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Apr, 17th 2007
Salient Features of the Finance Bill, 2007 - Direct Taxes by Ved Jain

Salient Features of the Finance Bill, 2007

 

Direct Taxes

                                                                Ved Jain

Introduction

 

            Keeping the tradition on, the Finance Minister on the last day of February, 2007, presented the annual statement in the Parliament.  In the recent memory, never has been such a golden period in the economy of the country,where the country has fared so well and none of the Finance Ministers in the past have been so lucky to have enjoyed such growth in the economy giving leverage to the Finance Minister to work out the policies in the manner he desires.  It is a growth all around and each sector has fared well except for small hiccups in the agriculture sector.    The growth rate of the GDP for the year 2006-07 is expected to be 9.2 per cent.  The growth rate in the industry is expected to be 10.0 per cent whereas in the services it is expected to be 11.2 per cent.   An idea of the comparative growth rate of the GDP in the past three years  can be had from the following table.

Table I

Particulars

FY 2004-05

FY 2005-06

FY 2006-07

Gross Domestic Product

At 1999-2000 prices

At current prices

(Rs. in 1000 Cr.)

2389.6

2855.9

(Rs. in1000 Cr.)

2604.5

3250.9

(Rs. in1000 Cr.)

2844.0

3715.5

GDP growth in per cent

7.5

9.0

9.2

Growth in industry in per cent

              9.8

9.6

10.0

Growth in Services in per cent

9.6

9.8

11.2

Growth in Agriculture in

 per cent

0.0      

6.0

2.7

 

Service Sector continues to dominate the growth in GDP.  As a result, share of services in GDP has gone up to 55.1 per cent and the share of agriculture in GDP  has declined to 18.5 per cent.  The share of industry has gone up to 26.4 per cent.

 

It may be interesting to note that the growth in revenue has been more steeper.  An idea of the growth in revenue can be had from Table II.

Table II

Particulars

FY 1998-99

(Rs. in Cr.)

FY 2004-05

(Rs. in Cr.)

FY 2005-06

(Rs. in Cr.)

FY 2006-07

(Rs. in Cr.)

FY 2007-08

(Projected)

(Rs. in Cr.)

Direct taxes

46600

132181

165203

229272

267490

 

Indirect taxes

97197

_________

143797

172777

_________

304958

200949

_________

366152

238576

_________

467848

280632

_________

548122

 

An analysis of the above table shows that there has been an impressive growth in the tax revenue.   The total tax revenue which stood at Rs.143797 Cr. in the year 1998-99 has increased to Rs.467848 Cr. in the year 2006-07, i.e., 3.25 times in a period of 8 years..  Not only that, the growth in direct taxes has been more impressive as the same has grown by 5.74 times during the same period, i.e., from Rs.46600 Cr. in the year 1998-99 to Rs.229272 Cr. in the year 2006-07.   Another interesting feature is that the gap between the direct taxes and the indirect taxes is narrowing down.  The contribution of the direct taxes to the total revenue now stands at around 48per cent as against 32per cent in the year 1998-99.  This data probably endorses the theory that direct taxes have a direct correlation with the capacity to pay.  With the impressive economic growth and per capita GDP, the capacity to pay direct taxes has increased and is reflected in the growth in the direct taxes. 

            Looking to the impressive economic condition, everyone was expecting a lot from this Budget particularly some cut in the rate of direct taxes .  The Finance Minister though has tried to meet some of these expectations and has announced some concessions, but on the whole the proposal on direct taxes such as increase in dividend distribution tax, levy of Minimum Alternate Tax (MAT) on companies enjoying exemption under Section 10A or Section 10B indicate that this budget exercise has been aimed at generating more revenue rather than rationalizing the same considering the impressive growth of tax collection this year.  The taxes levied/raised far outweigh the tax concessions proposed in the budget.

            Further, the Finance Minister having announced in the last year’s budget, his intention to bring a comprehensive direct tax code and reiterating the same in this budget, has still proposed 84 clauses in this Finance Bill, 2007, amending the provisions of income tax and wealth tax, as against 57 clauses in the Finance Bill, 2006. Some of these amendments have far reaching consequences not only in increasing the tax liability, but also the tax administration and the penal provision.  The implication of these amendments is being analysed below.  Unless otherwise stated, all these amendments are proposed to be effective from 1st April, 2008, i.e., Asstt. Year 2008-09, relevant to the income earned in the Financial year 2007-08.

 

A      TAX RATES

1.      Basic exemption increased by Rs.10,000.00

The Finance Bill, 2007 proposes to increase the basic exemption available to an individual,  Hindu Undivided Family, Association of Persons or Body of Individuals and every artificial person by Rs.10,000.00.  Accordingly, the basic exemption shall stand increased from Rs.1,00,000.00 to Rs.1,10,000.00. In the case of a woman individual resident in India, it shall stand increased from existing Rs.1,35,000.00 to Rs.1,45,000.00 and in the case of a Senior Citizen (who is of the age of 65 years or more at any time during the year) from Rs.1,85,000.00 to Rs.1,95,000.00.

2.      Increase in Education Cess from 2 per cent to 3 per cent

The Finance Bill proposes to levy an additional cess of 1 per cent on all taxes to fund the secondary and higher education, thus effectively increasing the rate of education cess from 2 per cent to 3per cent with effect from 1st April, 2007.    This education cess at the rate of 3per cent shall be payable by everyone across the board on all taxes.  Thus, the gain arising consequent to the above enhanced basic exemption of Rs.10,000.00 stands diluted and gets neutralized at income of Rs.5,00,000.00.   Moreover there is an increase in the net tax liability in case the income is more than Rs.5,00,000.00 as can be seen from the following table.

Table III

Income

 

Rs.

Tax previously levied for AY 2007-08

Rs.

Tax proposed to be levied for AY 2008-09

Rs.

Gain/Loss

 

Rs.

100000

NIL

NIL

NIL

110000

1020

NIL

1020

150000

5100

4120

980

200000

15300

14420

880

250000

25500

24720

780

500000

102000

101970

30

1000000

255000

256470

(-) 1470

2000000

617100

622017

(-) 4917

5000000

1626900

1641717

(-) 14817

 

3.      No surcharge for firms and companies having income up to Rs.One Crore    

          The Finance Bill, 2007, proposes to remove the surcharge on income tax on all firms and companies with a taxable income of Rs.One Crore  or less presently leviable at the rate of 10per cent.  Accordingly, firms and companies having income up to  Rs.One Crore will get this relief but there will be no relief on firms and companies having income of above Rs.One Crore.  However, there will be a marginal relief available in case the total tax payable consequent to levy of surcharge is more than the income that exceeds Rs.One Crore.

It may be noted that in the case of individual or HUF surcharge @ 10 per cent is applicable in case the income exceeds Rs. 10 lacs. Thus, for income between Rs.10 lacs to Rs.100 lacs, the effective tax rate for individual and HUF will be 33.99 per cent whereas for firms and companies the same will be 30.90 per cent  As such, probably for the first time it will be so that a company or a firm will be liable to pay tax at a lower rate as compared to the tax rate applicable to an individual or HUF.  Accordingly, it will be more advisable to plan the remuneration and interest payable to the partners in case the taxable income of the firm does not exceed Rs. 1 Crore and get the income of the firm distributed by way of share of profit which is exempt under Section 10(2A) of the Act after paying tax at lower rate in the hands of the firm rather than allocating the same by way of interest or remuneration to partners in case such allocation results in income of the partners going beyond Rs.10 lacs.. 

 

4.      Dividend distribution tax being increased from 12.5 per cent to 15 per cent.

          The Finance Bill proposes to increase the dividend distribution tax from 12.5per cent to 15per cent on dividend distribution by the companies on or after 1st April, 2007.The Finance Minister has justified the above increase in Para 176 of his budget speech—“as a step necessary to improve the vertical equity having regard to the capacity to pay”.  Probably this explanation of the Finance Minister is not in line with the explanation given by him in his budget speech for the year 1997.  In fact it is contrary to what was stated in that speech, when he abolished tax on the dividend income in the hands of the shareholders by stating:

“100.  Another area of vigorous debate over many years relates to the issue of tax on dividend.  I wish to end this debate.  Hence I propose to abolish tax on dividends in the hands of the shareholders.

“101.  Some companies distribute exorbitant dividends.  Ideally they should retain the bulk of their profits and plug them into fresh investments”.  I intend to reward companies who invest in future growth.  Hence, I propose to levy a tax on distribution of profits at the rate of 10per cent on the amount so distributed.  The tax shall be an incidence on the company and shall not be passed on to the shareholders”.

In the above explanation it has been aaccepted  that taxation of dividend income in the hands of the shareholders tantamounts to double taxation as dividend is nothing but distribution of post tax profit of the company to its shareholders who own the company.  Further, the levy of dividend distribution tax was not a revenue raising measure but a measure to invest in future growth.  Thus, increase in the rate of dividend distribution tax from 12.5per cent to 15per cent tantamounts to again going back to the regime of double taxation.  The reasoning this year that the increase is to improve vertical equity mean that dividend income should not be taxed at a concessional rate meaning thereby that dividend income need to be taxed again despite the fact that the same is distributed out of the post tax income of the company.  That was the controversy and debate going on which was ended by the Finance Minister in the year  as is evident from the verbatim of the budget speech quoted above.  The incidence of double taxation is more considering the fact that the dividend income may not be taxable in the hands of all shareholders because of the basic exemption available to an individual or a HUF and in many cases the same may not be liable for tax at such a higher rate.      

           

It is also to be noted that there is no exemption from the dividend distribution tax even in a case, where a company distributes dividend  out of its dividend income, it has earned and which has already been subjected to dividend  distribution tax.  Thus, there is a cascading effect of dividend distribution tax which was not there even in the pre-1997 period as there used to be Section 80M providing exemption to companies in respect of the dividend income to the extent the same was distributed to the shareholders. 

As per the budget documents the total dividend distribution tax paid by the companies during the financial year 2005-06 was Rs.8033 Cr. which means that this increase in the dividend distribution tax from 12.5per cent to 15 per cent, an effective increase in tax rate of 2.97 (16.995 – 14.025)  will bring an additional revenue of more than Rs.1700 Cr. 

It has also been proposed to levy tax on dividend distribution by money market mutual funds and liquid mutual funds at the rate of 25per cent as against the present rate of 12½per cent applicable to an individual and 20per cent on others.  Definition of the money market mutual fund and liquid mutual fund shall be as given in Security and Exchange Board of India (Mutual Fund) Regulations, 1996.  However, the tax rate on income distributed other than by a money market mutual fund or liquid mutual fund shall continue to be charged at the existing rate of 12.5per cent for individual or HUF and 20per cent in the case of any other person.  The exemption provided in respect of equity-oriented fund by the proviso shall continue to be available as the proviso is not proposed to be deleted.   Thus, the equity-oriented fund shall continue to be outside to be the purview of dividend distribution tax.      

5.      Minimum Alternate Tax extended to be paid by undertakings in free trade zones, software technology parks and export oriented units

            The scope of Minimum Alternate Tax is being extended to dilute the exemption presently available to the undertakings under Section 10A or 10B of the Act.  As per the existing provision, a company is required to pay Minimum Alternate Tax at the rate of 10 per cent of its book profits in case tax payable by such company on its total income computed under the Act is less than that.  However, income of the undertaking covered by the provision of Section 10A and 10B is excluded from such book profits while computing Minimum Alternate Tax.  Consequent to this proposal of the Finance Bill. 2007, profit of all undertakings in free trade zones, software technology parks and export oriented units shall now be liable for the Minimum Alternate Tax.  The tax effect will be 10.30 per cent in case the book profit does not exceed Rs. One Crore and 11.33 per cent in case book profit exceeds Rs.One Crore.  It may be noticed that under the existing provisions,  income of these undertakings was to be fully exempt till 31.3.2009 and these undertakings would have been liable to pay normal tax on income earned on or after 1st April, 2009.  Consequent to the levy of the Minimum Alternate Tax, though these companies will now be liable to pay MAT, yet MAT so paid will be eligible for credit in the subsequent years when these companies will be liable to pay normal tax. This will reduce the net tax liability of these companies in those years to the extent of tax credit Thus, the levy of Minimum Alternate Tax from this year in a way is payment of advance tax in respect of tax liability likely to arise in respect of the income earned on or after 1st April, 2009.  In fact the total amount of Minimum Alternate Tax paid will get fully adjusted against the tax liability likely to arise in the Financial year 2009-2010, i.e., Asstt. Year 2010-2011 as can be seen from the following example:

“Company ABC Ltd presently enjoying 100per cent exemption in respect of its information technology enabled services under Section 10A of the Act, having net income of Rs.100 Crores per annum.   Assuming that the book profit for each of the three years continues to be the same, then the tax calculation for three succeeding Asstt. Years will be as under :

i)          Income earned in FY 2007-08, i.e. AY 2008-09        Rs.100 Cr.

            Book Profit                                                                       Rs.100 Cr.

            Total income computed under the provision of the Act    NIL

            (in view of the exemption under Section 10A of the Act)

            MAT payable on book profit @ 11.33per cent        Rs.11.33Cr.            Rs.11.33 Crores eligible to be carried forward

u/s 115JAA(1A) of the Act

ii)         Income earned in FY 2008-09, i.e. AY 2009-10              Rs.100 Cr

            Book Profit                                                                             Rs.100 Cr.

            Total income computed under the provision of the Act        NIL

            (in view of the exemption under Section 10A of the Act)

            MAT payable on book profit @ 11.33per cent              Rs.11.33Cr                   Rs.11.33 Cr.             eligible to be carried forward

u/s 115JAA(1A of the Act alongwith earlier year

credit of Rs.11.33 Cr..

iii)        Income earned in FY 2009-10, AY i.e. 2010-11              Rs.100 Cr.

            Book Profit                                                                             Rs.100 Cr.

            Total income computed under the provision of the Act  Rs.100 Cr.

            (No exemption available under Section 10A of the Act

            in view of the sunset clause)

            Tax payable on above income @ 33.99per cent                                                                                                                                                Rs.33.99 Cr.

            MAT credit available of AY 2008-09         Rs.11.33 Cr. 

            MAT credit available of AY 2009-10         Rs.11.33 Cr.

                                                Total Credit                                       Rs.22.66 Cr.

            Net tax payable                                                                    Rs.11.33 Cr.

            MAT on book profit of Rs.100 Cr. @11.33 per cent                                            for this year i.e. AY 2010-11                                                   Rs.11.33 Cr.

            Net tax liability and MAT liability is exactly same

            as such only Rs.11.33 Cr. is to be paid for AY 2010-11

            as against Rs.33.99 Cr. which this company would

            otherwise have been required to pay had it not been

            liable tp pay MAT in earlier years.  It may be noted

            that tax paid for AY 2010-11 shall not be eligible for

            carry forward.

The above example shows that by levying MAT on these companies all that the Revenue will achieve will be collection of tax in advance without any net gain and at the cost of going back on promise of not to tax such profits, though rule of promissory estoppel  does not apply to the State. The applicability of MAT and the dividend distribution tax on companies are big obstacles in the corporatisation of Indian businesses.  In these circumstances it is more prudent to carry on the business in the status of a firm and have the benefit of share of profit, which is tax free under Section 10(2A) without any payment of MAT neither in the hands of the firm nor the recipient.

 

B.     DEDUCTIONS

1.      Deduction in respect of health insurance premium being increased to Rs.15,000

            The deduction available to an individual or HUF while computing the total income in respect of helth insurance premium is being raised from Rs.10,000 to Rs.15,000 and in the case of senior citizens from Rs.15,000 to Rs.20,000.

            Presently this deduction is available when the premium is paid by cheque.  The same is being regularized to provide for the payment of premium  by any mode other than cash to be eligible for deduction under this section.  Corresponding amendment is being made in Section 36(1)(ib) allowing deduction of the premium paid by the employer to keep in force an insurance on the health of its employees by any mode other than cash as against the present requirement of making the payment by cheque only.  This amendment will facilitate payment of health insurance premium        online or through any other electronic mode, credit card, etc.

 

2.      Deduction in respect of interest on loan for higher education to be allowed to the parents/spouse also

          Presently under the provision of Section 80E of the Income Tax Act, a deduction is allowed from the total income of the individual in respect of the interest on loan taken from any financial institution or approved charitable institution for the purpose of pursuing his own higher education.  This deduction, presently, is not available in respect of loan taken for the purpose of higher education of the children or spouse making this provision almost redundant.  To address this issue the Finance Bill, 2007 proposes to extend the  scope of this deduction in respect of interest on loan taken for higher education of a relative which shall mean spouse and children of the individual.  As such, the parents shall now be eligible to claim deducation in respect of the interest paid on loan for the higher education of their children.  Similarly the spouse shall be eligible to claim deduction in respect of the interest paid on loan taken for higher education of the spouse meaning wife or husband as the case may be. 

This provision may  help many husbands to encourage their wife or vice versa to go for higher education.   It may be noted that there is no ceiling on the amount of the interest and exemption is available for eight years starting from the year in which the assessee starts paying interest on the loan.   The higher education for the purpose of this section means full time studies for any graduate or post-graduate course in engineering, medicine, management or for postgraduate course in applied sciences or pure sciences including mathematics and statistics.  This deduction will in a way help in reducing the effective rate of interest on educational loan. 

3.      Benefit of contribution to pension fund being extended to private employer

            The present benefit of contribution to pension scheme under Section 80CCD available to Central Government employees is being extended to all other employers.   This amendment is being made with retrospective effect from 1st April, 2004, i.e., Asstt. Yerar 2004-05.  Under this provision contribution made by an employee as well as by employer to the extent of 10per cent of the salary by each of them, to a pension scheme is eligible for deduction while computing the total income in the year of contribution and the amount received under the pension scheme together with the income accrued thereon is chargeable to tax in the year of receipt.  This provision was initially introduced to promote contributory pension scheme for Central Government employees and now being extended to other employers.  All exmployers shall now be in a position to start a contributory pension scheme for their employees. 

 

C.     EXEMPTIONS

1.      Tax holiday for hotels and convention centres in the National Capital Region for Commonwealth Games

            The Finance Bill, 2007, proposes to insert a new Section 80-ID providing deduction in respect of profits and gains from the business of hotels and convention centres set up in the National Capital Territory of Delhi and the districts of Faridabad, Gurgaon, Gautam Budh Nagar (NOIDA) and Ghaziabad.  The exemption shall be available to the hotel of 2 star, 3 star, and 4 star categories and the convention centres which start functioning at any time during the period beginning on 1st April, 2007 and ending on 31.3.2010.  The exemption shall be 100per cent of the profit for five consecutive asstt. years.  For claiming this exemption it will be necessary that the return is filed before the due date provided under the Act.  The above provision has been inserted for encouraging the setting up of hotels and convention centres for accommodating the visitors to the Commonwealth games being hosted in Delhi in the year 2010.

2.      Extension of time-limit for claiming benefit under Section 80IB(4)

          The benefit of  Section 80IB(4) in respect of new industrial undertakings set up in the State of Jammu and Kashmir is being extended by five years to 31.3.2012.  Consequent to the above amendment, industrial undertaking which begins to manufacture or produce articles or things or to operate its cold storage plant till 31.3.2012 in the State of Jammu and Kashmir shall be eligible for 100per cent deduction of its profits for a period of first five asstt. years, followed by 25 per cent deduction (30 per cent in the case of a company) for the next five asstt. years.

3.      Restricting the benefit under Section 80-IA to builders only

The Finance Bill, 2007, proposes to insert a retrospective amendment effective from 1st April, 2000, i.e., Asstt. Year 2000-01 clarifying that the benefit under Section 80-IA of tax holiday for a period of ten years in respect of an undertaking engaged in the development of infrastructure facility, industrial parks and Special Economic Zones shall be available only to a person who makes the investment and himself executes such development work and the same will not be available to a person who enters into a contract with another person, i.e., undertaking or enterprise for executing the civil construction work or any other works contract.  This amendment is being done to clarify that the intention of the legislature was always to provide benefit to the persons who develop the infrastructure facilities on its own and not to the persons who execute the contract for developing such facilities for others. 

4.      80-IA benefit not to be available post amalgamation or post de-merger

            The Finance Bill, 2007, proposes to insert a new provision in Section 80IA denying tax benefit to the amalgamated or the resulting company in case where an undertaking of Indian company which is entitled to deduction is transferred before the expiry of the eligible period to another Indian company eligible for deduction in a scheme of amalgamation or de-merger after 31st March, 2007.  In view of the above amdnement it will not be possible for any eligible undertaking to change hands and continue to avoid the benefit after 31st March, 2007.

5.      Tax benefit in Special Economic Zone (SEZ) to be allowed to new units only

            The Finance Bill, 2007, proposes to amend the provision of Section 10AA providing exemption to the unit in the Special Economic Zone, clarifying that this benefit shall be available only to the new units and not to the units which migrate to the Special Economic Zone for availing of tax concession. The unit shall be required to fulfill the conditions of having begun the manufacturing or producing articles or things or providing services on or after 1st April, 2006, in a new Special Economic Zone and the same should not have been formed by splitting up or reconstruction of a business already in existence and the same should not have been formed by the transfer of machinery or plant previously used for any purpose subject to such relaxations as are available for transfer of old machinery under Section 80-IA of the Act.  This amendment is being made retrospectively from 10th February, 2006, the day when this Section 10AA was introduced in the Act by the Special Economic Zone Act, 2005.

 

6.      Scope of infrastructure facility widened to include cross-country natural gas distribution network.

            The scope of Section 80IA(4) providing 100per cent deduction for ten years in respect of the profit of the business of development, operation and maintenance of infrastructure facility is being widened to include undertakings carrying on the business of laying and operating cross-country gas distribution network including gas pipelines and storage facilities being internal part of the network if the same is approved by the Petroleum and Natural Gas Regulatory Board and fulfills the other conditions as may be prescribed.

7.      Scope of infrastructure facility being widened

            The definition of infrastructure facility is being widened to include the navigational channel in the sea for the purpose of providing tax benefit under Section 80IA.  As such, the profit arising from navigational channel in the sea shall also be eligible for tax benefit for a period of ten years under Section 80IA of the Act.  

8.      Restriction on exemption of income of venture capital company/fund

            The present exemption available to venture capital company/fund is being restricted and the same will now be available only in respect of income from investment in a venture capital undertaking engaged in the business of nanotechnology, Information Technology relating to hardware and software development, seed research and development, biotechnology, research and development of new chemical entities in the pharmaceutical sector, production of biofuels or building and operating composite hotel-cum-convention centre with seating capacity of more than 3,000 or engaged in the dairy industry or poultry industry.  Further, the venture capital undertaking shall be such domestic company whose shares are not listed in a recognized stock exchange in India.   Thus, the scope of existing exemption of total income of the venture capital company/fund has been curtailed considerably by these amendments.

 

D.      CHARITABLE TRUSTS/INSTITUTIONS

1.      Registration of trusts

            The Finance Bill, 2007, proposes to modify the provision relating to the registration of trusts.   As per the proposal, effective from from 1st June, 2007, a trust or institution shall be eligible for registration and claiming exemption under Section 11 and 12 only from the financial year in which such application for registration is made.  Further, the power of condonation of delay available to the Commissioner/Director is being withdrawn.  Under the existing provision a charitable or religious trust or institution is required to make an application for registration within one year from the date of its creation and further in case of delay the Commissioner has power to condone such delay, if he is satisfied that the application was delayed for sufficient reasons.  The effect of the above amendment shall be that in case the trust or institution does not make the application within the financial year its income of that year will not be exempt under Section 11 and 12 and the same will be liable for taxation with no power to any authority to condone the delay.  No time period is being given for making an application for registration and as such some of the trusts or institutions which may come into existence during the last days of the financial year, say last week of March, may not be in a position to claim exemption in respect of the money received towards the corpus at the time of registration of the trust from the settler or by way of donation if it does not make an application for registration immediately before the close of the financial year.   The implication of this provision appears to be too harsh taking into consideration the fact that these NGOs are rendering vlaluable service to the society and are not manned by full time/trained staff and any technical  lapse/delay in filing the application for registration should not convert the tax-free income into a taxable income bringing heavy tax liabilities and money paid for a good particular cause gets diverted towards payment of taxes.  Further, the existing provision of condonation of delay was with a senior officer of the tax department and as such no harm is likely to be caused in case this power is retained with such senior officer who condones the delay only on being satisfied with the sufficiency of the reasons for such delay.  Since the above provision is applicable with effect from 1st June, 2007, it will be advisable for all trusts or institutions who are not presently registered to make an application immediately so as to get covered by the existing provision and do not get hit by the proposed amendment.  It may be noted that turst/institution registered under Section 12AA are not liable to pay fringe benefit tax . So it is all the more advisable to be cautious about the registration.

 

2.      Rejection of approval under Section 80G to be an appealable order

            Under the existing provision, a charitable trust or institution is required to make an application to the Commissioner seeking approval so that the donation paid to it becomes eligible for deduction under Section 80G in the hands of the donor.  The order of rejection passed in such cases by the Commissioner presently is not appealable and the only recourse available to such trust or institution is to file a writ petition before the High Court, in case the trust or institution is not satisfied with the rejection order.  To address this issue, Section 253 is being amended to provide that the order of rejection of approval by the Commissioner under Section 80G(5)(vi) shall also be an appealable order to the Appellate Tribunal.  This amendment shall be effective form 1st June, 2007 and as such an appeal can be filed on or after 1st June, 2007 in respect of any order of rejection of approval passed by the Commissioner/Director under Section 80G of the Act.

 

E.     SALARIES

1.      Deeming fiction in respect of concession in the matter of rent

            The Finance Bill, 2007, proposes to insert a retrospective amendment effective from 1st April, 2002, providing that the concession in the matter of rent shall be deemed to have been provided where accommodation (both furnished or unfurnished) is provided to the assessee by any employer other than the Central or State Government.  As per the deeming fiction, in case accommodation is owned by the employer the value of the same shall be taken to be a fixed percentage of the salary, i.e., 20per cent in cities having population exceeding 4 lacs and 15per cent in other cities.  In case the accommodation is not owned by the employer but is taken on lease or rent, the value of accommodation shall be the actual of lease rent paid or payable by the employer or 20per cent of the salary whichever is lower.   The above amendment is being made to overcome the difficulty arising consequent to the judgement delivered by the Supreme Court in the case of Arun Kumar and Ors vs Union of India 286 ITR 89 whereby it was held that before invoking Rule 3  which prescribes a fixed percentage of salary as the value of accommodation, it needs to be established that there is a concession in the matter of rent regarding any accommodation provided to the assessee by the employer as required under Section 17(2) of the Act.  The implication of the above judgement was that where accommodation was owned by the employer and the same was provided to the employee, the value of the perquisite can be calculated only after ascertaining the market value of such accommodation and then comparing the same with the rent being recovered from the employee.  With the proposed deeming fiction no such exercise shall be required to be carried out by the employer and in all cases where accommodation owned by the employer has been provided to the employee, irrespective of the rental value of such accommodation, a fixed percentage as stated above shall be deemed to be the rental value for the purpose of computing the perquisite liable for taxation.

 

F.     BUSINESS INCOME

1.      Cash expenditure exceeding Rs.20,000 to be fully disallowed

            The Finance Bill, 2007. proposes to revert to the pre-1996 period whereby any expenditure in respect of which payment exceeding Rs.20,000 is made otherwise than by account payee cheque or draft,  the same shall be fully disallowed while computing profit and gains of business or profession under Section 40A(3) as against the existing provision where 20per cent of such expenditure is disallowed.  The amendment is being proposed on the ground that the existing provision of 20per cent has diluted the deterrence potential and needs to be restructured.  Further, a proviso is being inserted to provide that no disallowance shall be made if the payment is made under such circumstances as may be prescribed having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors.  The proposed amendment will again generate a lot of dispute and litigation and will give discretionary power to the AO.  These were the very reasons that the amendment was carried out by the Finance Act, 1995 proposing 20per cent disallowance instead of 100per cent disallowance with no discretion.  The 20per cent disallowance was to act as a deterrence so as to discourage cash payment as in any case the bogus expenditure is otherwise not allowable.  The audit trail is available in both the situations and the provision providing 100per cent disallowance with exceptions prscribed may again lead to more disputes and litigation and even the benefit of 20per cent disallowance which the Revenue was otherwise getting may also be lost in case the cash payment gets covered by the circumstances.     

A further amendment has been proposed in this section providing that in case the expenditure was incurred in any earlier year and the payment of the same is made in any subsequent year which is hit by the provision of Section 40A(3), then the disallowance shall be made in the year of the payment, not in the year when the expenditure was incurred as against the existing provision whereby the assessment of the earlier year is rectified by invoking the provision of Section 154. 

It may be noted that the above amendment to Section 40A(3) shall be applicable in respect of expenditure incurred on or after 1.4.2007, and in the absence of any guidelines being prescribed one may really find it difficult to comply with such requirement. 

2.      Benefit of provision of bad and doubtful debts being extended to Cooperative Banks

            The Financial Bill, 2007, proposes to extend the benefit in respect of any provision for bad and doubtful debts presently available to the Scheduled Banks under Section 36(i)(viia) to Cooperative Banks also.  Under the provision of Section 36(i)(viia),  deduction in respect of bad and doubtful debts is allowed only if such debts are actually written off.   However, in the case of banks a provision for bad and doubtful debts is also allowed of an amount not exceeding 7½ per cent of the total income and an amount not exceeding 10per cent of the aggregate average advances.  The income of Cooperative Banks was exempt utpo the Asstt. Year 2006-07 under Section 80P of the Act.  This exemption was withdrawn by the Finance Act, 2006, but no corresponding benefit in respect of the provision for bad and doubtful debts as available to scheduled banks were extended to Cooperative Banks.   To overcome this lapse, the benefit of the provision for bad and doubtful debts under Section 36(i)(viia) is being extended to Cooperative Banks retrospectively from 1st April, 2007, i.e., income earned by the banks during the Financial year 2006-07, relevant to Asstt. Year 2007-08, the year from which the income of Cooperative Banks have become taxable..

 

3.      Deduction in respect of special reserve available to financial corporations being reduced to 20 per cent of the profit

            The Finance Bill, 2007, proposes to reduce the deduction of 40per cent presently available under Section 36(1)(viii) to financial institutions engaged in providing long-term finance for industrial, agricultural, infrastructure facility development and to a public company formed with the main object of providing long-term finance to houses for residential purposes to 20per cent in respect of special reserve created and maintained out of its profit derived from the business of providing long-term finance.  However, the existing limit restricting the overall deduction to twice the amount of the share capital and general reserve shall continue to be the same with the result that these entities may not be affected overall but the period required for reaching the limit of twice the share capital and general reserve shall get enlarged.  Further, the benefit  of this provision is being extended to Cooperative Banks also.       

 

4.      Deduction in respect of contribution to exchange risk administration fund withdrawn

            The Finance Bill, 2007, proposes to withdraw the deduction under Section 36(1)(x) in respect of any sum paid by public financial institutions as contribution towards exchange risk administration fund. 

 

5.      Contribution to credit guarantee fund trust for small industries to be eligible expenditure

            The Finance Bill, 2007, proposes to allow deduction to a public financial institution in respect of contribution to such credit guarantee fund trust for small industries as the Central Government may notify in the official gazette.    It is interesting to note that the Finance Bill on the one hand intends to withdraw the exemption available to a public financial institution in respect of contribution to exchange risk administration fund, but on the other hand, wants to insert a new provision allowing deduction in respect of contribution to credit guarantee fund trust for small industries.

6.        Deduction of expenditure in case of corporation only when the same are notified      

The  Finance Bill, 2007, proposes to make an amendment to Section 36(1(xii) in respect of the expenditure incurred by a corporation constituted or established by Central, State or Provincial Act.   Under the existing provision, any expenditure not being in the nature of capital expenditure incurred for the objects and purposes authorized by the Act under which such corporation was constituted or established is an eligible expenditure while computing its income though the same may not be an expenditure incurred in the course of its business.  This provision was introduced by the Finance Act, 2003 with retrospective effect, i.e., Asstt. Year 2002-03.  The present Finance Bill proposes to insert a clause that the expenditure shall be allowed only to such corporation or body corporate which is notified by the Central Government in the official gazette for the purpose of this clause.  As such, all such corporations or bodies whether set up by the Central or State Government shall now be required to get approval from the Central Government.

 

7.      Benefit of weighted deduction for expenditure incurred on scientific research being extended by five years

            The benefit of provision of Section 35(2AB) providing weighted deduction in respect of the expenditure incurred on scientific research which was to come to an end on 31.3.2007 is being extended by five years to 31.3.2012.  As such, a company engaged in the business of biotechnology, manufacture or production of any drugs, pharmaceuticals, electronic equipment, computers, telecommunication equipment, chemicals etc., shall now be entitled to claim a deduction of 150per cent of the expenditure incurred on scientific research (not on land or building) on in-house research and development facilities which is approved by the prescribed authority, till 31.3.2012.  This provision will go a long way in encouraging all these companies to incur more and more expenditure on scientific research.   It may be noted that the benefit of this provision is available only to companies and not to other person.

G.       Fringe Benefit Tax

1.         Sweat Equity Share included in fringe benefit

            The scope of Fringe Benefit Tax is being widened by including the employees stock option as fringe benefit liable for tax.  For this purpose the fair market value of the share on the date of the exercise of the option by the employee as reduced by the amount actually paid by him or recovered from him shall be considered to be the fringe benefit.  The fair market value shall be determined in accordance with the method to be prescribed by the CBDT.

 

2.         Expenditure on display of products and distribution of samples to be outside the purview of fringe benefit 

            The Fringe Benefit Tax, 2007, proposes to widen the exemption available in respect of expenditure on advertisement so as to exclude the expenditure on display of products and on distribution of samples of any item either free of cost or at consessional rate to any person as against existing provision whereby these samples distributed to doctors only werel outside the purview of fringe benefit.

3.         Alignment of due date for payment of advance FBT

            The Finance Bill, 2007, proposes to change the scheme of payment of advance Fringe Benefit Tax.  Under the existing provision an employer is liable to pay Fringe Benefit Tax within a fortnight after the end of each quarter on the basis of actual fringe benefit provided during the quarter.  This scheme is being changed to provide that advance tax on fringe benefits is to be paid on the basis of annual estimation on the line on which advance tax on income is payable.  The due date of advance tax on fringe benefit and the percentage is exactly same as that of the advance income tax.  Accordingly, FBT is to be paid in advance as under:

            1.         In the case of company         15 per cent                 by 15th June

                                                                        45 per cent                 by 15th September

                                                                        75 per cent                 by 15th December

                                                                        100 per cent              15th March

            2.         In the case of person

                        other than company              30 per cent                 by 15th September

                                                                        60 per cent                 15th December

                                                                        100 per cent              31st March

            This amendment shall be effective from 1.6.2007 and as such the advance fringe benefit tax for the current Financial year 2007-08 shall be required to be paid as per the above scheme.

 

4.         Banking Cash Transaction Tax

          The Finance Bill, 2007, proposes to increase the limit for levy of Banking Cash Transaction Tax in case of withdrawals of cash exceeding Rs.50,000 in the case of individual and HUF from the present limit of Rs.25,000 on any single day from an account with any scheduled bank.   This amendment shall also be effective from 1.6.2007. 

 

H.     CAPITAL GAIN

1.      Exemption under Section 54EC

          The Finance Bill, 2007, proposes to make certain amendments to Section 54EC of the Act to give legal sanctity to the notification No. 380/2006 dated 22.12.2006 issued by the Central Board of Direct Taxes in respect of the bonds issued by the National Highway Authority of India NHAI) and Rural Electrification Corporation (REC) for claiming exemption under Section 54EC of the Act restricting the benefit to a sum of Rs.50 lacs only. Accordingly, this amendment has been made retrospectively from 1st April, 2006.  Further, it has been proposed that the bonds issued by the NHAI and REC which are redeemable after three years and issued on or after 1st April, 2007, shall be eligible for claiming exemption under Section 54C of the Act upto a sum of Rs.50 lacs and there will be no requirement of notifying such bonds by the Central Government in the official gazette.  The effect of the above amendment will be that NHAI and REC shall be free to issue the bonds as and when they desire.  However, no assessee shall be entitled to make investment for claiming exemption under Section 54EC of an amount exceeding Rs.50 lacs.

 

2.      Capital asset to include drawings, paintings, etc.

            The scope of capital asset is being widened by including certain items held as personal effects such as archaeological collections, drawings, paintings, sculptures or any work of art.  Presently no capital gain tax is payable in respect of transfer of personal effects as it does not fall in the definition of the capital asset.  To restrict the misuse of this provision, the definition of capital asset is being widened to include those personal effects such as archaeological collections, drawings, paintings, sculptures or any work of art.    Transfer of above items shall now attract capital gain tax the way jewellery attracts despite being personal effect as on date.

 

I.      INCOME FROM OTHER SOURCES

1.         A retrospective amendment effective from 1st April, 2005, is being made to provide that gifts/donations received from a local authority or a charitable trust or institution or a university or an educational institution shall not be included in the total income liable for taxation.  

 

 J.     TAX DEDUCTION AT SOURCE

1.      Rate of deduction being increased from 5per cent to 10per cent for payment of professional/technical services, commission, brokerage, etc.

            The Finance Bill, 2007, proposes to increase the rate of deduction of TDS in respect of payment of commission or brokerage under Section 194H of the Act from 5per cent to 10per cent.  Similarly, the rate of deduction of tax at source is being increased from 5per cent to 10per cent in respect of fees for professional or technical services under Section 194J of the Act.  Thess amendments shall be effective from 1st June, 2007.  Accordingly all payments made after 1st June, 2007, shall be at the new rate.

 

2.      Reduction in TDS rate on payment of rent for the use of machinery or plant

            The Finance Bill, 2007, proposes to reduce the rate for deduction of tax at source under Section 194-I of the Act on rent for use of any machinery or plant or equipment uniformly to 10per cent as against the existing rate of 15per cent in case the payment is made to an individual or HUF or 20per cent in case the payment is made to any other person.  The above amendment has been made taking into consideration that the plant and machinery are eligible for depreciation and as such the existing rate of TDS is too high.   This amendment shall be effective from 1st June, 2007.  Accordingly, payments made before 1st June, 2007, shall continue to be covered by the higher rate whereas payments made on or after 1st June, 2007, shall be liable for lower rate.

 

3.      Banks not to deduct TDS in case interest payable does not exceed Rs.10,000

            The threshold limit for deduction of tax at source in respect of interest payable by a banking company or a cooperative society under Section 194A of the Act is being increased from Rs.5,000 to Rs.10,000.  This amendment shall also be effective from 1st June, 2007.

            Consequential amendment has been proposed in Section 206A requiring the banks to file quarterly returns in respect of the interest paid to a resident not exceeding Rs.10,000 as against present requirement of filing return of interest paid not exceeding Rs.5000.

 

4.      8 per cent  cent taxable bonds to be liable for TDS

            Presently no tax is deducted at source on the interest payable on 8per cent Savings (Taxable) Bonds, 2003, despite the fact that such interest income is liable for taxation.  The Finance Bill, 2007, proposes to extend the provision of tax deduction at source in case interest payable on such bonds exceeds Rs.10,000 during the Financial year.  This amendment shall also be effective from 1st June, 2007.

 

5.      Individual and HUF also to deduct tax at source on payment to contractors

            Under the existing provision, individual or HUF whose turnover exceeds the maximum limit specified in Section 44AB of the Act during the immediately preceding financial year are liable to deduct tax at source on payment to sub-contractors under Section 194C(2) of the Act.  However, such individual and HUF are not liable to deduct tax at source when the payment is made to contractors covered by the provision of Section 194C(1) of the Act.  The Finance Bill, 2007, proposes to extend the provision of TDS under Section 194C(1) to such individual and HUF while making payment to contractors as well.  This provision shall also be effective from 1st June, 2007.

 

6.      Education Cess on TDS

            Education Cess at the new rate of 3per cent (2per cent for primary education, 1per cent for higher education) shall be applicable on payment of TDS with effect from 1st April, 2007 despite the fact that Finance Bill, 2007, will get approved sometime in May, 2007..

 

7.      Levy of surcharge for the purpose of TDS

            Surcharge at the rate of 10per cent for deducting tax at source shall be leviable in case where payment is made to an individual or HUF, AOP or BOI where the aggregate amount paid or likely to be paid and and subject to tax deduction for such individual, HUF, AOP, BOI exceeds Rs.10 lacs.  In case payment is made to a firm or domestic company, the surcharge at the rate of 10per cent shall be applicable when the aggregate amount paid or likely to be paid and subject to tax deduction exceeds Rs.1 Cr.  In the case of payment to a company other than a domestic company, surcharge at the rate of 2.5per cent is leviable.  The effect of changes made in TDS rates, education cess is given below:

 

(i).        Payment of interest, Section 194A

A.     If paid to a person other than  a company

Tax     :  10%

Surcharge  :  10%

Education Cess  : 3% of Tax & Surcharge

Overall TDS rate   :  11.33% if surcharge is applicable and otherwise  10.30%.

B.     If paid to a company

Tax     :  20%

Surcharge   :  10% of Tax

Education Cess   :  3% of tax and surcharge

Overall TDS rule :   22.66% if surcharge is applicable and otherwise 20.60%.

(ii).       Payment to Contractors, Section 194C(1)

            Tax     :    2%

            Surcharge    :  10% of Tax

            Education Cess  : 3per cent of tax and surcharge. 

Hence over all  rate will be 2.266per cent if surcharge is applicable otherwise the rate will be 2.06per cent.

(iii).      Payment to Sub-Contractor, Section 194C(2)

            Tax     :   1%

            Surcharge  :  10%  Tax

            Education Cess  : 3per cent of Tax & surcharge

Hence over all rate will be 1.133per cent, if surcharge is applicable,  otherwise it will be 1.03per cent. 

            (iv).      Payment of Rent  for Land and Building, Section 194-I

                        A.  If paid to an individual or HUF

                              Tax Rate   :   15%

                              Surcharge :    10% of Tax

                              Education Cess :  3% of tax & surcharge

                              Overall TDS rate : 16.995% if surcharge is applicable otherwise     

                            15.45%

                        B.  If paid to a person other than individual or HUF

                              Tax Rate     :         20%

                              Surcharge    :     10% of Tax

                              Education Cess :  3% of Tax & Surcharge

                              Overall TDS Rate :   22.66% if surcharge is applicable

                               otherwise   20.60%  

 

 

 

            (v).       Payment of Rent for Plant and Machinery, Section 194-I               

From 01.04.2007 to 31.05.2007

From 01.06.2007 onwards

Tax Rate: 15% if paid to  individual or    HUF

                :  20% if paid to a person other than Individual and HUF

Tax Rate     :        10% for all

Surcharge  :10%

Surcharge            10% Tax

Education Cess : 3%  of Tax and Surcharge

Education Cess : 3% of Tax & Surcharge

Overall TDS Rate :16.995% or 22.66% if surcharge is applicable otherwise 15.45% or is 20.60per cent

Overall TDS rate    11.66% if surcharge is applicable, otherwise 10.30%

            (vi).      Payment of Professional/Technical Services/Commission/ Brokerage, Section 194-H and 194-J

                        From 01.04.2007 to 31.05.2007

From 01.06.2007 onwards

Tax Rate                           5%

Tax Rate             10%

Surcharge                       10%

Surcharge            10% of Tax

Education Cess 3% of the Surcharge

Education Cess : 3% of Tax & Surcharge

Overall TDS Rate      5.665%  if surcharge is applicable otherwise 5.15per cent

Overall TDS rate    11.33% if surcharge is applicable, otherwise 10.30per cent

             

             (vii)     Salaries, Section 192

Tax to be computed at normal rate on the basis of following table.

Basic Exemption                   Rs.1,10,000/-

From 1,10,000/-  to 1,50,000          @ 10%

          1,50,000/-  to 2,50,000         @ 20%

            2,50,000/-  onward               @ 30%

Surcharge to be levied @ 10% in case taxable income exceeds Rs.10,00,000/-.  Education Cess to be added @ 3% 

 

However Basic Exemption for Woman Tax Payers shall be Rs.1,45,000/- and  for Senior Citizen Rs.1,95,000/-

 

K.     ASSESSMENT/ADMINISTRATIVE PROCEDURE

1.      Penalty for concealment of income

            The Finance Bill, 2007, proposes to make far reaching changes in respect of the penalty for concealment of income detected during the course of the search.  As per the existing provision of Section 271(1)(c), Explanation (5), where in the course of a search the assessee is found to be the owner of any money, bullion, jewellery or other valuable articles or things and the assessee claims that such assets have been acquired by him by utilizing income

(i)                 for any previous year which has ended before the date of the search, but the return of income either has not been furnished, or where such return has been furnished but such information has not been declared,

(ii)               or for any previous year which is to end on or after the date of the search,

then notwithstanding such income declared by him in any return of income furnished on or after the date of the search, such person shall be deemed to have concealed the particulars of his income unless such income is recorded before the date of the search in the books of accounts maintained by him. 

However, no penalty is leviable if such person in the course of search makes a declaration that such assets have been acquired out of the income not disclosed and specifies the manner in which such income has been earned and pays the tax together with interest in respect of such income. 

            The above Explanation is proposed to be withdrawn with effect from 1.6.2007 and is being substituted by another Explanation (5A) and  a new Section 271AAA by dividing such concealed income in two parts.  One pertaining to the period of which due date of filing return has expired and the other pertaining to the period of which due date of filing the return has not expired. The new Explanation 5A shall govern the concealed income pertaining to the period of which the due date of which filing the return has expired.    As per this new Explanation (5A), where in the course of the search initiated after the 1st day of June, 2007, the assessee is found to be the owner of any money, bullion, jewellery, any valuable articles or things and the assessee claims that such assets have been acquired by him utilizing his income for any previous year, or the assessee is found to be the owner of any income based on any entry in the books of account or other documents or transactions and claims that such entry in the books of accounts or documents or transactions represent his income for any previous year which has ended before the due date of the search and the due date for filing the return has expired and the assessee has not filed the return, then notwithstanding such income is declared by him in any return of income furnished on or after the date of the search, such person shall be deemed to have concealed the particulars of his income.   The implication of the above Explanation (5A) is in case the return has not been filed for any year, the due date of which has expired irrespective of whether such income represents the income earned in the ordinary course  and which is properly recorded in the regular books of accounts maintained in the normal course, the same shall be deemed to be concealed income liable for penalty which can be upto 100per cent to 300per cent of the tax on such income. 

            A cursory look at the above provision shows that the filing of return on the due date is more important rather than the fact whether the income has been concealed or not.  It will be interesting to note that as per the above Explanation even the income which is represented by the proper books of accounts maintained in the normal course of business, shall be deemed to be concealed income in case the return per chance is not filed before the due date and the person unluckily gets searched thereafter but before he has filed the return.

            The new Section 271AAA provides for levy of penalty in respect of the income of the period for which the due date for filing the return either has not expired or the year in which the search is conducted.  It provides that any income of such period which is represented by any money, bullion, jewellery or other valuable articles or things or any entry in the books of accounts, documents or transactions which is found in the course of the search and which is not found recorded before the date of the search in the books of accounts or other documents maintained in the normal course of business, then penalty at the rate of 10per cent of such income can be levied by the AO.  However, no such penalty shall be levied if the assessee admits (declares) this undisclosed income during the course of the search, specify the manner in which such income has been derived, substantiate the manner and pays the tax together with interest.  

A comparison of the two provisions, i.e., Explanation (5A) to Section 271(1)(c) and the new Section 271AAA indicates that the rigours of the penalty have been considerably increased in respect of period of which due date has expired whereas rigours have been diluted a lot in respect of the period for which the due date of filing the return has not expired.  In such a case even if the person does not declare such income  during the course of the search, the penalty at best can be 10 per cent of the income and no penalty in case the assessee surrenders the same.   Further there is an exception under Section 271AAA  in respect of the income found recorded in the books of accounts maintained in the ordinary course but surprisingly there is no similar exception in Explanation (5A).  The provision of Explanation (5A) apparently is too harsh and the provision of Section 271AAA is too liberal. With the proposed amendments one will get away with no penalty or minimal penalty in case one is found with cash, jewellery, etc., as the same is considered to be current year income in the absence of any evidence to the contrary.  But one will get penalized to the extent of 300 per cent penalty if concealed income is based on any documents which indicate the period of earning, of which due date of filing return has expired. 

 

2.      Income Tax Settlement Commission

            The Finance Bill, 2007, virtually proposes to bring down the curtains on the Settlement Commission.  It has been proposed that any application for settlement of tax on or after 1st June, 2007, can be filed only when the proceeding is pending before the AO, not with any other income tax authorities including the CIT(A) and that too other than a proceeding for assessment or reassessment under Section 147 or an assessment or reassessment consequent to a search or a proceeding for making fresh assessment in pursuance of order passed under Section 254 or Section 263 or Section 264 setting aside or canceling the assessment.   The effect of the above amendment is that a settlement application can be filed only when the original assessment proceedings after the filing of the return are pending before the AO and that too before he completes the assessment.  Further, the additional amount of tax payable for being eligible for filing an application to the Settlement Commission should exceed Rs. 3 lacs and the same is to be paid on or before making the application as against the existing provision whereby an application can be filed where the additional amount of tax payable exceeds Rs. 1 lac and the same is to be paid only after the application is admitted before the Settlement Commission.  The amendment further proposes requiring the Settlement Commission to issue  notice within seven days of filing the application for deciding the fate of the application and within a period of 14 days the Settlement Commission is supposed to either admit or reject the application.  It has been further provided that where no order is passed within the aforesaid period of  14 days the application shall be deemed to have been admitted.  The final disposal of the application is to be made within a period of nine months from the end of the month in which the application was received.  It is interesting to note that in case the application is not disposed of within the above-said period of nine months, the application shall abate and the AO shall be free to use the material filed by the assessee before the Settlement Commission while making the assessment consequent to abatement of the proceedings. . 

            As regards the existing applications filed on or before 1st June, 2007, which are pending for admission, the same shall be deemed to have been admitted if the tax on the income disclosed in the application alongwith the interest are paid before 31st July, 2007.  In case the tax and interest are not paid, then the application shall be deemed to have been rejected.  In respect of applications which have been admitted before 1st June, 2007, the tax and interest shall be required to be paid before 31st July, 2007.  In case of non payment of tax by 31st July, 2007, even if an extension or instalment is granted by the Settlement Commission, such application shall abate.  All these applications which have been filed before 1st June, 2007, are to be decided before 31st March, 2008.  It has been further provided that after 1st June, 2007, the assessee can apply for settlement only once during his life time. 

The above provisions appear to be inequitable.   An application for settlement should not abate and the assessee should not be made to suffer in case the final order is not passed before the due date as specified unless the delay is attributable to the assessee. 

 

3.      Special Audit fee to be paid by the Central Government

            The Finance Bill, 2007, proposes significant change in respect of payment for the special audit directed by the Assessing Officer under Section 142(2A) of the Act.  As per the existing provision, the remuneration of the auditor and incidental expenses are to be borne by the assessee.  This  Finance Bill proposes that the remuneration of the auditor and the expenses incidental thereto shall be determined by the Commissioner in accordance with the guidelines as may be prescribed  and the same will be paid by the Central Government.  The new provision shall be effective in respect of the direction for special audit issued by the AO on or after 1st June, 2007.  This amendment will go a long way in realizing the fees of the special audit at an early date without any difficulty and dispute.  It has been further provided in this section that the AO before directing the assessee to get the accounts audited shall give reasonable opportunity of being heard on this issue.

 

4.      Definition of Assessing Officer being widened

            The Finance Bill, 2007, proposes to widen the definition of the Assessing Officer (AO) to include Addl. Commissioner as one of the AO given in Section 2(7A) of the Act.  As per the existing definition, the Joint Commissioner or the Joint Director can be an AO provided he is specifically directed by the Commissioner under Section 120(4)(b) to exercise the powers of the AO.  This definition does not include Addl. Commissioner as one of the tax authorities.  There has been some dispute on this issue in view of the fact that as per Section 2(28C) Joint Commissioner means a Joint Commissioner or an Addl. Commissioner.  However, in a recent judgement delivered by the Delhi Bench of the ITAT  in the case of Bindal Apparels vs Addl. CIT, it has been held that the Addl. Commissioner does not fall in the definition of AO under Section 2(7A).  To overcome this judgement this amendment is being made retrospectively from 1st June, 1994, so that the assessment orders passed by the Addl. Commissioners does not get quashed.

5.      Assessment of search cases with the prior approval of Joint Commissioner

          The Finance Bill, 2007, proposes to make an amendment by inserting a new Section 153D in the Act providing that the assessment or reassessment orders in the search cases under Section 153A or 153B shall not be passed by the AO below the rank of Joint Commissioner without the previous approval of Joint Commissioner.  This amendment shall be effective from 1.6.2007 and as such all assessment orders in search cases after 1.6.2007 have to be passed with the prior approval of the Joint Commissioner. 

6.      Presumption in respect of seized books of accounts being extended to all proceedings

            The Finance Bill, 2007, proposes to make a retrospective amendment extending the presumption under Section 132(4A) of the Act in respect of seized books of accounts, money, bullion, jewellery or other valuable articles or things to any proceedings under the Act whereby such books of accounts and assets are presumed to belong to such person, in the possession and control the same is found. Further the presumption is that contents of such books of account and documents are true and the same, are signed and in the handwriting of the person to whom it purports to be.     So far this presumption was applicable only in respect of the search proceedings of the searched person.  This amendment is also being made retrospectively with effect from 1.10,1975 with corresponding amendment in the Wealth Tax Act.  This amendment will also have far reaching consequences and will put a serious onus/burden on those assessees who may not have any control/knowledge in respect of such assets, books of accounts or documents.

7.      Transfer Pricing—Extension of time where reference is made to TPO

            The Finance Bill, 2007, proposes to extend the period by 12 months  for completing the assessment where reference is made by the AO to the Transfer Pricing Officer (TPO) for determination of the armed length’s price of international transaction.  Thus, wherever the assessment period is prescribed for completing the assessment, in case a reference is made to the TPO, the time period for assessment shall be the time period prescribed plus 12 months.  This amendment shall be effective from 1.6.2007 and shall also be applicable to cases where reference to the TPO has been made prior to 1st June, 2007.

 

8.      Annexureless returns

            The Finance Bill, 2007, proposes to amend the provision of Section 139 giving powers to the Board to make rules for any class or classes of persons who shall be required to furnish a return in the electronic form and may not be required to furnish documents, audit report in physical form alongwith the return of income but may be required to submit the same on demand by the AO.  Since the above scheme was introduced in the Financial year 2006-07 itself, the above amendment is being made retrospective with effect from 1st April, 2006 to give legal sanctity to the scheme implemented and the action taken in the preceding year itself without any such authorisation being there in the statute.. 

9.      Provision to provide for appeal by a person denying liability to deduct tax on payment to non-resident

            The existing provision of Section 248, is being substituted to provide for appeal by the person who is required to deduct tax under an agreement in respect of any payment other than interest made to a non-resident in case such person denies his liability for making such deduction on the ground that income is not chargeable to tax in India.  In such a case, an appeal can be filed by such person to the Commissioner (Appeals) after payment of the tax within one month from the date of payment of tax and ask the CIT(A) to declare that such person is not liable to make such deduction.  This amendment shall be effective from 1st June, 2007, and will  help the  residents making payment to non-residents which in their opinion is not chargeable to tax under the law.

10.    Stay granted by ITAT to get vacated despite no fault of assessee after one year

            The Finance Bill, 2007, proposes to make an interesting amendment providing that the Income Tax Appellate Tribunal may pass an order of stay in the first instance for a period not exceeding 180 days from the date of such order.  The same may be extended for a further period or periods if the Tribunal is satisfied that the delay in disposal of the appeal is not attributable to the assessee.  However, a restriction has been placed in the power of the Tribunal providing that the aggregate of the period originally allowed and the period extended in any case shall not exceed 365 days and in case the appeal is not disposed of within such period the stay shall stand vacated.  The above provision not only intends to curtail the power of the judicial authority but is also otherwise inequitable.  The assessee having obtained the stay by demonstrating before the judicial authority that it has got prima facie case, the balance of convenience is in its favour, It will be unjustified to vacate the stay even in those circumstances where the appeal does not get disposed of because of adjournment sought by the Department or non-functioning of the benches which are beyond the control of the assessee.  The Appellate Tribunal, being a judicial authority, discharges its function in an equitable manner applying the principle of natural justice and as such the prerogative of extending the stay should be left to such authority who invariably applies its mind at the time of  extending the stay to the effect that the assessee has fully cooperated in the early disposal of the appeal.  It is a settled convention at present that the stay gets vacated the moment the assessee delays the disposal of the appeal. 

The above amendment shall be effective from 1.6.2007.    

 11.    Interest to be computed at the rate of 1per cent per month instead of 12per cent per annum

            The Finance Bill, 2007, proposes to amend various provisions of the Act, i.e., Section 201(1A), 132B(4)(a), 245D(6A), Rule 60(1)(a) and Rule 68A(3) of the Second Schedule to the Income Tax Act, to substitute the levy of interest at the rate of  1per cent per month as against the 12per cent per annum presently provided in these Sections.  This is being done in view of the Rule 119A whereby it has been provided that where interest is to be computed on per annum basis, any fraction of a month is to be ignored and where interest is to be computed on per month basis any fraction of a month is deemed to be a full month.  The provision of Section 234A, 234B, 234C, 234D, 244A and 220(2) provide for levy of interest at the rate of 1per cent per month. However, Section 201(1A), 132B(4)(a), 245D(6A) Rule 60(1)(a) and Rule 68A(3) provided for levy  of interest on per annum basis.  Accordingly, under the existing provision, no interest is leviable under these Sections in case of default of less than one month.  After the amendment, the interest shall be leviable even for default of part of a month.  However, this amendment is being made effective from 1st April, 2008 and accordingly  this new mechanism of 1per cent per month shall be applicable in respect of the period starting from 1st April, 2008, only and not before and there will be no liability to pay interest in case of delay in payment of TDS for the fraction of a month during the Financial year 2007-08.

12.    Time limit for seeking exemption from the Provident Fund Commissioner to Provident Fund Trust being extended

            The Finance Act, 2006, has made an amendment providing that the approved provident fund shall seek an exemption under Section 17 of the PF Act or on before 31.3.2007, so as to get the benefit of a recognized provident fund.under the Income Tax Act.  The time period for getting such extension is being extended to 31.3.2008 in view of practical difficulties in obtaining such approval.  

13.    Definition of India

            The Finance Bill, 2007, proposes to provide definition of India in the Act itself.   Existing definition given in Section 2(25A) is a deeming definition providing that India shall be deemed to include Union Territories of Dadra and Nagar Haveli, Goa, Daman, Diu and Pondicherry.  This definition was inserted in the year 1963 consequent to Tax Laws (Extention to Union Territories) Regulation, 1963 so as to extend the scope of this Act to above areas.   The Finance Bill, 2007, proposes to substitute the above definition with the comprehensive definition of India, given in the Constitution providing that India means the territory of India as referred to in Article 1 of the Constitution, its territorial waters, seabed and sub-soil underlying such waters, continental shelf, exclusive economic zone or any other maritime zone  and the airspace above its territory and territorial waters.  This amendment is also being made retrospectively from 25th August, 1976.

14.    Income deemed to accrue or arise in India

            A retrospective amendment with effect from 1st June, 1976, is being made by inserting Explanation to Section 3 of the Act to provide that where income is deemed to accrue or arise in India under clause (v), (vi), (vii) by way of interest, royalty, fee for technical services of Section 9(1), such income shall be included in the total income of the non-resident irrespective of the fact whether such non-resident has a residence or place of business or business connection in India.  This amendment is being made to overcome the recent judgement whereby it was held that despite the deeming fiction there must be sufficient territorial nexus between the income and the territory of India.

 
 
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