tax at the rate of 16.995 (say 17%), including surcharge and education cess.
2.7 Income Distribution Tax by Mutual Fund :
S. 115-R provides for payment of tax on income distribution by a Mutual Fund (other than distribution by equity oriented fund). The existing rate of tax at 12.5% for individuals and HUF and 20% for other assessees will continue. However, in the case of income distribution by a Money Market Mutual Fund or a Liquid Fund, the rate of tax payable will be 25% w.e.f. 1-4-2007. For this purpose, ‘Money Market Mutual Fund’ means a fund as defined in S. 2(D) of SEBI (M.F.) Regulations, 1996. The term ‘Liquid Fund’ means a scheme or a plan of M.F. which is classified by SEBI as such in accordance with the guidelines issued by it or regulations made by it. It may be noted that surcharge at 10% of tax and education cess at 3% of tax and surcharge will be payable by M.F. on the Income Distribution Tax stated above.
3. Tax Deduction at Source (TDS) :
3.1 Rates of TDS :
The rates for TDS, effective from 1-4-2007, provided in Part II of the First Schedule to the Finance Act, 2007, are the same as in last year. These rates are to be increased by surcharge at 10% of tax in the case of an individual, HUF, AoP and BoI, if the income or the aggregate of such income paid or likely to be paid and subject to TDS during the financial year exceeds Rs.10 lacs. In the case of a domestic company or a firm, the rate of surcharge is 10% of tax if the income or the aggregate of such income subject to tax during the financial year is likely to exceed Rs.1 crore. In the case of a non-resident company, the rate of TDS is 2.5% if such income exceeds of Rs.1 crore. The Education Cess in all such cases will be 3% of tax and surcharge.
3.2 Interest on securities :
U/s.193 no tax is required to be deducted at source at present from 8% Savings (Taxable) Bonds, 2003. It is now provided that w.e.f 1-6-2007, tax will be deducted at source at the applicable rate (including surcharge and education cess), if such interest exceeds Rs.10,000.
3.3 TDS on Interest :
S. 194A provides for deduction of tax at source from interest (other than interest on securities) at the applicable rate (including surcharge and education cess) if such income exceeds Rs.5,000. W.e.f 1-6-2007, it is now provided that no tax will be deducted by a bank, a co-operative bank or a Post Office, if such interest income is less than Rs.10,000. In other cases the limit of Rs.5,000 will continue.
3.4 Payments to contractors :
S. 194C provides for deduction of tax at source from payments to contractors/sub-contractors. At present, the Section applies to a company, firm, society, trust, co-operative society, Government, local authority, etc. W.e.f. 1-6-2007, the provisions of this Section will apply to any individual or HUF whose total sales, gross receipts or turnover from business or profession exceed the limits prescribed in S. 44AB during the preceding financial year. Therefore, such persons will now have to deduct tax at source at the applicable rate of 1% or 2% from payments exceeding the prescribed limits made to a contractor.
It may be noted that this provision for TDS will not apply to such individuals or HUF if the payment to a contractor is exclusively for personal purposes. In other words, if no deduction is claimed for such payment in the computation of business/profes-sional income, there will be no obligation to deduct tax at source.
3.5 Commission or brokerage :
S. 194H provides for TDS from payment of commission or brokerage. The rate of tax for this purpose is 5% if the payment to a person during the financial year exceeds Rs.2,500. This rate is increased to 10% w.e.f 1-6-2007.
It is further provided that w.e.f. 1-6-2007, no such deduction of tax shall be made from payment by BSNL or MTNL to their public call office franchisees.
3.6 Payment of rent :
S. 194-I provides for TDS from rent. This was applicable to rent for land, building, (including factory building) together with furniture, fittings, etc. By amendment by TLA - 2006, this provision applied to rent for (i) land, (ii) building (including factory building), (iii) machinery, (iv) plant, (v) equipment, (vi) furniture, and (vii) fittings. The limit of Rs.1.20 lacs provided in this Section for TDS applied to the aggregate rent of all the assets. The rate of TDS was 15% of rent if payment was to individual or HUF and 20% of rent if payment was to any other person. This new provision applied to all leasing companies also engaged in the business of leasing equipments. This revised provision became effective from 13-7-2006.
In view of several representations, the Finance Act, 2007 has revised the rate for TDS w.e.f. 1-6-2007 as under :
(i) 10% in respect of rent for use of machinery, plant or equipment.
(ii) In respect of rent for use of land, building, furniture or fittings payable to (a) Individual or HUF will be 15% and (b) Others — will be 20%.
3.7 Payment of professional fees :
S. 194J, provides for TDS from professional fees and technical consultancy fees at the rate of 5%. By amendment by TLA - 2006, this provision was extended to following items w.e.f. 13-7-2006.
(i) Royalty, if it exceeded Rs.20,000 in any financial year.
(ii) Any sum payable under an agreement for (a) not carrying out any activity in relation to any business or (b) not sharing any know-how, patents, copyrights, trademarks, etc. as provided in S. 28(va) (i.e., non-compete fees) if the same exceeded Rs.20,000 in any financial year.
It may be noted that the Finance Act, 2007, has increased the rate for TDS u/s.194 J from 5% to 10% w.e.f. 1-6-2007.
TLA - 2006, provided in S. 40(a)(ia) that no deduction for payment of rent or royalty will be allowed in the computation of income of a resident if tax was not deducted at source as provided in S. 194-I and S. 194-J. This amendment was made from A.Y. 2006-07 and applied to payments made during the year ending 31-3-2006. It may be noted that obligation to deduct tax at source on the basis of amended provision was effective from 13-7-2006. It is for consideration as to how disallowance u/s. 40(a)(ia) can be made for non-deduction of tax during the period 1-4-2006 to 12-7-2006 when the above Sections were not applicable to rent for use of plant, machinery, equipment, etc. and to royalty or payment of non-compete fees.
3.8 Collection of tax at source :
S. 206C(1C) provides for collection of tax at source at 2% from fees collected under a contract or licence or lease, etc. for mining and quarrying. It is now provided that w.e.f. 1-6-2007, this provision will not apply to mining and quarrying of mineral oil including petroleum and natural gas.
3.9 Surcharge and Education Cess :
The rate of tax applicable to provisions for TDS is to be increased by surcharge, as explained in para 3.1 above. Further, Education Cess at 3% of tax and surcharge as explained in para 3.1 is also payable on the TDS amount.
4. Exemptions :
4.1 S. 10(15)(vii) :
This Section grants exemption to interest on bonds issued by a local authority. From A.Y. 2008-09 interest on bonds issued by State Pooled Finance Entity will also be exempt from tax. Such entity is defined to mean an entity set up according to guidelines for the Pooled Finance Development Scheme notified by the Central Government.
4.2 S. 10(23 BB) :
Exemption granted to income of Secretariat of Asian Organisation of the Supreme Audit Institutions up to 31-3-2008 has now been extended up to 31-3-2011.
4.3 S. 10(23 BBF) :
This Section is added by the TLA - 2006, effective from A.Y. 2006-07. The exemption granted on total income of the North-Eastern Development Finance Corporation Ltd. has been partially withdrawn from A.Y. 2006-07. This Section provides for withdrawal of exemption in a phased manner. It is now provided that this Corporation will get exemption on income to the extent of (i) 80% in A.Y. 2006-07, (ii) 60% in A.Y. 2007-08, (iii) 40% in A.Y. 2008-09 and (iv) 20% in A.Y. 2009-10. There will be no exemption from the A.Y. 2010-11 onwards.
4.4 S. 10(23 BBG) :
This is a new Section which grants exemption to any income of the Central Electricity Regulatory Commission formed u/s.76(1) of the Electricity Act, 2003 from A.Y. 2008-09.
4.5 S. 10(23 EC) :
This is a new Section which grants exemption to contributions from commodity exchanges and their members to notified investor protection fund. It is also clarified that any amount standing to the credit of such a fund and not charged to tax during the previous year if shared with a commodity exchange, such income shall be deemed to be the income of the year in which it is shared and shall be chargeable to income tax. This provision comes into force from A.Y. 2008-09.
4.6 S. 10(23FB) :
This Section provides for exemption to any income of a venture capital company or venture capital fund set up to raise funds for investment in a venture capital undertaking. Such income is considered as income of investors in such venture capital company/fund by virtue of pass-through status provided in S. 115V. By amendment of S. 10 (23FB), effective from A.Y. 2008-09, it is provided that the exemption will now be available only in respect of income of a venture capital company/fund from investment in a venture capital undertaking engaged in certain specified businesses or industries as under :
(i) Nanotechnology,
(ii) Information technology relating to hardware and software development,
(iii) Seed research and development,
(iv) Bio-technology,
(v) Research and development of new chemical entities in the pharmaceutical sector,
(vi) Production of bio-fuels,
(vii) Building and operating composite hotel-cum-convention centre with seating capacity of more than three thousand, or
(viii) Developing or operating and maintaining or developing, operating and maintaining any infrastructure facility as defined in Explanation to S. 80IA(4)(i) — i.e., Road, bridge, highway, water project, irrigation project, port, air port, etc., or
(ix) Dairy or poultry industry.
Therefore, exemption is now restricted only to income from investment in such venture capital undertakings.
5. Charitable trusts :
5.1 S. 10(23C) :
(i) Under this Section, the Central Government has power to issue notification granting exemption in respect of income of the following charitable trusts or institutions :
(a) Any university or other educational institution existing solely for educational proposes and not for the purpose of making profit and having annual gross receipts exceeding the prescribed limit of Rs.1 crore.
(b) Any hospital or other institution for reception and treatment of illness of persons existing solely for philanthropic purposes and not for the purpose of profit and having annual gross receipts exceeding the prescribed limit of Rs.1 crore.
(c) Any trust or institution wholly for public, religious or charitable purposes and having importance throughout any State or throughout India.
(d) Any other fund or institution established for charitable purposes and having importance throughout any State or throughout India.
(ii) At present, there is no time limit for issue of the above notification after the application for exemption is made by the trust or institution. Now a time limit is fixed by amendment of this Section by TLA - 2006. This notification will have to be issued or order rejecting the application will have to be passed within one year from the end of the month in which the application for exemption is made.
(iii) By another amendment of this Section by TLA - 2006, it is provided that any of the above trusts or institutions which has income, without consider-ing the exemption, exceeding the maximum limit not chargeable to tax should get its accounts audited by a Chartered Accountant in the pre-scribed form and file the same with the return of income.
(iv) S. 12A at present provides for compulsory audit of charitable trust or institution if the income exceeds Rs.50,000. From A.Y. 2006-07, this provision for audit will apply only if the income exceeds maximum amount not liable to tax.
(v) At present, funds or institutions of importance covered u/s.10(23C)(iv) and (v) are required to be notified by the Central Government in order to avail of the exemption u/s.10(23C). The Finance Act, 2007, provides that effective from 1-6-2007, such funds or institutions will have to seek approval of prescribed authority viz. Chief CIT or Director General. Hence, the requirement of notification by the Central Government is now dispensed with. Henceforth, funds/institutions already notified by the Central Government will have to seek renewal of recognition from the prescribed authority when the present recognition expires. All pending applications with the Central Government, as on 1-6-2007, will be transferred to the prescribed authority who shall process them further. As stated earlier, decision on all applications will have to be taken within the prescribed period of one year from the end of the month in which such application is made.
5.2 S. 12 A and S. 12AA :
The Finance Act, 2007, has amended these Sections effective from 1-6-2007. Now, registration of a charitable trust or institution will be governed by S. 12AA. The power of the CIT to condone delay in making application for registration is taken away w.e.f. 1-6-2007. Therefore, a trust/institution which makes delayed application for registration cannot get registration from the date of its creation even if there is a reasonable cause for such delay. In order to be eligible for exemption from the date of creation, the trust/institution will have to make the application for registration in the same financial year in which it is created/established. CIT can grant registration u/s.12AA after 1-6-2007 from the first day of the financial year in which application is made.
5.3 S. 35 :
(i) S. 35(1)(ii) and S. 35(1)(iii) provides for deduction of 125% of any donation or contribution made to a scientific research association or a university, college or other institution approved by the Central Government. By amendment by TLA - 2006, it is now provided that such approval will be granted in accordance with the guidelines and conditions laid down by the Central Government by rules to be prescribed.
(ii) Further, a time limit of one year from the end of the month in which application for approval of the institution under this Section is made is fixed. The Government will have to notify the institution or pass order rejecting the application within this time frame.
(iii) If the Assessing Officer finds that the affairs of the institution are not carried on in accordance with the terms of the approval, he can recommend to the Government to withdraw the approval.
(iv) It may be noted that the prescribed authority has now power to withdraw recognition or approval given to any trust or institution u/s.10(23 C), u/s.35, u/s.35AC, u/s.35CCA, etc. It is now provided, by amendment of S. 35, S. 35AC, S. 35CCA and S. 80GGA by TLA - 2006, that if any assessee has given any donation to the trusts or institutions to which the above Sections apply, before the date on which such recognition or approval is withdrawn, the benefit of deduction will not be denied to the assessee.
6. Tax holiday for units in SEZ :
S. 10AA was added in the Income-tax Act by the Special Economic Zones Act, 2005, w.e.f. 10-2-2006. This Section provides for tax holiday in respect of income derived from a unit in SEZ from manufacture and export of articles or things or from provision of services. U/s.10AA(4) the benefit is available to a unit that commences manufacture or production or provision of services on or after 1-4-2005. This provision is now amended with retrospective effect from 10-2-2006 in order to ensure that the benefit of the Section is available only to a new unit which satisfies the following conditions :
(i) It is not formed by the splitting up, or the reconstruction of a business already in existence. It is, however, provided that this condition shall not apply in respect of any undertaking which is formed as a result of re-establishment, reconstruction or revival of the business as is referred to in S. 33 B, in the circumstances and within the period specified in that Section.
(ii) It is not formed by the transfer to a new business of machinery or plant previously used for any purpose. It is, however, provided that it shall be permissible to install used machinery or plant to the extent of twenty percent of the total value of machinery or plant installed in setting up of the business.
7. Salary income and provision of residential accommodation :
7.1 S. 17(1)(viii) :
The term ‘Salary’ is defined in S. 17(1) to include the contributions made by the Central Government to the account of an employee under a Pension Scheme referred to in S. 80CCD. This provision is now extended to such contribution made by employers other than the Central Government i.e., by State Government, local authorities, companies, firms, and others. Corresponding amendments are made in S. 7(iii) and S. 80CCD. This provision comes into effect from A.Y. 2004-05.
It may be noted that the assessee will be entitled to claim deduction u/s.80CCD, subject to certain limits and conditions, when the above contribution by the employer under the Pension Scheme is added to his income u/s.7(iii) read with S. 17(1) (viii).
7.2 S. 17(2)(ii) :
This Section provides that the perquisite in the hands of an employee shall include value of any concession in the matter of rent respecting any accommodation provided to the employee. In order to provide as to what constitutes concession in the matter of rent, this Section has been amended by insertion of Explanation 1, with retrospective effect from A.Y. 2002-03. The provisions of Rule 3 of Income-tax Rules, 1962, relating to valuation of perquisites, both in the case of furnished and unfurnished accommodation, which were in force up to A.Y. 2005-06 are now incorporated in this Section. It appears that this amendment is made in view of the decision of the Supreme Court in the case of Arunkumar and Others v. UOI, (286 ITR 89) to set at rest any possible controversy on this issue.
7.3 S. 17(2)(ii) — New explanation :
It may be noted that Rule 3 which was in force from A.Y. 2006-07 provided that for calculating the value of this perquisite the upper limit will be 20% of the salary for unfurnished accommodation in cities with population above 4 lacs and 15% in other cases. By an amendment of this explanation it is now provided, effective from A.Y. 2006-07, that value of the perquisite in respect of unfurnished accommodation will now be computed as under :
(i) The specified upper limit will be 15% of salary in respect of accommodation in cities having population exceeding 25 lacs, 10% for cities having population between 10 lacs and 25 lacs and 7.5% for cities having population of less than 10 lacs.
(ii) Value of accommodation will be determined by adopting the specified rate as reduced by the amount recoverable from the employee if the accommodation is owned by the employer.
(iii) If the accommodation is taken on rent or lease by the employer, the value of perquisite will be taken to be the lease rent or rent payable by the employer or 15% of the salary whichever is lower, as reduced by the amount recovered from the employee.
From the above, it will be evident that employees who are provided quarters by the employer either rent-free or at concessional rent, will benefit by this provision with retrospective effect from A.Y. 2006-07.
It may be noted that for furnished accommodation and accommodation provided in certain special circumstances, the existing provisions will continue to operate.
8. Business deductions :
8.1 S. 35(2AB) :
This Section provides for weighted deduction of 150% of the expenditure incurred by companies engaged in certain businesses e.g., bio-technology, drugs, pharmaceuticals, electronic equipment, computers, telecommunication equipments, chemicals, etc. on in-house research and development facility approved by prescribed authority. At present, the Section provides for this benefit in respect of expenditure incurred up to 31-3-2007. This benefit is now extended in respect of expenditure to be incurred up to 31-3-2012.
8.2 S. 36(1)(viia) :
At present, this Section provides for deduction in respect of any provision for bad and doubtful debts made by a scheduled bank or a non-scheduled bank to the extent provided in the Section. By amendment of this Section, effective from A.Y. 2007-08, this deduction can now be claimed by a co-operative bank other than a primary agricultural society or a primary agricultural and rural development bank. This amendment is conse-quential to the amendment made last year in S. 80P, making income of co-operative bank taxable w.e.f. A.Y. 2007-08.
8.3 S. 36(1)(viii) :
At present, this Section provides for deduction up to 40% of the profit derived from the business of providing long-term finance carried on by specified entities if the said amount is transferred to a special reserve account. This benefit is available to (i) a financial corporation engaged in providing long-term finance for industrial or agricultural development or development of infrastructure facility in India, and (ii) a pubic company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of residential houses in India.
This Section has been substantially modified as under, and comes into force from A.Y. 2008-09.
(i) This deduction is restricted to amount up to 20% of profits derived from the eligible business if such amount is transferred to a special reserve account.
(ii) When such special reserve exceeds twice the amount of paid-up capital and general reserve of the specified entity, no deduction will be available under this Section.
(iii) This deduction can be claimed by any of the specified entities engaged in the eligible business stated below :
(a) A financial corporation specified in S. 4A of the Companies Act
(b) A public sector financial corporation
(c) A banking company
(d) A co-operative bank (other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank Business of providing long-term finance in India for industrial or agricultural development or development of infrastructure facility or construction or purchase of houses for residential purposes.
(e) A housing finance company Business of providing long-term finance for construction or purchase of houses in India for residential purposes
(f) Any other financial corporation, including a company Business of providing long-term finance for development of infrastructure facility in India.
8.4 S. 36(1)(xiv) :
Clause (xiv) has been inserted w.e.f. A.Y. 2008-09 to provide for deduction in respect of any contribution made by a public financial institution to a notified credit guarantee fund for small industries.
9. Disallowance of expenditure :
(i) S. 40A(3) provided for disallowance of 20% of any expenditure if the payment for the same is not made by a crossed cheque or a crossed bank draft and such payment exceeds Rs.20,000. By amendment of the Section by TLA - 2006, it was provided that such disallowance can be made if the amount is not paid by an ‘account payee cheque’ or an ‘account payee bank draft’. This will mean that any payment exceeding Rs.20,000 for purchase of goods, raw materials, stores, etc. or for any expenditure for which deduction is claimed, should be made by an ‘account payee cheque/bank draft’. This amendment came into force from 13-7-2006.
(ii) This Section has been further amended by the Finance Act, 2007, to provide that w.e.f. A.Y. 2008-09, if the payment for such expenditure is not made by an account payee cheque or an account payee bank draft, the entire amount of expenditure will be disallowed. The existing provision that in specified cases, as prescribed in Rule 6DD, the provision for such disallowance will not apply will continue. Thus, an assessee will suffer 100% dis-allowance if he does not comply with the require-ments of S. 40A(3) effective from 1-4-2007.
(iii) At present, the Section provides that if liability for such expenditure is provided in one year, and the expenditure is allowed in that year, non-compliance with provisions of S. 40A(3) in the subsequent year when actual payment is made will enable the AO to rectify the assessment for earlier year u/s.154. From A.Y. 2008-09, it is now provided that in such a situation, rectification u/s.154 of earlier assessment is not to be made, but amount disallowable u/s.40A(3) will be considered as income of the year in which actual payment for such expenditure is made otherwise than by account payee cheques/drafts.
(iv) The effect of this amendment will be that if liability for any expenditure of Rs.1,00,000 is incurred in the accounting year 2006-07, the same will be allowed in A.Y. 2007-08 if provision for the same is made in that year. If the actual payment of Rs.1,00,000 is made by a crossed cheque in the month of April 2007, only 20% of Rs.1,00,000 i.e., Rs.20,000 will be added as income of A.Y. 2008-09. This is because if Rs.1,00,000 was paid by a crossed cheque in March 2007, only 20% i.e., Rs.20,000 would have been disallowable in A.Y. 2007-08.
(v) It may be noted that S. 40A(3) applies to expenditure claimed as deduction for computation of income from business or profession and income from other sources. This Section does not apply to capital expenditure.
10. Book profits S. 115JB :
At present, in computing book profits u/s.115JB, income derived from undertakings in free trade zones, etc. covered u/s.10A and income derived from 100% EOU covered u/s.10B is to be excluded. In other words, this income is exempt from Minimum Alternate Tax (MAT). It is now provided by amendment of S. 115JB, effective from A.Y. 2008-09, that the income covered u/s.10A and u/s.10B will not be excluded and the same will be liable to MAT. The above amendment does not cover income derived by a unit set up in SEZ covered by S. 10AA and therefore, such income of a SEZ unit will not suffer MAT.
11. Gifts from third parties :
(i) In 2004, a new provision was introduced in S. 56 to provide that any money received by an individual or HUF, without consideration (i.e., gift) in excess of Rs.25,000 on or after 1-9-2004 from third parties will be treated as income from other sources. The exception to this Rule was about receipts from relatives, receipts on the occasion of marriage of the individual, receipts under a will or by way of inheritance or receipts in contemplation of death of payer.
(ii) By amendment of S. 56 by TLA - 2006, it was provided that the following receipts will also be excluded and the same will not be treated as income :
(a) Receipts from any local authority,
(b) Receipts from any fund, foundation, university, educational institution, hospital or other medical institution, trust or institution referred to in S. 10(23c), or
(c) Receipts from any trust or institution registered u/s.12AA.
TLA - 2006 provided that the above provision will apply w.e.f. 13-7-2006. However, the Finance Act, 2007, now provides that this provision will apply from 1-9-2004 onwards.
(iii) This Section is further amended with effect from 1-4-2006 by TLA - 2006 to the effect that receipts from one or more persons aggregating to more than Rs.50,000 in any financial year, without consideration, will be treated as income of the individual or HUF. The exceptions as stated above will continue as in earlier years.
(iv) It may be noted that prior to 1-4-2006, the Section provided that amount exceeding Rs.25,000 received from any person would be taxable. Therefore, a view could be taken that each receipt of Rs.25,000 or less could be ignored. In other words, there was no concept of aggregation of all such receipts. The amendment made w.e.f. 1-4-2006 provides that if the aggregate of such receipts from third parties in any financial year is more than Rs.50,000, the whole of this amount will be treated as income from other sources. This amended Section will apply from A.Y. 2007-08.
(v) The above provision in S. 56 applies to gifts received by an individual or HUF in monetary terms i.e., by cash, cheque, bank draft, etc. It does not apply to gifts received in kind. Further, the Section does not apply to any gift received by a firm, AOP, company, etc.
(vi) The Finance Act, 2007 has inserted clause (10 BC) in S. 10 to provide for exemption of receipts for specified purposes from the Central/State Governments or local authority. This exemption is granted with retrospective effect from A.Y. 2005-06. It is now provided that any amount received by an individual or his legal representative by way of compensation from the Government or local authority on account of any disaster will not be liable to tax. For this purpose, ‘Disaster’ is defined in S. 2(d) of the Disaster Management Act, 2005, as under :
‘Disaster’ means a catastrophe, mishap, calamity or grave occurrence in any area, arising from natural or man-made causes, or by accident or negligence which results in substantial loss of life or human suffering or damage to, and destruction of property, or damage to or degradation of, environment, and is of such a nature or magnitude as to be beyond the coping capacity of the community of the affected area."
This amendment makes it clear that if any ex-gratia amount is received from the Central/State Government, which has no connection with any ‘Disaster’, the same will be taxable u/s.56 (2)(v) or (vi). To meet this contingency, the amendment in S. 56(2) should have added ‘Central or State Government’ along with ‘Local Authority’ as stated in para 11(ii)(a) above.
(vii) It is also provided that if the amount to the extent of the receipt for compensation has been allowed as a deduction under the Income-tax Act on account of any loss or damage caused by such disaster, the above exemption will not be available. In other words, if an individual has suffered loss of Rs.10 lacs due to earthquake in a particular area and he receives Rs.7 lacs as compensation from the State Government, he will be entitled to get deduction for such loss, if allowable as business loss, to the extent of Rs.3 lacs only.
12. Capital gains :
12.1 Capital Asset — S. 2(14) :
This Section defines the term ‘Capital Asset’ to mean property of any kind excluding the specified assets listed in the Section. One of the excluded assets is ‘Personal Effects’ i.e., movable assets held for personal use like wearing apparel, furniture, etc. Hitherto only ornaments and precious stones were not considered as personal effects. By amendment of this Section, w.e.f. A.Y. 2008-09, the following items are excluded from the definition of personal effects.
(i) Jewellery (including ornaments, precious items, etc.) (ii) Archaeological collections, (iii) Drawings, (iv) Paintings, (v) Sculptures, and (vi) Any work of art.
The effect of this amendment is that capital gain on any sale of drawings, paintings, etc. held as personal effects, on or after 1-4-2007, will be liable to tax.
12.2 S. 49 :
This Section provides for determining the deemed cost of acquisition of capital asset under certain circumstances. By amendment of this Section, w.e.f. A.Y. 2008-09, it is provided that if an assessee sells the shares acquired under an ESOP scheme or acquired as sweat equity shares, the cost of acquisition shall be deemed to be the fair market value which has been taken into account while computing the value of fringe benefits u/s.115 WC(i)(ba).
12.3 S. 54EC :
(i) This Section provides for exemption from long-term capital gains tax if such capital gain is invested in ‘long-term specified assets’ within a period of six months. The Finance Act, 2006, amended this Section and provided that such investment can be made only in bond issued after 1-4-2006 by National Highways Authority of India (NHAI) or Rural Electrification Corporation Ltd. (REC) as notified by the Central Govt. with a lock-in period of 3 years.
(ii) It may be noted that by two notifications dated 29-6-2006 issued by the Central Government, NHAI was authorised to issue such bonds up to the limit of Rs.1500 crores and REC was similarly authorised to issue bonds up to Rs.4500 crores. These bonds were subscribed within a short period of time. There were protests against the limit prescribed in the above notifications as assessees had no avenue for saving tax on capital gains u/s.54EC after the limits were exhausted.
(iii) By a notification dated 22-12-2006, only REC was authorised to issue such bonds up to Rs.3500 crores during the period 22-12-2006 to 31-3-2007 with the following conditions :
(a) Persons who had made investment exceeding Rs.50 lacs u/s.54EC during the period 1-4-2006 to 21-12-2006, should not be allowed to invest in any bonds during the period 22-12-2006 to 31-3-2007.
(b) No person will be able to subscribe bonds exceeding the value of Rs.50 lacs u/s.54EC during the period 22-12-2006 to 31-3-2007. If any person has subscribed for such bonds of an amount of less than Rs.50 lacs, he will be allowed bonds for the balance amount, so that his total investment u/s.54EC cannot exceed Rs.50 lacs.
The time limit of six months was extended up to 31-3-2007 for those who could not make such investment due to the fact that the bonds were not available.
(iv) The Government has realised that S. 54EC did not empower it to prescribe the ceiling limit on issue of bonds by NHAI or REC. It was also realised that the ceiling limit of Rs.50 lacs for each assessee also could not be imposed by a notification. To validate such unauthorised notifications, S. 54EC has now been amended with retrospective effect from 1-4-2006. Accordingly, Explanation (b) below S. 54EC(3) has been modified retrospectively to validate the above actions.
(v) (a) It may be noted that S. 54EC(1) has now been amended w.e.f. 1-4-2007 by addition of a proviso to that Section. In brief S. 54EC(1) provides that where long-term capital gain arises to an assessee on transfer of a capital asset, and the assessee at any time within six months invests such capital gain in specified bonds, the whole of the capital gain will not be liable to tax. If the amount invested is less than the capital gain, the exemption will be available to proportionate amount of capital gain. Now, the proviso is added w.e.f. 1-4-2007 which reads as under :
"Provided that the investment made on or after the first day of April, 2007, in the long term specified asset by an assessee during any financial year does not exceed fifty lakh rupees."
(b) Since this is a proviso, we have to read the same in the context of the main S. 54EC(1). It will be noticed that S. 54EC(1) refers to ‘capital gain’ arising from the transfer of ‘a long-term capital asset’. Again, the amount for exemption is to be computed with reference to capital gain arising on transfer of each long-term capital asset. Therefore, it is possible to take the view that the limit of Rs.50 lacs provided in the above proviso will apply to each item of long-term capital gain.
(c) It may be noted that Explanation (ba) which is added below S. 54EC(3), effective from 1-4-2007, only states that for the above purpose, investment should be made on or after 1-4-2007 in bonds of NHAI or REC, as may be notified by the Central Government. In this explanation, it is not provided that the Government can specify any conditions (including condition laying down ceiling on amount of bonds to be issued) while issuing notification. Therefore, no condition about ceiling on total investment by an assessee in a financial year can be provided, as was done in the notification of 22-12-2006, which has now been validated only for the F.Y. 2006-07.
(d) The following illustration will illustrate the position :
A. Shri ABC sells his land in April 2007, and makes a long-term capital gain of Rs.70 lacs. In view of the above proviso, he can invest up to Rs.50 lacs within six months u/s.54EC. He will have to pay tax on balance Rs.20 lacs.
B. If Shri ABC sells shares in an unlisted public limited company in May 2007, and makes long-term capital gain of Rs.30 lacs, he can take the view that capital gain on each capital asset is to be separately computed, and therefore, he will be eligible to invest Rs.30 lacs in bonds u/s.54EC, as the limit of Rs.50 lacs under the proviso applies to each item of capital gain separately.
13. Co-operative banks :
(i) A new S. 44DB has been added in the Income tax Act from A.Y. 2008-09 to make a special provision for computing deductions in the case of a co-operative bank. In the last year’s Finance Act the income of co-operative bank (other than primary agricultural credit society or primary co-operative agricultural and rural development bank) was made taxable from A.Y. 2007-08 by amendment of S. 80-P and S. 2(24)(viia). The new S. 44DB now provides that in the event of amalgamation or demerger of co-operative banks, deduction u/s.32 (Depreciation), 35D (Amortisation of preliminary expenses), and 35DD (Amortisation of amalgama-tion and demerger expenses) and 35DDA (Amortisation of VRS payments), which is al-lowable to the amalgamating or demerged bank will continue to be allowed to the amalgamated or resulting bank for the balance period. In the year of amalgamation or demerger, the deduction will be allowed to amalgamating/demerged as well as amalgamated/resulting bank on proportionate basis. The terms ‘Amalgamation’ and ‘Demerger’ are defined in the same manner in S. 2(1B) and S. 2(19AA) which apply to limited companies.
(ii) A new S. 72AB has also been added from A.Y. 2008-09 to provide for carry forward and set-off of accumulated losses and unabsorbed depreciation allowance in the case of amalgamation or demerger of co-operative banks. The Section provides that the accumulated business losses and unabsorbed depreciation of amalgamating or demerged co-operative banks will be allowed to be set off against the income of amalgamated/resulting co-operative banks, subject to the conditions specified in the Section. These conditions are more or less the same as provided in S. 72A dealing with carry forward and set-off of accumulated losses and absorbed depreciation in the case of amalgamation or demerger of limited companies.
(iii) It may be noted that these two Sections do not deal with a situation where a co-operative bank merges with any other nationalised bank or a private sector bank which is registered under the Companies Act.
14. Chapter VIA deductions :
14.1 S. 80C :
This Section gives a list of 21 items giving various modes of investment in specified assets enabling an individual or HUF to claim deduction up to Rs.1 lac in the computation of total income. One more item is added to the list from A.Y. 2008-09. By amendment of this Section investment in bonds of NABARD, which are notified by the Central Government, on or after 1-4-2007, will also be eligible for deduction u/s.80C, subject to the overall limit of Rs.1 lac in a financial year.
14.2 S. 80CCD :
This Section provides for deduction in respect of contribution to the Pension Scheme of the Central Government as notified by the Central Government, subject to the limit of 10% of salary. This Section was added w.e.f. A.Y. 2004-05. By amendment of this Section, it is now provided that such contribution to approved/notified Pension Scheme of any other employer will be eligible for deduction u/s.80CCD. This amendment is made retrospectively w.e.f. A.Y. 2004-05. This will mean that employees’ contribution to the Pension Schemes of State Government, public sector companies, private sector companies, local authorities and others will be eligible for deduction u/s.80CCD from A.Y. 2004-05. In view this retrospective amendment, a number of employees who have made such contribution to such Pension Scheme on or after 1-1-2004 will be eligible to this relief. The same can be claimed by getting the assessments from A.Y. 2004-05 rectified u/s.154. As stated earlier, S. 7 and S. 17(1)(viii) have also been amended from A.Y. 2004-05 to include the contribution of employer to such Pension Scheme as income of the employee. However, such employers’ contribution up to 10% of salary can also be claimed as deduction u/s.80CCD.
14.3 S. 80D :
This Section provides for deduction of Mediclaim Insurance Premium. At present, the Section provides for this deduction if payment of premium is made by a cheque. It is now provided that such payment can be made by any mode of payment, other than cash.
This Section is amended from A.Y. 2008-09 and limits for deduction of Mediclaim Insurance Premium is increased as under :
(i) In the case of a senior citizen, the limit of Rs.15,000 is increased to Rs.20,000.
(ii) In the case of others, the limit of Rs.10,0000 is increased to Rs.15,000.
14.4 S. 80E :
This Section provides for deduction in respect of interest on loan taken by an individual for his higher education. The Section is amended to provide, from A.Y. 2008-09, that this deduction will be available for interest on loan taken for higher education of the individual or his relatives i.e., spouse and children. Such interest should be paid to institutions specified in the Section. It may be noted that there is no upper limit for the amount of interest for which this deduction can be claimed.
14.5 S. 80IA :
(i) S. 80IA provides for a ten-year tax benefit to an undertaking engaged in development of infrastructure facilities, industrial parks, SEZ, generation and distribution of power, etc. The benefit of this Section is now extended to an undertaking which lays and begins to operate a cross-country natural gas distribution network, including pipelines and storage facilities being an integral part of such net work from A.Y. 2008-09. Such an undertaking should satisfy the following conditions :
(a) It should be owned by an Indian company or a consortium of Indian companies or by an authority, board, or statutory corporation;
(b) It is approved by the Petroleum and Natural Gas Regulatory Board;
(c) One-third of the total pipeline capacity is available for use on common carrier basis by third parties;
(d) It starts operation on or after 1-4-2007; and
(e) It complies with any other conditions as may be prescribed.
(ii) The benefit of this Section is also extended to an undertaking engaged in developing, operating and/or maintaining a navigational channel in the sea from A.Y. 2008-09. Such an undertaking will have to enter into an agreement with the Govern-ment or a local authority, etc. for developing, operating and/or maintaining such navigational channel in the sea.
(iii) S. 80IA(4)(v) provides that the benefit of this Section is available to an enterprise set up for reconstruction or revival of a power generating plant. One of the conditions is that it should begin to generate, transmit or distribute power before 31-3-2007. This date is now extended to 31-3-2008.
(iv) As stated earlier, S. 80IA provides for deduction of income derived by an enterprise or an undertaking engaged in development of infrastructure facilities, industrial parks and SEZ. It appears that the intention of the legislation from the beginning was to allow tax benefit for the ten-year period under this Section to the person who develops such facilities. In the case of Patel Engg. Ltd. v. DCIT, 94 ITD 411 (Mum.), it was held by ITAT that this benefit can be claimed by a person who has taken a works contract to assist the developer of the above facilities. In order to clarify this position, the Section is amended with retrospective effect from A.Y. 2000-01 to provide that this benefit cannot be claimed by a person who executes a works contact entered into with the enterprise/undertaking who has undertaken to develop these facilities. This will mean that the assessments of such contractors for past years will be reopened if they have been allowed this benefit. If their appeals are pending, they will be decided against them.
(v) S. 80IA(12) provides that where the under-taking of an Indian company, entitled to deduction under this Section, amalgamates or demerges, the benefit u/s.80IA will continue to apply to the amalgamated company or the resulting company for the balance period. A new Ss.(12A) is added from A.Y. 2008-09 to provide that the above benefit will now not be allowed if the amalgamation or demerger takes place on or after 1-4-2007. No reasons are given either in the Budget speech or in the Explanatory Memorandum for withdrawing this concession. This amendment will not affect the position on amalgamation or demerger of units to which S. 80IB and S. 80IC apply.
14.6 S. 80 IB :
This Section grants deduction to an industrial undertaking set up in Jammu and Kashmir for manufacture and production of specified items between the period 1-4-1993 to 31-3-2007, for a period of 10 years. The last date for setting up the undertaking in J & K has now been extended up to 31-3-2012 for claiming deduction under this Section.
14.7 S. 80IC :
This Section provides for deduction of income derived from industrial undertaking set up in the State of Sikkim during the period 23-12-2002 to 31-3-2012. The deduction allowed in respect of manufacture or production of specified articles is 100% of income for 10 years. By amendment of S. 80IC(2), it is now provided that this deduction will not be available if such undertaking is set up after 31-3-2007. In other words, period during which the new industrial undertaking has to be set up and has to start manufacture or production of articles has been curtailed by five years. This clause amending this provision was not included in the Finance Bill, 2007, introduced in the Parliament, but has been made at the time of passing the Finance Bill. No reasons for curtailing this benefit have been given.
14.8 S. 80ID :
This new Section has been introduced with a view to provide adequate number of hotel rooms to meet the requirements for accommodating visitors to the Commonwealth Games which are to be hosted by our country in 2010 and also to boost the number of convention centres. The Section provides that the income of an assessee derived from the business of hotel or from the business of building, owning and operating a convention centre will be eligible for deduction of 100% of such income for five consecutive assessment years. For this purpose, the hotel should be located in the specified areas i.e., National Capital Territory of Delhi and the Districts of Faridabad, Gurgaon, Gautam Budh Nagar (NOIDA) and Ghaziabad. It is also provided that the hotel should be constructed and started at any time during the period 1-4-2007 to 31-3-2010. Similarly, the convention centre should also be located in the above specified area and should be constructed at any time during that period. The undertaking claiming the above deduction should not be formed by splitting up or reconstruction of a business already in existence and should not be formed by the transfer to a new business of a building previously used as hotel or convention centre. Further, the above undertaking should not be formed by transfer to the hotel/convention centre of a machinery or plant previously used for any other purpose. The assessee claiming this deduction will have to get the accounts of the undertaking audited by a Chartered Accountant and audit report in the prescribed form, certifying that the deduction has been correctly claimed, and will have to file the same along with the return of income. It is also provided that in computing the total income of the assessee no deduction shall be allowed under any other provisions of Chapter VIA or S. 10AA. The Central Government has to prescribe the details about the sizes and the facilities to be available in the hotel or convention centre, in respect of which the deduction is allowable under this Section.
14.9 S. 80IE :
This is a new Section added from A.Y. 2008-09. It may be noted that under the existing S. 80IC(2)(a)(iii) benefit of that Section is available to an industrial unit set up in the North-Eastern States during the period of 24-12-1997 to 31-3-2007. Since this time limit has expired on 31-3-2007, a new S. 80IE is inserted from the current year. This Section applies to any undertaking which begins to manufacture or produce specified articles during the period 1-4-2007 to 31-3-2017 in any of the North-Eastern States. The deduction allowed to such unit will be 100% of the income derived from the undertaking for a period of 10 years. This benefit will also be available to an undertaking which undertakes substantial expansion to manufacture specified articles. It is also provided that the benefit will also be available to an undertaking which carries on the business of (a) hotel (not below two stars), (b) adventure and leisure sports, including ropeways, (c) providing medical and health services (nursing home with minimum 25 beds), (d) running an old-age home, (e) operating vocational training institute for hotel management, catering and food craft, (f) entrepreneurship development, nursing and para medical, civil aviation-related training, fashion designing and industrial training, (g) running information technology IT-related training centre, (h) manufacturing of IT hardware and (i) bio-technology. It may be noted that the undertaking claiming deduction under this Section should be new. It should not be formed by splitting up or the reconstruction of a business already in existence and should not be formed by transfer to a new business of any machinery or plant previously used for any purpose. There are certain other conditions which are as contained in S. 80IA/80IC.
15. Other amendments :
15.1 S. 2(25A) :
Clause (25A) has been inserted in S. 2 w.e.f. 25-8-1976. The term ‘India’ is defined to mean the territory of India as referred to in Article 1 of the Constitution, its territorial waters, seabed and subsoil underlying such waters, continental shelf, exclusive economic zone or any other maritime zone as referred to in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 and air space above its territory and territorial waters.
15.2 S. 9(1) :
This Section explains as to what shall be the income deemed to accrue or arise in India. Clauses (v), (vi) and (vii) of this Section provide that if an Indian resident pays to a non-resident any amount on account of interest, royalty or fees for technical services, the same will be taxable in India. This is irrespective of the fact that the non-resident may not have any operations in India. If the payment for services is made by a resident who has used the same in India, it is taxable in India. Only if the resident pays for using the services or the loan for earning income from a source outside India, it will not be taxable in India. In the above context, the Supreme in the case of Ishikawaji — Harima Heavy Industries Ltd., (288 ITR 408), has held that for any such deemed income to be taxable in India, there must be sufficient territorial nexus between such income and the territory of India. It has been held that where any sum is payable to a non-resident by a resident, the deeming sweep of the said Section cannot bring to tax, any income of a non-resident received outside India from Indian concern for services rendered outside India. In regard to fees for technical services, it has been specifically held that for the fees to be taxable in India, the services have not only to be utilised in a business in India, but also have to be rendered in India. By amendment of this Section, w.e.f. 1-6-1976, Explanation has been inserted at the end of S. 9 with a view to overcome the ratio of the above decision and to provide that income will be deemed to accrue or arise to a non-resident in India on account of interest, royalty and fees for technical services, whether or not the non-resident has a residence or place of business or business connection in India.
15.3 S. 72A :
This Section deals with carry forward and set-off of accumulated losses and unabsorbed depreciation in the case of amalgamation or demerger of a company. At present, the Section applies to a company owning an industrial undertaking, a ship, a hotel or a banking company. The benefit of this Section is now extended to amalgamation of one or more public sector companies engaged in the business of operation of aircraft w.e.f. A.Y. 2008-09.
15.4 S. 292C :
This is a new Section inserted w.e.f. 1-10-1975. Under the existing position, where any books of account, other documents, money, bullion, jewellery or other valuable article or thing is found in a search in possession of any person, it is presumed u/s.132(4A) that (i) such books of account, etc. belong to such person (ii) the contents of such books of account are true (iii) the document is signed by and is in that person’s handwriting, and (iv) in case of documents stamped, executed or attested that it has been properly stamped, executed or attested. The Supreme Court in the case of Metraini v. CIT, (287 ITR 209), held that the said presumptions are not available under any other proceedings under the Act. To meet with this situation, the new Section provides that the said presumptions will be applicable in any other proceeding under the Act. Corresponding amendments have also been made in the Wealth-tax Act.
15.5 Recognised Provident Fund :
The Finance Act, 2006, amended Rule 4 of Part A of Schedule IV of Income-tax Act to provide that the recognised P.F. shall comply with the provisions of S. 1(3) & (4) of the PF Act and the assessee (establishment) should be exempted u/s.17 of the P.F. Act. Time limit up to 31-3-2007 was fixed for this purpose. This time limit is now extended to 31-3-2008.
15.6 Banking Cash Transaction Tax :
This tax was levied by the Finance Act, 2005, on cash withdrawals from bank account on any single day. The tax is payable in the case of individual or HUF if the withdrawal on a single day exceeds Rs.25,000. This limit is now enhanced to Rs.50,000 from 1-6-2007. The limit of Rs.1,00,000 for such withdrawals in other cases will remain unchanged.
It is also now provided that from 1-6-2007, this tax will not be payable by any offices or establishments of the Central or State Governments. In other words, they can draw cash from bank accounts on a single day without any monetary limit.
16. Fringe Benefit Tax (FBT) :
Fringe Benefit Tax was introduced by the Finance Act, 2005. Chapter XIIH containing S. 115W to S. 115WL has been inserted. In spite of repeated suggestions this tax has not been abolished. This year its scope has been extended to ESOPs. Some other amendments are made in these Sections, which are discussed below. These amendments are effective from A.Y. 2008-09.
16.1 ESOP :
FBT is now extended to shares allotted or transferred under any Employees Stock Option Plan (ESOP) and to Sweat Equity Shares. In view of this, shares allotted/transferred under an ESOP or shares allotted/transferred to an employee or a director at a discount or for consideration other than cash for providing any intellectual property or for providing know-how or value additions will be liable to FBT. For this purpose, the value of fringe benefit will be considered as the fair market value of the shares on the date on which the option vests with the employee, as reduced by the amount actually paid by the employee or the director to whom this benefit is given. The method of determining the ‘fair market value’ of the shares will be prescribed by CBDT.
It may be noted that proviso to S. 17(2)(iii) is deleted. Therefore, ESOP will not be taxable as perquisite in the hands of the employee. Further, for computing capital gain in the hands of the employee/director on sale of shares allotted under an ESOP/Sweat Equity Shares, fair market value which has been taken into account while computing the value of fringe benefit, will be considered as actual cost. In other words, the value determined under the Rules framed by CBDT on the date of vesting (without deducting the amount actually paid by the employee/director) will be considered as cost of shares.
16.2 S. 115WKA :
This is a new Section inserted from A.Y. 2008-09. It provides that the employer can recover the FBT paid or payable by it on ESOP/Sweat Equity Shares, as stated above, from the employee or the director. For this purpose, the employer is authorised to modify any agreement or scheme under which the ESOP/Sweat Equity Shares are issued on or after 1-4-2007. In view of this provision, a question will arise whether FBT amount recovered by the employer will be its income liable to tax. The answer to this question will be in the negative, because FBT is additional Income Tax, as provided in S. 115WA and not allowable as deduction in computing total income u/s.40(ic). Therefore, any recovery of FBT from the employee cannot be considered as income liable to tax. On the same analogy, FBT paid by the employee to the employer u/s.115WKA cannot be added to the cost of shares in the hands of the employee.
When ESOP is allowed to the employee, the employer will have to debit the difference between the fair value as determined under the Rules as reduced by the actual amount received from the employee to its Profit & Loss A/c. and credited to Share Capital or Share Premium A/c. The amount debited to the Profit & Loss A/c. will be considered as a benefit given to the employee and will be allowable as business expenditure. FBT is payable on expenditure which is allowed as business expenditure. Therefore, if ESOP expenditure is not allowed, no FBT will be payable on the same.
16.3 S. 115WB(2) :
This Section provides for computation of fringe benefits under different heads of expenses. One of the items is ‘Sales promotion including publicity’. There are certain exceptions under this item. The list of exceptions is enlarged w.e.f. A.Y. 2008-09 and it is now provided that expenditure on display of products and expenditure on distribution of samples, either free of cost or at a concessional price, will not be liable to FBT.
16.4 S. 115WJ :
This Section provides for advance payment of FBT. Provisions relating to the due dates for the payment of FBT, amount to be paid in each instalment and interest for the shortfall in payment of instalment are brought on par with those relating to payment of advance Income Tax. The FBT will have to be paid based on the estimated amount of FBT liability for the year. Presently, all assesses have to pay FBT based on actual amount of expenditure on fringe benefits within 15 days from the end of each quarter ending on 30th June, 30th September, 31st December and by 15th March for the quarter ending on 31st March. It is now provided that from the current year from 1-6-2007 the amount payable as a percentage of total FBT liability will be as under :
Due date Cumulative amount payable as % total FBT liability
Companies Other than companies
15th June 15% —
15th September 45% 30%
15th December 75% 60%
15th March 100% 100%
If there is any delay or default in payment of advance payment of FBT, interest at the rate of 1% p.m. is payable on the shortfall. The provisions similar to S. 234B and S. 234C have been inserted in S. 115WJ by the above amendment w.e.f. 1-6-2007.
17. Penalty
17.1 Penalty Order — S. 275 :
At present, the Assessing Officer can pass any penalty order under various Sections for concealment of income, delay in filing return, non-submission of return, non-deduction of tax at source, etc. According to existing provisions of S. 275, such order can be passed after the assessment is completed or after CIT(A) or ITA Tribunal Order. There is no provision for revising the penalty order after any appeal decision. S. 275 has been amended by TLA - 2006, w.e.f. 13-7-2006, to provide that if a penalty order is passed before any Appellate order by CIT(A), ITA Tribunal, High Court or Supreme Court, the same can now be revised by enhancing, reducing or cancelling penalty in conformity with the decision of the Appellate authority. Such revised order can be passed within six months from the end of the month in which the Appellate order is received. It is also provided that the assessee can file appeal against the above revised order before CIT(A).
17.2 S. 271 :
(i) Explanation 3 to S. 271(1) provides that a person who fails to furnish return of income within the prescribed time is deemed to have concealed the particulars of his income. He is liable to pay penalty with reference to tax on the total income assessed. There was no clarity whether advance tax, TDS, etc. should be deducted before quantifying the penalty amount. It is now clarified by amendment of Explanation 4 that tax determined on the income assessed will be reduced by advance tax, TDS, TCS and self-assessment tax paid before issue of notice u/s.148. This amendment is effective retro-spectively from A.Y. 2003-04.
(ii) If the assessee is found to be owner of any money, bullion, jewellery or other valuable articles or things (referred to as valuable assets), and claims that such assets are acquired by utilising his income which is recorded before the date of search or before the end of the previous year which is to end after the date of search or he declares such assets in the statement u/s.132(4), he gets immunity under Explanation 5 from penalty for concealment. This Explanation 5 to S. 271(1)(c) is now amended and will apply only to search initiated before 1-6-2007.
(iii) In respect of search conducted on or after 1st June 2007, a newly inserted Explanation 5A to S. 271(1)(c) provides that the assessee who is found to be the owner of valuable assets or any income based on any entry in books of account, etc. and claims that such assets are acquired out of income earned during any previous year ended before the date of search and whose date of filing return has expired and he has not filed the return, then even if such income is declared in the return filed subsequently, he shall be deemed to have concealed such income and he will be liable to pay concealment penalty at minimum of 100% and maximum of 300% of the amount of tax sought to be evaded.
17.3 S. 271AAA :
This is a new Section which will apply to concealment penalty leviable in respect of search initiated on or after 1-6-2007. It provides as under :
(i) The assessee shall be liable to penalty u/s.271 AAA in respect of undisclosed income of the year of search or the preceding year for which due date of filing return of income has not expired, found during search initiated on or after 1st June 2007, at the rate of 10% of the undisclosed income.
(ii) For this purpose, ‘Undisclosed income’ shall mean :
(a) any money, bullion, jewellery or other valuable articles or thing or any entry in books of account or other documents or transactions found during search, which has not been recorded in books of account or has not been disclosed to the Chief Commissioner/Commissioner before the search.
(b) Any income represented by expenses recorded in the books, which are false or could not have been found to be false had the search not been conducted.
(iii) In a case referred to in (i) above, no penalty shall be leviable if
(a) the assessee admits undisclosed income in the statement taken u/s.132(4);
(b) substantiates the manner of deriving undisclosed income, and
(c) pays tax along with interest on such undisclosed income.
(iv) If penalty is leviable u/s.271AAA, no penalty shall be leviable u/s.271(1)(c).
18. Assessment procedure :
18.1 S. 139 :
S. 139 is amended by TLA - 2006 to provide that any university, educational institution, hospital, etc. with gross receipts of less than Rs.1 crore, which is claiming exemption u/s.10(23c) will have to file its return of income if it has income exceeding the taxable limit, without considering the income which is exempt under the above Section.
18.2 S. 139C :
This is a new Section inserted with retrospective effect from 1-6-2006. Presently, a return may be treated as defective if certain documents, receipts, etc. are not enclosed with the return. With the introduction of e-filing of returns, the Scheme does not envisage any attachments to be submitted with the return. A proviso has been inserted to provide that CBDT may dispense with any of the prescribed conditions for a class or classes of persons, so that the return may not be regarded as defective. The proviso to S. 139 has now been deleted and new S. 139C now empowers the CBDT to make rules providing for certain class or classes of persons who may not be required to furnish documents, receipts, certificates, or audit reports required to be furnished along with the return under any provision of the Act, but to furnish them before the Assessing Officer on demand.
18.3 S. 139D :
This is also a new Section inserted with retrospective effect from 1-6-2006. It empowers the CBDT to make rules providing for (i) the class or classes of persons required to furnish return in electronic form, (ii) the form and manner in which the e-return is to be furnished, (iii) the computer resource or the electronic record to which the e-return may be transmitted, and (iv) the documents which may not be furnished along with the e-return but shall be produced before the Assessing Officer on demand.
18.4 S. 142(2A) — Special audit :
The amendment of the Section, with effect from 1st June 2007, provides that the Assessing Officer shall give the assessee a reasonable opportunity of being heard before directing the assessee to get his accounts audited u/s.142(2A). This is in pursuance of the Supreme Court decision in the case of Rajesh Kumar v. DCIT, (287 ITR 91) wherein the Supreme Court held that the direction u/s.142(2A) is a quasi-judicial order and the principles of natural justice are required to be applied.
It is also provided that where any direction for special audit is issued on or after 1st June 2007, the expenses of the special audit including the remuneration of the auditors shall be determined by the Chief Commissioner/Commissioner in accordance with prescribed guidelines and shall be paid by the Central Government.
18.5 Transfer pricing assessments — S. 92CA :
Provides for reference to Transfer Pricing Officer (TPO) in specified cases. The procedure for completion of assessment by TPO, time limit for passing order by TPO and the binding effect of his order has now been provided by amendments in S. 92CA, S. 153 and S. 153B. These amendments are made w.e.f. 1-6-2007. These amendments are as under :
(i) U/s.92CA, the assessing officer (AO) can refer the computation of arm’s-length price to a TPO. Currently, there is no extra time available to the AO for completing the assessment or reassessment in cases where such transfer pricing assessment is required.
(ii) In order to ensure that the TPO as well as the AO get sufficient time to make the audit of transfer price and the assessment in cases involving international transactions, the time limit for completion of assessment or reassessment is increased by 12 months as compared to the regular assessments.
(iii) Further, the TPO is required to complete the transfer pricing assessment, two months before the due date for regular assessment.
(iv) This provision applies where references for transfer pricing assessments are made after 31st May 2007; or where references have been made before 1st June 2007, but transfer pricing assessments have not been completed by TPO before 1st June 2007.
(v) It is further provided that the assessing officer has to complete the assessment ‘in conformity with’ the transfer pricing assessment order. This means that the Assessing Officer is required to accept the arm’s-length price as computed by the TPO and has no discretion in the matter of computation of arm’s-length price.
18.6 S. 153D :
A new S. 153D is inserted to provide that no order of assessment or reassessment u/s.153A and u/s. 153B in case of search or requisition shall be made by an Assessing Officer below the rank of Joint Commissioner, except with the prior approval of the Joint Commissioner. This amendment is applicable from 1st June 2007.
18.7 S. 155 :
This Section gives powers to the Assessing Officer to amend the assessment order under certain circumstances. It is now provided by amendment by TLA 2006 that if an assessee has not been granted deduction u/s.10A, u/s.10B or u/s.10BA on the ground that the convertible foreign exchange for exports has not been brought into India within the prescribed time, the Assessing Officer will now be able to amend the assessment order within 4 years when the convertible foreign exchange is brought in India. Thus, the deduction under the above Sections can be claimed when the convertible foreign exchange is brought into India.
18.8 S. 172 :
This Section provides for assessment of non-resident shipping companies. Currently, there is no time limit prescribed for completion of assessment of returns filed u/s.172(4). Now a time limit for completion of assessment is provided as 9 months from the end of the year of filing the return. In case of returns filed before 1st April 2007, the time limit for completion of assessment is 31st December 2008.
18.9 S. 288B :
At present, S. 288B provides for rounding off the tax payable or refund of tax due to the nearest rupee one. It is now provided by TLA 2006 that any tax payable or refund of tax due shall be rounded off to the nearest multiple of rupees ten.
19. Appeals :
19.1 S. 246A — Appeals to CIT(A) :
Amendment made to this Section now provides that appeals can be filed before CIT(A) against the orders passed by AO under the following Sections :
(i) S. 206C(6A) — Holding that a person is deemed to be an assessee in default for failure to collect tax at source or for failure to deposit tax collected at source. This appeal can be filed w.e.f. 1-42007.
(ii) S. 271AAA — Levying penalty where search u/s.132 has been initiated on or after 1-6-2007.
19.2 S. 248 — S. 249 :
Under the existing provisions of S. 248, it is provided that where any person has deducted and paid tax, as provided in S. 195 and S. 200 in respect of any sum chargeable under the Income-tax Act, other than interest, but denies his liability to make such deduction, can file appeal to CIT(A). This Section is now substituted by a new Section which provides that where, under an agreement or other arrangement, the tax deductible on any income, other than interest, u/s.195 is to be borne by the payer, and such person pays the tax, but claims that no tax is deductible on such income, he can file ap-peal to CIT(A). U/s.249. Such appeal will have to be fled within 30 days of the date of payment of such tax. This provision comes into force on 1-6-2007.
19.3 S. 253 — Appeal to ITA Tribunal :
At present, no appeal lies against the order rejecting approval by the CIT to grant certificate of exemption u/s.80G(5)(vi). By amendment of S. 253 it is now provided, w.e.f. 1-6-2007, that appeal can be filed against the order of rejection u/s.80G(5)(vi) to ITA Tribunal on or after 1-6-2007.
19.4 S. 254 :
Currently, in case of stay-granted matters before the ITA Tribunal, if appeals are not disposed of within a period of 180 days from the date of the stay order, the stay order is automatically vacated after the expiry of 180 days, unless the stay is further extended by the Tribunal for a period not exceeding 180 days at a time. It is now provided that the total stay period shall not exceed 365 days cumulatively from the date on which the stay was first granted. It is also provided that the Tribunal shall dispose of the appeal within the period of such stay, failing which the order of stay shall stand vacated at the expiry of the stay period. This amendment applies from 1st June 2007.
20. Settlement Commission :
Chapter XIX-A containing S. 245A to S. 245L deal with the provisions relating to settlement. The Finance Act 2007 makes substantial changes in these provisions. The corresponding provisions in the Wealth-tax Act have also been amended. It is stated that these changes are being made to avoid delay in determining the tax liability of the assessee, which is caused because of factors like duplication of proceedings and absence of statutory time frame for settling the case. It is also stated that these amendments will streamline the proceedings before the Settlement Commission. If one considers these amendments, it is possible to conclude that the objective with which this Commission was set up will not be achieved. Very few assessees will be able to approach the Commission and over a period of time, the Commission may have to be wound up. These amendments come into force on 1-6-2007. In brief they can be summarised as under :
(i) Under the existing provisions, an assessee may make an application to the Commission at any stage of the proceedings in his case pending before any Income-tax Authorities. It is now provided that after 31-5-2007, an assessee can make an application to the Commission only during the pendency of the proceedings before the Assessing Officer. Further, an assessee shall not be allowed to make the application before the Commission during the pendency of the following proceedings of assessment :
(a) Assessment/reassessment proceedings in response to a notice u/s.148. These proceedings shall be deemed to have commenced on the date on which notice u/s.148 is issued;
(b) Assessment or reassessment proceedings u/s.153A or each of six assessment years preceding the assessment year relevant to the previous year in which a search u/s.132 was conduced or a requisition u/s.132A was made; and also the assessment or reassessment proceedings in case of such persons for the assessment year relevant to the previous year in which the search u/s.132 was conducted or the requisition u/s.132A was made. These proceedings shall be deemed to have commenced on the date on which the search u/s.132 was initiated or the requisition u/s.132A was made;
(c) Proceedings of making fresh assessment where original assessment was set aside u/s.254 by the ITA Tribunal or u/s.263 or S. 264 by the Commissioner, such proceedings shall be deemed to have commenced from the date on which the order setting aside the original assessment was passed;
(ii) At present, an application can be made only if the additional amount of income-tax payable on the income disclosed in the application exceeds one lakh rupees. This limit is enhanced to three lakh rupees.
(iii) At present, the income-tax payable on the income disclosed in the application has to be paid after the application is allowed to be proceeded with u/s.245D(1). Now such tax along with interest, if any, should be paid on or before the date of making the application and proof of such payment should be attached with the application. It is also provided that the applicant shall intimate to the Assessing Officer in the prescribed manner.
(iv) Under the existing provisions, the Commission, on receipt of an application, calls for a report from the Commissioner. After considering the material contained in such report and having regard to the nature and circumstances of the case or the complexity of the investigation involved, the Commission passes an order to reject the application or to allow the application to be further proceeded with. Under the existing provisions, there is no statutory time limit for passing the order for rejecting or allowing the application to be proceeded with. It is now provided that the Settlement Commission, within 7 days of receipt of the application, shall issue a notice to the applicant to explain as to why his application be admitted. After hearing the applicant, within 14 days from the end of receipt of the application, the Settlement Commission shall pass an order for rejecting the application or allowing the application to be proceeded with. Complexity of the investigation involved in a case shall not be the criteria for admitting or rejecting the application. Further, where no order of rejection or admission of an application is passed within the aforesaid period, the application shall be deemed to have been allowed to be proceeded with. It is also provided that :
(a) applications which were made before 1-6-2007, but pending on that date as to whether to be rejected or allowed to be proceeded with, shall be deemed to have been allowed to be proceeded with if the tax on the income disclosed in the application and the interest is paid or before 31-7-2007. In case, such tax and interest is not paid on or before the aforesaid date, the application shall be deemed to have been rejected;
(b) in respect of applications which were admitted before 1-6-2007, but order of settlement was not passed before the said date, the tax on the income declared in the application and interest thereon shall have to be paid on or before 31-7-2007. Tax and interest shall be paid by this date even in cases where the Commission has already granted any extension or instalment for payment of tax beyond the said date. If the tax and interest is not paid on or before 31st July 2007, the application shall not be allowed to be further proceeded with and the proceedings before the Commission shall abate on 31st July 2007.
(v) If an application made on or after 1-6-2007 is allowed to be proceeded, the Settlement Commission shall issue a notice to the Commissioner within 30 days from the date on which the application was received. In case of applications referred to in (iv)(a) above, if the tax and interest has been paid before 31st July 2007, such notice shall be issued to the Commissioner on or before the 7th day of August 2007. The Commissioner shall send his report within 30 days from the date on which the communication from the Settlement Commission is received by him;
(vi) On receipt of the report of the Commissioner, the Settlement Commission shall hear the applicant and the Commissioner within fifteen days from the date of receipt of the report. If it is found that the application was not a valid application, the Commission by passing an order may declare the application as invalid. Copy of the order declaring an application as invalid will have to be sent to the applicant and the Commissioner. In case an application is declared invalid the proceedings before the Commission shall abate. If the Commissioner does not send the report within the specified period, the Commission may proceed in the matter further without the report of the Commissioner.
(vii) In respect of application made before 1-6-2007 and referred to in (iv)(a) or (iv)(b) above, which are not declared invalid or as the case may be allowed to be further proceeded with, the Settlement Commission, may direct the Commissioner to make or cause to be made such further inquiry or investigation as it deems fit. The Commissioner shall submit his report within 90 days from the date on which the communication from the Settlement Commission is received by him;
(viii) The Commission shall, after giving an opportunity to the Commissioner and to the applicant and considering the reports of the Commissioner and other material available with it, pass the settlement order. At present, there is no time limitation for making the order of settlement. It is now provided that the Commission shall pass such order within 9 months from the end of month in which the application was received. In respect of applications received before 1-6-2007, the Commission shall pass the order on or before 31st March 2008;
(ix) Under the existing provisions, it is provided that the Commission may grant immunity from prosecution under Indian Penal Code, Income-tax Act and any other Central Act. It is now provided that the Commission shall not grant immunity from prosecution under any law other than the Income-tax Act and Wealth-tax Act. However, in respect of pending applications, the existing provisions shall continue.
(x) At present, it is provided that the Commission may reopen completed proceedings. It is now provided that the Commission shall not have powers to reopen the completed proceedings in a case where an application u/s.245C has been filed on or after 1st June 2007.
(xi) It is now provided that if the application made on or after 1-6-2007 is rejected or such application or an application referred to in (iv)(a) above is declared invalid or an application referred to in (iv)(b) above is not allowed to be further proceeded with or the settlement order is not passed within the specified period, the proceedings before the Commission shall abate and the Assessing Officer or the Income- tax Authority before whom the proceedings were pending at the time of making the application, as the case may be, shall resume and complete the proceedings. Credit shall be allowed by the Assessing Officer for the tax and interest paid by the applicant. The period from the date on which the application was made before the Commission and up to the date on which proceedings get abated shall be excluded from the time limitation for completing the proceedings by the Assessing Officer. It is also provided that this will be the position in respect of all applications pending on 1-6-2007, in respect of which settlement orders are not passed before 31-3-2008 as stated in (viii) above.
(xii) It is also provided that after 1-6-2007, an assessee can apply for settlement only once during his lifetime. For this purpose, an application which was not admitted shall not be deemed to be an application.
21. To sum up :
The above analysis of the amendments made by TLA - 2006 and the Finance Act, 2007, will show that the already complex direct tax laws have been made more complex. The present Finance Minister has presented his fourth consecutive Budget this year. During the last three years, two Taxation Laws Amendment Acts have been passed. In other words, there have been more than 500 amendments in the last three years. Service Tax net has been widened and three more taxes like STT, FBT and BCTT have been introduced. All these taxes have increased the compliance cost to assessees.
In this year’s budget, some amendments are made with retrospective effect. This will create hardship in cases like amendment in S. 80IA, denying deduction to assessees who have taken works contract for developing infrastructure facilities from A.Y. 2000-01. It is rather unfortunate that no provision is made for waiver of interest chargeable u/s.234B/234C when such retrospective amend-ments are made resulting in extra demands being created after several years. Further, no reasons are given for withdrawing S. 80IA benefit in the event of amalgamation or demerger of the company.
The provision restricting amount that can be deposited u/s.54EC will also create hardship in many genuine cases. This is one instance where notification is issued first, restricting the deposit without authority of law, and later on validated by retrospective amendment.
There are some amendments made with a view to deny the benefit granted by judicial pronounce-ments. All these steps add to the number of amendments in our direct tax laws every year.
FBT is one provision which has created resentment in tax paying public. If the suggestion for granting exemption up to Rs.2 lacs of Fringe Benefits had been accepted, most of the small assessees would have been saved of the botheration of making computation and payment of this tax. From the speech of the Finance Minister in the Rajya Sabha on 4th May 2007, it appears that there is a rethinking about this tax. He has stated that if average rate of tax paid by the corporate assessees, which is now 19.26%, increases even by 1%, the Government will think of abolishing this tax. Industry has been suggesting that FBT can be abolished and the corporate tax rate can be increased by 2 to 3%.
The provisions relating to Settlement Commission made by this Finance Act are such that no assessee would like to approach the Commission. The institution of Settlement Commission was set up three decades ago. It has not been effective in settling the disputes since the procedure is complicated. This procedure could have been simplified and made time-bound. Again, the system of selecting members of the commission should have been made more transparent and left to an independent panel on the lines as panel for selection of ITA Tribunal Members. The provisions should have been made to strengthen the commission rather than making provisions to ensure winding up the Commission.
The Finance Bill, 2007, has passed on 4th May 2007 and received the assent of the President on 11-5-2007. The Finance Act, as passed by the Parliament, contains 92 Sections making over 125 amendments to provisions of Income-tax and Wealth-tax Acts.
Why so much amendments:- The Finance Minister is continuously saying that very soon a new Direct Tax Code simplifying our tax laws, as prepared by the Internal Committee, will be introduced in the Parliament. If it is so, what is the requirement of so much amendments?
Broadly stated, these amendments can be divided into 5 parts :
• Some controversial provisions.
• Provisions made with retrospective effect, which will nullify the effect of some judicial pronouncements.
• Provisions which will adversely affect the assessees.
• Provisions which will give some relief to assessees.
• Procedural provisions.
The Taxation Laws (Amendment) Bill, 2005, introduced in the Lok Sabha on 12-5-2005, has been passed in the month of May, 2006 as Taxation Laws (Amendment) Act, 2006 (TLA — 2006). This Act also makes some important amendments in the Income-tax Act, which apply to the accounting year 2004-05 and onwards.
The Finance Act, 2007, amends provisions relating to Service Tax and Banking Cash Transaction Tax. While some new services are brought within the Service Tax net, the scope of some existing services is widened. The exemption limit for small service providers is increased from Rs.4 lacs to 8 lacs.
In this article, some of the important amendments made by the Finance Act, 2007 and TLA — 2006 are discussed.
2. Rates of Taxes, Surcharge and Education Cess :
2.1 Exemption limit :
The exemption limit has been increased by Rs.10,000 for individuals, HUF, AoP, and BoI w.e.f A.Y. 2008-09. Therefore, the position in such cases will be as under :
Existing Rs. Revised Rs.
(i) Individual (Male), HUF or AoP 1,00,000 1,10,000
(ii) Women (Below 65 years age) 1,35,000 1,45,000
(iii) Senior Citizens (Above 65 years age) 1,85,000 1,95,000
2.2 Rates of taxes :
There is no change in slabs of income for individuals, HUF, AoP and BoI and rates of taxes. Therefore, the existing rates will continue in A.Y. 2008-09. Similarly, there are no changes in rates of taxes for other assessees, including non-residents.
2.3 Rates of surcharge :
The rate of surcharge in the case of individuals, HUF, AoP and BoI, which is 10% of tax when income exceeds Rs.10 lacs continues. However, in the case of a domestic company and firm, the present rate of 10% of tax will now apply, w.e.f. A.Y. 2008-09, only if the income exceeds Rs.1 crore. Similarly, the present rate of 2.5% of tax payable by a non-resident company will now be payable w.e.f A.Y. 2008-09 only if the total income exceeds Rs.1 crore. No surcharge is payable by a co-operative society or local authority.
2.4 Surcharge on FBT :
The rate of surcharge on FBT is 10% of tax if fringe benefits in the case of AoP or body of individuals exceed Rs. 10 Lacs. In case of a domestic company and a firm, the rate of surcharge is 10% of FBT and in the case of a non-resident company, it is 2.5% of FBT. No surcharge is payable on FBT in the case of a local authority.
2.5 Education Cess :
In A.Y. 2007-08, the rate of Education Cess is 2% of tax and surcharge. From A.Y. 2008-09, further education cess at 1% of tax and surcharge is payable for meeting the Government’s commitment for higher education. Hence, the rate of Education Cess from A.Y. 2008-09 will be 3% of tax and surcharge.
2.6 Dividend Distribution Tax :
S. 115-O provides for payment of tax on dividend distribution by a domestic company at 12.5%. This rate is increased to 15% w.e.f 1-4-2007. Therefore, any dividend declared and distributed by a domestic company on or after 1-4-2007 will suffer tax at the rate of 16.995 (say 17%), including surcharge and education cess.
2.7 Income Distribution Tax by Mutual Fund :
S. 115-R provides for payment of tax on income distribution by a Mutual Fund (other than distribution by equity oriented fund). The existing rate of tax at 12.5% for individuals and HUF and 20% for other assessees will continue. However, in the case of income distribution by a Money Market Mutual Fund or a Liquid Fund, the rate of tax payable will be 25% w.e.f. 1-4-2007. For this purpose, ‘Money Market Mutual Fund’ means a fund as defined in S. 2(D) of SEBI (M.F.) Regulations, 1996. The term ‘Liquid Fund’ means a scheme or a plan of M.F. which is classified by SEBI as such in accordance with the guidelines issued by it or regulations made by it. It may be noted that surcharge at 10% of tax and education cess at 3% of tax and surcharge will be payable by M.F. on the Income Distribution Tax stated above.
3. Tax Deduction at Source (TDS) :
3.1 Rates of TDS :
The rates for TDS, effective from 1-4-2007, provided in Part II of the First Schedule to the Finance Act, 2007, are the same as in last year. These rates are to be increased by surcharge at 10% of tax in the case of an individual, HUF, AoP and BoI, if the income or the aggregate of such income paid or likely to be paid and subject to TDS during the financial year exceeds Rs.10 lacs. In the case of a domestic company or a firm, the rate of surcharge is 10% of tax if the income or the aggregate of such income subject to tax during the financial year is likely to exceed Rs.1 crore. In the case of a non-resident company, the rate of TDS is 2.5% if such income exceeds of Rs.1 crore. The Education Cess in all such cases will be 3% of tax and surcharge.
3.2 Interest on securities :
U/s.193 no tax is required to be deducted at source at present from 8% Savings (Taxable) Bonds, 2003. It is now provided that w.e.f 1-6-2007, tax will be deducted at source at the applicable rate (including surcharge and education cess), if such interest exceeds Rs.10,000.
3.3 TDS on Interest :
S. 194A provides for deduction of tax at source from interest (other than interest on securities) at the applicable rate (including surcharge and education cess) if such income exceeds Rs.5,000. W.e.f 1-6-2007, it is now provided that no tax will be deducted by a bank, a co-operative bank or a Post Office, if such interest income is less than Rs.10,000. In other cases the limit of Rs.5,000 will continue.
3.4 Payments to contractors :
S. 194C provides for deduction of tax at source from payments to contractors/sub-contractors. At present, the Section applies to a company, firm, society, trust, co-operative society, Government, local authority, etc. W.e.f. 1-6-2007, the provisions of this Section will apply to any individual or HUF whose total sales, gross receipts or turnover from business or profession exceed the limits prescribed in S. 44AB during the preceding financial year. Therefore, such persons will now have to deduct tax at source at the applicable rate of 1% or 2% from payments exceeding the prescribed limits made to a contractor.
It may be noted that this provision for TDS will not apply to such individuals or HUF if the payment to a contractor is exclusively for personal purposes. In other words, if no deduction is claimed for such payment in the computation of business/profes-sional income, there will be no obligation to deduct tax at source.
3.5 Commission or brokerage :
S. 194H provides for TDS from payment of commission or brokerage. The rate of tax for this purpose is 5% if the payment to a person during the financial year exceeds Rs.2,500. This rate is increased to 10% w.e.f 1-6-2007.
It is further provided that w.e.f. 1-6-2007, no such deduction of tax shall be made from payment by BSNL or MTNL to their public call office franchisees.
3.6 Payment of rent :
S. 194-I provides for TDS from rent. This was applicable to rent for land, building, (including factory building) together with furniture, fittings, etc. By amendment by TLA - 2006, this provision applied to rent for (i) land, (ii) building (including factory building), (iii) machinery, (iv) plant, (v) equipment, (vi) furniture, and (vii) fittings. The limit of Rs.1.20 lacs provided in this Section for TDS applied to the aggregate rent of all the assets. The rate of TDS was 15% of rent if payment was to individual or HUF and 20% of rent if payment was to any other person. This new provision applied to all leasing companies also engaged in the business of leasing equipments. This revised provision became effective from 13-7-2006.
In view of several representations, the Finance Act, 2007 has revised the rate for TDS w.e.f. 1-6-2007 as under :
(i) 10% in respect of rent for use of machinery, plant or equipment.
(ii) In respect of rent for use of land, building, furniture or fittings payable to (a) Individual or HUF will be 15% and (b) Others — will be 20%.
3.7 Payment of professional fees :
S. 194J, provides for TDS from professional fees and technical consultancy fees at the rate of 5%. By amendment by TLA - 2006, this provision was extended to following items w.e.f. 13-7-2006.
(i) Royalty, if it exceeded Rs.20,000 in any financial year.
(ii) Any sum payable under an agreement for (a) not carrying out any activity in relation to any business or (b) not sharing any know-how, patents, copyrights, trademarks, etc. as provided in S. 28(va) (i.e., non-compete fees) if the same exceeded Rs.20,000 in any financial year.
It may be noted that the Finance Act, 2007, has increased the rate for TDS u/s.194 J from 5% to 10% w.e.f. 1-6-2007.
TLA - 2006, provided in S. 40(a)(ia) that no deduction for payment of rent or royalty will be allowed in the computation of income of a resident if tax was not deducted at source as provided in S. 194-I and S. 194-J. This amendment was made from A.Y. 2006-07 and applied to payments made during the year ending 31-3-2006. It may be noted that obligation to deduct tax at source on the basis of amended provision was effective from 13-7-2006. It is for consideration as to how disallowance u/s. 40(a)(ia) can be made for non-deduction of tax during the period 1-4-2006 to 12-7-2006 when the above Sections were not applicable to rent for use of plant, machinery, equipment, etc. and to royalty or payment of non-compete fees.
3.8 Collection of tax at source :
S. 206C(1C) provides for collection of tax at source at 2% from fees collected under a contract or licence or lease, etc. for mining and quarrying. It is now provided that w.e.f. 1-6-2007, this provision will not apply to mining and quarrying of mineral oil including petroleum and natural gas.
3.9 Surcharge and Education Cess :
The rate of tax applicable to provisions for TDS is to be increased by surcharge, as explained in para 3.1 above. Further, Education Cess at 3% of tax and surcharge as explained in para 3.1 is also payable on the TDS amount.
4. Exemptions :
4.1 S. 10(15)(vii) :
This Section grants exemption to interest on bonds issued by a local authority. From A.Y. 2008-09 interest on bonds issued by State Pooled Finance Entity will also be exempt from tax. Such entity is defined to mean an entity set up according to guidelines for the Pooled Finance Development Scheme notified by the Central Government.
4.2 S. 10(23 BB) :
Exemption granted to income of Secretariat of Asian Organisation of the Supreme Audit Institutions up to 31-3-2008 has now been extended up to 31-3-2011.
4.3 S. 10(23 BBF) :
This Section is added by the TLA - 2006, effective from A.Y. 2006-07. The exemption granted on total income of the North-Eastern Development Finance Corporation Ltd. has been partially withdrawn from A.Y. 2006-07. This Section provides for withdrawal of exemption in a phased manner. It is now provided that this Corporation will get exemption on income to the extent of (i) 80% in A.Y. 2006-07, (ii) 60% in A.Y. 2007-08, (iii) 40% in A.Y. 2008-09 and (iv) 20% in A.Y. 2009-10. There will be no exemption from the A.Y. 2010-11 onwards.
4.4 S. 10(23 BBG) :
This is a new Section which grants exemption to any income of the Central Electricity Regulatory Commission formed u/s.76(1) of the Electricity Act, 2003 from A.Y. 2008-09.
4.5 S. 10(23 EC) :
This is a new Section which grants exemption to contributions from commodity exchanges and their members to notified investor protection fund. It is also clarified that any amount standing to the credit of such a fund and not charged to tax during the previous year if shared with a commodity exchange, such income shall be deemed to be the income of the year in which it is shared and shall be chargeable to income tax. This provision comes into force from A.Y. 2008-09.
4.6 S. 10(23FB) :
This Section provides for exemption to any income of a venture capital company or venture capital fund set up to raise funds for investment in a venture capital undertaking. Such income is considered as income of investors in such venture capital company/fund by virtue of pass-through status provided in S. 115V. By amendment of S. 10 (23FB), effective from A.Y. 2008-09, it is provided that the exemption will now be available only in respect of income of a venture capital company/fund from investment in a venture capital undertaking engaged in certain specified businesses or industries as under :
(i) Nanotechnology,
(ii) Information technology relating to hardware and software development,
(iii) Seed research and development,
(iv) Bio-technology,
(v) Research and development of new chemical entities in the pharmaceutical sector,
(vi) Production of bio-fuels,
(vii) Building and operating composite hotel-cum-convention centre with seating capacity of more than three thousand, or
(viii) Developing or operating and maintaining or developing, operating and maintaining any infrastructure facility as defined in Explanation to S. 80IA(4)(i) — i.e., Road, bridge, highway, water project, irrigation project, port, air port, etc., or
(ix) Dairy or poultry industry.
Therefore, exemption is now restricted only to income from investment in such venture capital undertakings.
5. Charitable trusts :
5.1 S. 10(23C) :
(i) Under this Section, the Central Government has power to issue notification granting exemption in respect of income of the following charitable trusts or institutions :
(a) Any university or other educational institution existing solely for educational proposes and not for the purpose of making profit and having annual gross receipts exceeding the prescribed limit of Rs.1 crore.
(b) Any hospital or other institution for reception and treatment of illness of persons existing solely for philanthropic purposes and not for the purpose of profit and having annual gross receipts exceeding the prescribed limit of Rs.1 crore.
(c) Any trust or institution wholly for public, religious or charitable purposes and having importance throughout any State or throughout India.
(d) Any other fund or institution established for charitable purposes and having importance throughout any State or throughout India.
(ii) At present, there is no time limit for issue of the above notification after the application for exemption is made by the trust or institution. Now a time limit is fixed by amendment of this Section by TLA - 2006. This notification will have to be issued or order rejecting the application will have to be passed within one year from the end of the month in which the application for exemption is made.
(iii) By another amendment of this Section by TLA - 2006, it is provided that any of the above trusts or institutions which has income, without consider-ing the exemption, exceeding the maximum limit not chargeable to tax should get its accounts audited by a Chartered Accountant in the pre-scribed form and file the same with the return of income.
(iv) S. 12A at present provides for compulsory audit of charitable trust or institution if the income exceeds Rs.50,000. From A.Y. 2006-07, this provision for audit will apply only if the income exceeds maximum amount not liable to tax.
(v) At present, funds or institutions of importance covered u/s.10(23C)(iv) and (v) are required to be notified by the Central Government in order to avail of the exemption u/s.10(23C). The Finance Act, 2007, provides that effective from 1-6-2007, such funds or institutions will have to seek approval of prescribed authority viz. Chief CIT or Director General. Hence, the requirement of notification by the Central Government is now dispensed with. Henceforth, funds/institutions already notified by the Central Government will have to seek renewal of recognition from the prescribed authority when the present recognition expires. All pending applications with the Central Government, as on 1-6-2007, will be transferred to the prescribed authority who shall process them further. As stated earlier, decision on all applications will have to be taken within the prescribed period of one year from the end of the month in which such application is made.
5.2 S. 12 A and S. 12AA :
The Finance Act, 2007, has amended these Sections effective from 1-6-2007. Now, registration of a charitable trust or institution will be governed by S. 12AA. The power of the CIT to condone delay in making application for registration is taken away w.e.f. 1-6-2007. Therefore, a trust/institution which makes delayed application for registration cannot get registration from the date of its creation even if there is a reasonable cause for such delay. In order to be eligible for exemption from the date of creation, the trust/institution will have to make the application for registration in the same financial year in which it is created/established. CIT can grant registration u/s.12AA after 1-6-2007 from the first day of the financial year in which application is made.
5.3 S. 35 :
(i) S. 35(1)(ii) and S. 35(1)(iii) provides for deduction of 125% of any donation or contribution made to a scientific research association or a university, college or other institution approved by the Central Government. By amendment by TLA - 2006, it is now provided that such approval will be granted in accordance with the guidelines and conditions laid down by the Central Government by rules to be prescribed.
(ii) Further, a time limit of one year from the end of the month in which application for approval of the institution under this Section is made is fixed. The Government will have to notify the institution or pass order rejecting the application within this time frame.
(iii) If the Assessing Officer finds that the affairs of the institution are not carried on in accordance with the terms of the approval, he can recommend to the Government to withdraw the approval.
(iv) It may be noted that the prescribed authority has now power to withdraw recognition or approval given to any trust or institution u/s.10(23 C), u/s.35, u/s.35AC, u/s.35CCA, etc. It is now provided, by amendment of S. 35, S. 35AC, S. 35CCA and S. 80GGA by TLA - 2006, that if any assessee has given any donation to the trusts or institutions to which the above Sections apply, before the date on which such recognition or approval is withdrawn, the benefit of deduction will not be denied to the assessee.
6. Tax holiday for units in SEZ :
S. 10AA was added in the Income-tax Act by the Special Economic Zones Act, 2005, w.e.f. 10-2-2006. This Section provides for tax holiday in respect of income derived from a unit in SEZ from manufacture and export of articles or things or from provision of services. U/s.10AA(4) the benefit is available to a unit that commences manufacture or production or provision of services on or after 1-4-2005. This provision is now amended with retrospective effect from 10-2-2006 in order to ensure that the benefit of the Section is available only to a new unit which satisfies the following conditions :
(i) It is not formed by the splitting up, or the reconstruction of a business already in existence. It is, however, provided that this condition shall not apply in respect of any undertaking which is formed as a result of re-establishment, reconstruction or revival of the business as is referred to in S. 33 B, in the circumstances and within the period specified in that Section.
(ii) It is not formed by the transfer to a new business of machinery or plant previously used for any purpose. It is, however, provided that it shall be permissible to install used machinery or plant to the extent of twenty percent of the total value of machinery or plant installed in setting up of the business.
7. Salary income and provision of residential accommodation :
7.1 S. 17(1)(viii) :
The term ‘Salary’ is defined in S. 17(1) to include the contributions made by the Central Government to the account of an employee under a Pension Scheme referred to in S. 80CCD. This provision is now extended to such contribution made by employers other than the Central Government i.e., by State Government, local authorities, companies, firms, and others. Corresponding amendments are made in S. 7(iii) and S. 80CCD. This provision comes into effect from A.Y. 2004-05.
It may be noted that the assessee will be entitled to claim deduction u/s.80CCD, subject to certain limits and conditions, when the above contribution by the employer under the Pension Scheme is added to his income u/s.7(iii) read with S. 17(1) (viii).
7.2 S. 17(2)(ii) :
This Section provides that the perquisite in the hands of an employee shall include value of any concession in the matter of rent respecting any accommodation provided to the employee. In order to provide as to what constitutes concession in the matter of rent, this Section has been amended by insertion of Explanation 1, with retrospective effect from A.Y. 2002-03. The provisions of Rule 3 of Income-tax Rules, 1962, relating to valuation of perquisites, both in the case of furnished and unfurnished accommodation, which were in force up to A.Y. 2005-06 are now incorporated in this Section. It appears that this amendment is made in view of the decision of the Supreme Court in the case of Arunkumar and Others v. UOI, (286 ITR 89) to set at rest any possible controversy on this issue.
7.3 S. 17(2)(ii) — New explanation :
It may be noted that Rule 3 which was in force from A.Y. 2006-07 provided that for calculating the value of this perquisite the upper limit will be 20% of the salary for unfurnished accommodation in cities with population above 4 lacs and 15% in other cases. By an amendment of this explanation it is now provided, effective from A.Y. 2006-07, that value of the perquisite in respect of unfurnished accommodation will now be computed as under :
(i) The specified upper limit will be 15% of salary in respect of accommodation in cities having population exceeding 25 lacs, 10% for cities having population between 10 lacs and 25 lacs and 7.5% for cities having population of less than 10 lacs.
(ii) Value of accommodation will be determined by adopting the specified rate as reduced by the amount recoverable from the employee if the accommodation is owned by the employer.
(iii) If the accommodation is taken on rent or lease by the employer, the value of perquisite will be taken to be the lease rent or rent payable by the employer or 15% of the salary whichever is lower, as reduced by the amount recovered from the employee.
From the above, it will be evident that employees who are provided quarters by the employer either rent-free or at concessional rent, will benefit by this provision with retrospective effect from A.Y. 2006-07.
It may be noted that for furnished accommodation and accommodation provided in certain special circumstances, the existing provisions will continue to operate.
8. Business deductions :
8.1 S. 35(2AB) :
This Section provides for weighted deduction of 150% of the expenditure incurred by companies engaged in certain businesses e.g., bio-technology, drugs, pharmaceuticals, electronic equipment, computers, telecommunication equipments, chemicals, etc. on in-house research and development facility approved by prescribed authority. At present, the Section provides for this benefit in respect of expenditure incurred up to 31-3-2007. This benefit is now extended in respect of expenditure to be incurred up to 31-3-2012.
8.2 S. 36(1)(viia) :
At present, this Section provides for deduction in respect of any provision for bad and doubtful debts made by a scheduled bank or a non-scheduled bank to the extent provided in the Section. By amendment of this Section, effective from A.Y. 2007-08, this deduction can now be claimed by a co-operative bank other than a primary agricultural society or a primary agricultural and rural development bank. This amendment is conse-quential to the amendment made last year in S. 80P, making income of co-operative bank taxable w.e.f. A.Y. 2007-08.
8.3 S. 36(1)(viii) :
At present, this Section provides for deduction up to 40% of the profit derived from the business of providing long-term finance carried on by specified entities if the said amount is transferred to a special reserve account. This benefit is available to (i) a financial corporation engaged in providing long-term finance for industrial or agricultural development or development of infrastructure facility in India, and (ii) a pubic company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of residential houses in India.
This Section has been substantially modified as under, and comes into force from A.Y. 2008-09.
(i) This deduction is restricted to amount up to 20% of profits derived from the eligible business if such amount is transferred to a special reserve account.
(ii) When such special reserve exceeds twice the amount of paid-up capital and general reserve of the specified entity, no deduction will be available under this Section.
(iii) This deduction can be claimed by any of the specified entities engaged in the eligible business stated below :
(a) A financial corporation specified in S. 4A of the Companies Act
(b) A public sector financial corporation
(c) A banking company
(d) A co-operative bank (other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank Business of providing long-term finance in India for industrial or agricultural development or development of infrastructure facility or construction or purchase of houses for residential purposes.
(e) A housing finance company Business of providing long-term finance for construction or purchase of houses in India for residential purposes
(f) Any other financial corporation, including a company Business of providing long-term finance for development of infrastructure facility in India.
8.4 S. 36(1)(xiv) :
Clause (xiv) has been inserted w.e.f. A.Y. 2008-09 to provide for deduction in respect of any contribution made by a public financial institution to a notified credit guarantee fund for small industries.
9. Disallowance of expenditure :
(i) S. 40A(3) provided for disallowance of 20% of any expenditure if the payment for the same is not made by a crossed cheque or a crossed bank draft and such payment exceeds Rs.20,000. By amendment of the Section by TLA - 2006, it was provided that such disallowance can be made if the amount is not paid by an ‘account payee cheque’ or an ‘account payee bank draft’. This will mean that any payment exceeding Rs.20,000 for purchase of goods, raw materials, stores, etc. or for any expenditure for which deduction is claimed, should be made by an ‘account payee cheque/bank draft’. This amendment came into force from 13-7-2006.
(ii) This Section has been further amended by the Finance Act, 2007, to provide that w.e.f. A.Y. 2008-09, if the payment for such expenditure is not made by an account payee cheque or an account payee bank draft, the entire amount of expenditure will be disallowed. The existing provision that in specified cases, as prescribed in Rule 6DD, the provision for such disallowance will not apply will continue. Thus, an assessee will suffer 100% dis-allowance if he does not comply with the require-ments of S. 40A(3) effective from 1-4-2007.
(iii) At present, the Section provides that if liability for such expenditure is provided in one year, and the expenditure is allowed in that year, non-compliance with provisions of S. 40A(3) in the subsequent year when actual payment is made will enable the AO to rectify the assessment for earlier year u/s.154. From A.Y. 2008-09, it is now provided that in such a situation, rectification u/s.154 of earlier assessment is not to be made, but amount disallowable u/s.40A(3) will be considered as income of the year in which actual payment for such expenditure is made otherwise than by account payee cheques/drafts.
(iv) The effect of this amendment will be that if liability for any expenditure of Rs.1,00,000 is incurred in the accounting year 2006-07, the same will be allowed in A.Y. 2007-08 if provision for the same is made in that year. If the actual payment of Rs.1,00,000 is made by a crossed cheque in the month of April 2007, only 20% of Rs.1,00,000 i.e., Rs.20,000 will be added as income of A.Y. 2008-09. This is because if Rs.1,00,000 was paid by a crossed cheque in March 2007, only 20% i.e., Rs.20,000 would have been disallowable in A.Y. 2007-08.
(v) It may be noted that S. 40A(3) applies to expenditure claimed as deduction for computation of income from business or profession and income from other sources. This Section does not apply to capital expenditure.
10. Book profits S. 115JB :
At present, in computing book profits u/s.115JB, income derived from undertakings in free trade zones, etc. covered u/s.10A and income derived from 100% EOU covered u/s.10B is to be excluded. In other words, this income is exempt from Minimum Alternate Tax (MAT). It is now provided by amendment of S. 115JB, effective from A.Y. 2008-09, that the income covered u/s.10A and u/s.10B will not be excluded and the same will be liable to MAT. The above amendment does not cover income derived by a unit set up in SEZ covered by S. 10AA and therefore, such income of a SEZ unit will not suffer MAT.
11. Gifts from third parties :
(i) In 2004, a new provision was introduced in S. 56 to provide that any money received by an individual or HUF, without consideration (i.e., gift) in excess of Rs.25,000 on or after 1-9-2004 from third parties will be treated as income from other sources. The exception to this Rule was about receipts from relatives, receipts on the occasion of marriage of the individual, receipts under a will or by way of inheritance or receipts in contemplation of death of payer.
(ii) By amendment of S. 56 by TLA - 2006, it was provided that the following receipts will also be excluded and the same will not be treated as income :
(a) Receipts from any local authority,
(b) Receipts from any fund, foundation, university, educational institution, hospital or other medical institution, trust or institution referred to in S. 10(23c), or
(c) Receipts from any trust or institution registered u/s.12AA.
TLA - 2006 provided that the above provision will apply w.e.f. 13-7-2006. However, the Finance Act, 2007, now provides that this provision will apply from 1-9-2004 onwards.
(iii) This Section is further amended with effect from 1-4-2006 by TLA - 2006 to the effect that receipts from one or more persons aggregating to more than Rs.50,000 in any financial year, without consideration, will be treated as income of the individual or HUF. The exceptions as stated above will continue as in earlier years.
(iv) It may be noted that prior to 1-4-2006, the Section provided that amount exceeding Rs.25,000 received from any person would be taxable. Therefore, a view could be taken that each receipt of Rs.25,000 or less could be ignored. In other words, there was no concept of aggregation of all such receipts. The amendment made w.e.f. 1-4-2006 provides that if the aggregate of such receipts from third parties in any financial year is more than Rs.50,000, the whole of this amount will be treated as income from other sources. This amended Section will apply from A.Y. 2007-08.
(v) The above provision in S. 56 applies to gifts received by an individual or HUF in monetary terms i.e., by cash, cheque, bank draft, etc. It does not apply to gifts received in kind. Further, the Section does not apply to any gift received by a firm, AOP, company, etc.
(vi) The Finance Act, 2007 has inserted clause (10 BC) in S. 10 to provide for exemption of receipts for specified purposes from the Central/State Governments or local authority. This exemption is granted with retrospective effect from A.Y. 2005-06. It is now provided that any amount received by an individual or his legal representative by way of compensation from the Government or local authority on account of any disaster will not be liable to tax. For this purpose, ‘Disaster’ is defined in S. 2(d) of the Disaster Management Act, 2005, as under :
‘Disaster’ means a catastrophe, mishap, calamity or grave occurrence in any area, arising from natural or man-made causes, or by accident or negligence which results in substantial loss of life or human suffering or damage to, and destruction of property, or damage to or degradation of, environment, and is of such a nature or magnitude as to be beyond the coping capacity of the community of the affected area."
This amendment makes it clear that if any ex-gratia amount is received from the Central/State Government, which has no connection with any ‘Disaster’, the same will be taxable u/s.56 (2)(v) or (vi). To meet this contingency, the amendment in S. 56(2) should have added ‘Central or State Government’ along with ‘Local Authority’ as stated in para 11(ii)(a) above.
(vii) It is also provided that if the amount to the extent of the receipt for compensation has been allowed as a deduction under the Income-tax Act on account of any loss or damage caused by such disaster, the above exemption will not be available. In other words, if an individual has suffered loss of Rs.10 lacs due to earthquake in a particular area and he receives Rs.7 lacs as compensation from the State Government, he will be entitled to get deduction for such loss, if allowable as business loss, to the extent of Rs.3 lacs only.
12. Capital gains :
12.1 Capital Asset — S. 2(14) :
This Section defines the term ‘Capital Asset’ to mean property of any kind excluding the specified assets listed in the Section. One of the excluded assets is ‘Personal Effects’ i.e., movable assets held for personal use like wearing apparel, furniture, etc. Hitherto only ornaments and precious stones were not considered as personal effects. By amendment of this Section, w.e.f. A.Y. 2008-09, the following items are excluded from the definition of personal effects.
(i) Jewellery (including ornaments, precious items, etc.) (ii) Archaeological collections, (iii) Drawings, (iv) Paintings, (v) Sculptures, and (vi) Any work of art.
The effect of this amendment is that capital gain on any sale of drawings, paintings, etc. held as personal effects, on or after 1-4-2007, will be liable to tax.
12.2 S. 49 :
This Section provides for determining the deemed cost of acquisition of capital asset under certain circumstances. By amendment of this Section, w.e.f. A.Y. 2008-09, it is provided that if an assessee sells the shares acquired under an ESOP scheme or acquired as sweat equity shares, the cost of acquisition shall be deemed to be the fair market value which has been taken into account while computing the value of fringe benefits u/s.115 WC(i)(ba).
12.3 S. 54EC :
(i) This Section provides for exemption from long-term capital gains tax if such capital gain is invested in ‘long-term specified assets’ within a period of six months. The Finance Act, 2006, amended this Section and provided that such investment can be made only in bond issued after 1-4-2006 by National Highways Authority of India (NHAI) or Rural Electrification Corporation Ltd. (REC) as notified by the Central Govt. with a lock-in period of 3 years.
(ii) It may be noted that by two notifications dated 29-6-2006 issued by the Central Government, NHAI was authorised to issue such bonds up to the limit of Rs.1500 crores and REC was similarly authorised to issue bonds up to Rs.4500 crores. These bonds were subscribed within a short period of time. There were protests against the limit prescribed in the above notifications as assessees had no avenue for saving tax on capital gains u/s.54EC after the limits were exhausted.
(iii) By a notification dated 22-12-2006, only REC was authorised to issue such bonds up to Rs.3500 crores during the period 22-12-2006 to 31-3-2007 with the following conditions :
(a) Persons who had made investment exceeding Rs.50 lacs u/s.54EC during the period 1-4-2006 to 21-12-2006, should not be allowed to invest in any bonds during the period 22-12-2006 to 31-3-2007.
(b) No person will be able to subscribe bonds exceeding the value of Rs.50 lacs u/s.54EC during the period 22-12-2006 to 31-3-2007. If any person has subscribed for such bonds of an amount of less than Rs.50 lacs, he will be allowed bonds for the balance amount, so that his total investment u/s.54EC cannot exceed Rs.50 lacs.
The time limit of six months was extended up to 31-3-2007 for those who could not make such investment due to the fact that the bonds were not available.
(iv) The Government has realised that S. 54EC did not empower it to prescribe the ceiling limit on issue of bonds by NHAI or REC. It was also realised that the ceiling limit of Rs.50 lacs for each assessee also could not be imposed by a notification. To validate such unauthorised notifications, S. 54EC has now been amended with retrospective effect from 1-4-2006. Accordingly, Explanation (b) below S. 54EC(3) has been modified retrospectively to validate the above actions.
(v) (a) It may be noted that S. 54EC(1) has now been amended w.e.f. 1-4-2007 by addition of a proviso to that Section. In brief S. 54EC(1) provides that where long-term capital gain arises to an assessee on transfer of a capital asset, and the assessee at any time within six months invests such capital gain in specified bonds, the whole of the capital gain will not be liable to tax. If the amount invested is less than the capital gain, the exemption will be available to proportionate amount of capital gain. Now, the proviso is added w.e.f. 1-4-2007 which reads as under :
"Provided that the investment made on or after the first day of April, 2007, in the long term specified asset by an assessee during any financial year does not exceed fifty lakh rupees."
(b) Since this is a proviso, we have to read the same in the context of the main S. 54EC(1). It will be noticed that S. 54EC(1) refers to ‘capital gain’ arising from the transfer of ‘a long-term capital asset’. Again, the amount for exemption is to be computed with reference to capital gain arising on transfer of each long-term capital asset. Therefore, it is possible to take the view that the limit of Rs.50 lacs provided in the above proviso will apply to each item of long-term capital gain.
(c) It may be noted that Explanation (ba) which is added below S. 54EC(3), effective from 1-4-2007, only states that for the above purpose, investment should be made on or after 1-4-2007 in bonds of NHAI or REC, as may be notified by the Central Government. In this explanation, it is not provided that the Government can specify any conditions (including condition laying down ceiling on amount of bonds to be issued) while issuing notification. Therefore, no condition about ceiling on total investment by an assessee in a financial year can be provided, as was done in the notification of 22-12-2006, which has now been validated only for the F.Y. 2006-07.
(d) The following illustration will illustrate the position :
A. Shri ABC sells his land in April 2007, and makes a long-term capital gain of Rs.70 lacs. In view of the above proviso, he can invest up to Rs.50 lacs within six months u/s.54EC. He will have to pay tax on balance Rs.20 lacs.
B. If Shri ABC sells shares in an unlisted public limited company in May 2007, and makes long-term capital gain of Rs.30 lacs, he can take the view that capital gain on each capital asset is to be separately computed, and therefore, he will be eligible to invest Rs.30 lacs in bonds u/s.54EC, as the limit of Rs.50 lacs under the proviso applies to each item of capital gain separately.
13. Co-operative banks :
(i) A new S. 44DB has been added in the Income tax Act from A.Y. 2008-09 to make a special provision for computing deductions in the case of a co-operative bank. In the last year’s Finance Act the income of co-operative bank (other than primary agricultural credit society or primary co-operative agricultural and rural development bank) was made taxable from A.Y. 2007-08 by amendment of S. 80-P and S. 2(24)(viia). The new S. 44DB now provides that in the event of amalgamation or demerger of co-operative banks, deduction u/s.32 (Depreciation), 35D (Amortisation of preliminary expenses), and 35DD (Amortisation of amalgama-tion and demerger expenses) and 35DDA (Amortisation of VRS payments), which is al-lowable to the amalgamating or demerged bank will continue to be allowed to the amalgamated or resulting bank for the balance period. In the year of amalgamation or demerger, the deduction will be allowed to amalgamating/demerged as well as amalgamated/resulting bank on proportionate basis. The terms ‘Amalgamation’ and ‘Demerger’ are defined in the same manner in S. 2(1B) and S. 2(19AA) which apply to limited companies.
(ii) A new S. 72AB has also been added from A.Y. 2008-09 to provide for carry forward and set-off of accumulated losses and unabsorbed depreciation allowance in the case of amalgamation or demerger of co-operative banks. The Section provides that the accumulated business losses and unabsorbed depreciation of amalgamating or demerged co-operative banks will be allowed to be set off against the income of amalgamated/resulting co-operative banks, subject to the conditions specified in the Section. These conditions are more or less the same as provided in S. 72A dealing with carry forward and set-off of accumulated losses and absorbed depreciation in the case of amalgamation or demerger of limited companies.
(iii) It may be noted that these two Sections do not deal with a situation where a co-operative bank merges with any other nationalised bank or a private sector bank which is registered under the Companies Act.
14. Chapter VIA deductions :
14.1 S. 80C :
This Section gives a list of 21 items giving various modes of investment in specified assets enabling an individual or HUF to claim deduction up to Rs.1 lac in the computation of total income. One more item is added to the list from A.Y. 2008-09. By amendment of this Section investment in bonds of NABARD, which are notified by the Central Government, on or after 1-4-2007, will also be eligible for deduction u/s.80C, subject to the overall limit of Rs.1 lac in a financial year.
14.2 S. 80CCD :
This Section provides for deduction in respect of contribution to the Pension Scheme of the Central Government as notified by the Central Government, subject to the limit of 10% of salary. This Section was added w.e.f. A.Y. 2004-05. By amendment of this Section, it is now provided that such contribution to approved/notified Pension Scheme of any other employer will be eligible for deduction u/s.80CCD. This amendment is made retrospectively w.e.f. A.Y. 2004-05. This will mean that employees’ contribution to the Pension Schemes of State Government, public sector companies, private sector companies, local authorities and others will be eligible for deduction u/s.80CCD from A.Y. 2004-05. In view this retrospective amendment, a number of employees who have made such contribution to such Pension Scheme on or after 1-1-2004 will be eligible to this relief. The same can be claimed by getting the assessments from A.Y. 2004-05 rectified u/s.154. As stated earlier, S. 7 and S. 17(1)(viii) have also been amended from A.Y. 2004-05 to include the contribution of employer to such Pension Scheme as income of the employee. However, such employers’ contribution up to 10% of salary can also be claimed as deduction u/s.80CCD.
14.3 S. 80D :
This Section provides for deduction of Mediclaim Insurance Premium. At present, the Section provides for this deduction if payment of premium is made by a cheque. It is now provided that such payment can be made by any mode of payment, other than cash.
This Section is amended from A.Y. 2008-09 and limits for deduction of Mediclaim Insurance Premium is increased as under :
(i) In the case of a senior citizen, the limit of Rs.15,000 is increased to Rs.20,000.
(ii) In the case of others, the limit of Rs.10,0000 is increased to Rs.15,000.
14.4 S. 80E :
This Section provides for deduction in respect of interest on loan taken by an individual for his higher education. The Section is amended to provide, from A.Y. 2008-09, that this deduction will be available for interest on loan taken for higher education of the individual or his relatives i.e., spouse and children. Such interest should be paid to institutions specified in the Section. It may be noted that there is no upper limit for the amount of interest for which this deduction can be claimed.
14.5 S. 80IA :
(i) S. 80IA provides for a ten-year tax benefit to an undertaking engaged in development of infrastructure facilities, industrial parks, SEZ, generation and distribution of power, etc. The benefit of this Section is now extended to an undertaking which lays and begins to operate a cross-country natural gas distribution network, including pipelines and storage facilities being an integral part of such net work from A.Y. 2008-09. Such an undertaking should satisfy the following conditions :
(a) It should be owned by an Indian company or a consortium of Indian companies or by an authority, board, or statutory corporation;
(b) It is approved by the Petroleum and Natural Gas Regulatory Board;
(c) One-third of the total pipeline capacity is available for use on common carrier basis by third parties;
(d) It starts operation on or after 1-4-2007; and
(e) It complies with any other conditions as may be prescribed.
(ii) The benefit of this Section is also extended to an undertaking engaged in developing, operating and/or maintaining a navigational channel in the sea from A.Y. 2008-09. Such an undertaking will have to enter into an agreement with the Govern-ment or a local authority, etc. for developing, operating and/or maintaining such navigational channel in the sea.
(iii) S. 80IA(4)(v) provides that the benefit of this Section is available to an enterprise set up for reconstruction or revival of a power generating plant. One of the conditions is that it should begin to generate, transmit or distribute power before 31-3-2007. This date is now extended to 31-3-2008.
(iv) As stated earlier, S. 80IA provides for deduction of income derived by an enterprise or an undertaking engaged in development of infrastructure facilities, industrial parks and SEZ. It appears that the intention of the legislation from the beginning was to allow tax benefit for the ten-year period under this Section to the person who develops such facilities. In the case of Patel Engg. Ltd. v. DCIT, 94 ITD 411 (Mum.), it was held by ITAT that this benefit can be claimed by a person who has taken a works contract to assist the developer of the above facilities. In order to clarify this position, the Section is amended with retrospective effect from A.Y. 2000-01 to provide that this benefit cannot be claimed by a person who executes a works contact entered into with the enterprise/undertaking who has undertaken to develop these facilities. This will mean that the assessments of such contractors for past years will be reopened if they have been allowed this benefit. If their appeals are pending, they will be decided against them.
(v) S. 80IA(12) provides that where the under-taking of an Indian company, entitled to deduction under this Section, amalgamates or demerges, the benefit u/s.80IA will continue to apply to the amalgamated company or the resulting company for the balance period. A new Ss.(12A) is added from A.Y. 2008-09 to provide that the above benefit will now not be allowed if the amalgamation or demerger takes place on or after 1-4-2007. No reasons are given either in the Budget speech or in the Explanatory Memorandum for withdrawing this concession. This amendment will not affect the position on amalgamation or demerger of units to which S. 80IB and S. 80IC apply.
14.6 S. 80 IB :
This Section grants deduction to an industrial undertaking set up in Jammu and Kashmir for manufacture and production of specified items between the period 1-4-1993 to 31-3-2007, for a period of 10 years. The last date for setting up the undertaking in J & K has now been extended up to 31-3-2012 for claiming deduction under this Section.
14.7 S. 80IC :
This Section provides for deduction of income derived from industrial undertaking set up in the State of Sikkim during the period 23-12-2002 to 31-3-2012. The deduction allowed in respect of manufacture or production of specified articles is 100% of income for 10 years. By amendment of S. 80IC(2), it is now provided that this deduction will not be available if such undertaking is set up after 31-3-2007. In other words, period during which the new industrial undertaking has to be set up and has to start manufacture or production of articles has been curtailed by five years. This clause amending this provision was not included in the Finance Bill, 2007, introduced in the Parliament, but has been made at the time of passing the Finance Bill. No reasons for curtailing this benefit have been given.
14.8 S. 80ID :
This new Section has been introduced with a view to provide adequate number of hotel rooms to meet the requirements for accommodating visitors to the Commonwealth Games which are to be hosted by our country in 2010 and also to boost the number of convention centres. The Section provides that the income of an assessee derived from the business of hotel or from the business of building, owning and operating a convention centre will be eligible for deduction of 100% of such income for five consecutive assessment years. For this purpose, the hotel should be located in the specified areas i.e., National Capital Territory of Delhi and the Districts of Faridabad, Gurgaon, Gautam Budh Nagar (NOIDA) and Ghaziabad. It is also provided that the hotel should be constructed and started at any time during the period 1-4-2007 to 31-3-2010. Similarly, the convention centre should also be located in the above specified area and should be constructed at any time during that period. The undertaking claiming the above deduction should not be formed by splitting up or reconstruction of a business already in existence and should not be formed by the transfer to a new business of a building previously used as hotel or convention centre. Further, the above undertaking should not be formed by transfer to the hotel/convention centre of a machinery or plant previously used for any other purpose. The assessee claiming this deduction will have to get the accounts of the undertaking audited by a Chartered Accountant and audit report in the prescribed form, certifying that the deduction has been correctly claimed, and will have to file the same along with the return of income. It is also provided that in computing the total income of the assessee no deduction shall be allowed under any other provisions of Chapter VIA or S. 10AA. The Central Government has to prescribe the details about the sizes and the facilities to be available in the hotel or convention centre, in respect of which the deduction is allowable under this Section.
14.9 S. 80IE :
This is a new Section added from A.Y. 2008-09. It may be noted that under the existing S. 80IC(2)(a)(iii) benefit of that Section is available to an industrial unit set up in the North-Eastern States during the period of 24-12-1997 to 31-3-2007. Since this time limit has expired on 31-3-2007, a new S. 80IE is inserted from the current year. This Section applies to any undertaking which begins to manufacture or produce specified articles during the period 1-4-2007 to 31-3-2017 in any of the North-Eastern States. The deduction allowed to such unit will be 100% of the income derived from the undertaking for a period of 10 years. This benefit will also be available to an undertaking which undertakes substantial expansion to manufacture specified articles. It is also provided that the benefit will also be available to an undertaking which carries on the business of (a) hotel (not below two stars), (b) adventure and leisure sports, including ropeways, (c) providing medical and health services (nursing home with minimum 25 beds), (d) running an old-age home, (e) operating vocational training institute for hotel management, catering and food craft, (f) entrepreneurship development, nursing and para medical, civil aviation-related training, fashion designing and industrial training, (g) running information technology IT-related training centre, (h) manufacturing of IT hardware and (i) bio-technology. It may be noted that the undertaking claiming deduction under this Section should be new. It should not be formed by splitting up or the reconstruction of a business already in existence and should not be formed by transfer to a new business of any machinery or plant previously used for any purpose. There are certain other conditions which are as contained in S. 80IA/80IC.
15. Other amendments :
15.1 S. 2(25A) :
Clause (25A) has been inserted in S. 2 w.e.f. 25-8-1976. The term ‘India’ is defined to mean the territory of India as referred to in Article 1 of the Constitution, its territorial waters, seabed and subsoil underlying such waters, continental shelf, exclusive economic zone or any other maritime zone as referred to in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 and air space above its territory and territorial waters.
15.2 S. 9(1) :
This Section explains as to what shall be the income deemed to accrue or arise in India. Clauses (v), (vi) and (vii) of this Section provide that if an Indian resident pays to a non-resident any amount on account of interest, royalty or fees for technical services, the same will be taxable in India. This is irrespective of the fact that the non-resident may not have any operations in India. If the payment for services is made by a resident who has used the same in India, it is taxable in India. Only if the resident pays for using the services or the loan for earning income from a source outside India, it will not be taxable in India. In the above context, the Supreme in the case of Ishikawaji — Harima Heavy Industries Ltd., (288 ITR 408), has held that for any such deemed income to be taxable in India, there must be sufficient territorial nexus between such income and the territory of India. It has been held that where any sum is payable to a non-resident by a resident, the deeming sweep of the said Section cannot bring to tax, any income of a non-resident received outside India from Indian concern for services rendered outside India. In regard to fees for technical services, it has been specifically held that for the fees to be taxable in India, the services have not only to be utilised in a business in India, but also have to be rendered in India. By amendment of this Section, w.e.f. 1-6-1976, Explanation has been inserted at the end of S. 9 with a view to overcome the ratio of the above decision and to provide that income will be deemed to accrue or arise to a non-resident in India on account of interest, royalty and fees for technical services, whether or not the non-resident has a residence or place of business or business connection in India.
15.3 S. 72A :
This Section deals with carry forward and set-off of accumulated losses and unabsorbed depreciation in the case of amalgamation or demerger of a company. At present, the Section applies to a company owning an industrial undertaking, a ship, a hotel or a banking company. The benefit of this Section is now extended to amalgamation of one or more public sector companies engaged in the business of operation of aircraft w.e.f. A.Y. 2008-09.
15.4 S. 292C :
This is a new Section inserted w.e.f. 1-10-1975. Under the existing position, where any books of account, other documents, money, bullion, jewellery or other valuable article or thing is found in a search in possession of any person, it is presumed u/s.132(4A) that (i) such books of account, etc. belong to such person (ii) the contents of such books of account are true (iii) the document is signed by and is in that person’s handwriting, and (iv) in case of documents stamped, executed or attested that it has been properly stamped, executed or attested. The Supreme Court in the case of Metraini v. CIT, (287 ITR 209), held that the said presumptions are not available under any other proceedings under the Act. To meet with this situation, the new Section provides that the said presumptions will be applicable in any other proceeding under the Act. Corresponding amendments have also been made in the Wealth-tax Act.
15.5 Recognised Provident Fund :
The Finance Act, 2006, amended Rule 4 of Part A of Schedule IV of Income-tax Act to provide that the recognised P.F. shall comply with the provisions of S. 1(3) & (4) of the PF Act and the assessee (establishment) should be exempted u/s.17 of the P.F. Act. Time limit up to 31-3-2007 was fixed for this purpose. This time limit is now extended to 31-3-2008.
15.6 Banking Cash Transaction Tax :
This tax was levied by the Finance Act, 2005, on cash withdrawals from bank account on any single day. The tax is payable in the case of individual or HUF if the withdrawal on a single day exceeds Rs.25,000. This limit is now enhanced to Rs.50,000 from 1-6-2007. The limit of Rs.1,00,000 for such withdrawals in other cases will remain unchanged.
It is also now provided that from 1-6-2007, this tax will not be payable by any offices or establishments of the Central or State Governments. In other words, they can draw cash from bank accounts on a single day without any monetary limit.
16. Fringe Benefit Tax (FBT) :
Fringe Benefit Tax was introduced by the Finance Act, 2005. Chapter XIIH containing S. 115W to S. 115WL has been inserted. In spite of repeated suggestions this tax has not been abolished. This year its scope has been extended to ESOPs. Some other amendments are made in these Sections, which are discussed below. These amendments are effective from A.Y. 2008-09.
16.1 ESOP :
FBT is now extended to shares allotted or transferred under any Employees Stock Option Plan (ESOP) and to Sweat Equity Shares. In view of this, shares allotted/transferred under an ESOP or shares allotted/transferred to an employee or a director at a discount or for consideration other than cash for providing any intellectual property or for providing know-how or value additions will be liable to FBT. For this purpose, the value of fringe benefit will be considered as the fair market value of the shares on the date on which the option vests with the employee, as reduced by the amount actually paid by the employee or the director to whom this benefit is given. The method of determining the ‘fair market value’ of the shares will be prescribed by CBDT.
It may be noted that proviso to S. 17(2)(iii) is deleted. Therefore, ESOP will not be taxable as perquisite in the hands of the employee. Further, for computing capital gain in the hands of the employee/director on sale of shares allotted under an ESOP/Sweat Equity Shares, fair market value which has been taken into account while computing the value of fringe benefit, will be considered as actual cost. In other words, the value determined under the Rules framed by CBDT on the date of vesting (without deducting the amount actually paid by the employee/director) will be considered as cost of shares.
16.2 S. 115WKA :
This is a new Section inserted from A.Y. 2008-09. It provides that the employer can recover the FBT paid or payable by it on ESOP/Sweat Equity Shares, as stated above, from the employee or the director. For this purpose, the employer is authorised to modify any agreement or scheme under which the ESOP/Sweat Equity Shares are issued on or after 1-4-2007. In view of this provision, a question will arise whether FBT amount recovered by the employer will be its income liable to tax. The answer to this question will be in the negative, because FBT is additional Income Tax, as provided in S. 115WA and not allowable as deduction in computing total income u/s.40(ic). Therefore, any recovery of FBT from the employee cannot be considered as income liable to tax. On the same analogy, FBT paid by the employee to the employer u/s.115WKA cannot be added to the cost of shares in the hands of the employee.
When ESOP is allowed to the employee, the employer will have to debit the difference between the fair value as determined under the Rules as reduced by the actual amount received from the employee to its Profit & Loss A/c. and credited to Share Capital or Share Premium A/c. The amount debited to the Profit & Loss A/c. will be considered as a benefit given to the employee and will be allowable as business expenditure. FBT is payable on expenditure which is allowed as business expenditure. Therefore, if ESOP expenditure is not allowed, no FBT will be payable on the same.
16.3 S. 115WB(2) :
This Section provides for computation of fringe benefits under different heads of expenses. One of the items is ‘Sales promotion including publicity’. There are certain exceptions under this item. The list of exceptions is enlarged w.e.f. A.Y. 2008-09 and it is now provided that expenditure on display of products and expenditure on distribution of samples, either free of cost or at a concessional price, will not be liable to FBT.
16.4 S. 115WJ :
This Section provides for advance payment of FBT. Provisions relating to the due dates for the payment of FBT, amount to be paid in each instalment and interest for the shortfall in payment of instalment are brought on par with those relating to payment of advance Income Tax. The FBT will have to be paid based on the estimated amount of FBT liability for the year. Presently, all assesses have to pay FBT based on actual amount of expenditure on fringe benefits within 15 days from the end of each quarter ending on 30th June, 30th September, 31st December and by 15th March for the quarter ending on 31st March. It is now provided that from the current year from 1-6-2007 the amount payable as a percentage of total FBT liability will be as under :
Due date Cumulative amount payable as % total FBT liability
Companies Other than companies
15th June 15% —
15th September 45% 30%
15th December 75% 60%
15th March 100% 100%
If there is any delay or default in payment of advance payment of FBT, interest at the rate of 1% p.m. is payable on the shortfall. The provisions similar to S. 234B and S. 234C have been inserted in S. 115WJ by the above amendment w.e.f. 1-6-2007.
17. Penalty
17.1 Penalty Order — S. 275 :
At present, the Assessing Officer can pass any penalty order under various Sections for concealment of income, delay in filing return, non-submission of return, non-deduction of tax at source, etc. According to existing provisions of S. 275, such order can be passed after the assessment is completed or after CIT(A) or ITA Tribunal Order. There is no provision for revising the penalty order after any appeal decision. S. 275 has been amended by TLA - 2006, w.e.f. 13-7-2006, to provide that if a penalty order is passed before any Appellate order by CIT(A), ITA Tribunal, High Court or Supreme Court, the same can now be revised by enhancing, reducing or cancelling penalty in conformity with the decision of the Appellate authority. Such revised order can be passed within six months from the end of the month in which the Appellate order is received. It is also provided that the assessee can file appeal against the above revised order before CIT(A).
17.2 S. 271 :
(i) Explanation 3 to S. 271(1) provides that a person who fails to furnish return of income within the prescribed time is deemed to have concealed the particulars of his income. He is liable to pay penalty with reference to tax on the total income assessed. There was no clarity whether advance tax, TDS, etc. should be deducted before quantifying the penalty amount. It is now clarified by amendment of Explanation 4 that tax determined on the income assessed will be reduced by advance tax, TDS, TCS and self-assessment tax paid before issue of notice u/s.148. This amendment is effective retro-spectively from A.Y. 2003-04.
(ii) If the assessee is found to be owner of any money, bullion, jewellery or other valuable articles or things (referred to as valuable assets), and claims that such assets are acquired by utilising his income which is recorded before the date of search or before the end of the previous year which is to end after the date of search or he declares such assets in the statement u/s.132(4), he gets immunity under Explanation 5 from penalty for concealment. This Explanation 5 to S. 271(1)(c) is now amended and will apply only to search initiated before 1-6-2007.
(iii) In respect of search conducted on or after 1st June 2007, a newly inserted Explanation 5A to S. 271(1)(c) provides that the assessee who is found to be the owner of valuable assets or any income based on any entry in books of account, etc. and claims that such assets are acquired out of income earned during any previous year ended before the date of search and whose date of filing return has expired and he has not filed the return, then even if such income is declared in the return filed subsequently, he shall be deemed to have concealed such income and he will be liable to pay concealment penalty at minimum of 100% and maximum of 300% of the amount of tax sought to be evaded.
17.3 S. 271AAA :
This is a new Section which will apply to concealment penalty leviable in respect of search initiated on or after 1-6-2007. It provides as under :
(i) The assessee shall be liable to penalty u/s.271 AAA in respect of undisclosed income of the year of search or the preceding year for which due date of filing return of income has not expired, found during search initiated on or after 1st June 2007, at the rate of 10% of the undisclosed income.
(ii) For this purpose, ‘Undisclosed income’ shall mean :
(a) any money, bullion, jewellery or other valuable articles or thing or any entry in books of account or other documents or transactions found during search, which has not been recorded in books of account or has not been disclosed to the Chief Commissioner/Commissioner before the search.
(b) Any income represented by expenses recorded in the books, which are false or could not have been found to be false had the search not been conducted.
(iii) In a case referred to in (i) above, no penalty shall be leviable if
(a) the assessee admits undisclosed income in the statement taken u/s.132(4);
(b) substantiates the manner of deriving undisclosed income, and
(c) pays tax along with interest on such undisclosed income.
(iv) If penalty is leviable u/s.271AAA, no penalty shall be leviable u/s.271(1)(c).
18. Assessment procedure :
18.1 S. 139 :
S. 139 is amended by TLA - 2006 to provide that any university, educational institution, hospital, etc. with gross receipts of less than Rs.1 crore, which is claiming exemption u/s.10(23c) will have to file its return of income if it has income exceeding the taxable limit, without considering the income which is exempt under the above Section.
18.2 S. 139C :
This is a new Section inserted with retrospective effect from 1-6-2006. Presently, a return may be treated as defective if certain documents, receipts, etc. are not enclosed with the return. With the introduction of e-filing of returns, the Scheme does not envisage any attachments to be submitted with the return. A proviso has been inserted to provide that CBDT may dispense with any of the prescribed conditions for a class or classes of persons, so that the return may not be regarded as defective. The proviso to S. 139 has now been deleted and new S. 139C now empowers the CBDT to make rules providing for certain class or classes of persons who may not be required to furnish documents, receipts, certificates, or audit reports required to be furnished along with the return under any provision of the Act, but to furnish them before the Assessing Officer on demand.
18.3 S. 139D :
This is also a new Section inserted with retrospective effect from 1-6-2006. It empowers the CBDT to make rules providing for (i) the class or classes of persons required to furnish return in electronic form, (ii) the form and manner in which the e-return is to be furnished, (iii) the computer resource or the electronic record to which the e-return may be transmitted, and (iv) the documents which may not be furnished along with the e-return but shall be produced before the Assessing Officer on demand.
18.4 S. 142(2A) — Special audit :
The amendment of the Section, with effect from 1st June 2007, provides that the Assessing Officer shall give the assessee a reasonable opportunity of being heard before directing the assessee to get his accounts audited u/s.142(2A). This is in pursuance of the Supreme Court decision in the case of Rajesh Kumar v. DCIT, (287 ITR 91) wherein the Supreme Court held that the direction u/s.142(2A) is a quasi-judicial order and the principles of natural justice are required to be applied.
It is also provided that where any direction for special audit is issued on or after 1st June 2007, the expenses of the special audit including the remuneration of the auditors shall be determined by the Chief Commissioner/Commissioner in accordance with prescribed guidelines and shall be paid by the Central Government.
18.5 Transfer pricing assessments — S. 92CA :
Provides for reference to Transfer Pricing Officer (TPO) in specified cases. The procedure for completion of assessment by TPO, time limit for passing order by TPO and the binding effect of his order has now been provided by amendments in S. 92CA, S. 153 and S. 153B. These amendments are made w.e.f. 1-6-2007. These amendments are as under :
(i) U/s.92CA, the assessing officer (AO) can refer the computation of arm’s-length price to a TPO. Currently, there is no extra time available to the AO for completing the assessment or reassessment in cases where such transfer pricing assessment is required.
(ii) In order to ensure that the TPO as well as the AO get sufficient time to make the audit of transfer price and the assessment in cases involving international transactions, the time limit for completion of assessment or reassessment is increased by 12 months as compared to the regular assessments.
(iii) Further, the TPO is required to complete the transfer pricing assessment, two months before the due date for regular assessment.
(iv) This provision applies where references for transfer pricing assessments are made after 31st May 2007; or where references have been made before 1st June 2007, but transfer pricing assessments have not been completed by TPO before 1st June 2007.
(v) It is further provided that the assessing officer has to complete the assessment ‘in conformity with’ the transfer pricing assessment order. This means that the Assessing Officer is required to accept the arm’s-length price as computed by the TPO and has no discretion in the matter of computation of arm’s-length price.
18.6 S. 153D :
A new S. 153D is inserted to provide that no order of assessment or reassessment u/s.153A and u/s. 153B in case of search or requisition shall be made by an Assessing Officer below the rank of Joint Commissioner, except with the prior approval of the Joint Commissioner. This amendment is applicable from 1st June 2007.
18.7 S. 155 :
This Section gives powers to the Assessing Officer to amend the assessment order under certain circumstances. It is now provided by amendment by TLA 2006 that if an assessee has not been granted deduction u/s.10A, u/s.10B or u/s.10BA on the ground that the convertible foreign exchange for exports has not been brought into India within the prescribed time, the Assessing Officer will now be able to amend the assessment order within 4 years when the convertible foreign exchange is brought in India. Thus, the deduction under the above Sections can be claimed when the convertible foreign exchange is brought into India.
18.8 S. 172 :
This Section provides for assessment of non-resident shipping companies. Currently, there is no time limit prescribed for completion of assessment of returns filed u/s.172(4). Now a time limit for completion of assessment is provided as 9 months from the end of the year of filing the return. In case of returns filed before 1st April 2007, the time limit for completion of assessment is 31st December 2008.
18.9 S. 288B :
At present, S. 288B provides for rounding off the tax payable or refund of tax due to the nearest rupee one. It is now provided by TLA 2006 that any tax payable or refund of tax due shall be rounded off to the nearest multiple of rupees ten.
19. Appeals :
19.1 S. 246A — Appeals to CIT(A) :
Amendment made to this Section now provides that appeals can be filed before CIT(A) against the orders passed by AO under the following Sections :
(i) S. 206C(6A) — Holding that a person is deemed to be an assessee in default for failure to collect tax at source or for failure to deposit tax collected at source. This appeal can be filed w.e.f. 1-42007.
(ii) S. 271AAA — Levying penalty where search u/s.132 has been initiated on or after 1-6-2007.
19.2 S. 248 — S. 249 :
Under the existing provisions of S. 248, it is provided that where any person has deducted and paid tax, as provided in S. 195 and S. 200 in respect of any sum chargeable under the Income-tax Act, other than interest, but denies his liability to make such deduction, can file appeal to CIT(A). This Section is now substituted by a new Section which provides that where, under an agreement or other arrangement, the tax deductible on any income, other than interest, u/s.195 is to be borne by the payer, and such person pays the tax, but claims that no tax is deductible on such income, he can file ap-peal to CIT(A). U/s.249. Such appeal will have to be fled within 30 days of the date of payment of such tax. This provision comes into force on 1-6-2007.
19.3 S. 253 — Appeal to ITA Tribunal :
At present, no appeal lies against the order rejecting approval by the CIT to grant certificate of exemption u/s.80G(5)(vi). By amendment of S. 253 it is now provided, w.e.f. 1-6-2007, that appeal can be filed against the order of rejection u/s.80G(5)(vi) to ITA Tribunal on or after 1-6-2007.
19.4 S. 254 :
Currently, in case of stay-granted matters before the ITA Tribunal, if appeals are not disposed of within a period of 180 days from the date of the stay order, the stay order is automatically vacated after the expiry of 180 days, unless the stay is further extended by the Tribunal for a period not exceeding 180 days at a time. It is now provided that the total stay period shall not exceed 365 days cumulatively from the date on which the stay was first granted. It is also provided that the Tribunal shall dispose of the appeal within the period of such stay, failing which the order of stay shall stand vacated at the expiry of the stay period. This amendment applies from 1st June 2007.
20. Settlement Commission :
Chapter XIX-A containing S. 245A to S. 245L deal with the provisions relating to settlement. The Finance Act 2007 makes substantial changes in these provisions. The corresponding provisions in the Wealth-tax Act have also been amended. It is stated that these changes are being made to avoid delay in determining the tax liability of the assessee, which is caused because of factors like duplication of proceedings and absence of statutory time frame for settling the case. It is also stated that these amendments will streamline the proceedings before the Settlement Commission. If one considers these amendments, it is possible to conclude that the objective with which this Commission was set up will not be achieved. Very few assessees will be able to approach the Commission and over a period of time, the Commission may have to be wound up. These amendments come into force on 1-6-2007. In brief they can be summarised as under :
(i) Under the existing provisions, an assessee may make an application to the Commission at any stage of the proceedings in his case pending before any Income-tax Authorities. It is now provided that after 31-5-2007, an assessee can make an application to the Commission only during the pendency of the proceedings before the Assessing Officer. Further, an assessee shall not be allowed to make the application before the Commission during the pendency of the following proceedings of assessment :
(a) Assessment/reassessment proceedings in response to a notice u/s.148. These proceedings shall be deemed to have commenced on the date on which notice u/s.148 is issued;
(b) Assessment or reassessment proceedings u/s.153A or each of six assessment years preceding the assessment year relevant to the previous year in which a search u/s.132 was conduced or a requisition u/s.132A was made; and also the assessment or reassessment proceedings in case of such persons for the assessment year relevant to the previous year in which the search u/s.132 was conducted or the requisition u/s.132A was made. These proceedings shall be deemed to have commenced on the date on which the search u/s.132 was initiated or the requisition u/s.132A was made;
(c) Proceedings of making fresh assessment where original assessment was set aside u/s.254 by the ITA Tribunal or u/s.263 or S. 264 by the Commissioner, such proceedings shall be deemed to have commenced from the date on which the order setting aside the original assessment was passed;
(ii) At present, an application can be made only if the additional amount of income-tax payable on the income disclosed in the application exceeds one lakh rupees. This limit is enhanced to three lakh rupees.
(iii) At present, the income-tax payable on the income disclosed in the application has to be paid after the application is allowed to be proceeded with u/s.245D(1). Now such tax along with interest, if any, should be paid on or before the date of making the application and proof of such payment should be attached with the application. It is also provided that the applicant shall intimate to the Assessing Officer in the prescribed manner.
(iv) Under the existing provisions, the Commission, on receipt of an application, calls for a report from the Commissioner. After considering the material contained in such report and having regard to the nature and circumstances of the case or the complexity of the investigation involved, the Commission passes an order to reject the application or to allow the application to be further proceeded with. Under the existing provisions, there is no statutory time limit for passing the order for rejecting or allowing the application to be proceeded with. It is now provided that the Settlement Commission, within 7 days of receipt of the application, shall issue a notice to the applicant to explain as to why his application be admitted. After hearing the applicant, within 14 days from the end of receipt of the application, the Settlement Commission shall pass an order for rejecting the application or allowing the application to be proceeded with. Complexity of the investigation involved in a case shall not be the criteria for admitting or rejecting the application. Further, where no order of rejection or admission of an application is passed within the aforesaid period, the application shall be deemed to have been allowed to be proceeded with. It is also provided that :
(a) applications which were made before 1-6-2007, but pending on that date as to whether to be rejected or allowed to be proceeded with, shall be deemed to have been allowed to be proceeded with if the tax on the income disclosed in the application and the interest is paid or before 31-7-2007. In case, such tax and interest is not paid on or before the aforesaid date, the application shall be deemed to have been rejected;
(b) in respect of applications which were admitted before 1-6-2007, but order of settlement was not passed before the said date, the tax on the income declared in the application and interest thereon shall have to be paid on or before 31-7-2007. Tax and interest shall be paid by this date even in cases where the Commission has already granted any extension or instalment for payment of tax beyond the said date. If the tax and interest is not paid on or before 31st July 2007, the application shall not be allowed to be further proceeded with and the proceedings before the Commission shall abate on 31st July 2007.
(v) If an application made on or after 1-6-2007 is allowed to be proceeded, the Settlement Commission shall issue a notice to the Commissioner within 30 days from the date on which the application was received. In case of applications referred to in (iv)(a) above, if the tax and interest has been paid before 31st July 2007, such notice shall be issued to the Commissioner on or before the 7th day of August 2007. The Commissioner shall send his report within 30 days from the date on which the communication from the Settlement Commission is received by him;
(vi) On receipt of the report of the Commissioner, the Settlement Commission shall hear the applicant and the Commissioner within fifteen days from the date of receipt of the report. If it is found that the application was not a valid application, the Commission by passing an order may declare the application as invalid. Copy of the order declaring an application as invalid will have to be sent to the applicant and the Commissioner. In case an application is declared invalid the proceedings before the Commission shall abate. If the Commissioner does not send the report within the specified period, the Commission may proceed in the matter further without the report of the Commissioner.
(vii) In respect of application made before 1-6-2007 and referred to in (iv)(a) or (iv)(b) above, which are not declared invalid or as the case may be allowed to be further proceeded with, the Settlement Commission, may direct the Commissioner to make or cause to be made such further inquiry or investigation as it deems fit. The Commissioner shall submit his report within 90 days from the date on which the communication from the Settlement Commission is received by him;
(viii) The Commission shall, after giving an opportunity to the Commissioner and to the applicant and considering the reports of the Commissioner and other material available with it, pass the settlement order. At present, there is no time limitation for making the order of settlement. It is now provided that the Commission shall pass such order within 9 months from the end of month in which the application was received. In respect of applications received before 1-6-2007, the Commission shall pass the order on or before 31st March 2008;
(ix) Under the existing provisions, it is provided that the Commission may grant immunity from prosecution under Indian Penal Code, Income-tax Act and any other Central Act. It is now provided that the Commission shall not grant immunity from prosecution under any law other than the Income-tax Act and Wealth-tax Act. However, in respect of pending applications, the existing provisions shall continue.
(x) At present, it is provided that the Commission may reopen completed proceedings. It is now provided that the Commission shall not have powers to reopen the completed proceedings in a case where an application u/s.245C has been filed on or after 1st June 2007.
(xi) It is now provided that if the application made on or after 1-6-2007 is rejected or such application or an application referred to in (iv)(a) above is declared invalid or an application referred to in (iv)(b) above is not allowed to be further proceeded with or the settlement order is not passed within the specified period, the proceedings before the Commission shall abate and the Assessing Officer or the Income- tax Authority before whom the proceedings were pending at the time of making the application, as the case may be, shall resume and complete the proceedings. Credit shall be allowed by the Assessing Officer for the tax and interest paid by the applicant. The period from the date on which the application was made before the Commission and up to the date on which proceedings get abated shall be excluded from the time limitation for completing the proceedings by the Assessing Officer. It is also provided that this will be the position in respect of all applications pending on 1-6-2007, in respect of which settlement orders are not passed before 31-3-2008 as stated in (viii) above.
(xii) It is also provided that after 1-6-2007, an assessee can apply for settlement only once during his lifetime. For this purpose, an application which was not admitted shall not be deemed to be an application.
21. To sum up :
The above analysis of the amendments made by TLA - 2006 and the Finance Act, 2007, will show that the already complex direct tax laws have been made more complex. The present Finance Minister has presented his fourth consecutive Budget this year. During the last three years, two Taxation Laws Amendment Acts have been passed. In other words, there have been more than 500 amendments in the last three years. Service Tax net has been widened and three more taxes like STT, FBT and BCTT have been introduced. All these taxes have increased the compliance cost to assessees.
In this year’s budget, some amendments are made with retrospective effect. This will create hardship in cases like amendment in S. 80IA, denying deduction to assessees who have taken works contract for developing infrastructure facilities from A.Y. 2000-01. It is rather unfortunate that no provision is made for waiver of interest chargeable u/s.234B/234C when such retrospective amend-ments are made resulting in extra demands being created after several years. Further, no reasons are given for withdrawing S. 80IA benefit in the event of amalgamation or demerger of the company.
The provision restricting amount that can be deposited u/s.54EC will also create hardship in many genuine cases. This is one instance where notification is issued first, restricting the deposit without authority of law, and later on validated by retrospective amendment.
There are some amendments made with a view to deny the benefit granted by judicial pronounce-ments. All these steps add to the number of amendments in our direct tax laws every year.
FBT is one provision which has created resentment in tax paying public. If the suggestion for granting exemption up to Rs.2 lacs of Fringe Benefits had been accepted, most of the small assessees would have been saved of the botheration of making computation and payment of this tax. From the speech of the Finance Minister in the Rajya Sabha on 4th May 2007, it appears that there is a rethinking about this tax. He has stated that if average rate of tax paid by the corporate assessees, which is now 19.26%, increases even by 1%, the Government will think of abolishing this tax. Industry has been suggesting that FBT can be abolished and the corporate tax rate can be increased by 2 to 3%.
The provisions relating to Settlement Commission made by this Finance Act are such that no assessee would like to approach the Commission. The institution of Settlement Commission was set up three decades ago. It has not been effective in settling the disputes since the procedure is complicated. This procedure could have been simplified and made time-bound. Again, the system of selecting members of the commission should have been made more transparent and left to an independent panel on the lines as panel for selection of ITA Tribunal Members. The provisions should have been made to strengthen the commission rather than making provisions to ensure winding up the Commission.
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