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Salient Features of Finance Bill, 2006 By Ved Jain
June, 21st 2006

Salient Features of the Finance Bill, 2006

 

Direct Taxes

Ved Jain

Introduction

Budget is an annual exercise carried out by the Finance Minister to take stock of the economic condition of the country and to give direction for the future.  Just prior to the budget proposals, the Finance Minister places before the Parliament the economic survey highlighting the performance of the country on various fronts. This economic survey gives an indication of the direction the budget is likely to take.  Still, 28th February continues to be a day of suspense and the whole nation eagerly awaits the various schemes which the Finance Minister may announce on this day. 

            The industry looks forward to certain concessions in the taxes, may it be Customs, Excise or Service tax.  With growth in the number of income taxpayers, a large number of persons also eagerly wait for certain concessions and benefits which the Finance Minister may announce for them on this day.

            This year, 28th February was no exception and the Finance Minister made various announcements for each class of persons.  The Finance Minister announced various schemes for the benefit of people living in rural India which, in turn, will benefit the industry as well.  The Finance Minister also announced various concessions in the rate of Customs and Excise duties.   On the direct taxes front, the Finance Minister did not change the rate of personal income tax and corporate income tax except some minor changes in the rate of Minimum Alternate Tax (MAT) and Fringe Benefit Tax (FBT).   The Finance Minister has projected an increase of more than Rs.40,000 Crores in direct taxes collection.   The total estimated receipt on account of income tax (including corporate tax) for the Financial Year 2005-06 is expected to be Rs.1,69,812 Crores whereas the total receipt projected for the Financial Year 2006-07 is Rs.2,10,419 Crores.  The reason for such high projection is the buoyancy in the economy as reflected in the economic survey.  The Indian economy after a growth of 8.5% and 7.5% in the year 2003-04 and 2004-05 is projected to grow at 8.1% in the current year 2005-06.    It may be important to note that the growth of GDP in excess of 8% has been achieved by the economy in only five years of its recorded history and two out of these five years happen to be in the last three years only.   As such, the increase in tax collection projected for the year 2006-07 is mainly on account of growth in the economy. 

            Despite there being no change in the tax rate, the Finance Minister has proposed 57 clauses in the Finance Bill, 2006, amending the provisions of income tax and wealth tax.   Some of these provisions are going to have far reaching effect.  Major amendments proposed in the Finance Bill, 2006, and the implication of these amendments are being analysed below.  Unless otherwise stated, all these amendments are effective from 1st April, 2007, i.e., Asstt. Year 2007-08 (income earned in the Financial Year 2006-07).

A.        TAX RATES

1.         No change in the tax rates

            There is no change in the tax rates applicable to individuals, Hindu Undivided Families (HUF), firms, companies etc.   As such, the existing rates of 10%, 20% and 30% to individuals, HUF will continue with a surcharge of 10% in case the total income exceeds Rs.10,00,000.   Similarly for firms and companies, the tax rate of 30% shall continue to be applicable with a surcharge of 10%.  In addition, education cess @ 2% shall continue to be payable on the total tax by all classes of persons.

2.         Minimum Alternate Tax rate increased

            The rate at which Minimum Alternate Tax (MAT) is to be paid is proposed to be increased from 7.5% to 10% on the book profit computed in accordance with the provision of Section 115JB of the Act, i.e., book profit as computed under the  Companies Act.  The effective increase after taking into consideration the surcharge and education cess will be 2.81%.  The increased rate at which MAT is to be paid appears to be not so justified considering the fact that the MAT rate of 7.5% was fixed in the year 2001 when the effective corporate rate was around 40% and with the decline in the rate of corporate tax last year there should have been a corresponding decline in the rate of MAT as against the increase which has been proposed.   One cannot ignore the fact that the levy of MAT is an aberration and this aberration cannot be taken to the level of normal rate of tax, otherwise it defeats the very purpose of granting exemptions which may be either industry-based or sector-based.   In case any of the concession is not desirable or has outlived its utility, the better course would be to withdraw the very exemption rather than taxing that income indirectly by way of MAT.   MAT cannot be compared with normal rate of tax as has been done.     Increased   levy of MAT on income, which legislature has thought fit in the past to exempt in order to achieve certain other objectives, does not indicate healthy practice where the government goes back on the promises which it had made in the past.  Though there cannot be any doubt that the Rule of estoppel  does not apply  to the government, still the same need to be given a go by only in exceptional circumstances and when there is no alternative.   As such, the better course would have been, in case there were revenue compulsions, to increase normal rate of tax rather than increasing the rate of MAT

3.         Long-term capital gain arising on Security Transaction Tax (STT) paid equity share, liable for MAT

            The Finance Bill, 2006 proposes now to include income arising on account of long-term capital gain in respect of equity shares in a company or units of equity-oriented fund on which STT has been paid as part of  book profit for the levy of MAT.   This amendment has serious implication and goes against the reason for which the STT was imposed.    The Finance (No. 2) Act, 2004 had introduced the levy of STT as a presumptive method of collecting income tax in respect of the income arising from the transaction of sale/purchase of equity shares executed in a recognized stock exchange.   As per this presumptive method of taxation, the STT rate fixed were considered appropriate to the extent of the tax which would otherwise have been  payable on the long-term capital gain arising in respect of listed securities which at that point of time was 20 per cent after the benefit of indexation under Section 48 of the Act.   That is why long-term capital gain on such transaction was exempted and put in Clause (38) of Section 10 of the Act.   Since short-term capital gain on such transaction was chargeable at the rate of 30 per cent, after giving the benefit of 20 per cent  tax on account of STT captured by the method of presumptive tax, the balance amount of 10% was fixed under Section 111A.  With the proposed amendment, the long-term capital gain arising on the transaction of equity shares on which STT has been paid shall again be liable for MAT which virtually tantamounts to double taxation.   MAT is levied on that income which has not already been taxed and for which exemption has been sought and this is not the case in the case of long-term capital gain on which STT has been paid.   Such long-term capital gain forming part of the book profit of the company is a tax paid income and should not have been included again for the purpose of levy of MAT.   This income cannot be compared with the other income. Probably there is a thinking that STT is not in lieu of income tax.  However, the fact gets established beyond doubt from the Budget speech of 2004 of the Finance Minister itself where he stated as under.

111. Capital gains tax is another vexed issue.   When applied to capital market transactions, the issue becomes more complex.    Questions have been raised about the definitions of long-term and short-term, and the differential tax treatment meted out to the two kinds of gains.   There are no easy answers, but I have decided to make a beginning by revamping taxes on securities transactions.  Our founding fathers had wisely included entry 90 in the Union List in the Seventh Schedule of the Constitution of India.   Taking a cue from that entry, I propose to abolish the tax on long-term capital gains from securities transactions altogether.  Instead, I propose to levy a small tax on transactions in securities on stock  exchanges.   The rate will be 0.15 per cent of the value of security.  Thus, a transaction involving securities valued at, say, Rs.100,000 will now bear a small tax of Rs.150.   The tax will be levied on the buyer.   In the case of short-term capital gains from securities, I propose to reduce the rate of tax to a flat rate of 10 per cent.  My calculation shows that the new tax regime will be a win-win situation for all concerned.

The above speech clearly explains that STT is being levied instead of income tax.  Further, that is why credit of STT is allowed under Section 88E of the Act while computing tax liability in respect of income arising from carrying on business in securities on which STT has been paid,  If the above logic is not adhered to, there is no reason why not the dividend received by a company which is exempt under Section 10(33) of the Act and does not presently form part of the book profit may also be made liable for inclusion in the book profit for the levy of MAT ignoring the fact that dividend income is tax paid income as dividend distribution tax is required to be paid by the company at the time of distribution of dividend.   The Government may be justified for collecting tax for revenue consideration but the basic principle of taxation and the philosophy behind the same always need to be taken into consideration.

4.         Increase in the rate of Security Transaction Tax (STT)

            The Finance Bill, 2006, proposes to increase the rate of STT across the board by 25%.   As stated above, STT was introduced in the year 2004 and within a period of two years the rates have been increased by more than 60%.  In the year 2005, the rates were increased by 33% and this year the rates are being increased by another 25%.   This is despite the fact that the Finance Minister himself has said in the last budget that the tax rates have fairly stabilized and these need not be changed frequently.   The new STT rates effective from 1st June, 2006  shall be as follows :

i)                    Purchase of equity shares/units (delivery based)              0.125%

ii)                   Sale of equity shares/units (delivery based)                      0.125%          

iii)                 Sale of equity shares/units (non-delivery based)   0.025%

iv)                 Sale of derivatives                                                    0.017%

v)                  Sale of units to mutual fund                                      0.250%

 

B.        REBATES AND EXEMPTIONS

1.         Long-term savings to include bank fixed deposits

            Provision of Section 80C whereby a deduction of up to Rs.1,00,000 is allowed while computing total income of an individual or HUF in respect of the life insurance premium, contribution to Provident Fund etc., is being amended to include fixed deposit with a scheduled bank of a period of not less than five years.   Accordingly, an individual or HUF shall now be entitled to deduction of up to Rs. 1,00,000 in case he makes a fixed deposit of the period of five years or more.  This will help the taxpayer in planning his income whereby no tax shall be payable on the income of up to  Rs.2,00,000 in case he obtains a fixed deposit every year.    It may be noted that this is not an additional exemption.   This exemption shall be part of the Rs.1,00,000 exemption presently available in respect of life insurance premia, contribution to PF etc.  No condition has been imposed for not obtaining loan against such fixed deposit.  Further in case of cumulative fixed deposit where interest shall be payable on maturity, interest accrued each year will be deemed investment for that year.

2.         Ceiling in respect of contribution to pension fund increased to Rs.1,00,000

            The present ceiling of Rs.10,000 for claiming deduction under Section 80CCC in respect of contribution to any pension plan of LIC or any other insurer is being increased to Rs.1,00,000 .   Accordingly, one can contribute upto Rs.1,00,000 and claim deduction of the same.   However, it may be noted that this deduction is part of the 80C deduction and the total amount of the deduction including deduction claimed under Section 80C cannot exceed Rs.1,00,000.  The deduction claimed under Section 80C is full and the amount received on maturity is not taxable on maturity whereas the deduction claimed in respect of contribution to pension plan under Section 80CCC is liable for tax on maturity or as and when pension is received.    Thus, the benefit under Section 80CCC is not complete but it is a deferment of tax liability as against complete exemption of the amount paid under Section 80C of the Act.   Accordingly, for tax planning it may not be advisable to opt for exemption under Section 80CCC as compared to Section 80C unless the circumstances so warrant to have a pension plan for the future.

3.         Cooperative banks to pay tax on income

            The exemption available to cooperative banks under Section 80P is proposed to be withdrawn.   The reason given for the same is that cooperative banks are functioning at par with other commercial banks which are not enjoying any such tax benefit.   However, the benefit shall continue to be available to primary agricultural credit society or primary cooperative agricultural and rural development bank.   

C.        CHARITABLE TRUSTS OR INSTITUTIONS

1.         Charitable trusts or institutions to pay tax on anonymous donations

            A far reaching change has been proposed in the Finance Bill, 2006, whereby anonymous donations received by the charitable trusts or institutions shall be liable for tax at the rate of 30% without any deduction or set off under any other head.   This is being done by introducing a new Section 115BBC, providing that income by way of anonymous donations received by a university, educational institution, hospital or any fund, institution or trust shall be liable to tax at the rate of 30%.    However, donations received by a trust or institution created or established wholly for religious purposes shall be outside the purview of this provision.   Similarly anonymous donations received by a trust or institution which is created or established both for religious as well as charitable purposes shall not be covered by this provision unless such anonymous donation has been received with a specific direction that such a donation is for a university, educational institution or hospital or medical institution run by such trust or institution.     Anonymous donation shall mean voluntary contribution where a person receiving such contribution does not maintain record indicating the name and address of the donors and such other particulars as may be prescribed.   The above provision will make it obligatory on charitable trusts or institutions to establish the identity of the donors or contributors.   Probably the rules may prescribe that in case the amount of donation or contribution exceeds a particular amount, PAN etc may be required to be mentioned.   This may affect the working of a large number of NGOs which receive contributions from various persons and it may not be possible for such NGOs to provide details in respect of each of the contributors.  

It is a common knowledge that in the face of natural calamities such as Gujarat earthquake, tsunami etc., these NGOs receive contributions from the public at large which individually are small amounts but in aggregate these are substantial amount and it may not be possible or feasible for these NGOs to maintain such details including name and address of donors and to substantiate the same.    These NGOs are rendering valuable service to the society at large and are in fact in a better position to provide relief to the persons who really deserve it.   The objective of bringing this provision may be to check misuse by certain charitable trusts or institutions whereby the unaccounted  money is received as voluntary contribution but it still does not affect much because such contributions are considered income under Section 2(24)(iia) of the Act and exemption is allowed only when such contributions are actually used for charitable purposes.   Further, such use is subject to verification by the AO.   The exemption under Section 10(23C) as well as under Section 11 is not in respect of the income but is with reference to the expenditure actually incurred for charitable purposes.   Such expenditure for charitable purposes is equally important and desirable from the point of the society, particularly in the context of natural calamities and the work being done by Mother Teressa Trust which is not religious trust and receiving large amount of anonymous contribution  from people across the globe not only from India.   The type of difficulties which these charitable trusts will have to go at the ground level on this issue can be easily visualised. 

2.         Voluntary contribution received by education institutions and hospitals to be included  in the definition of income.     

            The Finance Bill, 2006, proposes to introduce an amendment to Section 2(24)(iia), whereby voluntary contributions received by universities, educational institutions, hospitals or other institutions which are claiming exemption under Section 10(23C) shall be considered as income.    This is being done, as present definition of income under Section 2(24(iia)  does not include voluntary contribution received  by educational institutions, hospitals, etc.  This amendment is being made  retrospectively with effect from 1st April, 1999 (Asstt. Year 1999-2000) in respect of educational institutions or hospitals having annual receipts exceeding Rs. 1 Crore.   For others the amendment shall be prospective, i.e., Asstt. Year 2007-08.    With the above amendment, all voluntary contributions including contribution with a direction that it shall form part of the corpus will be included in income with no exemption in respect of corpus contribution as is available to the trust or institution under Section 11(1)(d) of the Act.     As such, there is a need to insert a clause exempting corpus contribution  in Section 10(23C) on the line of Section 11(1)(d) of the Act.     

3.         Due date for applying for approval under Section 10(23C)

            The Finance Bill, 2006, proposes to introduce a time limit for making application for grant of exemption or continuance of exemption under Section 10(23C) by educational and medical institutions.   As per the existing provisions, any educational or medical institution having annual receipts exceeding Rs.1 Crore per annum and claiming exemption under Section 10(23C) is required to obtain approval.   No time limit by what time this application has to be made has been prescribed for obtaining this approval.   This Finance Bill proposes to provide that such application, for granting of exemption or continuance thereof, shall have to be filed at any time during the Financial Year itself for which exemption is being sought.   Further, no application can be made for obtaining approval for any earlier period.    This amendment shall be effective from 1st June, 2006 and, as such, approval for any Financial Year ending on or before 31st March, 2006, has to be made before that date and in case the same is not made the approval will not be granted.   This provision may create some practical difficulty in case for any justifiable reason the application could not be filed within the Financial Year.    There is no enabling provision giving power to the approving authority for condonation of delay in case of reasonable cause on the line which is available to the Commissioner under Section 12A(a)(i) in case of delay in filing application for registration of a trust or institution.   Further it may be practically difficult to file an application for approval within  the year itself as in some cases the concerned institution may not be aware of exceeding the prescribed limit before the end of the financial year.   As such, the need is to fix the time limit say by the last date of filing the return instead of the last day of financial year.   

  

D.        COMPUTATION OF INCOME

1.         Standard deduction not restored

            There is no change in the tax liability of salaried employees.   The benefit of standard deduction has not been restored back which was withdrawn by the Finance Act, 2005, ignoring the fact that employees do incur expenditure for earning salary income.

2.         Allocation of expenditure in relation to exempt income

            The Finance Bill, 2006, proposes to amend Section 14A making it mandatory for the Assessing Officer (AO) to determine the amount of expenditure incurred in relation to such income which does not form part of the total income in case the AO is not satisfied on the basis of the accounts of the assessee with the correctness of the expenditure allocated by the assessee himself.   The allocation by the AO in such a situation shall be done in accordance with the prescribed method.   Section 14A was inserted by the Finance Act, 2001 with retrospective effect from 1st April, 1962.   This was done to facilitate the allocation of expenditure in case the assessee is having taxable as well as tax free income such as income from dividend, agriculture income, etc.   A large number of disputes have arisen regarding allocation of expenditure in relation to dividend income which being dormant income does not require much of the expenditure.   Probably the method likely to be prescribed may empower the AO to allocate the percentage of expenditure on the basis of gross receipt or in proportion to the net income.

3.         Overdue interest converted into loan not to be eligible for deduction

            Provision of Section 43B is being amended to clarify that in case of overdue interest payable to financial institutions and if such interest gets converted into loan by the financial institution or the bank, the same shall not be deemed as actual payment and as such shall not be eligible for deduction while computing profit and gains of business or profession.  This amendment is being made retrospectively in respect of interest on loan from public financial institutions from the Asstt. Year 1989-90 and in respect of loan from scheduled banks with effect from the Asstt. Year 1997-98.

4.         Extension of tax benefits to power sector and industrial parks

            Benefit of deduction under Section 80-IA to the power sector is being extended till 31st March, 2010.    Accordingly, any undertaking which begins to generate power before 31st March, 2010 or which starts transmission or distribution by laying of network of new transmission or distribution lines before 31st March, 2010, or which undertakes substantial renovation and modernization of existing network of transmission and distribution lines before 31st March, 2010 shall be eligible for deduction of its income of an amount equal to 100% of the profit and gains from such business for ten consecutive Asstt. Years.   Similarly any undertaking which developes and operates, maintains an industrial power or a special economic zone, the tax benefit shall be available till 31st March, 2009. 

5.         Denial of deduction in respect of the expenditure on which TDS not deducted to continue                

            The Finance (No. 2) Act, 2004, has introduced Section 40a(ia) providing for that any interest, commission or brokerage, fee for professional services or fee for technical services or amount payable to a contractor or sub-contractor on which tax is deductible at source, shall not be eligible for deduction while computing profit and gains of business or profession if such tax has not been deducted or after deduction the same has not been paid during the previous year or in subsequent year before the period prescribed.    This provision being very harsh and despite many representations and suggestions to modify the same, the Finance Bill, 2006, has not addressed this issue and this will continue to be a cause of undue harassment to the taxpayer.  

Further, a new explanation is being inserted below Section 40(a) to clarify that any tax paid outside India which is eligible for relief under Section 90, 90A, 91 shall also not be eligible for deduction while computing profit and gains of business or profession.   This is a clarificatory amendment to avoid the controversy which has arisen that only income tax paid in India is not an allowable expenditure and income tax paid outside India is not to be disallowed.  

6.         Denial of deduction in case of delayed return

            The Finance Bill, 2006, proposes to provide that deduction under Section 10B, 80-IA, 80-IB, 80-IC shall not be allowed in case the return is not filed within the time limit prescribed under Section 139(1) of the Act.    Last year, similar amendment was carried out in Section 10A to deny exemption in case the return is not filed before the due date.   This year this provision has been extended to other deductions as stated above.  This provision will create undue hardship to certain units which are eligible for deduction and for unforeseen circumstances and for reasons beyond their control they are not able to file the return before the due date.   Apparently there does not appear to be any rationale to deny exemption in respect of the income which is not otherwise chargeable to tax merely on the ground that the return has been filed late despite the fact that there are so many deterrent provisions in the Act for enforcing compliance in time.  The Finance Act, 2005, has already inserted a proviso to Section 139(1) making it mandatory for these entities claiming exemption to file return of income.  A simple default of one day or two may invite additional huge tax liability besides liability of interest under Section 234A, 234B and 234C despite there being provisions to levy penalty for late filing of return under Section 271F of the Act.   It may be further noted that this provision shall be applicable from the Asstt. Year 2006-07 itself and as such one needs to ensure that return in such cases is filed before due date prescribed under Section 139(1) of the Act.  

7.         Exemption under Section 54EC for National Highway Authority (NHAI) and Rural Electrification Corporation (REC)

            Provisions of Section 54EC are being amended to provide that the exemption under this section will be available in respect of any long-term capital gain in case the same is invested in bonds which are issued by the NHAI or REC only.    Bonds issued by NABARD, National Housing Bank and SIDBI shall not be eligible for claiming exemption under this section on or after 1st April, 2006.

8.         Investment in eligible issue of capital not to exempt long-term capital gain     

            The Finance Bill, 2006, proposes to delete Section 54ED which provides exemption in respect of the long-term capital gain arising from listed securities or other units of mutual fund to the extent the same are invested in equity shares issued by a public company for subscription by the public.    Thus, this mode for claiming exemption shall not be available from the Asstt. Year 2007-08 onwards.

E.        Minimum Alternate Tax (MAT)

1.         Period of MAT credit being extended to 7 years

            Provisions of MAT are being amended.    Long-term capital arising from equity shares on which STT has been paid shall not be deducted while computing book profit as explained hereinabove.  The period of MAT credit of five years is proposed to be increased to seven years to give more time to take credit of such tax paid against regular income.    

2.         Depreciation on account of revaluation of assets to be added back while computing book profit

            The Finance Bill, 2006, proposes to amend the computation of book profit for the purpose of levy of MAT.   As per the proposed amendment, the depreciation to the extent it relates to the revalued part of the fixed assets shall be added while computing book profit in case the same has been added to the Profit & Loss Account.   On the principle of equity, it has also been provided that the transfer from revaluation reserve and credited in the Profit and Loss Account shall not be included in the book profit to the extent of the depreciation relatable to the revalued component of the fixed assets.   This amendment has been carried out to overcome the problem which has arisen where certain companies having charged full amount of depreciation including revalued part to the Profit and Loss Account, instead of transferring revaluation reserve to that extent to the Profit and Loss Account have directly transferred their revaluation reserve to the general reserve.  

 

F.         Dividend Distribution Tax

1.         Exemption from Dividend Distribution Tax to close-ended equity oriented mutual fund schemes 

            Presently there is an exemption from dividend distribution tax payable under Section 115-O only to open-ended equity oriented mutual fund.  The benefit of the same is being extended to the close-ended equity oriented mutual fund.   However, the definition of the equity-oriented mutual fund is being changed to align with the SEBI norms.    Accordingly, to be eligible as equity-oriented fund for claiming exemption from dividend distribution tax, the investible fund that is invested in the equity shares in domestic companies should be to the extent of more than 65% of the total proceeds of such fund instead of the existing requirement of more than 50%.    The above amendments shall be effective from 1st June, 2007.    Further, exemption from dividend distribution tax  to Infrastructure Capital Company is being withdrawn. 

 

G.        RETURN AND ASSESSMENT

1.         One by Six scheme abolished

            The Finance Bill, 2006, proposes to abolish One by Six scheme which requires a person to file return of income in certain conditions though his income may not be more than the amount not eligible to tax.   This provision is being introduced from the Asstt. Year 2006-07 itself and as such there will be no requirement to file the return by these persons henceforth.

2.         Return not to be declared defectiveCBDT being empowered

            Presently under Section 139(9), a return is considered to be defective unless all the conditions prescribed in Clause (a) to Clause (f) are fulfilled, such as computation of income, audit report, Balance Sheet, TDS Certificate etc.   The Finance Bill, 2006, proposes to amend the same, giving power to the Board to dispense with any of the conditions.  Further, the Board shall have the power to include any such conditions in the return form itself.    The objective of this amendment appears to be to shift the statutory requirement into the rules as part of the return form.    The Board on its part may notify all these conditions in the return form by asking to fill in all these information in the return format dispensing with the requirement of enclosing these statements, Balance Sheet, etc., as annexures to the return.             

3.         Notice for filing return may be issued beyond the Asstt. Year

            Presently under the provisions of Section 142(1) of the Act, the AO can issue notice asking the assessee to file the return of income before the end of the asstt. year.    After the end of the asstt. year notice under Section 142(1) cannot be issued and in case of income escaping assessment notice under Section 148 is to be issued.    The Finance Bill, 2006, proposes to amend this law providing that notice under Section 142(1) can be issued even beyond the end of the asstt. year.   This amendment shall be effective from 1st April, 2006.  Further, a proviso is being inserted with retrospective effect from 1st April, 1990, to validate the notice which has been served on or after 1st April, 1990 under Section 142(1) after the end of the relevant asstt. year by the AO to any person asking to file the return of income.   Accordingly, the assessment framed in such cases will not be invalid merely on the ground that a notice under Section 142(1) has been issued after the end of the asstt. year.   This amendment has been proposed to overrule the judgement delivered by the Delhi Bench of the ITAT in the case of Motorola where it has been held that no notice under Section 142(1) calling for the return can be issued beyond the asstt. year and any assessment framed in consequence thereof shall be null and void.   This retrospective amendment will affect large number of pending appeals at various levels on this issue.  

4.         Time limit for issue of notice under Section 143(2) not to apply in case of reassessment    

            Presently under the provisions of the Act, a notice under Section 143(2) cannot be served after a period of one year from the end of the month in which the return is filed by the assessee.   This provision is also applicable in the case of reassessment where a notice is issued under Section 148 of the Act.    Accordingly, once a return has been filed in response to notice under Section 148, the AO is required to serve notice under Section 143(2) of the Act within a period of one year from the end of the month in which such return has been filed.   In view of the express provision in Section 143(2) of the Act, it has been held by courts that any notice served under Section 143(2) for reassessment after the period of one year from the end of the relevant asstt. year shall be valid.    To overcome these judgements where reassessment framed has been quashed, the Finance Bill, 2006, proposes to insert a proviso below Section 148 to provide that where a return has been furnished during the period between 1st October, 1991 to 30th September, 2005, in response to a notice served under Section 148, the notice issued under Section 143(2) shall be deemed to be a valid notice though the same has been served after the expiry of 12 months from the end of the month in which the return was filed.    This amendment is also retrospective from 1st October, 1991.  However, the operation of this amendment shall be restricted till 30th September, 2005 as this amendment shall not be applicable in relation to any return which is furnished on or after 1st October, 2005.   The objective of this amendment is not to change the law but to validate the notices which per se were issued during the period between 1st October, 1991 to 30th September, 2005.

5.         Reducing the peiod for completion of assessment/reassessment

            Presently the law provides for completion of assessment under Section 153 of the Act within a period of two years from the end of the relevant asstt. year.  The same is proposed to be amended to reduce the period of two years to 21 months.   As such, all assessments shall be required to be completed by 31st December as against 31st March,   This amendment shall be effective from 1st June, 2006 and accordingly the assessment for the year 2004-05 shall become time-barred by 31st December, 2006.   Similarly the time period for completing reassessment under Section 153(2) is being reduced from one year from the end of the relevant year in which the notice under Section 148 was served to a period of nine months.   Accordingly, where notice under Section 148 is served before 31st March, 2006, the reassessment for the same need to be completed before 31st December, 2006.  Further, assessment or reassessment in search cases under Section 153B shall also be completed within a period of 21 months from the end of the Financial Year in which the search has been carried out.   The time period for completion of assessment where the original assessment is set aside under Section 254 or Section 263 or Section 264 is being reduced from one year to nine months from the end of the financial year in which the order under Section 254 is received by the Commissioner the order under Section 263 or 264 is passed by the Commissioner. 

 
 
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