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Taxation Laws (Second Amendment) Act, 2005 (Incl. 80HHC)
December, 28th 2005
 

THE TAXATION LAWS (SECOND AMENDMENT) ACT, 2005
ACT NO. 55 OF 2005, Dated 28-12-2005

A bill further to amend the Income tax Act, 1961 and the Finance Act, 2005.

Be it enacted by Parliament in the Fifty-sixth Year of the Republic of India as follows :

CHAPTER 1

PRELIMINARY

Short title and commencement.

1. (1) This Act may be called the Taxation Laws (Second Amendment) Act, 2005.

(2) It shall be deemed to have come into force on the 31st day of October, 2005.

CHAPTER II

AMENDMENTS TO THE INCOME-TAX ACT, 1961

Amendment of section 10.

2. In section 10 of the Income-tax Act, 1961 (hereafter in this Chapter referred to as the Income-tax Act), with effect from the 1st day of April, 2006,-

(a) in clause (6BB), for the words, figures and letters "or entered into after the 30th day of September, 2005 and approved by the Central Government in this behalf", the words, figures and letters "or entered into after the 31st day of March, 2006 and approved by the Central Government in this behalf" shall be substituted;

(b) in clause (15A), in the proviso, for the words, figures and letters "the 1st day of October, 2005" the words, figures and letter "the 1st day of April, 2006" shall be substituted;

(c) after clause (38), the following clauses shall be inserted, namely : -

'(39) any specified income, arising from any international sporting event held in India, to the person or persons notified by the Central Government in the Official Gazette, if such international sporting event -

(a) is approved by the international body regulating the international sport relating to such event;

(b) has participation by more than two countries;

(c) is notified by the Central Government in the Official Gazette for the purposes of this clause.

Explanation - For the purposes of this clause, "the specified income" means the income, of the nature and to the extent, arising from the international sporting event, which the Central Government may notify in this behalf;

(40) any income of any subsidiary company by way of grant or otherwise received from an Indian company, being its holding company engaged in the business of generation or transmission or distribution of power if receipt of such income is for settlement of dues in connection with reconstruction or revival of an existing business of power generation :

Provided that the provisions of this clause shall apply if reconstruction or revival of any existing business of power generation is by way of transfer of such business to the Indian company notified under sub-clause (a) of clause (v) of sub-section (4) of section 80-IA.

(41) any income arising from transfer of a capital asset, being an asset of an undertaking engaged in the business of generation or transmission or distribution of power where such transfer is effected on or before the 31st day of March, 2006, to the Indian company notified under sub-clause (a) of clause (v) of sub-section (4) of section 80-IA.'.

Amendment of section 28.

3. In section 28 of the Income-tax Act, after clause (iiic), -

(a) the following clause shall be inserted and shall be deemed to have been inserted, with effect from the 1st day of April, 1998, namely : -

"(iiid) any profit on the transfer of the Duty Entitlement Pass Book Scheme being Duty Remission Scheme, under the export and import policy formulation and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1922);".

(b) after clause (iiid) as so inserted, the following clause shall be inserted and shall be deemed to have been inserted, with effect from the 1st day of April, 2001, namely :-

"(iiie) any profit on the transfer of Duty Free Replenishment Certificate, being Duty Remission Scheme, under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1922);".

Amendment of section 80HHC.

4. In section 80HHC of the Income-tax Act, -

(i) in sub-section (3) -

(A) after the proviso, the following proviso shall be inserted and shall be deemed to have been inserted, with effect from the 1st day of April, 1998, namely : -

'Provided further that in the case of an assessee having export turnover exceeding rupees ten crores during the previous year, the profits computed under clause (a) or clause (b) or clause (c) of this sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in clause (iiid) or clause (iiie), as the case may be, of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee :

Provided also that in the case of an assessee having export turnover exceeding rupees ten crores during the previous year, the profits computed under clause (a) or clause (b) or clause (c) of this sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in clause (iiid) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assessee has necessary and sufficient evidence to prove that, -

(a) he had an option to choose either the duty drawback or the Duty Entitlement Pass Book Scheme, being Duty Remission Scheme; and

(b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under the Duty Entitlement Pass Book Scheme, being Duty Remission Scheme :

Provided also that in the case of an assessee having export turnover exceeding rupees ten crores during the previous year, the profits computed under clause (a) or clause (b) or clause (c) of this sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent. of any sum referred to in clause (iiie) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assessee has necessary and sufficient evidence to prove that, -

(a) he had an option to choose either the duty drawback or the Duty Free Replenishment Certificate, being Duty Remission Scheme; and

(b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under the duty Free Replenishment Certificate, being Duty Remission Scheme.

Explanation - For the purposes of this clause, "rate of credit allowable" means the rate of credit allowable under the Duty Free replenishment Certificate, being Duty Remission Scheme calculated in the manner as may be notified by the Central Government.':

(B) after the fourth proviso as so inserted, the following proviso shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 1992, namely : -

"Provided also that in case the computation under clause (a) or clause (b) or clause (c) of this sub-section is a loss, such loss shall be set off against the amount which bears to ninety per cent of -

(a) any sum referred to in clause (iiia) or clause (iiib) or clause (iiic), as the case may be, or

(b) any sum referred to in clause (iiid) or clause (iiie) as the case may be, of section 28, as applicable in the case of an assessee referred to in the second or the third proviso or the forth, as the case may be, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee.";

(ii) in the Explanation occurring at the end, with effect from the 1st day of April 1998,-

(I) in the proviso to clause (ba), for the word, brackets, figures and letter "and (iiic)", the brackets, figures, letter and word "(iiic), (iiid) and (iiie)" shall be substituted and shall be deemed to have been substituted;

(II) in clause (baa), in sub-clause (I), for the word, brackets, figures and letter "and (iiic)", the brackets, figures, letter and word "(iiic), (iiid) and (iiie)" shall be substituted and shall be deemed to have been substituted.

Amendment of section 80-IA

5. In section 80-IA of the Income-tax Act, in sub-section (4), after clause (iv), the following clause shall be inserted with effect from the 1st day of April, 2006, namely : -

"(v) an undertaking owned by an Indian company and set up for reconstruction or revival of a power generating plant, if -

(a) such Indian company is formed before the 30th day of November, 2005 with majority equity participation by public sector companies for the purposes of enforcing the security interest of the lenders to the company owning the power generating plant and such Indian company is notified before the 31st day of December, 2005 by the Central Government  for the purposes of this clause;

(b) such undertaking begins to generate or transmit or distribute power before the 31st day of March, 2007.".

Amendment of section 115W.

6. In section 115W of the Income-tax Act, in clause (a), with effect from the 1st day of April, 2006, -

(a) for sub-clause (iii), the following sub-clause shall be substituted, namely :

"(iii) an association of person or a body of individuals, whether incorporated or not;";

(b) after sub-clause (v), the following proviso shall be inserted, namely :

"Provided that any person eligible for exemption under clause (23C) of section 10 or registered under section 12AA or a political party registered under section 29A of the Representation of the People Act, 1951 (43 of 1951) shall not be deemed to be an employer for the purposes of this Chapter.",

CHAPTER III

AMENDMENTS TO THE FINANCE ACT, 2005

Amendment of section 94.

7. In Chapter VII of the Finance Act, 2005 (hereafter in this Chapter referred to as the Finance Act), in section 94, with effect from the 1st day of June, 2005 (18 of 2005),-

(a) after clause (3), the following clause shall be inserted and shall be deemed to have been inserted, namely :

'(3A) "banking company" means a company to which the Banking Regulation Act, 1949 applies and includes any bank referred to in section 51 of that Act (10 of 1949);.'

(b) after clause (4), following clause shall be inserted and shall be deemed to have been inserted, namely : -

'(4A) "co-operative bank" shall have the meaning assigned to it in Part V of the Banking Regulation Act, 1949 (10 of 1949);'

Insertion of new section 112A.

8. In Chapter VII of the Finance Act, after section 112, the following section shall be inserted and shall be deemed to have been inserted with effect from the 1st day of June, 2005.

This Chapter not to apply in certain cases.

"112A. The provisions of this Chapter shall not apply to, or in relation to, the taxable banking transactions entered into on or after the 1st day of June, 2005.

(a) between a scheduled bank and a banking company or a co-operative bank; or

(b) between a scheduled bank and another scheduled bank.".

CHAPTER IV

REPEAL AND SAVING

Repeal and saving

9. (1) The Taxation Laws (Amendment Ordinance, 2005 (Ord. 4 of 2005) is hereby repealed.

(2) Notwithstanding such repeal, anything done or any action taken under the Income-tax Act, 1961 (43 of 1961) and the Finance Act, 2005 (18 of 2005), as amended by the said Ordinance, shall be deemed to have been done or taken under the corresponding provisions of those Acts, as amended by this Act.

Statement of objects and reasons

The Central Government had, subsequent to the enactment of the Finance Act, 2005, taken certain policy decisions relating to income-tax and banking cash transaction tax and these decisions required immediate legislative action and such decision, inter alia, relate to the following, namely : -

(i) to exempt from income-tax any payment received in respect of a lease of an aircraft or an aircraft engine by the Government of a foreign State or a foreign enterprise from an Indian company engaged in the business of operation of an aircraft under an agreement entered into before the 1st day of April, 2006 and to amend, for the said purpose, clause (15A), of section 10 of the Income-tax Act, 1961;

(ii) to exempt specified income of the persons notified by the Central Government arising from any international sporting event conducted in India, approved by the recognised international body responsible for regulating the relevant sport and having multi-nation participation and to insert, for the said purpose, a new clause (39) in section 10 of the Income-tax Act, 1961;

(iii) to exempt any income of any subsidiary company by way of grant or otherwise received from an Indian company, being its holding company engaged in the business of generation, transmission or distribution of power if receipt of such income is for settlement of dues in connection with reconstruction or revival of an existing business of power generation taken over by an Indian company, referred to in sub-clause (a) of clause (v) of sub-section (4) of section 80-IA and to insert, for the said purpose, a new clause (40) in section 10 of the Income-tax Act, 1961;

(iv) to exempt any income arising from transfer of a capital asset, being an asset of an undertaking engaged in the business of generation, transmission or distribution of power where such transfer is effected on or before the 31st day of March, 2006, to the Indian company notified under sub-clause (a) of clause (v) of sub-section (4) of section 80-IA and to insert, for the said purpose, a new clause (41) in section 10 of the Income-tax Act, 1961;

(v) to allow tax benefit to an undertaking, owned by an Indian company and set up for reconstruction or revival of a power generating plant, under section 80-IA if it fulfils the following conditions, namely :

(a) such, Indian company is formed before the 30th day of November, 2005 with majority equity participation by public sector companies for the purposes of enforcing the security interest of the lenders to the company owning the power generating plant and is notified before the 31st day of December, 2005 by the Central Government;

(b) such undertaking begins to generate or transmit or distribute power before the 31st day of March, 2007, and to amend, for the said purpose, section 80-IA of the Income-tax Act, 1961;

(vi) to exempt political parties registered, under section 29A of the Representation of the People Act, 1951, with the Election Commission of India and companies registered under section 25 of the Companies Act, 1956 and section 12AA of the Income-tax Act, 1961 from liability of payment of fringe benefit tax payable under section 115WA of the Income-tax Act, 1961;

(vii) to exempt inter-bank transactions from banking cash transaction tax leviable under Chapter VII of the Finance Act, 2005.

2. As the Parliament was not in session and the amendments to the provisions of the Income-tax Act, 1961 and the Finance Act, 2005 as mentioned above were to be carried out immediately, the President was pleased to promulgate the Taxation Laws (Amendment) Ordinance, 2005 (No. 4 of 2005) on the 31st day of October, 2005 to achieve the aforesaid purposes.

3. In order to extend certain tax incentive to the export business with effect from the assessment year 1998-1999, it is proposed that the deductions allowable under section 80HHC of the Income-tax Act, 1961 for export business may be extended to any profit on transfer of the Duty Entitlement Pass Book Scheme or the Duty Free Replenishment Certificate, subject to certain specified conditions and to amend section 80HHC of the Income-tax Act, 1961 for the said purpose.

4. The Bill seeks to replace the said Ordinance and insert clauses 3 and 4 to give effect to the proposal mentioned in paragraph 3.

New Delhi;
The 29th November 2005.

P. Chidambaram.

PRESIDENT'S RECOMMENDAION UNDER ARTICLE 117 OF THE CONSTITUTION OF INDIA

[Copy of letter No. 142/29/2005-TPL, dated the 1st December, 2005 from Shri P. Chidambaram, Minister of Finance to the Secretary-General, Lok Sabha]

The President, having been informed of the subject matter of the proposed Taxation Laws (Second Account) Bill, 2005 to amend the Income-tax Act, 1961 and the Finance Act, 2005, recommends under clause (1) of article 117 and clause (1) of article 274 of the Constitution of India the introduction of the Bill in Lok Sabha.

Memorandum explaining the modifications contained in the Taxation Laws (Second Amendment) Bill, 2005 proposed to replace the taxation Laws (Amendment) Ordinance, 2005 (4 of 2005)

The Taxation Laws (Second Amendment) Bill, 2005 which seeks to repeal and replace the Taxation Laws (Amendment) Ordinance, 2005 (No. 4 of 2005), proposes to make the following modifications in the provisions contained in the said Ordinance : -

(i) Clause 3 of the Bill seeks to insert new clauses (iiid) and (iiie) in section 28 of the Income-tax Act, 1961 so as to provide that any profit on the transfer of the Duty Entitlement Pass Book Scheme, being Duty Remission Scheme or the Duty Free Replenishment Certificate, being Duty Remission Scheme Under the Export and Import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 shall be treated as business income. This modification is consequential to the amendment proposed to section 80HHC of the Income-tax Act, 1961 vide clause 4 of the Bill.

(ii) Clause 4 of the Bill seeks to amend section 80HHC so as to provide that-

(a) in the case of an assessee having export turnover not exceeding rupees ten crores during the previous year, the profit computed under sub-section (3) of section 80HHC shall be further increased by the amount which bears to ninety per cent of any receipt referred to in clause (iiid) or clause (iiie) of the section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee.

(b) in the case of an assessee having export turnover exceeding rupees ten crores during the previous year, the profit computed under sub-section (3) of the said section, shall be further increased by the amount which bears to ninety per cent of any receipt referred to in clause (iiid) or clause (iiie) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee subject to certain condition specified in the proposed third and fourth proviso to sub-section (3) of section 80-HHC.

(c) In case the computation under sub-section (3) of section 80HHC is a loss, such loss shall be set off against the amount which bears to ninety per cent of any receipt referred to in clause (iii) or clause (iiib) or clause (iiic) or clause (iiid) or clause (iiie), as the case may be, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee.

2. These proposed modifications will take effect from the retrospective dated specified in clauses 3 and 4 of the Bill.

ANNEXURE

EXTRACTS FROM THE INCOME-TAX ACT, 1961
(43 OF 1961)

CHAPTER III

INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME

Incomes not included in total income.

10. In computing the total income of a previous year of any person any income falling within any of the following clauses shall not be included-

(6BB) where in the case of the Government of a foreign State or a foreign enterprise deriving income from an Indian company engaged in the business of operation of aircraft as a consideration of acquiring an aircraft or an aircraft engine (other than payment for providing spares, facilities or services in connection with the operation of leased aircraft) on lease under an agreement entered into after the 31st day of the March 1997 but before the 1st day of April, 1999, or entered into after the 31st day of March, 2005 and approved by the Central Government in this behalf and the tax on such income is payable by such Indian company under the terms of that agreement to the Central Government the tax so paid.

Explanation. - For the purposes of this clause, the expression "foreign enterprise" means a person who is a non-resident;

(15A) any payment made, by an Indian company engaged in the business of operation of aircraft, to acquire an aircraft or an aircraft engine (other than a payment for providing spares, facilities or services in connection with the operation of leased aircraft) on lease from the Government of a foreign State or a foreign enterprise under an agreement, not being an agreement entered into between the 1st day of April, 1997 and the 31st day of March, 1999, and approved by the Central Government in this behalf:

Provided that nothing contained in this clause shall apply to any such agreement entered into on or after the 1st day of October, 2005.

Explanation - For the purpose of this clause, the expression "foreign enterprise" means a person who is a non-resident;

D. Profits and gains of business or profession.

Profits and gains of business or profession.

28. THE following income shall be chargeable to income-tax under the head "Profit and gains of business or profession", -

Deduction in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc.

80-IA(1)**

**

**

(4) This section applies to -

CHAPTER XII H

INCOME-TAX ON FRINGE BENEFITS

A.- Meaning of certain expressions

Definitions.

115W. In this Chapter, unless the context otherwise requires, -

(a) "employer" means, -

(i) a company;

(ii) a firm;

(iii) an association of persons or a body of individuals, whether incorporated or not, but excluding any fund or trust or institution eligible for exemption under clause (23C) of section 10 or registered under section 12AA;

(iv) a local authority; and

(v) every artificial juridical person, not falling within any of the preceding sub-clauses;

(b) "fringe benefit tax" or "tax" manes the tax chargeable under section 115WA.

EXTRACT FROM THE FINANCE ACT, 2005
(18 OF 2005)

Definitions.

94. In this Chapter, unless the context otherwise requires, -

Deduction in respect of profits retained for export business.

 

80HHC.(1)**

**

**

(3) For the purposes of sub-section (1),-

(a) where the export out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such export shall be the amount which bears to the profits of the business the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee;

(b) where the export out of India is of trading goods, the profits derived from such export shall be the export turnover in respect of such trading goods as reduced by the direct costs and indirect costs attributable to such export;

(c) where the export out of India is of goods or merchandise manufactured for processed by the assessee and of trading goods, the profits derived from such export shall, -

(i) in respect of goods or merchandise manufactured or processed by the assessee, be the amount which bears to the adjusted profits of the business, the same proportion as the adjusted export turnover in respect of such goods bears to the adjusted total turnover of the business carried on by the assessee; and

(ii) in respect of trading goods, be the export turnover in respect of such trading goods as reduced by the direct and indirect costs attributable to export of such trading goods:

Provided that the profit computed under clause (a) or clause (b) or clause (c) of this sub-section shall be further increased by the amount which bears to ninety per cent of any sum referred to in clause (iiia) not being profits on sale of a licence acquired from any other person), and clauses (iiib) and (iiic) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee.

Explanation - For the purposes of this sub-section, -

(a) "adjusted export turnover" means the export turnover as reduced by the export turnover in respect of trading goods.

(b) "adjusted profits of the business" means the profits of the business as reduced by the profits derived from the business of export out of India of trading goods as computed in the manner provided in clause (b) of sub-section (3);

(c) "adjusted total turnover" means the total turnover of the business as reduced by the export turnover in respect of trading goods;

(d) "direct costs" means costs directly attributable to the trading goods exported out of India including the purchase price of such goods;

(e) "indirect costs" means costs, not being direct costs, allocated in the ratio of the export turnover in respect of trading goods to the total turnover;

(f) "trading goods" means goods means goods which are not manufactured or processed by the assessee

 
 
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