CA Final DT Laws-Must read -Treatment of Business Issues N16

1 Special Business Issues Relevant for November 2016 Examination 1.1 Section 115-UB: Investment fund {Fin. Act, 2015 AY 2016-17}  Investment fund: Any fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which has been granted a certificate of registration as a Category I or a Category II under the SEBI (Alternative Investment Fund) Regulations, 2012.  SEBI (Alternative Investment Fund) Regulations, 2012 regulates all privately pooled investment vehicles which collect funds from investors for investments in accordance with a predefined investment policy for the benefit of its investors. AIF categorize funds into three broad categories:- Category I AIF:  Invest in start-up or early stage of any one category, namely, (i) venture capital funds; (ii) small and medium enterprise funds; (iii) social venture funds and (iv) infrastructure funds.  Investment allocates substantial majority of its capital to the target focus of above fund.  This fund have positive spill over effects on economy and for which the SEBI/ Government/ other regulators might provide incentives or concessions. Category II AIF:  This fund will cover private equity funds and debt funds. Such funds do not undertake leverage or borrowing other than to meet day-to-day operational requirements.  No specific incentives or concessions are given by the Government/other regulators. Category III AIF:  This fund employs complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives. This will cover hedge funds or funds which trade with a view to make short term returns or such other funds which are open ended.  No specific incentives or concessions are given by the Government/other regulators.  Venture capital company means such company which has been granted a certificate of registration under SEBI Act, 1992 and regulations made there under (and) approval of Central Government in this behalf.  Venture capital fund means such fund operating under a trust deed registered under the Registration Act, 1908 (and) granted a certificate of registration under SEBI Act, 1992 and regulations made there under (and) approval of Central Government in this behalf.  Any income other than profits and gains of business or profession accruing or arising to, or received by a unit holder of an investment fund shall be taxable in the hands of unit holder instead of investment fund.  Where in any previous year, total income of the investment fund, without giving effect to sec. 10(23FBA), is a loss under any head of income and such loss is not wholly set-off during the previous year, then, such loss shall be allowed to be carried forward and set-off in the subsequent years (and) such loss shall not be allowed be passed through to the investor.  Income of the unit holder from investment fund shall be of a same nature and shall be proportionate to his investment.  If the income of an investment fund during a previous year is not paid or credited to the unit holders, it shall be deemed to have been credited to the account of the unit-holder on the last day of the previous year.  Income paid by an investment fund to its unit holders would not be subject to dividend distribution tax.  The total income of the investment fund shall be of the nature of profits and gains of business or profession and shall be charged to tax at 30% where such fund is a company or a firm; (and) maximum marginal rate in any other case.  Section 194LBB: Any income (other than that proportion of income which is of the same nature 2 Extract from Direct Tax Laws – Quick Insight authored by Chakravarthi Murali [[[ Send an e-mail to quickinsightdt@gmail.com for sample chapters Entire DT laws made easy in less than 200 Pages with 100% exam approach as income chargeable under the head “Profits and gains of business or profession”) payable by the investment fund to a unit holder, the person responsible for paying shall at the time of credit or at the time of payment, whichever is earlier, deduct tax at the rate of 10%. Statement in prescribed form giving details of the nature of the income paid or credited during the previous year to be furnished to the unit-holder and the prescribed income-tax authority. TDS provisions would not be applicable in respect of the income received by the investment fund. Business Trust 1.2 Section 115UA: Special provision to business trust (Amended – Fin. Act, 2015 - AY 2016-17)  Subject to the provisions of section 111A and section 112, this section overrides the entire other provision of income-tax Act.  The SEBI has notified the regulations relating to two new categories of investment vehicles, they are (i) The SEBI (Real Estate Investment Trusts) Regulations, 2014; and (ii) The SEBI (Infrastructure Investment Trusts) Regulations, 2014.  Section 2(13A): “Business trust” means a trust registered as an Infrastructure Investment Trust under the SEBI (Infrastructure Investment Trusts) Regulations, 2014; or a Real Estate Investment Trust under The SEBI (Real Estate Investment Trusts) Regulations, 2014, the units of which are required to be listed on a recognised stock exchange, in accordance with the aforesaid regulations.  Special purpose vehicle means an Indian company in which the business trust holds controlling interest (and) not less than 50% of the equity share capital or interest as required by regulations to grant registration.  Any income distributed by a business trust to its unit holders shall be deemed to be of the same nature and in the same proportion in the hands of unit holder as it had been received b y, or accrued to, the business trust.  The listed units of a business trust, when traded on a recognised stock exchange, are liable to securities transaction tax, and consequently, the long term capital gains is exempt u/s. 10(38) and the short term capital gains is taxable at the rate of 15% u/s. 111A. Any other income of the trust shall be taxable at the maximum marginal rate.  Section 10(23FC): Any income of a business trust by way of interest received or receivable from a special purpose vehicle is exempt from tax. The business trust enjoys a special pass-through status in respect of interest received or receivable from SPV. (Interest income)  Where a unit holder in receipt of income referred in section 10(23FC), then, such distributed income shall be deemed to be income of such unit holder and shall be charged to tax as income of the previous year.  Section 10(23FCA): (Fin. Act, 2015 AY 2016-17) In the case of REITs, the income is mainly in the nature of rental income. This rental income arises (i) from the assets held directly b y REIT; or (ii) from the assets held by it through an SPV. The rental income arises from the assets held directly by REIT, exempt in the hands of REIT. Section 115UA(3): When the said income is distributed to unit holders, and then deemed as income of the unit holder. REIT gets the pass through status for this distribution to unit holders. Section 194LBA: Any distributed income referred in u/s 115UA, is payable by a business trust to its unit holders being a resident at the time of credit or payment, whichever is earlier deduct tax at 10%. Any distributed income referred in u/s 115UA, is payable by a business trust to its unit holders being a non-resident at the time of credit or payment, whichever is earlier deduct tax at 5%. Section 194-I: Where the income by way of rent is credited or paid to a REIT, in respect of any real estate asset held directly by such REIT, no tax is deductible at source u/s. 194-I. Profit and Gains of Business or Profession 3 Send an e-mail to quickinsightdt@gmail.com for sample chapters Entire DT laws made easy in less than 200 Pages with 100% exam approach  Section 10(23FD): There would be no tax liability in the hands of the business trust since dividend is subject to dividend distribution tax u/s 115-O in the hands of Indian company (SPV). Hence, the dividend income is exempt under section 10(34) in the hands of the business trust. So, Any distributed income received by a unit holder from the business trust, is exempt from tax in the hands of unit holder. (dividend income)  Section 49(2AC): Where the capital asset, being a unit of a business trust, became the property of the assessee in consideration of a transfer as referred to in clause xvii of section 47, the cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the share referred to in the said clause.  The person responsible for making payment shall furnish a statement in Form 64B giving the details of the nature of the income paid during the previous year and such other details as may be prescribed to the unit holder with in 30th June of the financial Year following the previous year in which income is distributed (and) a statement in Form 64A with digital signature duly verified by an Accountant within 30t h November of the financial year following the previous year during which such income is distributed to the Principal Commissioner or Commissioner of income-tax.  Clause xvii of section 47: Any transfer of a capital asset, being share of a special purpose vehicle as defined u/s 10(23FC) to a business trust in exchange of units allotted b y that trust to the transferor. Presumptive Taxation Provision relating to Resident: Section 44AD, 44AE, 115V [ 1.3 Section 44AD: Computation of income of specified business  Applicable to (i) an Individual; (ii) HUF; (iii) Firm (Not for limited liability partnership); (iv) who has not claimed deduction u/s 10AA or income based deduction under chapter VI-A in head-C.  All small businesses with total turnover or gross receipts of up to ` 100 lakhs.  Rate of tax would be 8% of total turnover or gross receipts.  Following persons are specifically excluded from applicability of this presumptive provision.  A person carrying on profession as specified u/s 44AA(1) namel y legal, medical, architectural, accountancy, technical consultancy, interior decorator and any professions as notified by Board; (or)  A person earning income in the nature of commission or brokerage; (or)  A person carrying on any agency business.  No deduction u/s 30 to 38 available. In case of firm Sec 40(b) is applicable.  Section 44AA & Sec 44AB: maintenance of books of accounts and tax audit. (i) Mandatory if income exceeds specified limit. (` 100 lakhs) (ii) Mandatory if income does not exceed specified limit but he intends to claim his income lower than income prescribed u/s 44AD (8% of total turnover or gross receipts) and his income exceeds the maximum amount not chargeable to tax.  Exemption u/s 10AA and deduction under Chapter VI-A is not available.  Requirement of advance tax payments is not applicable.  The written down value of any asset of such business shall be deemed to have been calculated. 1.4 Section 44AE: Computation of income of business of plying, hiring or leasing goods carriages  Applicable to all assessees including non-resident who carries on business of pl ying, hiring or leasing goods carriage and owns not more than 10 goods carriages at any time during the previous year.   The presumed income will be ` 7500 p.m. or part of month during which the goods carriage is owned by assessee in the PY or an amount actually earned by vehicle, whichever is higher.(w.e.f. 01.4.2015)   The date of put to use of vehicle is relevant if assessee intend to declare higher income than presumptive income.  No deduction u/s 30 to 38 available. In case of firm Sec 40(b) is applicable.  Section 44AA & Sec 44AB: maintenance of books of accounts and tax audit are mandatory if income does not exceed specified limit but he intends to claim his income lower than income prescribed u/s 44AE.  Chapter VI-A deduction is available  The written down value of any asset of such business shall be deemed to have been calculated. [ 4 Extract from Direct Tax Laws – Quick Insight authored by Chakravarthi Murali [[[ Send an e-mail to quickinsightdt@gmail.com for sample chapters Entire DT laws made easy in less than 200 Pages with 100% exam approach 1.5 Section 115V:Tonnage tax – Shipping business of domestic shipping company (Do not confuse with Sec. 44B) Presumptive taxation of a shipping company and application of normal corporate tax Application made to Joint Commissioner Tax is payable even loss in a year Once company opted the scheme then locked for 10 years Company owing at least one qualifying ship. Qualifying ship refers to having at least 15 tons capacity MAT credit can be carried forward to 10 assessment years Daily tonnage income multiplied with number of days operated in a year. Rounded off to nearest multiple of 100 tons. Capacity Applicable rate – per day Up to 1000 tons ` 70 for each 100 tons 1001 to 10,000 tons ` 53 for each 100 tons exceeding 1000 tons 10,001 to 25,000 tons ` 42 for each 100 tons exceeding 10,000 tons Exceeding 25,000 tons ` 29 for each 100 tons exceeding 25,000 tons At least 20% of book profit derived from its core and incidental activity transferred to a special reserve account and utilised before expiry of 8 years for acquisition of new ship Until the acquisition of new ship, such above said amount must be used for working capital requirement, but not used for (i) distribution of dividend; or (ii) remittance of profit outside India; or (iii) remittance for creation of asset outside India. Presumptive Taxation Provision relating to Resident: Section 44B, 44BB, 44BBA, 44BBB 1.6 Shipping business of any Non-resident  A non-resident (NR) has an option to offer the income as per the Indian income-tax Act or DTAA entered into between India and other countries, whichever is beneficial. Under Indian income-tax Act, section 44B and section 172 deals with computation of shipping business of non-resident. Section 172(1) – Default Provision Section 44B – Mandatory by Application Business of operation of ships occasionally and income is earned on account of passengers, livestock, mail or goods at a port in India in respect of export transaction. Business of operation of ships regularly and income is earned on account of passengers, livestock, mail or goods at a port in India or outside India in respect of export and import transaction. Amount payable to NR x 7.50% is taxable income Amount payable to NR x 7.50% is business income Set off and C/fwd of loss is not available Set off and C/fwd of loss is available Chapter VI-A deduction is not available Chapter VI-A deduction is available Additional Points in respective sections This section overrides entire IT Act Section 44AB - Tax audit provision is not applicable Import transaction taxable on receipt basis (Sec. 5) Lower income cannot be claimed Return is to be filed within 30 days of departure of ship No deducti on u/s 28 to 43A available. No order of assessment by AO after expiry of 12 months from end of FY in which return furnished Assessment by assessing officer within 36 months from end of FY in which shipping income deri ved Amount paid or payable in or out of India covered 1.7 Section 44BBA: Non-resident engaged in business of operation of aircraft Non-resident is in operation of aircraft Section 44AB tax audit provision is not applicable. Hence, lower income cannot be claimed Deduction u/s 28 to 43A is not available Chapter VI-A deduction is available Set off and carry forward of loss is available A sum equal to 5% of the aggregate of the amounts specified deemed to be the profit. (a) Paid or payable (in India or out of India) to the assessee or to any person for the carriage of passengers, livestock, mail or goods from any place in India (and) Profit and Gains of Business or Profession 5 Send an e-mail to quickinsightdt@gmail.com for sample chapters Entire DT laws made easy in less than 200 Pages with 100% exam approach (b) Received or deemed to be received (in India) by or on behalf of the assessee for carriage of passengers, livestock, mail or goods from any place outside India. 1.8 Section 44BB: Non-resident engaged in prospecting for (or) extraction or production of mineral oils  Mineral oil includes petroleum and natural gas  Section 44AB tax audit provision is optional. Hence, lower income can be claimed  Deduction u/s 28 to 41 and 43 and 43A is not available  Chapter VI-A deduction is available  Set off and carry forward of loss is available  A sum equal to 10% of the aggregate of the amounts specified deemed to be the profit (a) Paid or payable (in India or out of India) to the assessee or to any person in connection with prospecting for or extraction or production of mineral oil in India (b) Received or deemed to be received (in India) by or on behalf of the assessee or to any person in connection with prospecting for or extraction or production of mineral oil outside India  Seismic data acquisition and interpretation used to create highly accurate images of the earth's sub-surface which in turn are used by the exploration and production companies for locating potential oil and gas reserves based upon the geology observed. The income derived was to be computed under the provisions of section 44BB. {(In re Global Geophysical Services Ltd.)(2011)(AAR)}  The “pith and substance” of each of the agreements is inextricably connected with prospecting, extraction or production of mineral oil. The dominant purpose of each of such agreement is for prospecting, extraction or production of mineral oils though there may be certain ancillary works contemplated there under. If that be so, we will have no hesitation in holding that the payments made by ONGC and received by the non-resident assessees or foreign companies under the said contracts is more appropriately assessable u/s. 44BB and not Section 44D of the Act. If the dominant purpose is mining, the income is assessable only u/s 44BB and not as "fees for technical services" u/s 9(1)(vii) & 44D {In re Oil & Natural Gas Corporation Limited(2015)(SC)} 1.9 Section 44BBB: Foreign company engaged in certain turnkey power projects Turnkey power project approved by Central Government Section 44AB tax audit provision is optional. Hence, lower income can be claimed Deduction u/s 28 to 44AA is not available Chapter VI-A deduction is available Set off and carry forward of loss is available A sum equal to 10% of the profit Paid or payable (in India or out of India) to the assessee or to any person on account of such civil construction, erection, testing or commissioning shall be deemed to be income. 1.10 Section 44DA: Special provision for royalty income of non-resident { Ref. section 115-A}  This section overrides provisions specified u/s 44BB.  The income b y way of (i) royalty or (ii) fees for technical services received from government or an Indian concern by a non-resident (not being a company) or a foreign company carries on business in India through a permanent establishment or fixed place of business. Such income shall be computed under the head “PGBP” in accordance with the provisions of this Act.  The agreement entered after the 31.03.2003.  No deduction shall be allowed in respect of (i) any expenditure or allowance which is not wholly and exclusively incurred in India; or (ii) any amounts paid by permanent establishment to its head office or any other offices.  Every non-resident shall keep and maintain books of accounts and other documents u/s 44AA and get his accounts audited u/s 44AB and furnish report along with return of income. Best Wishes from Chakravarthi Murali