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What are the changes proposed in the budget?
March, 10th 2010

When understatement of price of movable will continue to be liable for tax under Sec. 56(2)(vii)(c)(ii), there is no reason for dispensing with the same for immovables.

Finance Act, 2008, had withdrawn concessions for those trusts and charitable institutions if their object was one of general public utility and they had receipts from transactions of business or commercial nature. This was to be effective from assessment year 2009-10. A retrospective amendment from the same assessment year now is proposed to roll back this withdrawal but limiting it only for those with turnover from business or commerce not exceeding Rs. 10 lakh. The limit is with reference to turnover and not to income. The proposal to continue this provision withdrawing relief itself needs review and at any rate, the exception should be with reference to the income which is a better criterion than turnover.

International taxation

The Supreme Court in Ishikawajima-Harima Heavy Industries Ltd. v Director of Income-tax (2007) 288 ITR 408 (SC)had held that in an indivisible business contract, supply of technology from abroad should not attract liability in India. This decision was rendered taking into consideration both the domestic law and the provisions of the Double Tax Avoidance Agreement between India and Japan. A retrospective Explanation was inserted under Sec. 9 by the Finance Act, 2007, to nullify the decision. But this Explanation was found to make no difference to the law laid down by the Supreme Court as decided by the High Court in Jindal Thermal Power Company Limited v Dy. CIT (2010) 321 ITR 31 (Kar). This Explanation is now proposed to be replaced by rephrasing it. As long as the Agreements themselves are not altered, even this amendment may fail in its intendment, since agreements will override the domestic law. There are other pressing issues in international taxation because of the Karnataka High Court decision in CIT (International Taxation) v Samsung Electronics Co. Ltd. [2010] 320 ITR 209 (Kar), requiring clearance from the assessing officer for every remittance abroad, though such a requirement is not prima facie warranted. The issue is now pending in appeal before the Supreme Court. Further a Board Circular No. 7 of 2009 dated October 22, 2009, withdraws three earlier circulars clarifying non-residents liability, without any explanation for each of the withdrawn circular. These issues relating to interpretation of law on which uncertainty has been created requires to be solved expeditiously. Probably these could be done either by circulars or incorporating amendments to the Bill now under consideration of the Parliament.

Gifts from non-relatives

Finance (No.2) Act, 2009, had extended the inference of deemed income from gifts from non-relatives of a sum of money to all movables and immovables, subject to basic exemption of Rs. 50,000. Even a concession in price in purchase of such movables or immovables was made liable as deemed gift. Stamp value was to be the benchmark both for gift of immovable property and concessional price in a purchase. While gift of such immovable property from non-relatives will continue to be liable with reference to such stamp value, the deemed gift in concessional purchase price is dropped with retrospective effect from October 1, 2009, the date from which it was made taxable. The reason for this amendment to Sec. 56(2)(vii) is that there is a time gap between the booking of the property and receipt of such property resulting in a taxable differential. An amendment made by way of Explanation to Sec. 50C had addressed this difficulty by adopting the stamp value as on the date on which transfer is inferred for tax purposes. Further, stamp value under Sec. 50C is a presumptive market value which was rebuttable. In fact, on the same reasoning, stamp value under Sec. 50C itself and gift of immovable property under Sec. 56(2)(vii) with reference to such stamp value should have been dropped because there cannot be a different criterion for the seller and the purchaser with reference to Sec. 50C because both are beneficiaries in understatement of sale consideration, for the purchaser it helps to launder unaccounted money while for the seller there is saving of capital gains tax. When understatement of price of movable will continue to be liable for tax under Sec. 56(2)(vii)(c)(ii), there is no reason for dispensing with the same for immovables. Probably, the amendment was intended to satisfy real estate sector so that the transactions below the stamp value may not get inhibited by this deeming provision.

Share acquisition by firms and cos

A new class of deemed income is proposed under Sec. 56(2)(viia). It would deem the value of any unlisted shares, if received without consideration and deem any concession in value of such shares if acquired by means other than gift as income. This is applicable only for firms and unlisted companies. It is stated that it is to prevent malpractice of transferring shares below the market rate. At the same time, it is stated in the Memorandum that this deeming provision is not intended to dilute the present exemptions available in the statute for transfers on reorganisation so that it will not affect present exemptions for amalgamation, demergers and conversion of proprietory concern and firm to companies. The provision is too broadbased and should have made exception for bona fide transactions and genuine cases of reorganisation or settlements, where no benefit is intended for the transferee.

TDS defaults

Sec. 40(a) (ia) at present would allow deduction of amounts on which tax was deductible only in the year in which such tax is deposited. Mere delay in deduction even during the year would have the effect of postponement of deduction to the year of deposit. This was relaxed only in respect of amount deductible in the month of March. But the proposed amendment would now allow the deduction in the year to which the payment relates, if the tax is deducted and paid before the due date for filing return for the relevant year. The need for continuation of this provision for disallowance of payments to residents itself needs review since the levy of interest for delayed deduction and possible penalty, besides the right to collect the tax from the deductee, should be sufficient protection for revenue. There was no need for distorting the income of the year by this disallowance. If the provision is to be continued, it should have exception at least for those cases where the deductee has paid the tax.

Tax audit report

Sec. 44AB is amended proposing to revise the limits for tax audit report for turnover from Rs. 40 lakh to Rs. 60 lakh and for the gross receipts from Rs. 10 lakh to Rs. 15 lakh with effect from assessment year (AY) 2011-12. The revision should, at least, be for Rs. 1 crore for turnover and Rs. 25 lakh for gross receipts since the limit was fixed in 1985 two decades-and-half earlier when the exemption limit was much lower and the money value was higher.

Time limit for appeal

There is no relaxation of the time limit of 120 days from the date of receipt of the order of the Tribunal. The High Court has inherent powers under the Constitution to relax the time limit at its discretion. The Supreme Court with reference to the central excise statute, which lays down a prescribed period for condonation had held that no condonation beyond the period specified in the statute is possible. Some High Courts had followed the central excise decision though income-tax law did not have such limitation. Amendment proposed in the Finance Bill, 2010, clarifies that the High Court may condone the delay, if such delay is explained by sufficient cause.

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